Donnerstag, Mai 07, 2009

A Brief History...

This is one of the best concise histories of the idiocy that has passed as policy in the US since the 1920s.

The decision to subsidize housing in the US was not one that immediately led to perdition: however, it compounded over time and that is why we are where we are.

Steve Malanga wrote:


The Times analysis exemplified our collective amnesia about Washington's repeated attempts to expand home ownership and the disasters they've caused. Each time we clean them up, then — as if under some strange compulsion — set in motion the mechanisms of the next housing calamity. That's exactly what we're doing once again.

This is indeed one of the fifth rails of US politics: don't dare touch housing subsidies, as entire industries were built upon them that throw more money at lobbying than anyone can really comprehend.

This cycle goes back nearly 100 years. In 1922, Commerce Secretary Herbert Hoover launched the "Own Your Own Home" campaign, hailed as unique in the nation's history. ...The great national effort seemed to pay off. From mid-1927 to mid-1929, national banks' mortgage lending increased 45%. The country was becoming "a nation of homeowners," the Times exulted.

But as homeownership grew, so did the rate of foreclosures, from just 2% of commercial bank mortgages in 1922 to 11% in 1927.

This happened just as the stock market bubble of the late '20s was inflating dangerously. Soon after the October 1929 Wall Street crash, the housing market began to collapse. Defaults exploded; by 1933, some 1,000 homes were foreclosing every day.

The "Own Your Own Home" campaign had trapped many Americans in mortgages beyond their reach.

Financial institutions were exposed as well. Their mortgage loans outstanding more than doubled from the early 1920s to 1930 — $9.2 billion to $22.6 billion — one reason that about 750 financial institutions failed in 1930 alone.

Sound familiar?

Following this catastrophe, the Depression-era federal government created many institutions to fix flaws in the mortgage market, from the Federal Home Loan Bank system to provide a stable source of funds for banks, to the Federal National Mortgage Association (later known as Fannie Mae) to purchase federally insured mortgages.

These were valuable initiatives, but they meant that by the end of the Great Depression, the government had become the dominant force in the mortgage market. Politicians could use that regulated market to advance their policy agendas — or careers.

In other words, the problem is part and parcel of the political culture of the US, which by definition means that it is a structural problem, one that will never go away due to the upswings that are part and parcel of the business cycle. The problems are also ones that any sort of downswing makes worse, as they are not sustainable: the longer the programs run, the larger the subsidies and the greater the imbalances, which then generate new legislation to address, beginning the positive feedback loop for a new cycle of worsening structural conditions.


As home ownership grew and housing prices rose, political pressure to allow riskier loans increased, too.

Under demands to keep pumping out loans, the government began loosening its mortgage-lending standards in subsidized programs, attracting riskier home buyers and provoking a surge in foreclosures on government-backed mortgages.

The failure rate on FHA-insured loans spiked fivefold from 1950 to 1960, according to a 1970 National Bureau of Economic Research study, while the failure rate on mortgages made through the Veterans Administration nearly doubled over the same period. By contrast, the foreclosure rate of conventional mortgages barely increased.

This latter is all you need to understand in order to see why the problem, the core problem, of today hasn't even been addressed and will not be as long as it remains profitable for politicians to behave otherwise: failure rates of subsidized mortgages increase over time as they are expanded, while failure rates of conventional mortgages are stable over time.

Rather than learn from this lesson, the government embarked on yet another failed attempt to increase home ownership: the FHA's urban-loan debacle of the 1960s. This time, the object was to solve America's urban discontent through ownership. In 1968, the federal government decided to give poor families FHA-insured loans that required down payments of as little as $250. The idea was that home ownership would bolster deteriorating cities.

Oddly enough, this is one I remember clearly from my childhood. The superficial understanding, which failed to comprehend the frustration and rage of the rioters and served to deny the real problem (that of the systematic racism of low expectations and the accompanying lack of social and economic mobility), was that those rioting didn't have a stake in the neighborhood, and by giving them, basically, houses, they'd then gain a stake in the neighborhood and wouldn't riot. This was at best superficial and rather condescending, since it implied that those who rioted didn't understand what they were doing. Riots are the symptoms of a society blind and unwilling to listen.

Not urban uplift, but urban disaster, followed. Unprepared for ownership, many families defaulted on mortgages or were fleeced by seedy speculators.Foreclosures spread, infecting at least 20 cities, where massive abandonments served to hasten urban deterioration. In the end, the government absorbed an estimated $1.4 billion in losses because of Washington's unexamined assumption that home ownership would transform the lives of low-income buyers in positive ways.

The road to hell is paved, of course, with the very best of intentions.

