The Bonfire of the Housing Vanity

If you're looking for someone to blame for the subprime mortgage fiasco, don't stop at George Bush. Go all the way back to Herbert Hoover.
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On Dec. 21, 2008, The New York Times seemed to solve America's confusion over the ongoing global financial crisis with an explanation both simple and familiar: Like so much else, our economic meltdown could be blamed on the blinkered right-wing zealotry of President George W. Bush.

Under the heading "The Reckoning," a 5,000-word front-page story titled "Ownership Society: White House Philosophy Stoked Mortgage Bonfire," by a team of four Times reporters, examined how Bush entered office "vowing to spread the dream of homeownership" and then "pushed hard" to expand it. The results, the story said, were lax lending standards, inflated house prices, a wave of mortgage defaults and a global credit meltdown so devastating that even Treasury Secretary Henry Paulson was compelled to admit that the Bush administration had "over-incented housing."

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But for a story premised on providing deeper context for the world's ongoing financial turmoil, the piece was remarkably short on that very element: context, particularly of the historical sort. In fact, the tendency to "over-incent" home ownership financed with mortgages has been part of the country's political DNA for nearly a century. Bush was no more likely to buck this tradition than to breathe water.

The deeper story of the U.S. government's love affair with home ownership can be found in a little-noticed collection of professorial essays released just as the mortgage-default tsunami was about to hit shore. In Chasing the American Dream: New Perspectives on Affordable Homeownership, edited by William Rohe, director of the Center for Urban and Regional Studies at the University of North Carolina, Chapel Hill, and Harry Watson, history professor and director of the Center for the Study of the American South, also at UNC, a variety of experts trace the trajectory of a pro-home ownership obsession that has afflicted U.S. policymakers for 90 years.

It's essential reading for anyone seeking to understand the ideological and policy history that has led to the current economic crisis. Essay by essay, fact by historical fact, the book builds a case that would seem implausible if not so well documented: Our current troubles should be blamed not on the president just departed but on another familiar bogeyman, Herbert Hoover.

When it was published in May 2007, Chasing the American Dream read like a typical academic monograph with no relevance to real-world current events. During the months following its publication, however, global financial turmoil turned the book into a thrilling political-financial whodunit that solves the mystery of how the United States put millions of its citizens in dwellings they couldn't even begin to afford.

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As told in Chasing the American Dream, the mystery tale begins during the three decades that preceded the Roaring '20s, when the country's rate of home ownership actually declined as rural residents, drawn by the era's rapid industrialization, moved into apartments in the city. When Hoover became Secretary of Commerce in 1921, however, he made it a goal to convince Americans that the answer to a wide array of problems — poverty, homelessness, civic inattention and even impure thoughts — was universal home ownership. He spearheaded the Better Homes Movement, which successfully promoted purchase and occupancy of single-family homes.

"The high rate of home ownership in the United States has been neither an accident nor an inevitable outcome of land availability and widespread prosperity," writes Lawrence Vale, who leads the Department of Urban Studies and Planning at the Massachusetts Institute of Technology. "Well in advance of the policy initiatives that made widespread home ownership financially plausible, both government and industry had transformed home ownership into an ideological necessity and installed it at the very center of American housing policy, where it has remained enshrined."

By 1931, Hoover's pro-home ownership campaigns had distributed millions of fliers, set up more than 7,000 local Better Homes committees and even impugned the moral and sexual adequacy of renters. Ownership of detached houses protected families from "the unwholesome and not infrequently contaminating ideas of the floating classes that predominate in the close-in rental districts," one pamphlet claimed, using the sort of opaque slurs that, in the period, typically targeted immigrants, minorities and Communists.

Though the rhetoric may sound quaint or offensive to a modern ear, Hoover's moral calculus has been at the tacit center of U.S. housing policy ever since, with home ownership enjoying "almost universal approval among citizens and officials at all levels," notes Edward Goetz, a professor specializing in housing policy at the Hubert H. Humphrey Institute of Public Affairs at the University of Minnesota, in a chapter about the polarizing politics of home ownership.

Hoover's campaigns claimed that 100 percent home ownership would make the country more politically and economically stable and better suited to fend off the threat of Communism; successive administrations enacted policies designed to advance this goal. Those policies — branded as a major part of what has come to be known as the American Dream — expanded and grew during the next 90 years, with no politician ever significantly challenging the steady, dramatic increase in governmental encouragement of home ownership over other forms of tenancy.

It took a huge government helping hand to ensure a nearly century-long population shift from apartments to owner-occupied houses. Beginning in Hoover's Depression-era tenure, government housing-subsidy programs have been added piecemeal over the years. Interest has been deductible since the income tax was enacted in 1913. But it wasn't until the 1930s, when federal assistance to home lenders was vigorously expanded, that the mortgage-interest deduction began growing into a subsidy for home owners so huge that it came to dwarf most other social programs.

In 1932, Hoover created the Federal Home Loan Bank to shore up savings and loan institutions. In 1934, Franklin Roosevelt created the Federal Housing Authority to stimulate the construction industry, and four years later he approved the founding of the Federal National Mortgage Association, known as Fannie Mae, a government-sponsored corporation that buys home loans from banks so they can loan again. During the 1940s, '50s and '60s, programs were established that backed mortgages with government insurance; subsidized interest rates for farmhouses; and further subsidized home loans under Fannie Mae.

