What's wrong with renting?
Washington is Doubling Down On the Wrong Housing Policy. Some Americans just can't afford to own a home.

By Charles Lane, THE WASHINGTON POST, 10/22/2009
http://www.statesman.com/search/content/editorial/stories/2009/10/22/1022lane_edit.html

The New York Times recently reported that a schoolteacher in Colorado recently got talked into buying a $134,000 fixer-upper with only 3.5 percent down. To afford that smidgen of equity, she liquidated her retirement savings. The bank rolled closing costs into the loan in return for a higher interest rate. Her monthly cost is 50 percent of her take-home pay. Happy for now, she may be a pink slip away from foreclosure and financial ruin.

Quick, call the government! The predatory lenders are back! Oh, wait: The U.S. government supports this transaction. The Federal Housing Administration made the loan possible by promising to pay it off if the teacher can't. 

Now you know why many housing experts, including the FHA's own inspector general, are fretting that the agency may be headed for a taxpayer bailout. The only remaining major source of middle-class mortgage liquidity, the FHA has increased its insurance portfolio from $323 billion in 2006 to $695 billion today — with the inevitable inclusion of some apparent clunker loans like the one in the Times story. Its default rate is 7.8 percent, up from 5.6 percent a year ago. Its capital reserves are below the statutory minimum, which is 2 percent of its portfolio. 

Actually, concern about an FHA collapse is slightly misplaced. To be sure, it might happen. The agency, which pays for losses out of the insurance premiums it collects, says it's tightening controls and can withstand anything short of a severe double-dip recession. Let's hope it is right — and that the business cycle cooperates. The real point, though, is what FHA's predicament suggests about the broader exhaustion of U.S. housing policy.

For decades, the U.S. government has subsidized homeownership — via FHA insurance, the mortgage interest deduction, Fannie Mae and Freddie Mac, and many other programs. The resulting overinvestment in residential real estate is a major cause of the current crisis. Yet, in trying to cope with the crisis, Washington is pouring on more housing subsidies, thus deepening the federal commitment to the old strategy and making it harder to move to a new one. 

Don't get me wrong: By encouraging thrift, self-reliance and neighborliness, individual homeownership can benefit society. Government support was, therefore, a wise investment. But homeownership is not for everyone — it can't be. Transient young people don't need or want mortgages and maintenance; ditto the frail elderly. More broadly, there are some people who just can't afford it.

HOT: Renting gives people mobility and access to job opportunities they might not have if tied down as a homeowner. This benefit applies to young people and anyone out of work in this recession.

Yet politicians of both parties have pretended otherwise. As of 1993, the homeownership rate was a healthy 64 percent of all households. President Bill Clinton, though, decreed that it should set a new record by the year 2000; he ordered the FHA, Fannie and Freddie, and the rest of the government to make it happen. Clinton hit his goal, only to be topped under the Bush administration's "ownership society," when the rate peaked at 69.2 percent.

As we all know, these gains proved unsustainable: Many unqualified buyers got mortgages and lost their homes when prices, inevitably, came back down to Earth. In that sense, excessive support for homeownership actually harmed intended beneficiaries and destroyed neighborhoods.

Today, the homeownership rate is 67.4 percent and falling. Government policy, including FHA insurance, the quasi-nationalization of Fannie and Freddie, and the Federal Reserve's massive purchases of mortgage-backed securities, is intended to slow this decline. The thinking is that housing prices were being driven down by panic and that the government had to step in lest the nation's main source of household wealth be swept away.

With luck, these improvisations will work. Even if they do, the price will be high. Take just one policy measure, the $8,000 tax credit for new homebuyers, which Congress might soon extend. According to a recent article by Ted Gayer of the Brookings Institution, it would cost the government about $15 billion, or about $43,000 per additional home sale.

And the federal taxpayer, the ultimate guarantor of trillions of dollars in mortgages, will emerge from the crisis deeply enmeshed in an asset category that, recent experience has shown, carries considerably more risk than was once commonly believed.

