The Housing Boom and Bust
By Thomas Sowell
(Basic Books, 184 Pages, $24.95)
In a recent issue of Time magazine, MSNBC news personality Joe Scarborough chastised Republicans. "We should erase the shabby standards of financial oversight," he wrote. "Republicans must be determined to never again adopt a laissez-faire approach to Wall Street. After...the sub-prime crisis, there is nothing conservative about turning a blind eye to reckless speculation and greed."
You know that the establishment, if not the public, has drunk deeply the Kool-Aid of conventional wisdom on the mortgage meltdown when a conservative and former Republican congressman like Joe Scarborough blames lax regulation and avarice.
The antidote is Thomas Sowell's new book, The Housing Boom and Bust. In this compact, tightly argued work, Sowell notes that thinking like Scarborough's wasn't limited to the aftermath:
A fundamental misconception of the housing market existed both during the housing boom and after the bust. That misconception was that the free market failed to produce affordable housing, and that government intervention was therefore necessary, in order to enable ordinary people to find a place to live that was within their means. Yet the hard evidence points in the opposite direction.
As with most major economic crises, the ultimate cause of the housing disaster is found not in the market, but in the political realm. The roots go back at least to the early 1990s, when the term "affordable housing" became the battle cry of the political class. Seldom did politicians make the meaning of affordable housing explicit, and for good reason. As Sowell puts it, the "political meaning of affordable housing is that individuals choose their housing and government somehow makes it financially possible for them to have it."
Over time, politicians would pull a variety of policy levers designed to achieve the goal of "affordable housing." One was making the Community Reinvestment Act more stringent, empowering radical activist groups to block bank mergers unless those banks made loans to riskier borrowers. Another was the pressure applied to Fannie Mae and Freddie Mac to buy riskier sub-prime loans to turn into mortgage-backed securities. That loosened restraint on lending standards, as lenders quickly realized they could make risky loans and dump them off on Fannie or Freddie.
Sowell considers the politician most responsible for this mess to be Rep. Barney Frank, the Massachusetts Democrat who is now head of the Financial Services Committee. Frank's most infamous remark was his 2003 comment regarding Fannie and Freddie that he wanted "to roll the dice a bit more in this situation toward subsidized housing." He never let the taxpayers know that it was their money that would be lost if he rolled snake eyes. In fact, he denied taxpayers were on the hook, saying he was making no explicit or implicit guarantee that the government would bail out the mortgage giants. Adding insult to injury, he dismissed the possibility of a crisis, saying that critics "exaggerate a threat of safety" and "conjure up the possibility of serious financial losses to the Treasury, which I do not see."
Frank was by no means alone. Sen. Chris Dodd, Rep. Maxine Waters, and Attorney General Janet Reno, among others, all played a part.
Nor was this a partisan affair. Sowell singles out Republican Senator Kit Bond of Missouri for going after the Office of Federal Housing Enterprise Oversight (OFHEO) after it issued a report in 2004 exposing Fannie Mae's accounting irregularities. Bond responded by calling for an investigation of OFHEO and tried to cut its budget and remove its leadership.
Sowell also points out the rather bipolar nature of the George W. Bush administration. On the one hand, many Bush officials warned about the need for more oversight of Fannie and Freddie. On the other, the administration added to the crisis by winning passage in 2002 of the American Dream Downpayment Act, which subsidized the down payments of low-income borrowers.
Sowell's analysis of economic factors is equally illuminating, particularly because he gives considerable attention to a local-level catalyst that has been ignored elsewhere. "It has been precisely where there was massive government intervention, in the form of severe building restrictions, that housing prices skyrocketed," Sowell writes.
Such restrictions come in many forms, such as "open space" laws, environmental regulation, and historical preservation codes. The net effect of such restrictions is to reduce the supply of land available for development and the supply of housing, driving up the price of both.
In Nevada, where the federal government owns much of the undeveloped land, environmentalists have successfully pressured the feds to slow housing development on that land. In Florida, the state legislature enacted "growth management" laws in the 1980s and 1990s requiring cities to draw urban growth boundaries. The legislature also made it easier for cities to deny building permits if the building would lead to increased traffic.
Some of the most restrictive laws were in coastal California. In the 1990s, voters in coastal cities such as San Ramon and Half Moon Bay approved local measures severely limiting growth. Counties in the San Francisco-Oakland area bought up land totaling 550,000 acres and turned them into parks and preserves. A similar policy helped drive up housing prices in Los Angeles.
Areas with the biggest run-up in housing prices had the farthest to fall when the bottom fell out. According to the latest National Delinquency Survey, the percentage of mortgages seriously delinquent (more than 90 days late on payments or in foreclosure) in Nevada, Florida, and California was 15.6 percent, 17.1 percent, and 10.8 percent, respectively.
Such restrictions, though, are only one factor and not everywhere an important one, as Sowell would probably acknowledge. Some places with very high delinquency rates, like Arizona, had only modest land restrictions.
Sowell's analysis has made some impact. At a June hearing in a subcommittee of the House Financial Services Committee, Rep. Ed Royce (R-CA) said, "Any member that's interested in this debate, I'd get a hold of Thomas Sowell's new book...and see the role that Congress played in helping create this crisis."
Unfortunately, it appears that few have taken Royce's advice.
Not many members of Congress seem worried about potential problems with the Federal Housing Authority. In the aftermath of the crisis, Congress turned to the FHA to help prop up the housing market. FHA loans now have a delinquency rate of more than 14 percent, the highest since records have been kept.
Worse, Barney Frank recently held a hearing in the Financial Services Committee on strengthening the Community Reinvestment Act. At issue was legislation proposed by Rep. Eddie Bernice Johnson (D-TX) that would "modernize" the CRA. "CRA has...been an extremely successful law; however, CRA needs to be updated," Johnson said. Her legislation would expand CRA's reach to credit unions, insurance companies, and mortgage lenders. Frank assured Johnson that Congress would be working to make CRA "more effective. It's a good program."
Commenting on the causes of the crisis, Sowell writes, "Many in Congress and elsewhere never really got it."
They still don't get it.
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