I submitted a question to his interview with Bigthink. The relevant segment is here, a bit more than 18 minutes in. I asked about equating affordable housing with mortgage subsidies. He said he never did that. For him, affordable housing means rental housing.
I was surprised by that answer. It made me wonder why so much of our public policy focus over the past several decades has been on bringing down mortgage interest rates and broadening access to mortgage credit.
[UPDATE: Russ Roberts has comments.]
READER COMMENTS
Lord
Jan 28 2010 at 7:50pm
You shouldn’t be as he has said it for a long time. The emphasis really changed when Thatcher and Reagan wanted to give public housing units to those that occupied them to remove the management burden from government, give them stakes in their community, encourage independence, promote real estate, and gain political support. The ownership society was only the extension of similar policies, getting wealthy under the pretense of helping the disadvantaged with expensive loans on overpriced property.
Chris Koresko
Jan 28 2010 at 8:19pm
Lord, your last sentence makes a strong statement about the motives of politicians you presumably don’t know personally. Can you support it with data?
Lord
Jan 28 2010 at 10:27pm
When people promote lending without establishing borrowers have any capacity to repay, that property is the only security and it only goes up, that lenders know what they are doing and only need to freed from constraints of regulation and leverage, that no one need look into anything for fear of finding anything, that creates one of the largest bubbles in history, speaks for itself.
Lord
Jan 28 2010 at 10:57pm
It is still a pretense even if you lie to yourself about what you are doing. The road to hell. If all you are doing is claiming to do good without ever seeing it is in fact good when it is in fact not good, you are still acting on pretense. When Megan argues lending any amount at any cost to anyone is good, like loan sharks are good charities, it is still pretense.
Andrew
Jan 29 2010 at 12:05am
Answer: no, he cannot. Does Lord offer an interesting, unique or even useful perspective? Again, no. Everyone knows the evil capitalist and greedy politician narratives.
Maybe Frank hoped people would make speculative housing purchases and rent them out. 🙂
DIV01
Jan 29 2010 at 6:56am
You have to admit that was a good bit of political shuffling. The gentleman has a reasonably strong hand in the legislation that aggravated this crisis. How this guy escapes political ostracization and the pitchfork mob is testament to his skills (vile he is) as a politician.
Bill Woolsey
Jan 29 2010 at 7:42am
It is simple.
Affordable housing is for poor people. Government subsidized apartments for people on welfare or flipping burgers.
Frank’s efforts on the mortgage front were aimed at helping the “middle class” buy single family homes in the high cost Boston metro area. Workers with good union jobs, school teachers, police officers, and the like. Saving up $100k to buy a small three bedroom house for $500k is unreasonable for people earing close to the median income in the U.S. So, the government should let them put down less and guarantee jumbo mortgages.
Where I live, people in that situation might need to save up 20k to buy a 200k house. The laws Frank tried to change wouldn’t be “necessary” in our area.
That is the way I see it.
This doesn’t mean that Frank’s efforts didn’t exacerbate the housing bubble. Running national financial policy to help Frank’s constituents just might be a bad idea.
Marc
Jan 29 2010 at 8:39am
You expected a politician to accept some blame for failed policies? I am surprised by that.
Ryan Vann
Jan 29 2010 at 9:09am
Prof Woolsey,
We must be standing in the same space because I see it as you do. Housing markets differ dramatically on a regional basis. In areas were markets were overblown, Frank’s efforts likely did lead to exuberance.
Aaron
Jan 29 2010 at 11:41am
@ Bill Woolsey
What’s wrong with middle class families renting, or moving somewhere where they can afford the down payment?
Theoretically, cities offer additional benefits and houses in the city cost more because of those benefits. Without market distortions, prices should adjust so the average buyer would be indifferent between Boston and any smaller town (not counting personal factors like proximity to family and friends).
Subsidizing home buyers in metro areas would serve to drive prices up even more in these cities, exacerbating the very problem that you claim they attempt to solve.
Am I missing something here?
Ryan Vann
Jan 29 2010 at 12:00pm
Aaron,
I don’t think you are missing anything so much as ascribing things that aren’t there. I didn’t sense any opposition in moving to lower cost areas in Prof. Woolsey’s comment. He was just trying to focus our attention away from the poor and where it belongs, which is on middle class homeownership.
Floccina
Jan 29 2010 at 12:06pm
I think that the push for the “ownership society” was based on a confusion between causation and correlation. The republicans noticed that home owners voted republican more than renters and so they tried to make more home owners. Same with holding of stocks republicans think that wider ownership of corporate stocks will result in more republican votes, I have my doubts.
Aaron
Jan 29 2010 at 1:53pm
@Ryan Vann
But those are the alternatives, aren’t they?