Not even the national FHA scandal could cure Washington of its obsessive housing disorder. It simply changed its sights. It now began pushing private banks to lend more in lower-income neighborhoods. In 1977 the federal government passed the Community Reinvestment Act (CRA) to give regulators the power to deny banks the right to expand if they didn't lend sufficiently in those neighborhoods. When banks responded that they couldn't find many credit-worthy customers in some neighborhoods, housing advocates backed by federal officials argued that banks had to change their lending criteria.

See the logical development? Rather than acknowledging that the programs weren't working and that the markets were telling a very different story, the government, in it's *infinite* wisdom, kept on digging and decided to bring in the heavy equipment to get to the bottom of the problem, while not realizing that it was the digging of the hole itself that was the problem. But at this point the hole started to get concrete sides...

Using protests under CRA, community groups like Acorn were able to pressure banks like Louisiana Bancshares in 1986 to agreed to new "flexible credit and underwriting standards" for minority borrowers. The advocates also attacked Fannie Mae, the giant quasi-government agency that bought loans from banks, arguing it was too strict in sticking to underwriting standards. The campaign gained further traction under President Clinton, whose housing secretary, Henry Cisneros, declared he would expand homeownership among lower- and lower-middle-income renters. His strategy: Push for no-down-payment loans; expand the size of mortgages that the government would insure against losses; use lending laws to direct more private money into low-income programs.

And that is the crux of the matter: using lending laws to direct more private money into low-income programs, of manipulating markets to be something that they could never be, which markets really don't like.

Soon after Cisneros announced his plan, Fannie Mae and Freddie Mac agreed to buy loans under looser guidelines. Washington also pressured nonbank lenders, which weren't covered by CRA, to lower their standards or feel the CRA heat.Then a coalition of nonbank lenders shocked the financial world by signing a 1994 agreement with HUD, pledging to join in efforts to rewrite lending standards. The first lender on board: Countrywide Financial, the huge mortgage firm that would be at the core of the subprime meltdown. Legislators pressed for more affordable lending and securitization of loans to clear them off bank books. The lending spree helped spark an increase in securitization of mortgages to people with dubious credit.

Bingo. See how the hole has been deepened, the sides reinforced by more and more concrete, that the hole started sucking in the equipment used to dig it...


Before we've even worked our way through this crisis, elected officials and policymakers are busy readying the next.

Barney Frank, the Massachusetts congressman who is chairman of the House Financial Services Committee, has balked at proposals to privatize Fannie Mae and Freddie Mac. Such a move would eliminate their risk to taxpayers because the government uses them to subsidize the affordable-housing programs that Frank supports.Republicans and Democrats, meanwhile, have scrambled to reignite the housing market through ill-conceived tax credits and renewed federal subsidies for mortgages.Behind these efforts is misconception among politicians that housing drives the American economy and therefore demands subsidy at virtually any cost.

Changing notions of fairness and equity also cloud policymakers' minds.

This is why the US economy won't be recovering sharply and why the desperately hoped-for stimulus effects will prove to be chimerical at best. The multiplier is well below 1, and we may well discover that there is a zero after that magic point as well...especially considering the corruption involved.


Our experience since the Depression should teach us that government's most important role in the market should not be to promote historically risky lending standards. It should be to ensure a sturdy economy and judicial system that protect the interests of buyers and sellers in the largest transaction that most will ever undertake.At the same time, government should do no harm, especially when it comes to the cost of housing.

This is indeed the needed structural change that would gut the baby-boomer generation and close down the liberal world for the intellectually, moral and increasingly fiscally bankrupt world that it is.

One reason politicians and policymakers increasingly feel they must subsidize mortgage rates and launch ownership campaigns is that since the 1970s, stringent housing and zoning regulations have raised the price of home construction and reduced the supply of affordable housing.One solution is for the federal government to tie aid to states to local regulatory reforms that reduce the cost of construction and encourage additional building.The federal government should also consider eliminating or capping the home-mortgage tax deduction, which drives up the price of housing in ways particularly damaging to lower- and moderate-income buyers.

Ultimately, the goal should be to end subsidies that amount to a government project to direct home ownership.That kind of political meddling in this vast marketplace has wreaked havoc and will continue to do so — if we keep letting it.

Hard to improve on this, suffice to say: this is the great myth of modern America, and until this myth is gored, taken down and buried with extreme prejudice, nothing will change.

It is the duty of the economics profession to be the dismal science, not merely its assigned role. By failing to make it clear that these kinds of systematic market distortions always ends in tears, it allows politicians and fools - sorry, I repeat myself - freedom of action to create the very problems that the taxpayers then have to clean up...

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