Shelterforce The journal of affordable housing and community building

Fall/Winter 2009 » February 12, 2010

The Housing Crisis: How Did We Get Here? Where Do We Go?

In early October 2008, The Kirwan Institute hosted a national summit on subprime lending, foreclosure, and race. We didn't know it when we were planning the event, but a series of unfolding economic events spurred by our nation's housing crisis would have our government contemplating a $700 billion financial sector bailout on the eve of our convening. By john powell & Jason Reece

Six months prior to the crisis, subprime lending, and its correlation with foreclosure and race, was an issue for which we had trouble garnering attention. But then all of a sudden, it was a hot topic, with our registration (and media interest) soaring in the days leading up to our event.

Now, going into 2010, it’s hard to imagine that it’s only been just over a year since the economic impact of our nation’s housing crisis became clear to many Americans, producing a series of drastic economic aftershocks that shook the domestic and global economies. The Troubled Asset Relief Program, Fannie Mae and Freddie Mac, CRA, Bear Stearns, subprime loans, and mortgage securities dominated the news, the final months of the presidential campaign and went from obscure topics to dinner table conversation.

From the perspective of trying to generate support to address the housing needs of our nation’s most marginalized communities, this newly found interest was refreshing. Fair housing advocates had been talking for years about the predatory nature of subprime lending in marginalized communities, but few would listen to these concerns. But as the crisis unfolded and information or misinformation was spread, we became wary of the narratives being told regarding the housing crisis, especially as these narratives related to discrimination in and solutions for marginalized communities.

Given the turmoil, confusion and uncertainty of the past year many authors have tried to contextualize, translate and understand the housing crisis and decode some of the mystery of a crisis that created turmoil from the inner city to the world’s great capitals of finance, impacting us all to some degree. If you search, “subprime crisis” on Amazon.com, over 870 books are identified, a similar search for “housing crisis” produces more than 4,000 titles for review. Among the vast number of books released on the housing crisis, three titles stand out and should be read for those trying to understand the housing crisis, its origins and what it means about the future of housing, affordable housing and fair credit.

Dan Immergluck’s Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America’s Mortgage Market (Cornell University Press, 2009) provides a detailed historical overview of the evolution of US mortgage markets during the New Deal era, to the era of deregulation/securitization, the emergence of the high risk loan products and the sudden growth of the high risk loan market. The chain of events resulted in a dual credit market (high risk and low risk) for homeowners (Immergluck does not use the subprime terminology). Foreclosed presents a thorough body of evidence which illustrates that ample warnings should have been evident leading into the 2007-2008 housing crisis, but these warnings were ignored and were not reflected in policy. Foreclosed also clearly points out the important role for government in both the emergence of the mortgage market and in assuring its sustainability, a role that has diminished (to our peril) in the decades leading up to the crisis.

Alyssa Katz’s Our Lot: How Real Estate Came to Own Us (Bloomsbury USA, 2009) also presents a historical view of factors leading to the housing crisis, intertwined with her first hand experience in hard hit neighborhoods. Katz focuses on the federal government’s longstanding push for encouraging homeownership, going back as far as the Hoover administration. Her analysis places emphasis on the nexus between Clinton administration policies that aimed to expand homeownership for low-income Americans and continued deregulation for the financial industry. This interaction created a great imbalance, setting up low-income families and neighborhoods to lose out. “The scheme was mind-blowingly na�ve,” Katz writes. It was “a vestige of a more innocent time not long ago when it was possible to believe that the fixed income managers of Lehman Brothers and cashiers who couldn’t even save for a down payment would both profit by doing business together—on terms set by one side, infinitely wealthier and more powerful than its partner.”

Katz’s prose is strongest when she’s exploring the direct impact on communities from the devastation created by the crisis in places like Cleveland, and the speculation or real estate manipulation which helped spur the housing crisis (and affordability problems) in many markets, but most notably along the coasts and in the Sun Belt.

Edmund Andrew’s Busted: Life Inside the Great Mortgage Meltdown (W.W. Norton & Company, 2009) differs significantly from the Katz’s and Immergluck’s titles, presenting a compelling first-person view of his experience signing into an unaffordable subprime loan which brought his family to the verge of foreclosure and financial ruin. Starting a new life after a divorce and with the aid of a mortgage broker who understood his “unusual situation,” Andrews, with the full assistance of the mortgage broker took out a loan for $460,000 for which he didn’t have to report his income. Andrews, like so many borrowers, banked on optimistic economic hopes for his new family and assumed that refinancing would save him before the mortgage reset. Andrews interweaves his personal account with interviews and an overview of more recent actions on both Wall Street and by the Federal Reserve that exacerbated the crisis (placing emphasis on the role of former Federal Reserve Chairman Alan Greenspan in contributing to the crisis).

The irony of someone as knowledgeable and affluent as Andrews, an economics reporter for The New York Times who earned a six-figure salary, being locked into a subprime loan is compelling. Also, his failed attempts to negotiate with his lender (Chase) provide for a frightening validation of the many complaints from borrowers who found lenders unresponsive to negotiating solutions. If someone as knowledgeable as Andrews falls prey to subprime lending, what does that say about the challenges faced by less informed borrowers, or those borrowers who were actively sought out and targeted by predatory lenders? While Andrews fully admits that he was well aware of the risk involved, these less experienced borrowers did not have his knowledge and were placed in a position of great vulnerability—a fact supported by the great racial and geographic disparities in where subprime loans were concentrated. Andrews touches on this fact at the end of his book when he writes: “Mortgage lenders had aimed their most baffling products at the consumers who were least likely to understand them.”

