Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, began her week with a bit of honest heresy, the kind that only she, among all the bank regulators, seems willing to utter in the wake of the financial crisis.
During the housing bubble, the percentage of Americans owning homes rose to 69 percent. In the end, that was not sustainable.
Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers — a speech that got surprisingly little attention — Ms. Bair listed her three main recommendations to “put the mortgage industry on a sounder footing.” The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.
“For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers,” Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes.
She tossed in Fannie Mae and Freddie Mac, the two “G.S.E.’s” (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers — and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses.
She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be “unsustainable,” Ms. Bair said.
She concluded: “Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer.” Like, you know, renting.
The point is: the financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business’s supposed raison d’être was making homeownership possible for people who lacked the means — or the credit scores — to get a traditional mortgage. It’s also why bank regulators and politicians were so willing to avert their eyes from the predations and excesses of the subprime companies.
Yet even now, it is difficult for the body politic to face this truth squarely, so intertwined is homeownership with the American Dream. Which is why Ms. Bair’s comments were so heretical. Maybe, she seemed to be suggesting, it’s time to break that link, painful though it would be. Maybe she’s right.
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The idealization of homeownership by both the public and the federal government is hardly a recent phenomenon, of course. The Federal Housing Authority has been around since 1934. Fannie Mae was founded in 1938. After World War II, the G.I. Bill included modest loans allowing veterans to buy their first homes, according to Michael D. Calhoun, the president of the Center for Responsible Lending. For decades, the savings and loan industry existed solely to make loans to home buyers. In return, the government gave savings and loans certain regulatory advantages over the banks. The mortgage-backed security itself — which emerged in the 1980s, and made the securitization of mortgages possible — required the passage of a handful of laws, which Congress happily provided.
And every president, Democrat and Republican alike, trumpeted the virtues of homeownership for all Americans. Bill Clinton put numerical goals on the percentage increase he wanted to see in homeownership, and greatly increased Fannie and Freddie’s affordable housing goals. (Those goals had first been in put in place during the presidency of George H. W. Bush.) George W. Bush trumpeted his “ownership society”— and increased those housing goals. Fannie Mae, for its part, explicitly wrapped itself in the American Dream; anyone who opposed Fannie Mae was quickly labeled “anti-homeownership” by the company’s lobbyists.
Indeed, conservatives tend to view the affordable housing goals imposed on Fannie and Freddie as the central reason for the credit crisis. “In order to increase homeownership, Fannie and Freddie were required to decrease their standards,” said Peter Wallison, a fellow at the American Enterprise Institute and perhaps the country’s leading critic of the G.S.E.’s. “We made a big mistake in trying to force housing onto a population that couldn’t afford housing.”
But, to my mind, that view is only half-right. Yes, people got loans who had no hope of paying them back, and that was insane. But Fannie and Freddie’s affordable housing goals — which the G.S.E.’s easily gamed — were not the main reason. Rather, it was the rise of the subprime lenders — and their ability to get even their worst loans securitized by Wall Street —that was the main culprit. Fannie and Freddie lowered their standards mostly because they were losing market share to the subprime originators.
Did government policy make the rise of the subprime lenders possible? You betcha. Over time, the federal government gradually loosened regulations and interest rate caps that allowed the business to first become viable and then to explode. And it completely bought into the idea that the subprime industry was a force for good, because it was expanding homeownership. This, of course, is something the mortgage originators encouraged. Angelo Mozilo, the founder of Countrywide Financial, was as vocal about his company making the American Dream possible as any Fannie Mae lobbyist.
But it was a lie. Gary Rivlin, my former colleague at The New York Times, has just published a scathing, important book, “Broke, USA,” which includes one shocking anecdote after another of people being conned into taking on mortgages, filled with hidden fees and adjustable rates, that they couldn’t possibly afford. The companies that did these things were not the outliers — they were the bulwarks of the industry: Household, Countrywide, New Century and a raft of others. And when state officials tried to crack down on these unseemly practices, the Office of the Comptroller of the Currency, instead of investigating, blocked their efforts. After all, homeownership was on the rise!
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