Free Down Payments and Subsidized Mortgages are Not Social Justice

In the same year that Congress banned housing discrimination, it also created a new Housing and Urban Development (HUD) program known as Section 235 to provide heavily subsidized loans for low-income families and individuals to allow them to buy homes, with special assistance for mothers on welfare. Since most Section 235 recipients had almost no equity in their homes, it was cheaper for them to abandon their house than to repair or sell it. Tens of thousands of homes were left to rot in previously stable neighborhoods.

Between 1970 and 1976, HUD took over 13 percent of the housing stock in

Detroit–25,000 homes–after owners abandoned the houses or defaulted.  The Detroit News reported that Section 235 was turning Detroit neighborhoods into “‘ghost towns’ where a handful of families exist amid vandalized and fire-gutted homes.” Detroit City Council President Carl Levin (and later a U.S. Senator) castigated “Hurricane HUD.” In 1976, the Detroit Board of Assessors estimated that “HUD has cost every citizen in Detroit 20 percent on his house.”

 The Chicago Tribune in 1975 denounced Section 235 for causing “the decay of hundreds of good neighborhoods… No natural disaster on record has caused destruction on the scale of the government’s housing programs.” President Richard Nixon, surveying Section 235’s wreckage, complained in 1973: “All across America, the federal government has become the biggest slumlord in history.”

Twenty years later, HUD Secretary Henry Cisneros admitted, “HUD has in many cases exacerbated the declining quality of life in America.” But that confession did not deter the Clinton administration from launching new dictates to forcibly change American homeownership patterns. 

In 1995, roughly 41% of black households owned their own homes in 1995, compared to over 70% of white households. The Clinton administration, like Biden’s campaign, championed the idea that racism was to blame for the gap and pressured Freddie Mac and Fannie Mae to boost subsidized lending. HUD Secretary (currently New York Gov.) Andrew Cuomo declared in 1998, “We will not tolerate a continued home ownership gap as wide as the Grand Canyon that divides Americans into two societies, separate and unequal.” The Clinton administration exacted multi-billion dollar penalties from mortgage companies it asserted had not made enough loans to minorities with subpar credit histories.

President George W. Bush turbocharged the same policies to prove he was a “compassionate conservative.” Bush proclaimed in 2002 that he would “use the mighty muscle of the federal government” to boost home ownership. Bush was determined to end the bias against people who wanted to buy a home but had no money. Congress passed Bush’s American Dream Downpayment Act in 2003, authorizing federal handouts to first-time homebuyers of up to $10,000 or 6% of the home’s purchase price. Bush also swayed Congress to permit the Federal Housing Administration to make no-down-payment loans to low-income Americans. Bush proclaimed: “Core American values of individuality, thrift, responsibility, and self-reliance are embodied in homeownership.” In Bush’s eyes, self-reliance was so wonderful that the government should subsidize it. Bush’s 2004 reelection campaign trumpeted his down payment giveaways, a shining example of “compassionate conservatism.”

Fannie Mae and Freddie Mac bought up bundles of subprime loans created by other companies, deadening the incentive for mortgage lenders to avoid reckless behavior. The tidal wave of subsidized lending helped send housing prices through the roof. When a recession began in 2007, home values skidded and laid-off workers ceased paying mortgages. In mid-2008, Fannie and Freddie declared bankruptcy. 

Clinton-Bush policies boosted the percentage of Americans living in their own homes to 69.2% — the highest rate on record. However, after housing prices collapsed, the rate fell to 62.9% by 2016. This is the equivalent of almost 8 million families or individuals losing or otherwise exiting their homes. This was the biggest loss of home ownership in American history, a much sharper fall than occurred during the Great Depression.  

Housing values have rebounded in many areas since the 2007 crash, but that is no consolation to people who lost their homes. The black homeownership rate has returned to around 41%, the same as before the Clinton-Bush interventions to close the racial gap.

Because minority households had seen the fastest growth in homeownership over the prior decade, black and Hispanic households were hit far harder by the housing collapse.

 “The implosion of the subprime lending market has left a scar on the finances of black Americans — one that not only has wiped out a generation of economic progress but could leave them at a financial disadvantage for decades,” The Washington Post noted in 2012. The median net worth for Hispanic households declined by 66% between 2005 and 2009. The median net worth of black households declined by 53% between 2005 and 2009, according to the Pew Research Center.

As New York Times business reporter Gretchen Morgenson and Joshua Rosner wrote in their book, Reckless Endangerment, “homeownership was no longer the route to a secure spot in middle-class America. For millions of families, especially those in the lower economic segments of the population, borrowing to buy a home had put them squarely on the road to personal and financial ruin.” 

Even Rep. Barney Frank (D-Mass.), the most influential congressman on housing policy and a champion of more subsidized mortgages, admitted in 2010: “It was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.” That devastation was aptly described in a 2017 federal appeals court dissenting opinion as “wrecking ball benevolence” (quoting a 2004 Barron’s op-ed I wrote on Bush housing follies). 

Politicians can reap votes and campaign contributions as long as subsidized borrowers don’t go bankrupt until after the next election. Fannie and Freddie got away with grossly irresponsible practices for many years because they spent hundreds of millions of dollars for lobbying and campaign contributions before their collapse. The Congressional Hispanic Caucus championed low lending standards, resulting in a tidal wave of NINA “no income, no assets” and “no document” mortgages which relied solely on a borrower’s asserted income. 

As the Wall Street Journal reported in 2009, “At the height of the subprime lending boom, in 2005, banking and finance companies gave at least $2.3 million in campaign contributions to members of the Hispanic Caucus.” This was crony capitalism at its worst — politicians making out like bandits which much of the economy was left in shambles. Will Joe Biden, who admits he was “seduced by real estate” and bought a mansion at an early age, unleash the next monumental skewering of American homeowners? The only “lesson” that Biden has drawn from past debacles is that the media will absolve presidents who wreck the housing market while trumpeting their good intentions. Despite 50 years of debacles, politicians are still glorified for pretending that free downpayments and subsidized mortgages are “magic beans” that multiply social justice in America.

Related Articles – Crisis, Economic Theory, Fiscal Policy, Philosophy, Policy, Sound Banking