#156 Winter 2008-09 — Financial Crisis

The Housing Change We Need

The foreclosure crisis has pushed the envelope so far, it's left an opening where we can start building a real national housing policy.

image shows shreds of newsprint with text announcing falling home prices, to illustrate an article about national housing policyI hate to write these words — but President Bush was right.

Speaking on Wall Street just before the G20 meeting, he said: “The crisis was not a failure of the free-market system, and the answer is not to try to reinvent that system.”

Indeed. The crisis was not a failure of the system; it is how the system works. And the answer is not to reinvent the system, but to reject it and try something new.

A crisis in housing has been part of the U.S. housing landscape for a long time. It was recognized at least as far back as the Housing Act of 1937, whose objective was to provide “adequate housing within their means for all Americans.” That promise was never fulfilled, and the history of U.S. housing policy is replete with one effort after another to solve the problem while preserving the dominance of the private housing market. The foreclosure of homes marketed to families of limited income is only the most current product of that crisis.

It is the private housing market system itself that produces these crises in housing, not because it is failing, but precisely because it is working. Housing is only provided to those who can pay enough for it to make a profit for its supplier. There is an obvious injustice in the results of such a system — today, there is not a single city in the country in which a full-time worker earning the minimum wage can afford even a one-bedroom apartment, a situation in which African-Americans, Hispanics, immigrants, and women suffer in grossly disproportionate numbers. When it turns out that the buyers cannot repay the loans, as was predictable, and foreclosure results, it appears as a credit crisis, rather than the housing crisis it really is.

The history of attempts to change the system is rife with the lesson that piecemeal reforms can ameliorate, but don’t solve, the problem. Grass-roots groups, alarmed by one phase of the crisis or another, have pushed for reform. With only one significant exception — public housing — and even that one to a limited degree, every public program to enlarge the supply of affordable housing has relied on bribing the private housing industry to make its product more affordable. Those programs have systematically been underfunded, have never been made a matter of entitlement, and have always been conspicuously inefficient in terms of the amount of subsidy siphoned off by those involved in producing housing for profit.

Thus, the first pillar of the crisis is the nature of housing development in America: It relies on the private sector to meet housing needs and is penurious to the point of starvation in the government resources it provides to meet the true need for housing, one of life’s necessities.

Governmental efforts to address the housing crisis have also been colored by the officially promulgated fantasy of homeownership as The American Dream. It is a powerful ideology that relies on two myths, which are the other two pillars of the housing crisis. One is the widespread equation of homeownership with the single-family house on its own lot — a design concept that would puzzle the majority of the people living in cities in the industrialized world. The other myth is the idea that only through ownership can security of tenure be attained, that security being identified with freedom from a landlord’s right to evict. Most buyers accepting this ideology are unaware that there are other forms of tenure that can provide equal rights of occupancy, because ownership is in fact a complex bundle of rights, among which security of occupancy may or may not be provided. Many of today’s foreclosed homeowners have become painfully aware of how insecure ownership can be.

The exploration of other designs and other forms of tenure has been severely limited in the United States. Our government has never dealt head-on with the possibilities of protecting tenants adequately in rental housing, nor in designing housing to provide real alternatives to the isolated single-family building. It has heavily promoted home buying, and when effective demand for single-family houses has proven limited, it has supported debt as a way of extending the profitable market to low-income households.

It is ironic that conservatives blame such legislative efforts as the Community Reinvestment Act (CRA) for the flood of foreclosures. In fact, the CRA was designed to ensure that families who could afford it were not prevented from buying a home because of race; foreclosures on mortgages obtained as a result of the CRA have been minimal. But as a result of the effort to extend the market to those who could not afford to pay what was required to provide profit, many homes were provided to families who had to borrow more than they could afford. As long as the market price went up, the expectation that the increase would be even greater than the discrepancy between current costs and incomes left everyone happy. As soon as prices stopped increasing, the problems began to mount. And today we have a crisis of multiplying foreclosures of those homes.

There are of course more visible aspects of the foreclosure crisis, ones that are more consistent with President Bush’s view of the matter, if slightly more rational than his. They focus on the financial side of the housing industry, and within that, on unregulated predatory practices. Some see these mushrooming practices as the result of the particular greed of particular brokers or lenders or builders or contractors or financial institutions; others see predatory lending as an inevitable outcome of an unregulated financial system. The solution is regulation — but not at the expense of seeing and dealing with the real roots of the problem.

