After the great U.S. housing bubble burst, there was a sense, particularly among conservatives, that a foolish liberal experiment in expanding homeownership to people without the income or credit or “personal responsibility” to own homes had failed once and for all. Henceforth, it was often said, we’d get back to the good old days of fixed-rate mortgages, large down-payment requirements, and tough credit requirements. Those people would be back in rental housing where they belonged.
But while the housing bubble did rightly convince some people that homeownership wasn’t all it was cracked up to be, the central function of residential real estate as the American middle class’s primary method of wealth accumulation means that giving up on broad-based homeownership may be equivalent to giving up on upward mobility. And as the New America Foundation’s Reid Cramer explains in the January/February issue of the Washington Monthly, there are models for expanding low-income and minority homeownership that have worked, even during the Great Recession:
In 1998, a credit union in Durham, North Carolina, started a project called the Community Advantage Program, or CAP, with money from the state government and a $50 million grant from the Ford Foundation. Its goal was to increase the flow of private capital to lower-income and minority borrowers. CAP purchased mortgage loans originated by banks that were seeking to satisfy the requirements of the Community Reinvestment Act, which mandates that banks make at least minimal loans (often to minorities) in their local communities. Eventually, CAP’s portfolio grew to more than 46,000 home-purchase mortgages made to lower-income households. Yet, despite what might be considered the risky profiles of its borrowers, CAP’s portfolio has weathered the storm, far exceeding the performance of the rest of the housing market during the recession. While nationwide, 15 percent of prime adjustable-rate mortgages and 20 percent of subprime fixed-rate mortgages have serious delinquencies, the CAP rate is only 9 percent. And CAP homeowners have seen a median annualized return on their equity of 27 percent, leading to a median increase in equity of close to $18,000, meaning that they were better off than investors in the Dow Jones over a similar time period.
The problem with the very different and notoriously disastrous Fannie Mae/Freddie Mac
model for expanding homeownership, argues Cramer, was their congressional mandate to make profits, which put these institutions into competition with predatory lenders using predatory methods.
The key lesson learned is that it’s a bad idea to put federal housing subsidies in the hands of profit-seeking institutions. Instead, to ensure that responsible buyers can access private capital, government will have to embrace an expanded direct role in providing insurance on mortgages and setting standards on future loans. We can do this through a recapitalized Federal Housing Administration or a new set of public entities that take the place of Fannie and Freddie. Promoting homeownership among those of modest means is an appropriate goal of government, but it is time to be up-front and direct about how we pursue that obligation.
In other words, we should stop blaming the victims here, take a fresh look at successful means for expanding homeownership, and stop believing Mr. Potter was right.