The interest groups that feed on federal housing policy will resist tooth and nail, but the country needs a fundamental change in strategy — one that reflects the lessons of this crisis. Government should be much more cautious about taking on mortgage risk or encouraging individuals to do so. Instead of glorifying homeownership and showering it with subsidies, government should strive for a more level playing field between owning and renting.

As it happens, renting is what the Colorado teacher was doing — before she spent her nest egg on a down payment. There was no shame in being a tenant, and there was a whole lot more financial safety.

REPRESENTATIVE READER COMMENTS:

HOT: This is a sampling of over 100 comments, many of which got into politics and personal attacks.

free_np wrote:
It has gotten so ridiculous out there that lawmakers will just shiver ... I was talking to a mortgage broker from a "big" bank. He said, "We love FHA backed loans because if you default, we don't give a damn, we're going to be fully reimbursed by the government." I was like... What's wrong with you people and shouldn't you be concerned if I can really afford this place? But that's the reality - the banks are happy to make the loans that will fail because of the explicit government guarantee. They prefer to do this as they can make larger loans with no risk to their capital and it does wonders to their bottom line.

It's a gross dereliction of fiduciary responsibility, and that abandonment of fiduciary duty undermines the whole financial system. Free-market theory says that the bankers who control the financial system protected the system from fraud, because the financial system is their cash cow. Free-market theory fails to account for the separation between authority, vested in executives, and responsibility for results, which falls on all the business' take holders, including share holders, customers, and the work force.

Economic opportunity for the masses isn't just a pipe dream. It was the foundation for America's twentieth-century prosperity, when we had the world's highest standard of living.

There's a clear conflict between the interests of short-term profit-taking and long-term growth, and the people who have all the authority are being paid to maximize profit, at the expense of all other concerns. The incentive structure makes no sense.

The fact that this irresponsibility ever prevails in any financial business is evidence of a failure of integrity. The fact that such an attitude can prevail among major banks is evidence of the abandonment of fiduciary integrity. The civil penalties for originating fraudulent loans obviously aren't adequate. We have to put criminal penalties in place for this type of fraud, and start putting people in jail for what amount to massive, systematic, financial swindles.

SoCoDenizen wrote:
Ditch the $8K tax credit. As this article illustrates, it's only prolonging the pain of the housing slump, by allowing underqualified buyers to purchase homes they couldn't otherwise afford. It's a sop to the real estate and mortgage industries, nothing more. I like the point he makes about renters, too. We treat renters like second-class citizens in this country, when in reality, many are making a wise decision by staying out of the government-subsidized housing market.
 
loretoguy wrote:
Misleading mortgage marketing ... incredibly STUPID potential buyers! Home ownership is only good for those who can understand the investment and can afford the investment. The greedy banks are certainly NOT GOING TO HELP with that decision! And greedy, unqualified potential home buyers or flippers deserve no sympathy.

dcliebler wrote:
The sad part is that this particular person who purchased the home is STILL probably paying less on her mortgage than she would be renting. Has anyone taken a look at what it costs to rent these days? [HOT: Buying a home can cost less than renting, especially with the government incentives, but homeownership is not always better. One must also consider differences between buing a New home vs. an Existing home.]

wstickney1 wrote:
Sadly I must agree with this column. Our society for noble reasons has encouraged home buying for even the most vulnerable of our society. The unintended consequences were a rise in foeclosures and economic disasters for the most vulnerable. As a former teacher I can sympathize with the lady from Colorado. Years ago when my family was displaced from a rental for the second time in less than four years because the owners decided to give the property we lived in to relatives, we entered the home buying market. But the rules were different. We put 10% down on a small $20,000 house with money borrowed from family. We then had a thirty year fixed rate mortage of $169 per month. Still with two young children and a stay at home mom, I had to work two additional jobs in addition to my teaching job to pay back the downpayment loan, the mortage, real estate taxes and upkeep on the home. And the one time we were three days late with a mortgage payment we got a nasty note from the bank telling us that people like us - those who could only put 10% down - needed to be more responsible. Things eventually got better when my salary gradually increased and my wife returned to work when the children were in elementry school and we are now forty years in our third home. But things were different then and the economy was more stable.

