Martin Luther King famously once proclaimed, “I have a dream, that one day my children would not be judged by the color of the skin, but by the content of their character, and that they would have a right to a home at an affordable price.”
Okay, that’s not exactly what he said. But an unusual coalition of financial institutions and community housing advocates has been arguing this.
The Dodd-Frank Act, passed last year revamping rules for financial institutions, directed all bank regulators to issue a joint regulation defining a reasonably safe, well-underwritten mortgage. Their recent proposed definition for such a “qualified residential mortgage” has created a stir because it has strict guidelines such as a 20 percent down payment requirement and tight limits on the collective debt of the borrower.
Rather than praising the definition of a good mortgage for ensuring borrower safety, consumer groups have criticized the regulation as being too strict, since banks would have to hold more capital against any loans that are riskier than qualified residential mortgages, meaning that financial institutions would charge more for mortgages with lower down payments.
“This is a civil rights issue,” John Taylor, president of the National Community Reinvestment Coalition, said recently.
Mortgage Bankers Association CEO David Stevens echoed the sentiment: “We still need to be able to make affordable mortgages that don’t just go to the wealthy, who can afford the biggest down payments and who have the most positive credit ratings.” Such a kind heart from a man whose organization has lost significant business in the past few years as mortgages to less qualified borrowers have dried up.
Stevens, Taylor, and the leaders of other groups such as the Center for Responsible Lending and the National Council of La Raza (not to mention the realtors and homebuilders associations) have been teaming up to fight the qualified residential mortgage definition on the grounds that it will cause low-income households to spend more time saving up for a down payment while increasing the cost of mortgages.
But why is access to affordable homes equated with access to affordable mortgages, i.e. debt? They are not the same thing.
This coalition is nothing new. Such groups were also aligned in the late-1980s hawking a similar product. MLK’s wife even gave a speech in 1989 encouraging President George H.W. Bush to push for “affordable housing” as a part of her late husband’s dream for civil rights.
Ultimately, the Government Sponsored Enterprise Reform Act of 1992 was passed creating “affordable housing goals” targeted at increasing lending to low-income families. But the trade-off for access to cheaper mortgage debt—often through a subprime loan—was that housing prices increased.
Affordable mortgages replaced affordable housing.
As Fannie Mae and Freddie Mac expanded their purchases of subprime mortgages throughout the 2000s, the prices of homes kept growing and growing—requiring more and more federal subsidies to keep pace. That is partly because as mortgage prices fell, demand increased for homes, and prices rose. It was basic economics at work.
Sure, increased mortgage rates can be quite the deterrent to homebuyers, especially first-time homebuyers. But so can high housing prices.
Yet Janis Bowdler, a research project director at La Raza, still argues that the new Dodd-Frank authorized regulations will “so significantly deter the ability of first-time buyers to break into the market that we will see a real decline in home ownership.”
The issue of whether increased homeownership is a good thing is a matter for a different column. The confusing part of Bowdler’s comment is why she isn’t pushing for lower housing prices if she is worried about first-time buyers.
With virtually ever other commodity, innovation that improves quality and lowers price is seen as a good thing. Only because of the misperception that owning a home is a universally good investment for households do we favor rising home prices. (Well, that and the politics of housing prices.)
But historically, home prices on a national level have generally grown just at the rate of inflation. Only during the recent housing bubble did prices break from their historical trend and double over the course of 10 years. It is a myth that homeownership inherently creates wealth.
Now, home values have been falling since 2006 as the bubble has deflated and we are almost back to the historical trend line that dates back to the end of World War II for housing prices. But a host of federal policies—like the First-time Homebuyers Credit and the Fed’s quantitative easing programs—have slowed the decline in prices; though they have not stopped it.
It's not that Washington should force prices to go lower, it's that La Raza and other consumer organizations should be clamoring for the government to get out of the way to let prices finish their fall back to natural levels. That would help first-time homebuyers since housing would become more affordable.
Plus the households would have less mortgage debt with less needed to borrow.
But if La Raza and their cohorts could write the rules, they’d keep the government involved while lowering the threshold for getting a federal subsidy.
When the homeownership mob—to borrow a John Carneyism—won the day in 1992, the results were 1) government supported housing finance that put taxpayers on the line; 2) lower underwriting standards for housing finance supported by Fannie and Freddie; and 3) a bubble created by an artificial boost in housing prices. Ultimately, millions of low-income families were stuck with high and unsustainable debt, leading to the millions of foreclsoures we are wrestling with today.
The same thing will happen again if the consumer groups win again. Crippling overnment-subsidized debt is not a civil right.
Anthony Randazzo is director of economic research at Reason Foundation and author of "Privatizing the Housing Finance System: A Brief History of the Housing Bubble and Ways to Keep It From Happening Again." This column first appeared at Reason.com.