Occupied Owner: Our Lot, by Alyssa Katz

For decades, the United States government, pushed by its business partners in the financial and real estate world, "marched the nation into a delusion." The fantasy is that we can create wealth for millions of homeowners by enriching investors, brokerage and mortgage companies and Wall Street bankers "to the fullest extent possible with few boundaries." By John Atlas

Our economy, driven by a culture that values debt, anxiety, and greed, results in a delusion, Alyssa Katz shows in her new book, Our Lot: How Real Estate Came to Own Us (Bloomsbury USA, 2009), that inevitably led to a real estate mania and the collapse of the global economy.

To help the reader navigate this complex story, Katz, a journalism professor at New York University, and a former editor of City Limits, has found vivid, outrageous, and sympathetic characters for us to follow. My favorite character is Gale Cincotta, a Chicago housewife and activist, who in the 1970s, helped turn the community organizing group, National People’s Action, into a powerful force that led to the passage of the federal Community Reinvestment Act (CRA) of 1977. The CRA, a brilliantly innovative affordable housing law, forced banks to meet the credit needs of all neighborhoods. It would become one of the most successful government policies to promote homeownership. At the outset of her story, Katz follows Cincotta, one of the few heroes of the book, to help explain how housing is financed in America.

Katz counterbalances Cincotta with another great character, Lewis Ranieri. Ranieri, a fierce, a trader for Salomon Brothers and a fierce pioneer of financial services deregulation, had no use for (or knowledge of) regulations like the CRA, or or even of the successful housing programs such as public housing. He certainly was not interested in improving the Federal Housing Administration (FHA) as a way of extending credit to previously discriminated urban households. Instead, Ranieri, partnering with President Ronald Reagans “brain trust,” devised an unfettered free market program to promote homeownership. Ranieri and the Reaganites plan would, according to Katz, “dismantle the regulations of a previous generation—cautious Depression-era strictures on securities trading that were preventing pension funds, insurance companies and other institutionsresponsible for investing billions of dollars in other peoples cash, from poring their wealth into the places where we live.” Ranieri’s program would turn homes into commodities as tradable as stocks and bonds. He called it securitization.

Soon, Salomon Brothers and the rest of the financial services industry convinced a Democratically-controlled Congress and Republican-controlled Senate that the combination of securitized mortgages and deregulation was the route to expanding homeownership: everyone would be a winner!

A nation came to believe, as Katz writes, that homeownership was the magic bullet that would make the poor wealthier, better citizens, and would improve their communities. Securitization would lead to more lower-income families becoming homeowners. Since government was not the solution, but the problem, as Reagan famously said, securitization and deregulation could cut back on spending money for subsidizing private and public housing.

Those darn federal housing finance bureaucracys rules and regulations, which limited the kind of funds that could be invested in real estate would no longer obstruct the spread of homeownership! Investors would make more money on a safe investment. Moodys and Standard and Poors, the rating agencies, would get paid by investment bankers by making sure each mortgage pool was a safe investment. Savings and Loans and banks would quickly sell the mortgages and get more money to lend to potential homeowners. This, of course, gave rise to a new and dangerous breed of mortgage bankers, like Countrywide, who, with no skin in the game, exploited the use of the subprime loan. And Ranieri? He would make more money for Salomon Brothers than anyone in its history.

What followed, Katz shows in chapter after chapter, was the growth of irresponsible mortgage companies operating outside the reach of the CRA, get-rich-quick house-flipping schemes, criminal mortgage frauds, predatory subprime loans, credit default swaps, and now, the worst recession since the Great Depression.

With her keen eye, vivid descriptions, and a sense of irony, Katz helps us navigate this complex story by traveling across the country so we can meet the winners, and (mostly) the losers. Hapless victims spend their savings on Florida swampland and lose money buying and flipping housing until there are no buyers, and they get stuck with worthless properties. In Cleveland’s neighborhoods—Slavic Village, Shaker Heights, South Euclid, anyone could get a mortgage even if they had no assets. Katz reminds us that much of the financing was not for new homeowners, but home equity loans. The mortgage brokers made higher commissions for selling high interest sub prime mortgages to customers who qualified for prime loans. Bankers sold the mortgages investment banks, like Solomon, which would put the mortgage in a pool of mortgages and sell it to investors, and everyone made money.