bhahn wrote:
Although many of his observations are valid, Mr. Lane misses the main point in his criticism of the $8,000 tax credit for new home buyers and other federal initiatives intended to stem the ongoing deflation in home values and growth in foreclosures. The growth in foreclosures, now projected to reach 7 million, was the primary cause of the recession, and still poses an extremely large and overly discounted risk to the financial sector. The continuing decline in home values has also evaporated billions of dollars in home equity, which over the history of this country has been the largest single source of savings for most homeowners.

It is therefore critical that we stem further declines in home values before they set off another wave of foreclosures and another economic crisis. Many of the subprime mortgages that have failed have already been foreclosed, or are in the process of otherwise being resolved. We now face a prime mortgage crisis. The majority of foreclosures today are on prime mortgages, held mostly by formerly credit-worthy homeowners who have lost their jobs. Most economists are predicting a relatively jobless recession in an economy where nearly 10% are unemployed, and their numbers are growing.

Stimulus programs have no doubt played a significant role in restoring stock market growth. The estimated 350,000 new first time buyers who took advantage of the $8,000 tax credit for new home buyers have no doubt slowed the decline in home values, but they haven’t yet stopped it. Extending the credit until such time as natural economic growth returns and creates increased organic demand for housing is a good idea. When we get to the point that home values stop dropping, we will still face a long period of flat home values until that happens. Nevertheless, a long period of flat home values is far preferable to additional substantial further declines that would again threaten the entire economy. [HOT: NO! Here's why. The tax credit is a drug, and the homebuilding industry is adicted. Extending the credit worsens the problem.]

Investing in these mortgage finance incentives is therefore worth it. In doing so we should not return to the unsound underwriting practices that created the mortgage crisis. No more subprime loans based on the assumption that teaser rates would be permanent, no more liar loans, etc.. With those caveats, we need to make it possible for more responsible home buyers to reduce the large current inventory of foreclosed and unsold homes, financed with affordable and soundly underwritten loans. [Zero or 3% down is not sound underwriting.] Although these programs will also help many first time buyers start down the road towards saving through home equity, we are not doing it primarily to help them, but instead to protect the entire economy.

Bruce Hahn
President
American Homeowners Grassroots Alliance [a builder's astroturf organization?]

NeedToKnow wrote:
"There was no shame in being a tenant, and there was a whole lot more financial safety."
My father was a renter all his adult life, until he had me & all his friends & relatives started urging him to "buy" with his WWII VA loan. So he did. He never wanted a house, he didn't know how to take care of one & didn't want to have something else in his life to take care of. He didn’t do a very good job of it. As a result, my elderly mother now "owns" an old house that she cannot take care of. The money my father put into the house - at least part of it - is still available to her, if she needs it. But now it is I who am now having to take care of things for her.

"Home ownership is a responsibility. Some people aren’t ready or capable of being responsible for a property."
But you skirted the issue of income very delicately in this article by completely failing to take note of the dismal wages so many hard-working people in this country are paid (like the teacher.) That teacher would have no problem paying for a home if she were getting more equitable wages. No matter how you look at it, as long as there is a poor working class, nothing is going to improve. Spread the blame around where it belongs: heap it on the shoulders of those who refuse to raise wages at the bottom & cut CEO benefits at the top.

