by Peter Marcuse
What is called the “subprime mortgage crisis” reflects a fundamental crisis in the housing system and a fundamental ideological blinders to the alternatives that the crisis suggests. The crisis is not a crisis of liquidity in the mortgage market, or a failure of regulation, nor is it the same as the crisis of Fannie Mae and Freddie Mac, which is a different crisis, with which it is often confused. It is rather the result of the inability of the market to provide adequate and affordable housing for large numbers of Americans, and of the ideological commitment to homeownership as the incarnation of the American Dream for the masses.
There has long been a crisis of housing affordable to a large portion of Americans. 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 United States housing policy is replete with one effort after another to solve the problem preserving the dominance of the private housing market . 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 1-bedroom apartment, a situation in which African-Americans, Hispanics, immigrants, and women suffer in grossly disproportionate numbers. As a result grass-roots groups, discontent with that situation, mounted substantial pressures for reform. With only one significant exception, and even that one limited (public housing ) very public program to enlarge the supply of affordable housing has relied on bribing the private housing industry to make its housing more affordable. Those programs have systematically been provided with grossly inadequate funds for that purpose, have never been made a matter of entitlement, and have always been conspicuously inefficient in terms of the amount of subsidy siphoned off as profit by those involved in its private provision.
Not only have prior governmental efforts in housing been subject to the pressures of the private housing industry , they have also been colored by the ideological belief in home ownership as “The American Dream.” It is a powerful ideology. It relies in part on the prevalent identification of homeownership with the single family home, and 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, of which security of occupancy may or may not be provided, as so many of today’s foreclosed home “owners” have become painfully aware.
The protest against inadequate housing was thus met by a program that tried to maintain these two causes of that inadequacy intact: promoting for lower-income households private home ownership, in homes supplied by the private market. The programs had a progressive component: preventing discrimination in housing, including mortgage provision, because of race, and the red-lining of minority neighborhoods.. The Community Reinvestment Act of 1977 resulted, requiring banks to allocate prescribed portions of their mortgage portfolios to such neighborhoods. That however meant that banks had to modify their normal definitions of risk (which included neighborhood conditions) to satisfy the act, and in turn meant that in some cases they in fact made more conventionally risky loans. Fannie Mae and Freddie Mac, government-sponsored private corporations that bundles individual mortgages into packages that are then turned into marketable securities, were encouraged to buy loans to low-income households as proof that they were in fact serving a public purpose, and engaged on large-scale advertising programs to market such loan. The history of these two corporations is in fact interesting, and too little discussed. Originally Fannie Mae was a governmental corporation, and agency of government, that served the function of packaging private loans and reselling them for a moderate fee to cover possible losses. When it turned out that the packaging-resale process in fact could generate a handsome profit, the agency was split into two, GNMA (The Government National Mortgage Agency) was kept as a government self-financing but not profit-making corporation dealing only in government-insured loans, keeping the fees it received for making loans as a reserve against possible defaults, and Fannie Mae was spun off as a private profit-making corporation, entitled to siphon off and return to investors any profits it might make. Yet Fannie Mae was given an expected if not formalized government guarantee against major losses, exemption from state and local taxes, and exemption from SEC oversight. Thus the profit from mortgage packaging activities was privatized and in part subsidized and the risk of loss remained ultimately public.
In any event, government policy massively promoted home buying by low-income households: everyone in the private housing industry made money on it, and politicians could happily claim they were helping more and more families achieve the American Dream.
Many homes were in fact provided to families who could not afford them. As long as their price on the market went up, the expectation that the increase in price would be even greater than the discrepancy between current costs and current incomes left everyone happy; as soon as prices stopped increasing, the problems began to mount.
So what’s the solution? There are a number of proposals, some partially incorporated in the Dodd bill already passed, which in effect make it possible to for home “owners” in or near default to extend the term of their mortgages. Other proposals address how new mortgages should be regulated in the future: lenders should be required to tell their prospective borrowers of the lowest-cost mortgages available., they should be forced to disclose all costs and fees up front, there should be more opportunity to evaluate the operation of mortgage markets. They are all worth doing, but they only deal with the fringe of the problem There is a history of stabs at regulation of specific problems, in the Fair Housing Act of 19The Equal Credit Opportunity Act of 1974, the Home Mortgage Disclosure Act of 1975, as well as the broader community Reinvestment Act of 1977.. In the end, deregulation is not the problem; the existence of what needs to be regulated is the problem.
