Saturday, July 28, 2007

The Foreclosing of America (4):

Vicious And Virtuous Circles

[Thus concludes our series. Read previous installments here, here, and here.]

I've written about now-dead GOP dreams of creating a nation of conservatives by goosing the percentage of Americans who own their homes - because, as the American Enterprise Institute once fantasized, people who own real estate "have a deeper commitment to their community, a more profound sense of family obligation and personal responsibility, a stronger identification with the national fortunes, and a personal interest in our capitalist economy. (They also have a greater propensity to vote Republican.)"

I've written about the victims, ordinary, cash-strapped Americans who made the mistake of presuming that the people selling them their "NINJA"—No Income, No Job, No Assets—mortgages wouldn't be cutting these deals had they not believed in the debtors' ability to honor the obligations - in the face of an (anti-) regulatory environment that let mortgage brokers make a killing whether the loans succeeded or not.

I've written about how this has turned middle class Americans into mendicants, filling neighborhoods with literal haunted houses: "big empty houses near the...border, and people start worrying about letting their kids out to play," houses "filled with smelly trash and mattresses used by vagrants."

And I've written, too, about the toll all this state-santioned bottom-feeding many fear with visit upon the national economy itself: that financial markets artificially propped up by securities made up of bundles of crappy NINJA mortgages, in turn artificially propped up, in a vicious circle, by an unsustainable bubble in housing prices enabled by these bottom-feeding lending practices, may just pop right alongside the housing bubble.

And I've written about how the very financial engineers who helped make it happen say "we're just starting to see the tip of the iceberg."

I've also described the politics—the circumstantial links that some day, if historians are ever allowed to un-bury the Bush administration's records, lay the whole thing at the doorstep of the Oval Office. It smells to high heaven, this whole setup. George Bush and his every ideological acolyte can't open their mouths without saying their grandest dream is to see every American owning their own home. And yet their only actual homeownership program of any substance whatsoever is providing $200 million in down payment assistance—about $100 bucks for every new homeowner.

Read on to the end of this post. You'll find out how the' foreclosure crisis spun of short-sighted Republicans' political greed can spur a new (old) progressive politics of homeownership that could someday save the world.


A hypothesis: the White House ordered "regulators" like "Chainsaw" Jim Gilleran, head of his Office of Thrift Supervision—a former banker under a cloud for signing Republican fundraising letters while serving as California's superintendent of banks—to stand down, and regulate nothing. Or, even worse, had these revolving-door regulators to pass the word to their friends and former colleagues in the industry to write the fastest, loosest NINJA loans they could dream up—for as sure as our troops in Iraq would be greeted as liberators, the boom that would come of the home-building boom would cover all bets, economic and political: Grover Norquist nirvana.

How irresponsible was that bet? About as irresponsible as the neoconservative "freedom agenda" that dreams about stirring up a regional war in the Middle East out of the fantasy that America will emerge the richer. The right-wing version of long-term policy planning: buy more lottery tickets. Because America always eventually ends up on top, no matter what.

Insane. But then, that's how these guys play the game.

It's also how they've just lost the game, in Fresno, Orlando, Dallas, Houston, Phoenix, Las Vegas, and Atlanta as much as Fallujah. Those are the cities neocon Joel Kotkin described, in American Enterprise magazine, as "Our New Cities of Aspiration," "the de facto headquarters of the American dream," taproots of "a new economic development paradigm in which opportunities for homeownership are central." Now they're the headquarters of the new American nightmare: losing your home.


For progressives, there's a moral to this story—if our leaders are daring enough to grasp the nettle: a progressive politics of homeownership and foreclosure rescue that will bring in its wake new vistas of shared prosperity and well-being. As usual for progressive political successes, it will produce a deeply virtuous circle.

It's not far-fetched. We've done it before.

America's last great foreclosure crisis, of course, was the Great Depression. 273,000 home mortgages were foreclosed in 1932, four times the normal rate, and the rate doubled again early in 1933. Writes Roosevelt biographer Jean Edward Smith, "House price plummeted, and the entire real estate market was threatened with collapse."

George W. Bush, of course, has nothing to say about the conditions today that are moving us in that direction—that would bust his Ownership Society mojo. Franklin Delano Roosevelt, on the other hand, enjoyed greater moral clarity. He immediately got through legislation establishing a Home Owners' Loan Corporation. One thing it did was provide federal money for repairs—something municipalities (remember the mayor of Shaker Heights sending out town workers to board up windows and whack down overgrown lawns) now have to do on their own. Those unfortunates who live in more cash-strapped municipalities who have to watch their foreclosed neighbors' former properties rot, even as, simultaneously, the value of their own properties decline for the haunted houses in their midst, are out of luck.

That is why FDR said protecting homeowners from "inequitable enforced liquidation at a time of general distress is a proper concern of the government." The situation, now as then, cried out for collective action coordinated by government, because it is a collective problem—protecting home values: a virtuous circle, helping everyone.

The HOLC also refinanced mortgages, mandating unprecedentedly low interest rates, and also unprecedentedly long repayment schedules. That set into motion a policy cascade that soon far transcended merely the needs of those in financial hardship and spread to the entire middle class—indeed, helped build the middle class.