Part of the lack of coherence in the current national debate stems from the confusion of quite different concepts: subprime lending, predatory lending, lending to low-income households, financialization of mortgage lending, unregulated lending, and the commodification of housing. Subprime lending is variously defined as a characteristic of a loan (a high-risk loan, a loan of comparatively burdensome interest rates or condition), a characteristic of a borrower (low-income, not creditworthy), or a characteristic of a lender (an unregulated financial firm).

Predatory lending is lending at exorbitant interest rates, concealed costs, high-pressured excessive amounts, the unconscionable taking advantage of borrowers. Lending to low-income households can be either a help in their attaining a feasible goal (as the CRA seeks to guarantee) or a trap sold to them to produce profits for the lender or intermediaries. Financialization of mortgages can be either a way to make new sources of capital available for social ends (as savings and loan associations, for instance, have historically done) or a way of squeezing yet more profit from mortgage lending (as when unregulated mortgages are packaged — securitized — and sold at speculative and unwarranted prices). Unregulated lending is a matter of degree, and the entity and manner of regulation as well as its extent are key variables (is it Goldman Sachs personnel or committed public servants that do the regulating?).

Each of these categories is complex, and each suggests much room for ambiguity and debate, and some may lead to fearsomely complex proposals for action — some of them worth doing, others merely deflecting attention from more serious problems.

Commodification of housing, however, is in a different category: It is the underlying problem. Commodification is the conversion of housing from something that provides shelter, protection, privacy, space for personal and family activities into something that is bought and sold and used to make money. Thus, every step that limits the commodified character of housing contributes to solving the housing crisis.

There are a number of proposals, some partially incorporated in the Housing and Economic Recovery Act of 2008, which in effect make it possible for homeowners in or near default to extend the term of their mortgages. Other proposals address the regulation of new mortgages: lenders should be required to tell prospective borrowers of the lowest-cost mortgages available; they must disclose all costs and fees up front; there should be more opportunity to evaluate the operation of mortgage markets. They are all worth enacting, but they do not go to the heart of the problem. Deregulation did not cause the problem; it merely allowed it to metastasize.

What’s needed is a bolder and more comprehensive set of actions addressing the real sources of the problem, the commodification of housing and its three pillars.

As to the first pillar: money. The present foreclosure crisis has created a political climate in which there is widespread recognition that something is wrong and needs fixing. Seven hundred billion dollars in a bailout package for large financial institutions strikes most people as wrong, whereas helping people at risk of losing their homes seems right. The comparatively trivial allocation of $4 billion for state and local governments in the Neighborhood Stabilization Fund to deal with foreclosures suggests there is an opening, perhaps even greater with the new Obama administration, for more effective policies. The low-income housing community, for which Shelterforce plays an important communicative role, is already pretty well united in its commitment to seek substantially greater funding to deal with the housing crisis.

But we should not confine our attention to the immediate foreclosure crisis, although it of course demands priority. The problem is not short-term; it is chronic — inherent in the system. As long as housing is provided only in response to “effective demand,” that is, for those rich enough or highly enough paid to purchase it with a profit for the provider, governmental action will be necessary if the large numbers of those with “ineffective demand” but real need are to be decently housed.

The conclusion is radical, but very simple: until adequate incomes are guaranteed, providing adequate public financing to cover the gap between even regulated housing costs and ability to pay is going to be permanent. Where that financing is to come from can be debated; measures such as the military budget and raising progressive income taxes are surely obvious possibilities; that the need will be ongoing is not debatable.

As to the other two pillars, ownership and isolated single-family design, they are intertwined. What’s needed is a frontal attack on the two myths that undergird the crisis. Rental tenure could in fact be made at least as secure of ownership by appropriate lease provision and selection of appropriate landlords, e.g. nonprofits or government. And rental is not the only alternative to individual ownership. A wide variety of tenures is available: cooperative, condominium, limited-equity co-ownership, mutual housing association, land trust, each of which combines various attributes in the bundle of rights that is “ownership.” (See “Homes That Last”.)