So what is really the problem ? It is both ideological and economic, and its name is the same in both: The private supply of one of life’s necessities through the private market, the provision of housing for profit not for people. In more classical terms, the handling of housing for its exchange value rather than for its use value, the commodification of housing.
The ideological problem lies in the belief in the goal of private single-family home “ownership” with the American Dream, visualized as a single-family home on a suburban lot, and the coupling of that belief with the conviction that the private market is the best way to achieve that goal. Underlying the widespread acceptance of the goal are some facts of life in the dominant housing system:
1. that rental tenure is insecure and always subject to the danger of eviction;
2. that the only alternative to insecure rental is ownership in fee simple;
3. that “ownership” in fee simple guarantees unrestricted use and secure occupancy and ultimately the ability to sell at a profit;
4. that housing prices seem to be steadily rising, and thus occupancy seems secure;
5. that “ownership” should be seen as a way of accumulating assets for households;
6. that public policy has provided substantial economic incentives for homeownership through the mansion tax subsidy, the deduction from income taxes of mortgage interest and real property taxes
7. that the experience of any kind of supportive collective or communal ownership and residential facilities is minimal.
So the ideology is rooted in real world experience, but a limited experience, more extremely limited in the United States than in many other countries. Knowledge of the way the housing system functions in the real world in fact contradicts the conclusions drawn from this limited experience.
1. Rental tenure could in fact be made at least as secure of “ownership” by appropriate lease provision and selection of appropriate landlords, e.g. non-profits or government;
2. 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.”
3. Clearly wrong, as hundreds of thousands are now finding.
4. Clearly wrong, as millions are now finding, Some 9 million households today have negative equity in their homes.
5. Putting the above two points together, wrong; treating housing for its exchange value runs contrary to optimizing its use value, and by and large does not even increase asset value for many.
6. True, but subject to technically easy congressional change—a political decision
7. True, but countless examples do exist, here and abroad.
The conclusion at the ideological level then is that an educational campaign to illuminate the limits of home “ownership” and the range of available alternatives is needed.
The nature of the economic problem is similarly clear. It results from the simple fact that the overwhelming majority of housing, both units and services, are privately provided for profit. Yet the simple fact is that, given the level of rents required to produce the profit that is sought, a major part of the population cannot afford adequate housing, and will either pay a disproportionate part of their incomes for housing, neglecting food or clothing or health care or education. There are two answers to this problem:
One is a mild one: extend control over the level of profits that is permitted in the provision of housing. The tools for this purpose are at hand: rent control; anti-speculation and excess profits taxes; criminalization of discrimination and unfair practices; eviction controls and building code improvement and enforcement. Such measures are more than lipstick on a pig, but fall short of reshaping the animal: providing an alternative.
The alternative 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. 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.
On the immediate question of what to do about the current crisis, separate it into the immediate crisis and the prevention of its recurrence in the future:
Included in the current package of reforms is $4 billion of grants to state and local governments to use in rescuing borrowers. Let it be used to buy the homes that are in foreclosure, possible in many cases at bargain prices, and let those units remain publicly owned units with their residents remaining in occupancy and control. Let there 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. But let there also be a wide range of experimentation with other forms of non-private-profit oriented ownership models. Many existing ideas are already on the table. Other physical forms of housing can also be explored; for instance, Dolores Hayden has argued from a feminist perspective that a non-sexist housing program would include the possibility of common cooking and eating facilities, shared recreational space, etc.
Importantly, let the $4 billion be vastly augmented. The treasury, in its current bail-out policies, is criticized for socializing the risk but letting the profits remain private. Use the $4 billion plus to socialize the profit in the housing supply system. The balance between private for-profit “ownership” of housing and public “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.
As to the future: accept the fact of on-going major public investment in the housing of its people. For those still in a position to buy privately and willing to do so, let the government help by playing the technical role of bundler, as GNMA now does, for a fee, but leave the risks of default with the originating bank, as it had been before FNMA began selling securities for a profit. Let Fannie Mae and Freddie Mac go bust. Deal with the impact on shareholders who invested, not to speculate, but to provide icome on retirement through pension funds, be helped by public assistance to those pension funds, not by bailing out the institutions that permitted the crisis to happen and had been profiting on the system for many years before its collapse.