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The false narrative of rising housing risk

As housing prices rise and Washington policymakers move forward on housing finance reform, it is both tempting and dangerous to believe the federal government is getting ready to expand its exposure to risky mortgages, leading to another housing bubble and taxpayer bailout. It is a familiar and false narrative that is supported by fear, not facts.

In his recent article, “Federal Government Has Dramatically Expanded Exposure to Risky Mortgages” Washington Post reporter Damian Paletta attempts to make this case, quoting several former officials like Dave Stevens and Ed Golding out of context, while completely misrepresenting the extensive body of research by the Urban Institute.

The truth is that the exact opposite is the case. Tight credit, high development and lending costs, restrictive zoning and exorbitant development fees are driving us into a new housing crisis that will be nothing like the last one. Pretending that the next crisis will be like the last one avoids the hard work of developing new, impactful and sustainable solutions to our current affordable housing supply crisis.

The holy grail of a shrinking, but influential group of opponents to homeownership is the assertion is that we are still burdened by the false narrative that housing prices will never go down, and an equally wrong belief that mortgage-backed securities were safe regardless of how many bad loans might be in them. This was certainly true 15 years ago. As one former colleague at Fannie Mae told me at the time, only half in jest, “we couldn’t believe that the people getting Liar’s Loans were actually lying.”

Some still assert that the Great Recession was caused by irresponsible people getting irresponsible mortgages for homes they could not afford. While there were certainly far too many people in this situation, the vast majority of losses at Fannie Mae and Freddie Mac were the result of buying too many toxic securities from large lenders like Countrywide and Indy Mac, among others, because they were desperate for mortgage volume as these same companies fueled the rise of the private label securitization (PLS) market as a competitor. The Financial Crisis Inquiry Commission wrote extensively about this in its comprehensive study of the crisis.

Today, the Qualified Mortgage Rule protects consumers from these types of toxic mortgage products. The proof of this is that mortgage performance is better today than at any time in the past 20 years according to data collected by CoreLogic. While there is a reasonable debate on how much total debt is appropriate, virtually no one in the consumer advocacy or banking sectors have argued that these product regulations should be changed.

The PLS market is a shadow of its formal profile in part because investors learned that they don’t want to be a part of this market at any cost, largely due to the risk of legal contracts that make loss mitigation impossible without another government bailout like the Troubled Asset Relief Program (TARP). It is not the role of government to prop up failed markets.

The real risk to the taxpayer, who is also the consumer in our $10 trillion mortgage market, is that housing prices will continue to rise due to a lack of supply of new affordable housing and good mortgages to people with very good, though not perfect, credit histories.

Mortgage access has become so tight following the crisis that the homeownership rate dropped from 69 percent in 2004 to 63.4 percent in 2016, recovering only marginally since then. Small increases in mortgage risk over the past few years are still well below levels seen during periods of responsible lending throughout the 1990s and early 2000s, as has been extensively documented by the Urban Institute. The result is that our homeownership rate is still too low, and the black homeownership rate of 41.1 percent today is lower than it was in 1968 when mortgage discrimination was legal.

Part of the reason black homeownership is so low is that most African American families did not get homes they couldn’t afford with mortgages driven by irresponsible affordable housing goals. Many were already homeowners and had good mortgages made by Fannie Mae, Freddie Mac and FHA during the 1990’s, driving their homeownership rate to 47.7 percent in 2002 according to the U.S. Census Bureau – well before the escalation of predatory lending to first time homebuyers. That growth in homeownership essentially ended as mortgage brokers and subprime lenders targeted them for equity-stripping schemes that destroyed their home’s value and left them on the edge of a cliff as the housing bubble burst.  As the recession spread, a disproportionate share of them drowned in underwater homes.

The generational impact of this disaster is stunning. 1.7 million black millennials who are mortgage ready today have shown little interest in buying a home of their own home. Having watched many of their parents, aunts, uncles and neighbors lose their homes, it’s little wonder. They have no interest in listening to a sales pitch about housing being the most effective wealth generator, despite the fact that it is true. It’s hard to blame them, although many do.

Millions of other millennials, including whites and all people of color, are burdened by inadequate incomes to service skyrocketing student debt. They have delayed getting married and having children, which delays homeownership, in some cases for generations. Nearly one in three millennials today live at home with their parents, which is not by choice for either the millennials or their parents!

As a result of the drop in homeownership, about a third of renters today live in single family homes. More renters overall mean higher rents, resulting in fewer affordable places to live for low- and moderate-income workers. The result is that our country has a growing number of working homeless people, who climb out of their car every morning, bathe in a public restroom, and go to work. That is simply not acceptable.

Blaming increased market share by Fannie, Freddie and FHA makes no sense. They were designed to play this role. Bank balance sheets are full of high-quality, often adjustable-rate mortgages today. Asking them to take on more long term, fixed-rate risk at a time of prolonged record-low interest rates is an invitation to repeat the disastrous Savings and Loan crisis of the 1980s, when banks all across the country failed because they made too many long-term loans at lower interest rates than they were earning in deposits. FHA and the GSEs are supposed to play a counter-cyclical role, leveling off periods of irrational exuberance, while calming the waters during periods of recession. As a result, the traditional role played by the housing economy has been to help bring us out of recession, not drive us into one.

Responsible housing finance reform, with broad bipartisan support, is still possible; but only if we learn the right lessons from history, and let our diverse opinions be guided by facts, not false narratives.

By David M. Dworkin

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