He is asserting that middle class families should be able to buy homes in cities like Boston. If they can’t, they either have to rent, or move somewhere with cheaper homes. If there are other alternatives, please mention them.
I see nothing wrong with renting or moving, so I don’t see why it’s necessary to give special treatment to middle class families who want to own a home in the city.
I did use the word “subsidize” when I shouldn’t have. I suppose lowering downpayment requirements isn’t a subsidy.
Ryan Vann
Jan 29 2010 at 3:10pm
Aaron
Upon second reading, I have to conceed and second your point. It seems Woolsey is having it both ways in his comment. That, or he isn’t ready to pull the trigger on clear opinion.
On one hand he is saying middle class families can’t afford houses in Boston area, and that there should be rules to address that. On the other hand, he seems open to the idea that Frank’s policies contributed to the bubble.
Debt to income ratios should either justify or not justify incurring more debt, regardless of how you structure that debt. In that regard, I see no reason why Bostonians should be subsidized in anyway to take on that debt.
Bill Woolsey
Jan 29 2010 at 5:11pm
Aaron:
I think that Fannie May and Freddie Mac should be closed down and all mortgage finance handled privately.
I don’t care whether school teachers, policeman, or people with good union jobs can buy homes in Boston.
I don’t favor subsidizing rental apartments for poor people either.
Any egalitarian tendencies I have would suggest subsidy for the education of poor children and maybe subsidies for the employment of low skilled workers.
I was speculating, really, on how Frank, you was in the thick of promoting irresponsible policies by Fannie and Freddie could say that to him, “affordable housing” means rental homes.
I presume this was basically a lie, but among politicians it was a clever side step of the question. Kling asked about affordable housing. Frank says affordable housing means rentals. He says nothing about his efforts to help middle class homebuyers in areas with very high home prices. You know, like helping his supporters living in his district.
Scott Sumner has some quotes on his blog from Frank showing that he seemed to be using the term affordable housing to refer to cheap mortgages in the past. http://www.themoneyillusion.com/?p=4041
I would think that the solution is for the Boston area to loosen zoning regulation. If they don’t want to do that, and people will only be teachers or policeman in the area if they can buy houses, then they just will have to pay them huge salaries, and so taxes will have to be higher. The people who like the zoning can pay high taxes for living in the area.
And yes, businesses can move from Boston to Charleston, South Carolina, where reasonbly paid workers can find reasonably priced homes.
I think it was a horrible policy to have an implicit government guarantee (which turned out to be a guarantee) for debt issued by Fannie and Freddie.
More generally, I think it was a horrible policy to have especially low capital requirements for mortgaged backed securities–or straight mortgages for that matter.
And there should have been no bailout for the broker dealers that funded mortgage backed securities with short term commerical paper.
Ryan Vann
Jan 30 2010 at 12:36am
Thank you for clarifying your position, Prof Woolsey.
Aaron
Jan 30 2010 at 12:47am
I suppose I was put off by the way you phrased that (it seems others were as well). Thanks for clarifying. I agree with you.
Chris Koresko
Jan 30 2010 at 1:09am
In 2006 I was urging friends in California not to buy houses because I believed the market was about to fall over. My argument was simple: the price of a house had been rising rapidly for some time, and people were starting to treat houses as investments. I’d read a statistic that a very large fraction (40%?) of them were second homes, which seemed to confirm that impression. It seemed obvious that the situation was unstable: if the price stopped rising and looked like it might fall, a lot of those houses would get dumped onto the market by people trying to cash out, and that would trigger a vicious circle and lead to a sharp decline in the price.
And that trigger was coming, since real prices just can’t keep rising exponentially forever. If they were going up 20% per year, they’d double in around 3.5 years. That rate would turn a $150K house into around $1M in a decade, and $10M a little more than decade after that. At some point even the most enthusiastic buyers get the willies.
I didn’t know or understand the roles of Fannie and Freddie then, and when I hear economists tell the story of the collapse it is usually centered on them. Nobody I know of today makes the simple argument that led me to the correct conclusion, and real estate people I talked to before the collapse were rather skeptical.
So: Was I wrong, and lucky? Or are the professionals missing something?
Douglass Holmes
Feb 1 2010 at 9:44am
Chris Koresko,
Your good advice and observation that ‘real prices can’t keep rising exponentially forever’ does not explain WHY the prices were rising so much in the first place. Fannie and Freddie were buying mortgages of dubious value. Easy credit allowed people to bid up the prices. Mortgage brokers, by being allowed to pass the risk on to Fannie and Freddie, did everything they could to process mortgages. This included ignoring questionable appraisals and kickbacks from sellers. This kept the appearance of continually rising prices. Nobody wanted to examine house prices too critically.
If I were a real economist, I would find data to back this up. 😉
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