Subsidies and regulations created the 2008 crisis. Guess what the 2020 candidates are proposing.
Politicians and regulators played a central role in the housing boom and bust that led to the 2008 financial crisis. But you’d never know that, judging from the Democratic presidential candidates’ housing proposals, which double down on the policies and interventions that caused the problem in the first place.
Sen. Elizabeth Warren wants to spend half a trillion dollars over 10 years on “affordable housing” subsidy programs. Under her plan, the federal government would provide down-payment grants for first-time home buyers living in communities that have faced racial discrimination in the past. She would also expand the purview of the Community Reinvestment Act, which is used by federal agencies to pressure mortgage companies into relaxing their lending standards for applicants from certain racial and ethnic groups.
Sen. Cory Booker, meanwhile, envisions a larger role for the federal government in the residential rental market. His plan is to reduce housing costs via a refundable tax credit for tenants. If more than 30% of your gross income goes toward rent—which is the case for “almost half” of all renters, according to the senator—you would qualify for a payout from Uncle Sam. Perhaps Mr. Booker reasons that subsidies have worked so well in bringing down the cost of college, we should apply them to housing as well.
Not to be outdone, Sen. Kamala Harris is now pushing a $100 billion homeownership plan of her own. Like Ms. Warren, Ms. Harris aims to reduce racial disparities by targeting minority communities. Participants would receive up to $25,000 to help cover down payments and closing costs. Speaking at a festival sponsored by Essence magazine, a publication for black women, Ms. Harris blamed homeownership disparities on housing discrimination and the unfair calculation of credit scores, both of which she pledged to address if elected.
Leave aside the astronomical costs of these proposals and the massive tax hikes that would be necessary to fund them. A more basic question is whether they would work as intended. An abiding belief on the political left is that more government subsidies and regulation of the private sector will produce less income inequality. But the history of the housing boom and bust provides much evidence to the contrary. Government housing policies and federal regulators played an instrumental part in the housing crisis, no matter how much Democrats want to blame it all on excessive greed or market failure or racial animus or some other bugaboo.
The lack of affordable housing was never as widespread as the left claimed. It was big problem in a few select places, such as Arizona, Florida and coastal California, where onerous land-use regulations were enacted at the behest of environmentalists. When you place vast swaths of land off-limits to developers, the price of the remaining land—and of the homes built on it—rises accordingly. A record three million households received foreclosure notices in 2009, but 50% of them were sent to only four states.
Peter Wallison, who follows the financial industry at the American Enterprise Institute, has noted that by mid-2008, right before the crisis, 56% of all U.S mortgages were subprime or otherwise risky. Of those, 76% were on the books of government agencies such as Fannie Mae and Freddie Mac . How did we reach that point? At the urging of federal housing regulators, lenders extended credit to people who never would have qualified for loans using traditional criteria. Lending quotas for favored minority groups and low-income applicants were increased by government bureaucrats, and mortgage companies came up with creative ways to meet them.
During the housing boom, the traditional 30-year fixed-rate mortgage became less common, while interest-only and adjustable-rate loans gained popularity. In 2002 less than 10% of new mortgages were interest-only, but that proportion rose to 31% by 2005. Lenders also knew that Fannie Mae was required to buy a certain number of these risky mortgages from banks, which meant that if a borrower defaulted on a loan, it would be Fannie’s problem and not the bank’s. Elizabeth Warren & Co. would have us believe that insufficient regulation of the private sector caused the housing crisis, but the truth is closer to the opposite.
Another pernicious mantra on the left is that loan disparities between blacks and whites are evidence of bias. Yes, studies show that blacks received subprime loans at higher rates than whites. They also show that whites received them at higher rates than Asians, which suggest that something other than racism is at work. Maybe the rate of loan approvals across groups differs because wealth, income and credit histories differ as well, and banks are in the business of reducing the risk of default.
Widespread homeownership is an admirable goal, but not at any cost. That ought to have been the biggest lesson of the housing crisis, though the leading presidential candidates show no signs of having learned it.
This piece originally appeared at The Wall Street Journal (paywall)
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Jason L. Riley is a senior fellow at the Manhattan Institute, a columnist at The Wall Street Journal, and a Fox News commentator. Follow him on Twitter here.
This piece originally appeared in The Wall Street Journal