Regaining the Dream: How To Renew the Promise of Homeownership for America’s Working Families. Roberto G. Quercia, Allison Freeman, and Janneke Ratcliff. Brookings Institution Press, pp. 160, $19.95 Since the Great Depression, and especially since the end of the Second World War, purchasing and owning one’s home has been perceived to be part and parcel [...]
Regaining the Dream: How To Renew the Promise of Homeownership for America’s Working Families. Roberto G. Quercia, Allison Freeman, and Janneke Ratcliff. Brookings Institution Press, pp. 160, $19.95
Since the Great Depression, and especially since the end of the Second World War, purchasing and owning one’s home has been perceived to be part and parcel of the ‘American Dream.’ For decades, the federal government has instituted numerous policies, most notably via spending through the tax code, to promote homeownership rather than renting. Recent scholarship, however, has suggested that tax subsidies for housing have not been economically efficient, nor have they reduced income inequality.
Unfortunately, this has not resonated with the Obama administration. Indeed, despite the fact that federal government support for the housing sector and risky behavior by Fannie Mae played a significant part in precipitating the financial crisis of 2008, President Obama has recently signaled that he would like to see proposals for a plan that would maintain a substantial role for the federal government in the mortgage market. Indeed, it is even possible that Fannie Mae and Freddie Mac, both now in government conservatorship, could be preserved, albeit under different names and in somewhat different forms. It should likewise be noted that any attempt to downscale the federal government’s role would have to be done gradually; the federal government currently backs 95 percent of new mortgage loans.
In Regaining the Dream, Roberto G. Quercia, Allison Freeman, and Janneke Ratcliffe, all affiliated with the Center for Community Capital at the University of North Carolina-Chapel Hill, suggest that “[t]he current crisis provides an invaluable opportunity to regain the dream by expanding access to sustainable and affordable mortgages for American families.” They premise their argument on the notions that homeownership, through the build up of equity, “helps build prosperity” and that it “signals thrift and an intention to provide for one’s own needs.” In their formulation, homeownership has an important collectivist element. “Buying a home signifies a willingness to commit to something larger than oneself—a specific neighborhood or community.” Long-term, civic-minded renters in New York City would naturally contest this assertion.
The authors advocate for community reinvestment programs that allow for low-income individuals to purchase homes. In their book, the authors trace the impact of the Community Advantage Program (CAP), an initiative designed to assist low- and moderate-income individuals to purchase their own homes. CAP was established by Self-Help Ventures Fund, the home and business lending division of a North Carolina-based community development financial institution and was a program that, in the authors’ words, brought “the secondary housing market into community reinvestment lending.”
In order to maintain an adequate capital base, Self-Help obtained a fifty- million dollar grant from the Ford Foundation. “In essence, the Ford Foundation grant strengthened Self-Help’s capital base so that it could purchase affordable home loans from lenders and then work with Fannie Mae to securitize the loans, using the Ford grant as recourse against losses.” Quercia, Freeman, and Ratcliffe contrast what they perceive to be the successes of the CAP program with the failures of the subprime mortgage industry. CAP’s ability to provide sustainable homeownership for persons who otherwise would not have qualified for a mortgage “was achieved by providing borrowers with carefully underwritten, fixed-rate loans that they could afford to repay over time.” They make the claim that CAP’s success was due to “the careful matching of affordable product with borrower.” Indeed, they argue that, “it was not risky borrowers but rather mortgages with unsustainable characteristics that led to massive defaults at the onset of the crisis.”
The authors argue that CAP can provide a model for rebuilding the American housing system and that it is a model for linking the primary and secondary markets. They put forth the case that “a national credit enhancement fund could play a role like that of the Ford grant within CAP.” In cover the cost for this special insurance fund, Quercia, Freeman, and Ratcliffe contend somewhat vaguely that, because “the market is a continuum,” and because “all industry benefits from systemic stability, then all industry should contribute to achieving the same.”
Unfortunately, the authors are scant on the details of how such a mechanism would work and why private parties should be forced to subsidize an insurance fund to provide housing assistance to individuals who cannot obtain a traditional mortgage. It is somewhat disconcerting that the authors would promote CAP to be a workable national model when they admit that “[u]nder CAP, lenders offered loan-to-value ratios of 95 to 103 percent and flexible ways of considering a borrower’s credit and income” (emphasis added). If the recent housing bubble has taught us anything, it is that the short-term advantages of “flexible” methods of assessing credit are outweighed by the long-term disadvantages.
In a certain sense, the most important facet of this recent work is its title: Regaining the Dream (also, it should be noted, the title of Chapter 8). The authors clearly subscribe to the prevailing notion that promoting homeownership for lower-income individuals is desirable goal of public policy. To that extent, they advocate a larger role for government regulation as a necessary precondition for housing finance system that would allow for community reinvestment lending. “The financial market’s failure to self-regulate,” they write, “provides a strong justification for more, and more effective, government regulation.” A bolder approach to rethinking housing finance, and one that would have utilized the title, Rethinking the Dream, would have been a study that substantially broke from conventional thought and rethought the very premises underlying American dream of homeownership. Indeed, there are indicators that suggest that housing is neither a lucrative investment, nor it is a necessary precondition for good citizenship.
In conclusion, Regaining the Dream offers a model for rebuilding the housing finance system that would necessitate greater government regulation. While the goal of promoting homeownership for lower- and middle-income individuals is a noble one, it is not without cost to responsible taxpayers who can afford traditional mortgages. That fact alone should be enough to promote a national policy debate about the hidden costs of policies designed to foster homeownership.
Jon Lewis (c) 2011