Although lax home-lending standards weren't the sole reason for the credit collapse and economic downturn, they contributed mightily to our economic headaches.
Those who have to deal with those problems, as well as policy planners who are looking ahead, would do well to revisit our national bias toward home ownership, and the distortions that it has created in the credit markets and the economy at large.
Considering our nation's longstanding policies that encourage home ownership, however, this won't be easy.
Since the enactment of the National Housing Act of 1934 and the creation of the Federal Housing Administration, it has been federal policy to broaden the base of home ownership. The government's first steps in the housing market, undertaken in the depths of the Depression, helped stem the tidal wave of foreclosures and stabilized the banking system.
Home ownership, of course, provides the nation with many vaunted benefits: it strengthens stable communities, fosters civic pride and encourages fiscal prudence. For decades, the government's encouragement of broad-based home ownership delivered on its promise.
As a result of the adoption of FHA-conforming self-amortizing mortgages (which replaced the annual mortgages that banks declined to roll over during the early 1930s) and an active secondary market for these mortgages made possible by the creation of the government-owned Federal National Mortgage Association in 1938, banks were able to provide mortgages to millions of homebuyers.
Between 1940 and 1970, the percentage of households that owned their dwelling in the United State rose from 43.6% to 64.2%. The percentage remained in the mid-60s through the mid-1990s, when it started inching upward due to a relaxing of credit standards.
What lawmakers overlooked in their zeal to expand home ownership was that a borrower's creditworthiness — based on stable income adequate to meet the debt obligation, a good credit record and a significant equity investment — was as important as credit availability in the success of the government's policy.
The behavioral characteristics that lead to creditworthiness such as an ability to save, defer gratification and work toward a goal are as central to community stability and civic pride as home ownership itself.
With mortgages easier to obtain and creditworthiness less significant, home ownership rose, reaching 69% in 2004. Wall Street's financial engineers helped fuel the fire by slicing, dicing, repackaging and morphing the mortgages of the less creditworthy into an almost infinite variety of securities and derivatives.
With a robust secondary market clamoring for more products, banks and mortgage originators were all too happy to create as many mortgages as possible.
Eventually, however, reality won out.
The peaking of housing prices in 2005 and their decline in 2006 revealed that the soaring housing market was nothing but a bubble. The collapse set off a violent downward economic and credit spiral from which we are now only fitfully recovering.
As we grapple with the untold billions of non-performing mortgages still on the books of federally dependent banks, as well as the future of
Fannie Mae and
Freddie Mac and the role of the government in the secondary mortgage market, we would do well to reconsider our policies.
Owning a home may be part of the American Dream for many. But enshrining it as enduring national policy may be a prescription for an American nightmare.