genedoug wrote:
This is part of a pattern. The SBA (meaning "Small" business administration) favors mid-sized businesses. While foreigners can get micro loans from private agencies, Americans can't do as well with their own government. The FHA is guaranteeing a $134,000 house, while the person seeking a $50,000 house will have a problem, and a person renting a trailer can just forget it. If they want to assist the ordinary working person in buying a house, they can provide, not a mortgage interest deduction, but a tax credit of say, 25% of the interest, such that a person in the 10% bracket gets the same benefit as somebody paying the same interest, but who is in a higher income bracket. The FHA could also encourage 30-year loans, and expect that bank interest be lowered if payment is guaranteed? But do they come and ask me? Oh, No-o-o-o-o!

flamingliberal wrote:
Oh those conniving thieving home loan borrowers. Why they've conned these banks out of trillions of dollars and now they've wrecked the economy. They knew the bankers were just being nice when they told them they could afford to buy a home. I feel sorry for those trusting, altruistic bankers. They were just trying to do good by their fellow humans and look what happened. Those bankers are the pillars of their communities. It's a shame those poor and middle class thieves conned them.

Independentmoderate wrote:
I'm about to sell my home to FHA buyers who qualify, but barely. I feel a bit guilty, because I'm well aware that the government is repeating history. While we're still reeling from the repercussions of the housing bubble, they are creating another.

skylark1 wrote:
Several points: 1. This country was not destroyed by working class people owning homes; it was destroyed by the outsourcing of manufacturing and decent jobs. 2. Many people buy because they want security, since landlords can and do raise rents or sell property and throw tenants onto the street without warning. (How does that work for the "frail elderly" you mentioned in the article?) 3. Right wingers are usually against working class housing or the idea of government subsidized apartments which might represent some choice for the renter, just as they are against living wage ordinances. 4. It seems odd to me that no one pushes the idea that modestly sized houses can be attractive or desirable. Some of the push to buy large homes is maybe part of the con game that has been run on Americans for the past 25 years, that run away capitalism will turn everyone into a prince or princess living in the mansion on the hill. The ruling class pushed this myth, while at the same time shipping all the jobs overseas, breaking the unions (in fact conning younger people into seeing unions as old fashioned and passe) and enabling the price of an education to rise into the stratosphere. This was all happening at the same time the dangerous lending was going on. Allowing working people access to housing with running water and electricity is not what has ruined the country.

claritygraph wrote:
A 135K mortgage should translate to about $1100 per month for mortgage and taxes in Colorado (taxes are low here). One of the few benefits of being a teacher is the greater job security offered, and health and retirement benefits few other job holders have. I don't see this as a bad move for the teacher. If the teacher rents, prices go up relentlessly. When we bought our 125K house 20 years ago in Colorado, our mortgage and taxes was half of our take home pay. Now it is much, much less a percentage of our take home pay and our motgage is almost paid off. Soon we will be living in our house for the sum of $235 per month for taxes while houses like ours are renting for $1700 per month. When we retire, we will be able to continue to live in our home despite losing a regular paycheck. Not everyone should buy a home, but a schoolteacher who has a regular job with seniority is definately someone who could manage a $135K mortgage if he or she is a frugal, careful person.

shehermit wrote:
Mr. Lane, I bet you either own your home or rent by choice. You can't appreciate being in the position of having your landlord raise your rent every year while ignoring property maintenance. "No shame in being a tenant, and...a whole lot more financial safety"? Tenants throw money down a black hole every month that could go toward equity - how is that achieving financial safety? "Her monthly cost is 50 percent of her take-home pay... she may be a pink slip away from foreclosure and financial ruin." Just substitute eviction for foreclosure.

I make less than $10 per hour, spend about half my take home pay on my mortgage and live without amenities that many consider necessities. I also have an excellent credit rating; my mortgage is fixed-rate and will never go up, unlike rent. When you said that government should strive for a more level playing field between owning and renting, you were correct; they can encourage lenders to structure their income requirements to allow for the fact that there are frugal borrowers who don't consider lattes or high-def cable to be essentials.

omaarsblade wrote:
The Washington Post, Omitted the Following Corporate Welfare Institutions, who Ruined the Countries Economy.
1. Wall Street;
2. AIG;
3. Fannie-Freddie Mac;
4. Major Bank Bailouts;
5. Morgan-Stanley;
6. Bear-Sterns;
7. Country Wide, Wachovia, Wells Fargo, Citi-Bank, Bank Of America, Chase Morgan and Other Banking Institutions;
8. President Bush's TARP Plan; and
9. Two 8 Year Wars that cost $10-20 Billion per month, with Interest for the past 8 years going to Communist-Socialist China.