The Federal Housing Administration was established in 1934 to insure mortgages, mandated at favorable terms; in 1938 the Federal National Mortgage Association (Fannie Mae) was established to create a secondary market for mortgage—a radically different secondary market than the one created by Wall Street investment banks in the 1990s because it served both the interests of creditors (by freeing up liquidity for loans) and borrowers (because their creditors required less liquidity from them upfront in order to ensure a profit). Then, following World War II, the Veterans Administration offered even more favorable terms for the men who had just defeated fascism.

Previous to this decades-long process, the typical mortgage required a down payment of half the home's value and came due in 10 years; after, a mortgage involved a down payment of 10 percent, was financed at 4 percent spread out over 30 years—and mortgage payments were tax deductible. The homeownership rate was 40 percent before the war; by 1965, it was almost 65 percent. The salubrious housing policy environment had helped boost consumer spending; the upshot was the greatest sustained economic boom in the history of mankind, and the largest middle class the world has ever known.

The American Dream was largely an invention of enlightened government. A virtuous circle, helping everyone.

So what does George Bush do with all this, having decided that a 65 percent national homeowner rate isn't high enough, because more homeowners equal more Republicans? Kicks in a federal down payment subsidy that averages a measly $100 bucks per new homeowner; this American Dream Down Payment Initiative Act is intended for individuals with incomes not exceeding 80 percent of the median area income, and is designed to give grants averaging $7,500 to about 40,000 households. There's also a "Self-Help Homeownership Opportunity Program" to help nonprofits like Habitat for Humanity. "Overall," the Federal Reserve Bank of St. Louis Reviewconcluded, "these programs are too small to have had a measurable effect on homeownership rates."

Even as homeownership rates have gone up, from the customary 65 percent to 69 percent. How so? Conservative stewards of our government green-lighted bottom-feeding mortgage brokers to more efficiently fleece undereducated consumers, with no regulatory oversight, and an incentive system that rewards salesmen for writing mortgages they know cannot be paid back.

And a housing boom has become a foreclosure boom. Yes: a vicious cycle, hurting everyone.

And I mean everyone—and not just if a housing securities collapse tanks the financial system. What FDR so wisely grasped—that preserving the value of a family's home is a collectiveOur schools are primarily funded by property taxes, which are levied based on the assessed value of homes. Is America prepared to reckon with the damage to school districts across the nation as home values collapse? good—is radically more true 85 years later.

Collapsing home values leave every child behind—a vicious circle, hurting everyone. Is anyone in the White House talking about this?

But rather an opportunity for politically ambitious progressives, when you think about it—not least those ambitious Democrats who happen to be running for president.

By ">this spring, one homeowner for every 775 lost their home to foreclosure. In Colorado it was one per 292 households. California's numbers had tripled from the previous year, accounting for 21 percent of the national total. "New City of Aspiration" Las Vegas is at one per 139 households.

Of course, even as anticipated tip-of-the-iceberg figures, this isn't much of a constituency. Figure that for every potential forecloser, 10 families fear losing their homes. Figure that for every one of these, that signs of their anxiety, like an unstifled yawn, carries over to friends, family, co-workers—who, beleaguered NINJA-victimized mortgage-holders or not, know the sting, like most Americans now know the sting, of owing more to creditors than they make in income every month?

What would a new progressive politics of homeownership do for them? One that deployed collective resources to keep people in their homes, keep neighborhood home values up, deployed a federal rainy day fun for municipalities to keep up school funding in the event of a property-tax drought, one that (if this is truly what Americans decided they wanted) could keep the homeownership rate at 69 percent or higher by offering a NINJA loan's inexpensive and accessible terms without NINJAs' lottery-like risks, which eliminated vulture-lenders with extreme prejudice and perhaps even put some of the worst offenders in jail (or, at least, not in charge of banking regulatory agencies)?

It would rescue millions of Americans from everyday anxiety in a way not seen since the passage of Medicare in 1965.

But it would do much more. It would spur a virtuous circle that would succor not merely millions of Americans, but 300 million Americans—every American. Spur consumption without expanding consumer debt. Preserve home values in every neighborhood. Make taking a flier on a first house or a bigger house or a nicer house a safe thing to do and not a reckless thing to do. Disincentivize corporate fleecing. Save the capital markets from volatility. Dissolve some of the inequality that comes of structurally more volatile capital markets. Save the middle class. Expand the tax base. Use that expanded tax base to vouchsafe programs—universal healthcare, affordable college—that expand the middle class, spur entrepreneurship, and take us back to the top: spurring consumption without expanding consumer debt, preserving home values, etc., etc., etc.

Virtuous circle.

That's the way liberal government used to do it. It seized upon crises to produce solutions that closed down the possibility of future crises. Insurance. Some wise person once remarked that a government is an insurance firm with an army. Well, our insurance firm sucks. The foreclosing of America proves it. Fix it, and—listen closely, ambitious politicians—you remind people that government is there to help them. The stock of the party that people traditionally associate with government skyrockets. They stop voting for the party that affects to despise government.

That's how you end the Big Con. When the social situation throws up thorns, liberals traditionally grasp the nettle. That's how, from the 1930s for almost the next half-century, for liberalism, everything came up roses.

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