Unwinding the mortgage giants won't cure Americans of their desire to own a home, whether they can afford it or not.
FROM THE ATLANTIC | AUGUST 10, 2013
More than four years ago, President Obama assumed office promising dramatic reform to the housing market. After all, it was the housing market that triggered the financial crisis, and the vast proliferation of low-quality loans that had fueled the housing bubble. But politics delayed those reforms, and now the president is reopening the issue with a call to wind down the two main federal mortgage agencies, Fannie Mae and Freddie Mac. "For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag," the president said this week. "It was 'heads we win, tails you lose.'"
Well, not entirely. The U.S. government and taxpayers did rescue these agencies in 2009 (to the tune of nearly $200 billion), and, after injecting them with capital and essentially nationalizing them, these companies started to turn a profit as the housing market slowly recovered. This month, they contributed more than $15 billion to the U.S. Treasury, and have been one factor in sharply reducing government deficits.
Even more, Obama's targeting of Fannie and Freddie is part of a larger narrative -- on both the left and the right -- that banks and government colluded to produce the financial crisis and the continuing drag on the United States. To be fair, Obama in the same speech this week acknowledged that much of the housing crisis was the product of "banks and the government...[making] everyone feel like they had to own a home, even if they weren't ready and didn't have the payment." But that chord is a decidedly minor one in a general atmosphere of blame.
Over the past decade, we have collectively spun a story of the financial crisis. It goes something like this: in the 2000s, government regulation of the financial system loosened as large banks, in collusion with free-market ideologues in government, convinced regulators that risk was a thing of the past. They then took advantage of easy money and lax regulation and began to push mortgages to speculators and low-credit individuals, who bought homes they couldn't afford. Those mortgages were then packaged and used as the fodder for financial derivatives, which turned bad loans into a global crisis. Meanwhile, millions of people lost homes and jobs; the government spent hundreds of billions to bail out the banks, and those millions of citizens were left with shattered credit, no employment, and fractured communities such as Detroit.
There is much that is true in this story. Its basic contours were repeated this week in the Justice Department case against Bank of America over lax lending practices in 2008. And Fannie and Freddie, independent agencies backed by the government, were the linchpins, buying up those mortgages and providing a seemingly endless backstop.
What's missing from the story is crucial, however. Obama alluded to it in his speech, but he buried the details. Often neglected is the degree to which so many felt that they needed to own a home. That wasn't created by banks and government, even though it was encouraged. The "ownership society" had been touted not just by President Bush in the 2000s, but by Clinton, Reagan, and by Americans of all parties and ideologies since the founding of the republic. There is nothing more "Jeffersonian" than owning your own land and home (and slaves...but that is another issue). The United States pulled immigrants in part because of the availability of land and the promise of independence that owning land afforded. Freed slaves after the Civil War were promised -- though not actually granted -- "40 acres and a mule" because having land was seen as a necessary component to liberty and freedom.
After World War II, agencies such as the Federal Housing Administration along with other New Deal creations such as Fannie Mae (the Federal National Mortgage Association) spurred more widespread home ownership, with returning GIs both swarming into colleges and then into vast new housing developments in the suburbs. Freddie Mac (the Federal Home Loan Mortgage Corporation), founded in 1970, was meant to augment that process with even more quasi-government intervention in the mortgage market, with the goal of reducing the risk local banks might incur in making new home loans.
These programs then combined with banks to produce the increase in home ownership, from 62 percent in the 1950s to almost 70 percent in the 2000s. The programs worked not because the docile masses were convinced to own homes but because the drive to have a home is deeply embedded in American culture (and many other cultures as well). Government and banks facilitated the realization of these desires, but it is beyond a stretch to claim that they created those desires. They stoked them, and often took advantage of them, but they did not implant and create them.
That part of the story is sadly, thought understandably, overlooked and underplayed. Targeting government ineptitude and Wall Street greed is a far better sell politically, and a better sell for the media, than speaking of collective responsibility for our dreams trumping our means. Aiming for a home, holding that as a goal, and living in a society that allows for the potential to meet it are powerful and productive fuels. But succumbing to the easy lure of a promise too good to be true, which was what many of those mortgages in the 2000s were, required multiple breakdowns, one of which is individual desire clouding judgment.
The easy story of what happened over the past years is now in danger of becoming a set "truth." It is so often repeated that it often goes unquestioned. But while that story has much to offer, it entirely elides how our individual desires, combined with a long history driving us toward the supreme value of owning a home, were vital ingredients in our recent fate. That story also infantilizes "the American people" by suggesting that so many of us were dupes and rubes, easily manipulated by government and business into making bad choices.
Blaming venal banks and inept government will not transform our system, however satisfying it may feel. Shuttering Fannie and Freddie will not force a shift in people's desires, though it will make it harder for banks to prey on those desires. Ending the government guarantee of mortgages via these agencies will lead to tighter credit standards, and hence less access to credit for those less well-off. That may be for the best, but it is hard to see that not generating backlash. Rather than unwinding these agencies, we should focus on those lending standards, and when they should be relaxed and when not.
Overall, we would be better served by understanding that many of the struggles of recent years stem from a mismatch between what we dream of and what this system is currently able to provide. Some of the gap is due to bad regulation, Wall Street greed, and speculation. Much of it, however, is due to a radical change in our economies that has upended 20th century industries and jobs and continues to do so. Responding to that change and recalibrating our expectations without giving up our dreams -- that is where our focus should be, and must be.