Homeownership

During a week where the FDIC, the White House, Congress and the Treasury Department are embroiled in a battle over how to best address the millions of Americans who are the brink of losing their homes to foreclosure, it may seem odd to discuss new strategies for helping more low-income families become homeowners. There is no disputing the fact that the foreclosure crisis and the larger global economic crisis it helped spawn, are the immediate issues at hand. However, once the dust has settled it will be necessary for government officials, advocates, and politicians to come together and have an honest discussion about the future of homeownership policies for low- and moderate-income Americans.

If you are still operating under the false assumption that the Community Reinvestment Act or low-income "predatory borrowers" are to blame for the economic crisis please read this excellent blog post by my New America colleague Ellen Seidman or even better, this recent statement by Comptroller of the Currency John Dugan.

The announcement yesterday of new procedures for streamlined modifications of primarily prime mortgage loans in trouble was a perfect example of a good (albeit overdue) program being drowned by a really inept rollout.

Briefly, Fannie Mae, Freddie Mac, their conservator the Federal Housing Finance Agency, the Hope Now Alliance and a group of large banks announced standard procedures to do quick modifications-involving primarily an appraisal and verification of income-of seriously delinquent loans in either Fannie or Freddie MBS, or in the portfolios of either the GSEs or the banks. There are clear limits on what is involved. The big one is these are largely prime loans, and loans for which the servicer has relatively undivided loyalties. They are not the privately-securitized sub-prime and Alt-A loans that have caused the bulk of the problem to date, especially in lower income communities. That's a big limitation, but the fact is that the prime foreclosure rate is increasing steadily. And as of June 2008, there were about 373,000 Fannie and Freddie owned or guaranteed loans (many of them prime) that were seriously delinquent, and the number was climbing fast. That's Fannie and Freddie alone, not counting loans held in bank portfolios.

Those who, like me, believe that CRA not only did not cause the current mess but has been a positive force, are gratified that the mainstream press has finally started to pick up the theme.  For example, this morning the New York Times ran an editorial pointing up both the fallacies of the anti-CRA argument and the good CRA has done.   And last week Forbes carried a piece by Luis Ubinas, the new President of the Ford Foundation, pointing out that the crisis was caused by risky mortgages (by risky, non-CRA-regulated lenders), not risky borrowers, and in particular not poor borrowers.  

Perhaps even more important for countering the effects of the "blame CRA" campaign in middle America, the McClatchy papers have distributed a news item blasting the myth, noting, "What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.  These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans."

In Monday's New York Times, Paul Krugman raises the question whether the United States has gone overboard in promoting home ownership. Krugman points out not only that the bursting of the subprime bubble has also burst the homeownership bubble, but also that homeownership brings risks of excessive leverage (if prices go down some, an equity stake can be totally lost); "stickiness" (making it hard to move when jobs dry up); and the high expense of commuting (when families chase low house prices well beyond where the jobs are).

Krugman got much right, but before we throw homeownership overboard, it's worth pausing a minute to consider both the benefits of homeownership done right and what we need to do to make rental housing a reasonable alternative, both as shelter and as a way to build assets.