Hundreds have written books and articles describing what I called "The Thrift Debacle," attributing blame and projecting the losses taxpayers will have to bear. Villains abound: lax federal regulators, state governments, congressmen, S&L operators, investment bankers, lawyers and accountants.
But I have come to believe that we have missed an important cause -- perhaps the central one -- of this fiasco. It is this: far more than any other country, the United States has committed substantial resources to providing its citizens not just with a residence but with high-quality housing. No other nation so richly financed or so freely permitted development of sites. No other nation has had such a diverse supply of raw materials suitable for construction. And no other nation has ever given such a free rein to commercial banks and savings institutions to grant the credit that poor families and undercapitalized builders desperately needed.
Until the 1930s the federal government did not direct funds to residential mortgages. But with unemployment during the Depression approaching 25 percent and annual housing starts at a dismal 93,000 in 1933, the New Deal was anxious to do something to spur construction. Deposit insurance, grudgingly accepted for banks by Franklin D. Roosevelt, was also extended to S&Ls in 1934. A year later FHA mortgage insurance and public housing were brought into being. In 1938 the institution known as Fannie Mae (the Federal National Mortgage Association) was created to increase liquidity for residential mortgages.
Although the effect of these actions was minimal at the time, after World War II things began to take off. From 1945 on, a bewildering array of additions to and expansion of federal credit guarantees and direct subsidies for housing underpinned massive American building of homes and apartments. Politicians of both parties embraced federal housing aid. Conservative Sen. Robert Taft (R-Ohio) was one of its strongest supporters in the 1950s. Democrats, in response to criticism that low-interest loans and public housing were costing the government too much, acted in in 1968 to allow interest rate subsidies to flow through private developers for both rental and sales housing. Republican President Richard Nixon took full advantage of the new program when he realized that, while the full amount of a government loan hit the budget immediately, only each year's payment for a rate subsidy had to be reported. The Department of Housing and Urban Development under Nixon brought federally aided construction to more than 600,000 units in 1972.
More effective than direct subsidies was ''privatization'' of federal credit guarantees, which began with deposit insurance, without which S&Ls would never have survived. With it, their assets soared from $8 billion in 1930 to $800 billion in 1980 as the maximum amount covered by insurance -- originally $2,500 -- was increased to $100,000.
During this surge, losses to FSLIC, the S&L insurance fund, were minimal. But at the same time, rising interest rates had so driven up S&L costs that most were losing money. Reported net worth had consistently fallen since the 1960s. If S&L portfolios were discounted to their market value, the system as a whole had a negative net worth of at least $17 billion, almost three times total FSLIC reserves.
Deregulation purists wanted to end all government involvement in banking. This meant abandoning deposit insurance and the quid pro quo that had required the S&Ls receiving it to concentrate on residential finance. But Congress would have none of that. Instead, it and the administration resurrected an old idea: S&Ls would retain deposit insurance but be allowed to make riskier and presumbly higher-yielding investments so they could once more earn a profit and continue to fund home loans.
The real driving force for lopsided deregulation therefore was the U.S. consensus that housing production and home ownership must be strongly promoted by the federal government. Had policy makers believed we could get along without such federal aid, S&Ls would have shrunk dramatically or even been eliminated.
But deposit insurance was not confined to S&Ls. Banks also used it. And while the insolvent thrift industry was doubling its assets in the '80s, banks were sharply increasing not only the size of their portfolio but the percentage in real estate loans. As the dimension of S&L losses mounted, bank regulators might well have clamped down on their constituents' real estate lending, but they didn't. Now bank losses threaten to engulf the system and add to the federal obligation.
Privatization, under which business uses federal guarantees for residential lending authorization, has gone beyond deposit insurance. At HUD, co-insurance allowed mortgage bankers to make loans for the construction and rehabilitation of apartments. Abuse of this feature by undercapitalized firms has now left the government with several billion dollars in losses. FHA insurance reserves fell from $8 billion in 1979 to $2.8 billion in 1989.
Fannie Mae and Freddie Mac, although largely cut loose by the government and owned by private shareholders, retain ''agency status.'' Investors in their securities believe, despite specific statements to the contrary, that the ''feds'' will be forced to meet their obligations. Consequently, Fannie and Freddie, both with minimal capital, have been able to go over $1 trillion in debt at favorable interest rates.
Now all this is coming to an end. S&Ls and banks are being required to increase capital and reduce risk. HUD coinsurance has been stopped. Secretary Jack Kemp is proposing higher FHA insurance premiums. The Treasury Department wants Fannie and Freddie forced to meet strict credit rating standards. Congress may balk at some of this, but the restraints on governmental housing aid will become stronger.
A good thing, too. The commitment to housing made sense for two or three decades after World War II. But by the end of the 1970s, we had neither the need nor the financial ability to continue massive federal credit guarantees for housing. Instead of curtailing it in the 1980s, however, a supposedly conservative administration pushed it to new heights. In large measure this accounted for the Reagan recovery, the price for which we shall pay into the hereafter. Having overbuilt many residential as well as commercial real estate markets and buried the country in debt, the government is pulling back from its housing commitment. The house party has come to an end.
The writer is a mortgage banker and a professor of real estate finance at Columbia University.