Keep in mind, Ronald Reagan's Savings-Loan Bailout won't be paid off until [2013], when we'll BEGIN paying off President Bush's [2008] Wall Street Bailout. Corporate welfare remains a Tradition in America, disguised as Bailout-Rescue. These corporations get "Tax Free Money" at the tax payers expense, while America's homeowners need a bail out. 

br30 wrote:
I don't know why we define home ownership as the American dream and place so much importance on it. Perhaps we should "dream" about something else, like good health and opportunity. There are many residents in large cities who rent their entire lives.....as long as they are saving adequately in an IRA....they should still be able to have a comfortable retirement. I think housing should only be seen for what it mainly is: shelter....not an investment or a tax shelter, but simply a place to live. Renting has some great perks and offers a lifestyle that many people would better benefit from than owning.

st50taw wrote:
The real story is why a school teacher doesn't make enough to afford a $134K home. Even renting a shack, the teacher would be one check away from disaster because she is not paid very much. Since when is a $135,000 "too much" for anyone dumb enough to teach your youngsters? You can't rent for less.

knjincvc wrote:
Someone wrote, "...no one should be spending more than 23% gross earnings on housing and property taxes...". Property taxes are a hidden unknown when buying a house. I keep reading comments (mostly from non-residents) about rescinding California's 1977 Prop 13 as a means to finance state government. Unchecked property taxes are a home buyers nightmare. [HOT: Texas voters recently approved constitutional amendments to address property rights and property tax issues.]

Marcus3 wrote:
The whole system as it is now is unsustainable. People have come to see their homes as "investments" rather than places to live and keep their stuff dry. As a results, the housing industry has been able to convince people that it's OK to buy a home that costs 4 or 5 times your annual pre-tax salary rather than 2 or 3 times income (and even THAT is high for those without cash reserves).

Change the guidelines so that home buyers need at least 10% down [FHA-backed loans only require 2.5%.]; refuse to offer home eq loans to those with less than 30% equity; get back to a sane level of overall debt consideration (no one should spend more than 23% gross earnings on housing and property taxes); and stop subsidizing over-paying with tax credits and tax deductions for interest (interest more than 8% of your pre-tax earnings shouldn't be deductible). THAT will keep agents from spinning "too-much house" as a good thing.

"Cold Turkey" [as with drub rehab] hurts, but it's the only cure for the problem. Well, that, and rewriting FHA regs to make sure people aren't as easily hooked on the house-drug to begin with.

dnjake wrote:
The problem is actually a much deeper one. The very low interest rates currently in force encourage people to make bad investments. It did not work the last time around. It probably will not work this time either. The other problem we have had for a long time is an endless trade deficit. Yes, it temporarily helps our standard of living when the Chinese and others sell us goods at an artificially low price. But it seriously distorts the global econcomy and gets us used to unsustainable expectations. If there is any real intention of achieving a sustainable US economy, we have to get to an environment where individual economic decisions are made based on a sustainable context. That means sustainable long term intrest rates. That means currency values that are determined by market forces. That means an end to US trade deficits. That means reasonable standards for home loans. As long as government policies are distorting most economic decisions, free market forces are never going to produce an economy that is sustainable in the long term.