Fannie Mae was partially privatized in 1968 in an effort to pump money into new housing construction for baby boom families, and in 1970, the Federal Home Loan Mortgage Corporation, or Freddie Mac, was set up to buy mortgages from the Federal Home Loan Bank system, subsidizing the creation of even more home loans.

Of course, during the 1940s, '50s, '60s and '70s the United States did produce thousands of publicly funded apartments. But they were a far cry from the comfortable, affordably priced apartments that had been an attractive part of the fabric of most cities before World War I. A 1937 law prohibited the use of "elaborate or expensive design materials" in public housing, and under this law (and the design tradition that followed it), publicly funded apartment buildings served as a bricks-and-mortar announcement: Decent, permanent housing for workers was to be found not in publicly funded apartments but in publicly subsidized home ownership.

Towers-in-a-park developments be-came known as "the projects"; they were cheap, ugly tenements meant as a sort of way station on the path toward eventual home ownership. Apartments in the projects had curtain rods instead of closet doors and kitchens jammed into living rooms; the developments themselves were built far away from job centers and isolated from existing neighborhoods. To telegraph the message that public apartments were no more than stopgap housing, ugliness actually became an overt aesthetic goal.

In his essay "Affordable Housing Design for Place Making and Community Building," Charles Bohl, director of the Knight Program in Community Building at the University of Miami's School of Architecture, cites an architect of one of Chicago's most infamous projects, Cabrini Green: "It actually cost more to have the painter paint the address numbers on the buildings than it would have to put up metal numerals. But I wasn't allowed to put up numbers, because it looked expensive."

Privately built apartments took on some of the stigma of public projects, in many cities being viewed as a type of blight best relegated to the least prestigious neighborhoods, notes Goetz, the University of Minnesota housing policy expert, in "Is Housing Tenure the New Neighborhood Guiding Line?" In the end, home ownership did indeed become the symbolic mark of the successful citizen, thanks to decades of relentless, frenetic government encouragement that eventually turned owning a home from a national goal into a national disaster.

Administrations since Hoover's have invented myriad ways to encourage low-income renters to make the leap into home ownership. But none has ever devoted more than a small portion of U.S. housing subsidies to improving the odds on what is, for the poor, sometimes a risky financial bet.

In his essay in Chasing the American Dream, MIT's Vale cites a 1945 book, Homeownership: Is It Sound?, which warned that "more loose talk and fewer facts have appeared in discussions of home ownership than have characterized all the other controversial fields of housing and planning put together. For some families, some houses represent wise buys ... but a culture and real estate industry that give blanket endorsement to ownership fail to indicate which families and which houses."

Sixty-four years later, buying a home is still a daring move for poor people who rent and barely make ends meet. While the message behind U.S. housing policy has been that home ownership helps poor people to better themselves, only a relatively small portion of total money spent on program subsidies goes toward advancing this goal. In dollar terms, U.S. government policy has focused more on ensuring investment returns for already stable home owners than on ensuring the prospects of paycheck-to-paycheck buyers, whose defaults now threaten the world economy.

The only significant challenge to the steady growth of government's role in encouraging home ownership came from Ronald Reagan, who in 1986 sought to eliminate all tax deductions for money spent on interest. He got his wish — except for the unassailable mortgage-interest deduction, which by 2001 accounted for $61 billion in tax breaks.

Though it dwarfs all other U.S. housing subsidies combined, the mortgage-interest deduction does relatively little to assist low-income renters who become home owners. Many low-income home owners receive no benefits because the standard deduction exceeds what they would receive by itemizing deductions, note Rohe and Watson in their introduction to Chasing the American Dream. Only 6 percent of Americans making $30,000 or less took advantage of the deduction, according to a 2001 study cited in the book. The most notable incentive of the mortgage-interest deduction is to encourage wealthier Americans to maximize deductions by taking out as large a mortgage as they can afford and, once settled, to borrow more money on their home equity.

The mortgage-interest deduction "is not well targeted," writes J. Michael Collins, an assistant professor specializing in consumer policy at the University of Wisconsin, Madison, in a chapter titled "Federal Policies Promoting Affordable Home-ownership: Separating the Accidental from the Strategic." The deduction, he says, creates an "incentive to borrow more as opposed to convert renters into long-term owners."

Recent years have seen a supercharging of the government-chartered system that encourages home ownership. Computerization, credit scoring and the increasing sophistication of secondary mortgage markets helped put detached houses in the hands of nearly all who wanted them.

By the turn of the century, Bill Clinton had implemented his National Homeownership Strategy to increase the percentage of Americans owning homes. In 2000, by law, half of Fannie Mae and Freddie Mac loan purchases had to involve borrowers with below-median incomes. Some 20 percent of the mortgages attached to low-income families in low-income areas; another 31 percent related to properties in center-city or rural areas.

When George W. Bush launched his Blueprint for the American Dream in 2002 with a goal of boosting the number of minority home owners in the United States by 5.5 million, he was simply carrying on American tradition (while, of course, attempting to build a larger constituency for the Republican Party). Chasing the American Dream chronicles that tradition's genesis and trajectory so effectively that it should become a must read for anyone looking for the spark that set the 21st-century mortgage bonfire which now seems to be consuming the world.

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