It has been more than a decade since the housing bubble burst, destroying the lives of millions of Americans and shedding billions of dollars unseen since the dot-com crash and savings and loan crisis. Despite a financial calamity that will be etched in history, it is apparent that politicians still have no clue as to why it happened, chalking it up to just an economic event that can be blamed on capitalism. Sen. Kamala Harris (D-CA) is a prime example of someone who has failed to learn from history and will be doomed to repeat it, should she win the presidency in 2020.
Subsidizing Down Payments
Sen. Harris is proposing a $100 billion program to help four million households who rent or live in historically red-lined communities, places that have been denied a diverse array of services because of race. Harris would direct the Department of Housing and Urban Development (HUD) to provide these households with up to $25,000 in down payment and closing cost assistance.
The Democratic presidential contender would also mandate an adjustment on how credit scores are calculated, factoring in rent payments, telephone bills, and utilities. She believes this would boost credit access for minority borrowers.
Speaking to a crowd at the Essence Festival in New Orleans, LA, Harris says that now is the time to end the racial wealth gap:
“A typical black family has just $10 of wealth for every $100 held by a white family. We must right that wrong and, after generations of discrimination, give black families a real shot at homeownership—historically one of the most powerful drivers of wealth in our country.”
On her campaign website, Harris claims that the subprime mortgage disaster and the Great Recession disproportionately affected minorities.
But it seems like she is getting her inspiration from the past.
LBJ Couldn’t Do Anything Right
Today, the black homeownership rate is at a 50-year low of just 42%. That is a ridiculous figure because this was around 25% during the segregation-era redlining.
Former President Lyndon Baines Johnson signed the Fair Housing Act of 1968 and the Housing and Urban Development Act of 1968, federal mortgage programs that aimed at helping redlined communities. Under this initiative, the minimum down payment was only $200 and federally subsidized interest rates were just 1%.
After just a few years, the efforts were tossed in the waste bin because of poor results.
Not only were fraud, waste, and abuse rampant, but there were also high foreclosure rates. It is estimated that one in eight homes were foreclosed on and foreclosures topped ten times the rate of conventional mortgages.
Of course, failing to admit they were wrong, politicians and bureaucrats substituted the policies with other disastrous measures that have only hurt the very people they claim they want to rescue.
Democrat or Republican, the federal government has intervened into the housing market for years on the premise that every American is entitled to a house. But interventionism under former Presidents Jimmy Carter and Bill Clinton did the most amount of harm for the entire nation.
The Community Reinvestment Act of 1977, which was later updated in the mid-1990s, pressured private lenders to extend risky loans to borrowers who have historically not qualified for mortgages. Conservatives are right to point out this failed measure, but they also tend to omit one crucial party that funded these transactions: The Federal Reserve.
In 1995, Clinton unveiled his National Homeownership Strategy, a 100-point plan to “boost homeownership in America to an all-time high by the end of the century.” Under this plan, one-third of Fannie Mae and Freddie mortgage acquisitions needed to be a part of the Oval Office’s affordable housing initiative – this figure surged to half by 2005. The government-sponsored enterprises (GSEs) took on bad loans and became the largest buyers of subprime mortgages and helped drive their growth. This measure also diminished underwriting standards.
In a January 2011 report, the Financial Crisis Inquiry Commission (FCIC) head Peter Wallison blamed US government housing policy for the economic collapse:
“I believe that the sine qua non of the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans—half of all mortgages in the United States—which were ready to default as soon as the massive 1997–2007 housing bubble began to deflate. If the U.S. government had not chosen this policy path—fostering the growth of a bubble of unprecedented size and an equally unprecedented number of weak and high risk residential mortgages—the great financial crisis of 2008 would never have occurred.”
Yet, Harris wants to emulate these efforts?
Feeling Good Substitutes Economics
The Harris proposal is a case study in feel-good politics. Sure, it makes us feel tingly inside to hear that a politician wants to give everyone a house, but it is hardly a reasonable endeavor, considering the putrid track record of the state.
One of the unintended consequences of the Harris plan is that the impecunious will purchase a house they cannot afford, similar to what occurred during the housing bubble. Subsidizing down payments will only steer low-income households to buy homes that cannot be sustained. Typically, according to the research, low-income homebuyers get into the market when prices are too high and credit standards are too low, pushing them into foreclosure once they endure a pecuniary plight, whether it is a job loss or an illness.
Housing prices have already gone through the roof in many parts of the country. Under the senator’s plan, the cost to buy a home would increase even more. Eventually, property owners and landlords would consume the value of the subsidies and add them to the price tag. In the end, if a bank requires 10% to 20% down payment, then her proposal would not even be enough, prompting her administration to either raise her offer of $25,000 or mandate banks to lower the down payment threshold – or both!
Finally, Harris does not address the meat and potatoes of the real estate market: Housing prices are too high because there is a short supply. Because of government restrictions, regulations, and other red tape barriers, the state prevents a new supply of housing from coming to market. Sure, this benefits homeowners and their equity, but it does not help those who want to own a home. So, if Harris really wanted to make housing more affordable and accessible, then she would want to slash and burn burdensome barriers to foster construction.
Does Harris have the right intentions? Absolutely. But good intentions will not produce good results.
Everything is a Right
Whenever the government tries to socially engineer society and guarantee someone something, it usually backfires. The government wants to give everyone an education, but what has happened? Students’ math and reading scores are plummeting, and if pupils make it to university or college they are leaving with tens of thousands of dollars in debt. When the state wants to secure a retirement income for millions of senior citizens, the program turns into a Ponzi scheme. Now, politicians want to make housing a right, but every time Washington has attempted this crusade, it has gone bust. When will politicians learn that interventionism begets interventionism and the solutions they propose target problems they created in the first place?
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