By Charles Lane
Sunday, October 18, 2009
The New York Times reports that a schoolteacher in Colorado recently got talked into buying a $134,000 fixer-upper with only 3.5 percent down. To afford that smidgen of equity, she liquidated her retirement savings. The bank rolled closing costs into the loan in return for a higher interest rate. Her monthly cost is 50 percent of her take-home pay. Happy for now, she may be a pink slip away from foreclosure and financial ruin.
Somebody, quick, call the government! The predatory lenders are back! Oh, wait: The U.S. government is supporting this transaction. The Federal Housing Administration made the loan possible by promising to pay it off if the teacher can't.
Now you know why many housing experts, including the FHA's own inspector general, are fretting that the agency may be headed for a taxpayer bailout. The only remaining major source of middle-class mortgage liquidity, the FHA has increased its insurance portfolio from $323 billion in 2006 to $695 billion today -- with the inevitable inclusion of some apparent clunker loans like the one in the Times story. Its default rate is 7.8 percent, up from 5.6 percent a year ago. Its capital reserves are below the statutory minimum, which is 2 percent of its portfolio.
Actually, concern about an FHA collapse is slightly misplaced. To be sure, it might happen. The agency, which pays for losses out of the insurance premiums it collects, says it's tightening controls and can withstand anything short of a severe double-dip recession. Let's hope it is right -- and that the business cycle cooperates. The real point, though, is what FHA's predicament suggests about the broader exhaustion of U.S. housing policy.
For decades, the U.S. government has subsidized homeownership -- via FHA insurance, the mortgage interest deduction, Fannie Mae and Freddie Mac, and many other programs. The resulting overinvestment in residential real estate is a major cause of the current crisis. Yet, in trying to cope with the crisis, Washington is pouring on more housing subsidies, thus deepening the federal commitment to the old strategy and making it harder to move to a new one.
Don't get me wrong: By encouraging thrift, self-reliance and neighborliness, individual homeownership can benefit society. Government support was, therefore, a wise investment. But homeownership is not for everyone -- it can't be. Transient young people don't need or want mortgages and maintenance; ditto the frail elderly. More broadly, there are some people who just can't afford it.
Yet politicians of both parties have pretended otherwise. As of 1993, the homeownership rate was a healthy 64 percent of all households. President Clinton, though, decreed that it should set a new record by the year 2000; he ordered the FHA, Fannie and Freddie, and the rest of the government to make it happen. Clinton hit his goal, only to be topped under the Bush administration's "ownership society," when the rate peaked at 69.2 percent.
As we all know, these gains proved unsustainable: Many unqualified buyers got mortgages and lost their homes when prices, inevitably, came back down to earth. In that sense, excessive support for homeownership actually harmed intended beneficiaries and destroyed neighborhoods.
Today, the homeownership rate is 67.4 percent and falling. Government policy, including FHA insurance, the quasi-nationalization of Fannie and Freddie, and the Federal Reserve's massive purchases of mortgage-backed securities, is intended to slow this decline. The thinking is that housing prices were being driven down by panic and that the government had to step in lest the nation's main source of household wealth be swept away.
With luck, these improvisations will work. Even if they do, the price will be high. Take just one policy measure, the $8,000 tax credit for new homebuyers, which Congress might soon extend. According to a recent article by Ted Gayer of the Brookings Institution, it would cost the government about $15 billion, or about $43,000 per additional home sale.
And the federal taxpayer, the ultimate guarantor of trillions of dollars in mortgages, will emerge from the crisis deeply enmeshed in an asset category that, recent experience has shown, carries considerably more risk than was once commonly believed.
The interest groups that feed on federal housing policy will resist tooth and nail, but the country needs a fundamental change in strategy -- one that reflects the lessons of this crisis. Government should be much more cautious about taking on mortgage risk or encouraging individuals to do so. Instead of glorifying homeownership and showering it with subsidies, government should strive for a more level playing field between owning and renting.
As it happens, renting is what the Colorado teacher was doing -- before she spent her nest egg on a down payment. There was no shame in being a tenant, and there was a whole lot more financial safety.