The design issue requires experimentation, but some points are clear. Multi-family housing is a perfectly acceptable way of living for millions of people in our cities. Thinking about the advantages of density, the costs of sprawl, the relation to mobility through efficient, ecologically sensitive transportation and building design, is already on the agenda of planners and housers. Feminist architects and critics have pioneered in designing alternate forms of housing that feature both individual privacy and common facilities. The rich have no difficulty living in high-rises, and some public housing provides very decent housing to other income groups. The possibilities are extensive.

One point in this argument represents a discordant point of view from many in the housing community. If the above analysis is correct, we should not swallow the view that a home should be seen as an asset to build wealth. What that boils down to is encouraging speculation in housing, hoping for ever-increasing land and housing prices that permit even a lower-income homeowner to reap the benefits of speculation. That is an attractive argument, at least until the housing bubble bursts; then the more fundamental need for security in having a roof over one’s head suddenly outweighs the hope of speculative gain from a possible increase in value of that roof.

Studies have shown that, as an investment, other avenues can produce better returns for the excess money that is invested in housing in the hope of speculative gain. That may be a hard pill to swallow for groups that have been lured into promoting homeownership for low-income families as the best way of providing economic security, but it needs to be faced.

The challenge to homeownership as the American Dream and the criticism of using housing as an asset for wealth-building may sound like academic ivory-tower criticism unrelated to real politics or policy, were it not for the fact that the concern for bailing out those threatened with foreclosure opens the door to considering solutions that genuinely go to the roots of the problem. The national debate now taking place over the mortgage mess has led to consideration of options otherwise unlikely to be on the table.

On the immediate question of what to do about the crisis as part of a long-term approach, not to fiddle with the existing system but to change it fundamentally:

The $4 billion in grants to state and local governments in the Neighborhood Stabilization Act is available to aid borrowers. It should be used to buy the homes that are in foreclosure, possible in many cases at bargain prices, allowing those units to remain occupied by their current residents, in a form that provides them with real security of occupancy and use and control. Let there also be experimentation with a wide range of forms of non-private-profit-oriented ownership models.

There should also be experiments to see if those units should be handled as an expansion of public housing along existing models, which can be adapted to provide the security and individual control that the owners wish. A strong case can be made that public housing, in is traditional or democratized (in the direction of tenant involvement) form, play a major role in this solution — for two reasons.

First, a legal envelope and management structure exists through which public-housing authorities can handle large numbers of units for low-income households, and would only need to be modified, not replaced, to handle the accession of a large number of acquired foreclosure-impacted properties. Second, had there not been so large a curtailment of subsidies in all forms, but particularly for public housing, the pressure for lower-income households to seek homeownership as the cheapest way of improving their housing conditions would have been reduced. In a sense, it was the cutback in public-housing subsidies that forced some people to turn to subprime mortgages.

In fact, the $4 billion needs to be vastly augmented. The Treasury, in its current bail-out policies, has been criticized for socializing the risk but letting the profits remain private. Now there is an opportunity for the federal government to commit to an ongoing major public investment in the housing of its people. It clearly has the resources to do so — if it can make $29 billion available to back Bear Stearns, it can provide $85 billion for AIG, the $5.2 trillion liability taken on with GSEs, etc. bringing the investment in housing from $4 billion to $40 billion would be a drop in the bucket of federal expenditures. Use the funds provided to socialize the profit in the housing supply system. The balance between private for-profit ownership of housing and social ownership should be shifted dramatically in favor of the latter. Likewise, development and construction and management should shift to the public sector; there is plenty of good experience in each area.

An example, to show how close to reality such proposals are: The City of Lancaster, just north of Los Angeles, has adopted a plan to buy empty houses in the process of foreclosure, renovate them as needed, and sell them at below the cost of purchase and repair to income-eligible families. It’s a solid idea, clearly expanding the supply of affordable housing for lower-income households. Suppose such houses, when sold, would carry provisions for resale only to other lower-income families, or assembled into limited-equity co-ops, or placed into a land trust, or even maintained as city-owned if the local housing authority is a well-run public agency. The units, permanently removed from the housing market — decommodified — would have a restraining influence on housing prices generally, and would provide secure housing for families that need it.

Not so complicated!

Then we would be tackling, not just the excrescences of a misguided system of providing one of life’s necessities, but paving the way for a wholesale transformation of the system to provide better housing opportunities for all: housing for people, not for profit.


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