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Federal Homeownership Subsidies Have Left A Trail Of Catastrophes

May 06, 2009

By Steven Malanga

In December, the New York Times published a lengthy article charging that the Bush administration's housing policies had "stoked" the foreclosure crisis, and thus the financial meltdown, by pushing for lax lending standards that lured millions of people into bad mortgages that they ultimately couldn't afford.

Yet almost everything the Times accused the Bush administration of doing was pursued many times by earlier administrations, both Democratic and Republican — and often with calamitous results.

The Times analysis exemplified our collective amnesia about Washington's repeated attempts to expand homeownership and the disasters they've caused. Each time we clean them up, then — as if under some strange compulsion — set in motion the mechanisms of the next housing calamity. That's exactly what we're doing once again.

This cycle goes back nearly 100 years. In 1922, Commerce Secretary Herbert Hoover launched the "Own Your Own Home" campaign, hailed as unique in the nation's history.

Responding to a small dip in homeownership rates, Hoover urged "the great lending institutions, the construction industry, the great real estate men ... to counteract the growing menace" of tenancy.

He pressed builders to turn to residential construction. He called for new rules that would let nationally chartered banks devote a greater share of their lending to residential properties.

Congress responded in 1927, and the freed-up banks dived into the market, despite signs that it was overheating.

The great national effort seemed to pay off. From mid-1927 to mid-1929, national banks' mortgage lending increased 45%. The country was becoming "a nation of homeowners," the Times exulted.

But as homeownership grew, so did the rate of foreclosures, from just 2% of commercial bank mortgages in 1922 to 11% in 1927.

This happened just as the stock market bubble of the late '20s was inflating dangerously. Soon after the October 1929 Wall Street crash, the housing market began to collapse. Defaults exploded; by 1933, some 1,000 homes were foreclosing every day.

The "Own Your Own Home" campaign had trapped many Americans in mortgages beyond their reach.

Financial institutions were exposed as well. Their mortgage loans outstanding more than doubled from the early 1920s to 1930 — $9.2 billion to $22.6 billion — one reason that about 750 financial institutions failed in 1930 alone.

Repeated Mistakes

Following this catastrophe, the Depression-era federal government created many institutions to fix flaws in the mortgage market, from the Federal Home Loan Bank system to provide a stable source of funds for banks, to the Federal National Mortgage Association (later known as Fannie Mae) to purchase federally insured mortgages.

Original Source: http://www.investors.com/NewsAndAnalysis/Article.aspx?id=476122

 

 
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