The Obama administration's response to the housing problems that have plagued the country since the financial crisis struck have been, to put it mildly, underwhelming. As part of his series of speeches touting "middle out" economics, President Obama decided to give the issue another whack yesterday, this time focusing on the future of housing finance.
Obama deserves points for wading into one of the thorniest public policy issues out there. Though there is consensus that government-backed mortgage giants Fannie Mae and Freddie Mac – which currently support almost 90 percent of the U.S. mortgage market – need to go, there is little agreement on what to replace them with. Dueling bills in the House and the Senate approach the problem in different ways, with the Senate preserving some federal role in the market, while the House, unsurprisingly, eschews federal support altogether. (John Griffith and Andrew Jakabovics of Enterprise Community Partners have a good brief on this, for those who want to get into the weeds.)
But the difficult questions regarding what to do with U.S. housing policy were made clear by the tension inherent in Obama's speech, which ultimately got bogged down by its adherence to two great American traditions that need to be re-thought: the benefits of home ownership overall and the existence of the 30-year mortgage.
While Obama rightly pointed out that not everyone should purchase a home, noting that "in the run-up to the crisis, banks and governments too often made everybody feel like they had to own a home, even if they weren't ready," he still extolled home ownership as the epitome of the American dream:
I think about my grandparents' generation. When my grandfather served in World War II, he fought in Patton's Army -- when he got back, this country gave him a chance to go to college on the G.I. Bill, but it also gave him the chance to buy his first home with a loan from the FHA. To him, and to generations of Americans before and since, a home was more than just a house. It was a source of pride and a source of security. It was a place to raise kids, to put down roots; a place where you could build up savings for college, or to start a business, or to retire with some security.
So how, exactly, do we go about discouraging people from rushing into the housing market if homeownership is simultaneously the key to American aspiration and building a better life for the next generation?
Such rhetoric is a bipartisan tradition. President George W. Bush had his "ownership society," while President Bill Clinton had the "National Homeownership Strategy: Partners in the American Dream." But what did the push for homeownership buy us, other than incentives for banks to prey on unwitting consumers and a mortgage bubble that burst with catastrophic consequences?
Also driving the home ownership rage is the mortgage interest deduction, which, even more so than Social Security, is the third-rail of American politics. Everyone loves it, and politicians aim to scale it back at their peril, even though it is one of the most expensive tax breaks and is extremely regressive, with most of the benefits going to the well-off. The public advantages provided of the mortgage interest deduction are extremely hard to find, but there it is, subsidizing homeowners while renters get nothing, giving more incentive to rush into purchasing a home.
Attached to the cult of homeownership is also the promise of the 30-year mortgage, the existence of which has become sacrosanct for Americans. In fact, one of Obama's principles for housing reform is to "preserve access to safe and simple mortgage products like the 30-year, fixed-rate mortgage." "That's something families should be able to rely on when they're making the most important purchase of their lives," he said.
But, again, there's no good reason to preserve the 30-year mortgage, which is largely an American creation that wouldn't exist without government intervention and the benefits of which are hard to understand. As Slate's Matt Yglesias put it while noting Canada's lack of a 30-year mortgage product, "If you cross the border into Canada it's not like people are living in yurts. It works fine."
That's not to say that Obama couldn't foster some positive changes to housing policy, but the real problems lie in what everyone takes for granted about how the U.S. housing market operates. A much more significant re-think is necessary to avoid the mess that built the housing bubble; anything else is merely tinkering at the edges.