To show how the culture of greed and debt was nurtured through indoctrination, Katz takes us to a pep talk in Florida where would-be rich people get inspirational self-help speeches from people like Tony Robbins. Katz takes us to a harrowing crime spree in Atlanta, where mortgage fraud is rampant. After correctly defining mortgage fraud, as “any transaction where a buyer or seller lies to reap more money on a deal, or to qualify for a purchase they otherwise couldnt get.” Katz points out that mortgage fraud “would apply to much of the everyday business of the home trade in the mid-2000s.”

Everything might have continued along quite smoothly except for one problem. The mortgages packaged into mortgage-backed securities by Wall Street firms and sold to investors required home values to keep rising and more importantly for borrowers to continue paying their mortgages. When they lost their job or couldnt afford to pay the balloon payments the delusion easy credit came to an end, they stopped paying, speculators started selling the housing, and the bubble burst.

Culprits

Many of the culprits have become familiar to some of us: home builders, real estate brokers, former Federal Reserve Chairman Alan Greenspan, predatory lenders, and the Wall Street bankers who colluded with the Reagan “brain trust.” Katz’s compelling narrative implicates the entire financial and housing food chain, which participated in this greedy shell game. Brokers who brought the borrowers to the lenders, mortgage companies that provided the mortgages, Wall Street firms who packaged the subprime loans into exotic investments, investors who bought the securities seeking the highest rates possible and credit agencies that cheated on the ratings. Greenspan and the regulators kept pumping money in, and instead of providing oversight, they just looked the other way. Some acted legally. Some acted illegally. But most of it was simply business as usual.

The scariest part of Katz’s book is all the smart people who helped cause the crisis. It was not just the business world and the Republicans. Katz implicates the best and brightest liberals. “President Clinton,” Katz writes, “chased the real-estate industry like a horny prom-date suitor.” Clinton’s Housing and Urban Development Secretary Henry Cisneros, referred to renters as “lifers as if they were in prison.” Michael Stegman, who headed policy development under Clinton and Clinton’s FHA chief Nicolas Retsinas both bought into a homeownership strategy powered by a menu of deregulation, written by the real estate industry and who pushed lenders to commit to new markets and looser underwriting. Retsinas, as Katz notes, went out on the line to turn FHA into an independent authority so it could be competitive with private products. The Clinton administration started “planting new homeowners like seeds in rocky soil.”

Katz lets them a little off the hook when she suggests that part of the reason they went along with the Republican program was to protect HUD from being completely dismantled by the Republican Congress. Even so, with their help, the real estate and financial services industry manipulated the noble American goals of homeownership and economic growth turning homes into profit making investments rather than places to live.

What Now?

I have one quibble with Katz. She roots government support for the dream of home ownership in the 1920s, when then-Secretary of Commerce Herbert Hoover launched a campaign that equated home buying to the “physical, mental, and moral fiber of one’s children.” It’s a nice piece of historical research, but the American dream of owning a home actually goes back further. And the policies designed to promote it were better. President Abraham Lincoln passed the Homestead Act, giving squatters free grants of federal land in exchange for a promise to improve it, farm it or reside there for at least five years. Hundreds of thousands of individuals received land grants, and succeeded as farmers. Even though most of those were not poor, but rather of moderate means, able to afford the cost of travel supplies, and equipment, “homesteading,” which made a slight comeback in the mid-1980s, may have been the last sound policy to promote homeownership for the poor in America.

Katz ends her analysis with an epilogue calling for sensible regulation that will prompt a return to more rational consumer behavior. It’s a tour de force, and alone it’s worth the price of the book. She optimistically observes that for the first time in a generation, active citizens have a chance to influence national policy. Our Lot: How Real Estate Came to Own Us, in discussing the roots of our homeownership obsession, proves to be a remarkably thorough and perceptive analysis of the recent housing bubble, how the bubble contributed to the current recession, and what we should do to avoid another bubble And it’s a great read.

John Atlas, a former public interest lawyer, is a journalist and president of the New Jersey-based National Housing Institute and author of Seeds of Change, a history of Acorn that Vanderbilt University Press will publish in 2010..

Published by the National Housing Institute