In our review of these three books, and reflecting on our work in this field, several key themes emerged between the various books. These themes are critical for both those trying to understand the housing crisis and those looking to reshape housing policy in the future.

Securitization and deregulation, growth of the global economy, concentration of subprime loans, views of homeownership, perception of homes as a source of profit as opposed to long-term investment, predatory lending, discrimination, and risk-taking all contributed to the crisis. Immergluck, Katz, and Andrews provide a multi-faceted explanation of the meltdown (with each taking a slightly different approach to analyze the crisis) that illustrates its complexity. The housing crisis is not just the result of a single bad actor or a series of bad actors, but represents the byproduct of systemic changes in our financial system and the global economy. While systems changed, our regulatory approaches to assuring fair housing did not. This mismatch helps us understand why regulations like the Community Reinvestment Act (and other laws and regulations) were not sufficient in a lending environment that had gone through profound changes. How could even basic regulations like CRA stem the crisis, when most lenders spreading subprime loans throughout marginalized communities were not subject to regulation by the law?

In this global economic age, our economic systems are complex and dynamic, and as such, solutions to the current housing crisis need to respect this. We must be diligent to create policy responses that can quickly adapt and adjust to the ever changing global economy. Our complex systems also mandate a continued assertive role for government in maintaining stability and assuring sustainability in housing and lending (as well as other facets of our economy and society).

Upon reading these volumes, you cannot escape the powerful impact historical policies and discriminatory actions have had in creating today’s crisis. The era of redlining in communities of color is well documented and addressed in all three books, but in greatest detail by Immergluck and Katz. The pathways to building the American middle class was aided by the development of the policies to support homeownership created by FHA and other post New Deal programs. Unfortunately, these programs primarily only served white suburban America, leaving most communities of color behind and leading to the huge race-based disparities in wealth in our nation today, where recent data finds the disparity in white vs. black assets to be nearly 900 percent. In many ways we are still trying to solve the problems created by the redlining era—instead of assuring sustainable credit in communities of color, the more drive there is to increase homeownership by creating a dual “predatory” lending market for underserved communities resulted in reverse redlining. That said, reverse redlining was only possible because of the continued effect of redlining dating back to the 50s and 60s with credit-starved communities of color presenting vulnerable targets for the lending industry.

Race is critical to understanding and solving the housing crisis; our society cannot tolerate or sustain a separate and unequal system of delivering credit to marginalized communities of color. Minority populations became the target of subprime loans, with many borrowers not being informed of other loan options even if they qualified. As we are learning from the recent Wells Fargo litigation in Baltimore, lenders openly targeted black families for subprime loan products. Because of the extreme concentrations of subprime loans in communities of color, these neighborhoods were disproportionately affected when foreclosures spiked, resulting in a deadly spiral of abandonment, blight, disinvestment and neglect for these communities. Until we can provide sustainable credit in our underserved and marginalized communities we will never truly address our nation’s housing challenges.

All three books conclude by addressing housing crisis solutions. Immergluck speaks to the many policies and solutions supported by the affordable housing, fair lending, and civil rights communities in the past year, that is, allowing bankruptcy judges to modify mortgages debts, expanding the scope and enforcing the CRA, enacting new state regulations to protect against predatory lending, and a full revamping of federal regulation to consumer protection and mortgage lending. Andrews critiques the Federal Reserve’s response to the crisis but also speaks to the increased spending and declining savings by Americans as a greater risk than just the housing crisis. In Andrews view, the over-reliance of housing equity for wealth and the decline of savings (and defined benefit retirement plans) are troubling signs of more economic hardship to come.

Katz makes the strongest argument when she writes that homeownership should not be the primary goal of public policy. In particular, she calls for more federal oversight in the lending, financial, and mortgage industry and setting reasonable limits on lending—a goal which will be difficult given the $2 billion in lobbying by the real estate and finance industries. Her recommendation is for more housing policy to be oriented toward providing sustainable and safe housing for renters and homeowners, a point with which we cautiously agree. Katz’s viewpoint naturally leads to a discussion as to who should be homeowners. Our fear is that given the already contentious and misinformed attacks on affordable housing policies and legislation like CRA in the wake of the housing crisis, this debate would be manipulated to further demonize “those people” who took out subprime loans as the source of the housing crisis. The debate would be fuel to the fire, aiding those who would like to justify excluding credit to those deemed unworthy of homeownership, which could produce another era of redlining in marginalized communities.

We need to widen the scope of these arguments in a couple of ways. First, there needs be an intentional and affirmative process to address the problem of a dual, racialized credit market. While strengthening anti-discrimination laws will help, this is not enough. The goal is not to eliminate discrimination but to eliminate the dual credit market and housing markets. Second, we need to think about housing as one of our principal gateways to opportunity in our society and not just as a place to live. This reasoning is the rationale behind the “opportunity-based housing” model supported by the Kirwan Institute. For many, homeownership is not just an investment in property or a way to build equity, but a means to gaining access to the opportunities available in specific neighborhoods such as good schools or accessible jobs. In many ways, Andrews’ book captures this phenomenon because when he takes out a loan, he does so not just to become a homeowner, but to gain access for his family to the amenities that came along with his suburban Maryland neighborhood. Access to high-opportunity neighborhoods is denied for too many families, often leaving a heavy racial footprint. One of the challenges for many homeowners of color has not just involved unsustainable credit, but homeownership that puts them in communities of declining opportunity. Housing policy should be affirmatively linking communities and individuals to areas of high opportunity, through sustainable forms of credit. While Immergluck, Katz, and Andrews make implicit suggestions along these lines, their books, and more importantly, our society, would be stronger by making these goals explicit.

Published by the National Housing Institute