Saturday, April 2, 2011

Who Decides the American Dream?

Now that we are 3+ years removed from the beginning of this financial mess, and with each set of data a recovery seems underway, many are starting to turn to the job of finding out just what happened and how to prevent it in the future. At the heart of this debate is homeownership and the perennial question "Who decides who gets to own a home?" Dig a little deeper and the question is "Who decides who decides who gets a home?"

Many point to the GSEs (Fred and Fan Mae) as being the responsible parties in subprime loans. They follow that one step further to the goals laid down by George W and Bill Clinton to boost homeownership which then gets backtracked to the Community Reinvestment Act of 1977. There is still an underlying question that isn't addressed by these causes though. The GSEs, Bill and George, and the CRA were merely trying to increase homeownership of those people who could afford a home but simply didn't qualify for a "conforming" mortgage as laid out by banks.

The above causes contributed to innovations such as 3% down mortgages and piggy-back loans which both served to counter the 20% down rule of conforming loans (I don't want to touch on 0 down loans as they seem barely justifiable even in highly specific cases). Russ Roberts lays out some good ideas in "Gambling With Other People's Money":
The opportunity to borrow money with a 3 percent down payment has three effects on the housing market: 
• It allows people who normally wouldn’t have accumulated a sufficient down payment to buy a house. 
• It encourages homeowners to bid on larger, more expensive houses rather than cheaper ones. 
• It encourages prospective buyers to bid more than a house is currently worth if the house is expected to appreciate in value
The first of the three points above is the whole point of the changes to conforming loans. The other two points are interesting but would take me way too long to comment on.

 Now we have a working class family that makes $40k a year with both parents working who want to buy a $120k house able to put down under $4000 instead of $24,000. Quite a difference. Assuming they can make the monthly payments, is there any reason they should not have the 3% mortgage available to them?

Was this push for higher homeownership rates simply identified with revisions to conformity rules on mortgages? Were banks (especially the GSEs) pressured to give more loans not only with less money down, but to people less likely to be able to pay? Part of this question addresses how the banks decided who was "worthy" of a loan. Whether upper-middle class families play the credit rating game better, or whether the rules to the credit rating game are biased towards the upper-middle class, I don't know. I do know that if you look at just credit scores, you will get some glaring disparities between the results and the actual thing you're trying to measure -- the credit worthiness of an individual. So the GSEs came up with some new ways to determine credit worthiness. Some of them were probably very good. Some of them ended up being pretty bad. No/low documentation mortgages and 0 down mortgages are glaringly bad. Looking at more than just credit rating is pretty darn good.

Now in 2011 we have some people trying to say the "American Dream" of homeownership isn't even all that great. A soon to be released article attempts to show that homeownership compared to renting isn't even beneficial financially: Second Thoughts on the American Dream. This premise seems awfully specious to me. I'll have to reserve judgement until the whole article is published though. And hope there aren't too many math problems in it. Owning a home isn't for everyone. And it's certainly not a right. I agree. But for whom is it for then? If one looks at the homeownership rates by income level, it seems pretty obvious that homeownership is a benefit. Homeownership rates go up as income goes up. This seems pretty damning evidence for this article.

At the end of all of this, who "deserves" a house? Who decides who deserves a house? Are the rules we make concerning mortgages, conformation, percent down, credit-worthiness, etc. effective at limiting homeownership to those who can afford it? Or are they constructed in a way that prohibits some from buying a home that otherwise could afford it?

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