mongolovesheriff wrote:
The writer buys into the Republic Party myth that homebuyers are to blame. Three real factors are to blame.
FIRST: Home mortgages became the speculative plaything of Wall Street. They were packaged, sold and resold, to the point that the real owner of any given mortgage loan became opaque. This derivative speculation brought huge profit to Wall Street as long as housing prices kept rising. So the unregulated speculation exacerbated the artificial rise in home prices.
SECOND: The banks got greedy with the step-up in monthly payments, where your payment could double or triple for no reason.
THREE: The government rewarded Wall Street's misbehavior with trillions in bailouts and near complete absolution. Yet still, some in the press want to toe the Republic Party line that, "it's all the fault of unqualified homebuyers".

knjincvc wrote:
BUSH ADMINISTRATION ANNOUNCES NEW HUD "ZERO DOWN PAYMENT" MORTGAGE: Initiative Aimed at Removing Major Barrier to Homeownership

LAS VEGAS - As part of President Bush's ongoing effort to help American families achieve the dream of homeownership, Federal Housing Commissioner John C. Weicher today announced that HUD is proposing to offer a "zero down payment" mortgage, the most significant initiative by the Federal Housing Administration in over a decade. This action would help remove the greatest barrier facing first-time homebuyers - the lack of funds for a down payment on a mortgage.

Speaking at the National Association of Home Builders' annual convention, Commissioner Weicher indicated that the proposal, part of HUD's Fiscal Year 2005 budget request, would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time homebuyers.

"Offering FHA mortgages with no down payment will unlock the door to homeownership for hundreds of thousands of American families, particularly minorities," said HUD's Acting Secretary Alphonso Jackson. "President Bush has pledged to create 5.5 million new minority homeowners this decade, and this historic initiative will help meet this goal." 

Preliminary projections indicate that the new FHA mortgage product would generate about 150,000 homebuyers in the first year alone.

"This initiative would not only address a major hurdle to homeownership and allow many renters to afford their own home, it would help these families build wealth and become true stakeholders in their communities," said Commissioner Weicher. "In addition, it would help spur the production of new housing in this country."
[HOT: This was a homebuilder proposal primarily aimed at generating wealth for builders, realtors, mortgage lenders, and Wall Street. They knew, or should have known, that zero-down loans would put borrowers at risk.]

For those that choose to participate in the Zero Down Payment program, HUD would charge a modestly higher insurance premium, which would be phased down over several years, and would also require families to undergo pre-purchase housing counseling.

HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development as well as enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov.

ripper368 wrote:
What most people don't realize is the fact that most people can't afford real estate. Most people can only afford the debt on real estate. When was the last time you heard of anyone buying property outright. When you look at the cost of land and housing, there is not a real price put on it, but a price based on time and ability to earn. The whole real estate market is a boondoggle that ties people into debt. It is social engineering at it's height. Building codes, property taxes, and the idea of eminent domain show the true nature of the "free enterprise" system we believe we have here. The setup for this joke is how much the banks and government make off of your "ownership", the punchline is you pay. 

mark2004a1 wrote:
"America's Luxury Home Builder" (Toll Brothers)
"Build Your Lifestyle With Your New Stanley Martin Home."
"Brookfield Homes, where design is the difference."
"Find the perfect home in the perfect location with Bozzuto Homes."
"At Ladysmith Village, Home is Much Bigger than Your House."
"Fine Urban Living" (PN Hoffman New Condos in DC & VA)
"Brand New Condos Throughout The Metro Area" (Kettler Condos)
"Over 50 years of better built & better value - Enjoy Life!" (Centex Homes)

dubya1938 wrote:
End all subsidies period. If people need other taxpayers' money to afford a down payment or first year's mortgage payments, how can they afford property taxes, electricity, heating, water, property insurance and cost of maintenance?

flippo10 wrote:
My pay in 1948 was $180.00/week
My first new car: 1947 Ford $1,025
My first house: 1948 $7,200 (less than annual salary)
Property tax: 1948 $114.00/yr

Isn't progress wonderful. Of course one can't live in the past, but it does give thought to why we're in the hole today. When the steel industry was going 100%, the oil refineries were being built, heavy industry was booming, heavy construction was booming, automobiles couldn't be built fast enough, and housing was booming.