REAL ESTATE
(Part 1 of 3)
Current Housing & Economic Challenges by James Carr Since the collapse of the housing market and onset of the foreclosure crisis, the idea of and public policies to support homeownership have been under attack. Six years into the crisis, the housing market continues to struggle, and many influential policymakers have made it their goal to significantly limit access to homeownership for the American public, in particular first-time homebuyers, borrowers of color, and low- and moderate-income families. Yet for more than 60 years, owner-occupied housing has not only been a source of pride and self-esteem for America’s families but also the cornerstone of the American Dream and the most significant and reliable source of asset building for the typical household. The assault on homeownership can be linked to widespread misunderstanding by many key policymakers, as well as the public, on three critical housing issues: • The reasons for the collapse of the housing market and the foreclosure crisis • The government’s role in ensuring the availability of the 30-year fixed-rate mortgage and the to-be-announced market • The current state of the housing recovery and its implications for families, communities, and the overall economy
1. Reasons for the collapse of the housing market and the foreclosure crisis In spite of a voluminous amount of data and other information on the causes of the foreclosure crisis, there remains substantial misunderstanding and confusion about the housing market’s collapse. There are three dominant public narratives on these causes: (1) A failed experiment in expanding
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homeownership to households that were not prepared to accept that responsibility; (2) the Community Reinvestment Act, or CRA, forced banks to make unsound and risky loans; and (3) people took out loans they could not afford. Both facts and common sense easily dismiss all three of these explanations. According to the Center for Responsible Lending, for example, only 9 percent of subprime loans, the high-cost loan products that were at the center of the housing market’s woes, were originated to first-time homebuyers. The majority of subprime loans were utilized for home refinancing. The argument that CRA was responsible is equally without merit; the Federal Reserve Board concluded that only 6 percent of subprime loans were covered under CRA. The vast majority of mortgages were originated and securitized by non-CRA covered institutions or did not otherwise meet CRA standards. And the idea that loans were originated to borrowers that financial firms felt were not eligible to receive them is, well, simply illogical. That fact is that in the decade leading up to the foreclosure crisis, the housing market had become saturated with reckless and unsustainable loans that were highly profitable to financial firms yet highly risky to consumers. And a major share of subprime loans were actually designed to fail—that is, they were designed to trigger an unaffordable increase in the loan’s interest rate typically two or three years after origination. That process was intended to force borrowers back to their lenders to refinance their loans back down to an affordable interest rate and, in the process, pay another round of unjustified high origination fees.