Time to Stop Undermining Homeownership

By Ralph Nader

Here’s a startling fact — more than 10 million Americans have been evicted from their homes since 2007. That’s nearly the entire population of the state of Michigan. Just imagine if the people of an entire state were rendered homeless overnight — it would be quite a calamity. The news media would no doubt cover it 24/7, millions of dollars would be raised in aid, and thousands would volunteer to help shelter the displaced. Any companies responsible for such a massive displacement of people would be vilified — think of the public relations lashing BP received after the Gulf of Mexico oil spill. While the housing crisis does not spur the same emotional response from the media and the general population as say, a natural disaster or a terrorist attack; perhaps it should. The housing crisis was not an inevitable glitch in the system, but rather a long-foreseen consequence of an industry running rampant in the name of profit.

The housing crisis is a multi-faceted issue with many moving parts, but here are some recent developments that warrant discussion.

In her new book, A Dream Foreclosured: Black America and the Fight for a Place to Call Home(Zuccotti Park Press) author Laura Gottesdiener details how poor, African American communities were specifically targeted and exploited by the banks with inferior or too-good-to-be-true loans over the course of several decades. Gottesdiener reports the touching, personal stories of these tragedies and, importantly, how four of the families fought back. The book is a gripping account of the rampant predatory corporate practices that took place all across the country and which have caused our economy so much harm — and how abused communities can begin the rebuilding process.

The post-financial crisis reality is that the dream of owning a home has ended for too many Americans. Looking ahead, it is unfortunate that much of the same flawed thinking that led to the subprime mortgage crisis is now re-occurring. President Obama recently announced his plan for a housing recovery, intending to “wind down” the two main federal mortgage agencies — Fannie Mae and Freddie Mac. (Recall Fannie and Freddie were bailed out by taxpayers with $185 billion.) Eliminating these agencies would effectively privatize the mortgage guarantee market, which many analysts say would undoubtedly result in higher costs to potential homeowners. Under the current Senate and House plans, borrowers would be paying about $75 and $135 more a month in interest, respectively, on a conforming loan of $200,000 with a 20 percent down payment according to Mark Zandi, chief economist at Moody’s Analytics.

In short, this action and its resulting, deceptive free-for-all could effectively end the ability of low-income earners to receive mortgages at all.

Notably, Fannie Mae and Freddie Mac have returned to profitability and are repaying their debt to the United States Treasury. The agencies have paid back more than two-thirds of the bailout money they received — about $146 billion so far. (Fannie Mae and Freddie Mac common stockholders have not been able to recover any value of their stock, however, despite having been repeatedly misled by government officials about the financial health of the agencies in 2008 prior to the bailout. See my May 18, 2013 letter to Treasury Secretary Jacob Lew.)

Joe Nocera of the New York Times writes:

[Fannie and Freddie’s] sole role now is to guarantee and securitize mortgages. And they are making huge amounts of money — much of which is going to the government. Fannie Mae, for instance, recently announced a quarterly profit of $10.1 billion, and said it was making a $10.2 billion payment to Treasury. ‘At the current pace,’ The Wall Street Journal reported, ‘over the next year, Fannie and Freddie are likely to repay the government more money than they borrowed.’

Economist Dean Baker, in an article for the Guardian, writes:

The moral hazard problem of the pre-crisis Fannie and Freddie — private profit and public risk — was eliminated when they went into conservatorship. In the last five years, they have been operated to sustain the housing market, together buying up more than 80% of the mortgages issues since the onset of the crisis.

Given that both are now covering their costs and making profits, which are, arguably, too large even, it’s difficult to see what the problem is. But President Obama wants to wind down them down and replace them with a new and ostensibly improved public-private system.

I and other advocates told members of Congress, government regulators and the media about the structural and operational problems of Fannie and Freddie for years leading up to the government takeover. We pointed out how these agencies had increasingly turned themselves into casinos before the crash, ignoring the many risks and taking advantage of an implied U.S. government guarantee. In a speech in 1998, I cautioned that one of the unintended consequences of fat profits over a long period is the tendency of governments and private corporations to start believing in fantasies about living happily ever after in the glory of ever-rising profits.

So yes, Fannie and Freddie aren’t perfect. But despite this, under conservatorship, the agencies have stabilized the housing market. The ideal path forward is to recapitalize, not liquidate. Jim Millstein, the former chief restructuring officer at the U.S. Treasury who worked on recouping the bailout of AIG in 2009, proposed such a plan in an op-ed in the Washington Post last year.

To shutdown Fannie and Freddie now is unnecessary and is akin to throwing out the baby with the bathwater. The problem, as it has always been, is reeling in the big banks whose primarily goal is to profit and pass on their risks despite any and all human and taxpayer cost.

Local initiatives are spreading. Look to Richmond, California. This town of just over 100,000 is standing on the front line of the housing crisis debate. Richmond officials are in the process of enacting a unique plan to save the homes of many Richmond residents. Nearly half of Richmond’s residential mortgage holders are currently at risk of foreclosure — 900 homes were foreclosured there in 2012. Gayle McLaughlin, mayor of Richmond, told Democracy Now: “The banks sold our community predatory loans, and now they have no solution that they’re presenting for this crisis. So we are stepping in to fix the situation.”

The city’s plan is to purchase the mortgages from the banks and offer families fairer deals to stay in their homes. If the banks refuse to sell, the city means to use eminent domain to keep its residents from being displaced. It is a bold plan, and obviously, the corporate interests intend to put up a fight. Congressman John Campbell of California has already introduced a bill intending to squash the plan.

The battle in Richmond is what we should expect to see all over the country as communities fight back against the corporate interests that would see millions more go homeless before it effects their government-subsidized bottom line.

(Autographed copies of my latest book Told You So: The Big Book of Weekly Columns are available at Told-You-So.com)