Housing and Wealth Destruction

Thomas J. Sugrue writes,

The bursting of the real estate bubble has been a catastrophe for the broad American middle class as a whole, but it has been particularly devastating to African Americans. According to the Center for Responsible Lending in Durham, North Carolina, nearly 25 percent of African Americans who bought or refinanced their homes between 2004 and 2008 (and an equivalent share among Latinos) have already lost or will end up losing their homes—compared to 11.9 percent of white families in the same situation. This disparate impact of the housing crash has made the racial gap in wealth even more extreme. As Reid Cramer, director of the Asset Building Program at the New America Foundation, puts it, “Basically, we have gone from an average minority family owning 10 cents to the dollar compared to the average white family to now owning less than a nickel.” The median black family today holds only $4,955 in assets.

Sugrue can only process this through the oppressor-oppressed model. He blames predatory lending. If he could open his eyes a little wider, he might be able to see the role played by government housing policy. Some notes:

1. From a wealth-destruction perspective, you cannot just look at the people who lost their homes. People who stayed current on their mortgages nonetheless experienced wealth destruction.

2. Probably more borrowers were “victimized” by Freddie Mac, Fannie Mae, and FHA than by Wall Street. That is, my guess is that a majority of the homeowners whose wealth has been crushed paid for their homes with loans backed by one of those agencies.

Speaking of housing, Luigi Zingales finds some numbers regarding occupancy fraud.

In fact, the authors find that more than 6% of mortgage loans misreport the borrower’s occupancy status, while 7% do not disclose second liens.

You get a lower rate by saying you plan to live in the home, so speculators will often lie about that. One of the reasons that programs to “help owners stay in their homes” are not doing very much is that a lot of those owners never occupied the homes in the first place.

Zingales references a working paper that I cannot find. Thus, I cannot tell whether the borrowers defrauded the lenders or the lenders defrauded the investors who bought the loans. I always presume that it is the borrower instigating the fraud. However, Zingales says that the bankers should be prosecuted. He makes it sound as if the lenders would record a loan internally as backed by an investment property and report it to investors as an owner-occupied home. That would require a much more complex conspiratorial action on the part of the lender, and until I learn otherwise, I will doubt that it happened.

10 thoughts on “Housing and Wealth Destruction

  1. I think there is little social pressure against fraud on the part of the buyer. Where I think you may be underselling the bank’s involvement, is I suspect agents originating the loan often think they are doing the buyer a good turn.

    That is, they kind of nod and wink about income or asset declarations, maybe even hint about how much it should be to get the best deal.

    It is easy to trick yourself into thinking you are helping someone get their dream home, or perhaps (ca. 2004) get their flipping business off the ground. And of course it benefits you too…

    • Yes, the agent thought they were doing them buyer a good turn. Just as Barney Frank thought he was doing a good turn by doing everything in his power to get lower income people into homes they “owed” (true ownership really only comes with the financial capacity to pay off the loan). But Zingales point is that banks misrepresented loans to investors to make them look less risky and sell them at higher prices. That is just fraud.

  2. …the Center for Responsible Lending…

    The Center for Irresponsible Lending must have been taken.

  3. From a wealth destruction perspective, you can’t even just look at the people who have lost some ability to convert their wealth-in-houses to wealth-in-pieces-of-paper, without also considering the people who have gained ability to convert their wealth-in-anything-else (including pieces of paper) into wealth-in-houses. There was probably net wealth destruction due to the housing crash, but not nearly as much as a simple measurement of changing house prices in dollars would indicate.

    • interesting way to look at it. From a social point of view, the wealth that was destroyed would be the resources that went into housing construction that should have been used elsewhere. That is a much smaller figure than the losses suffered by homeowners

      • Well, That is certainly closer to reality; but, what was the nature of the “wealth” that was “destroyed?”

        Was it the “credit” extended for the purchase?
        Was wealth in Tulip Bulb s “destroyed” when money lent for their purchase could not be repaid?

        No, the “wealth” in receivables for money lent was lost.
        Is that not Zingales plaint?

        The borrowers lost “opportunities.”

        Others lost the implied value of transferability. Which may not be the same as “wealth.

        And, how are we to know “should have been” (see, Hume), even if hindsight illuminates “could have been?’

  4. It seems to me that from a wealth-destruction perspective, people who stayed in their homes, on average, must have lost more (as a group, they had more home equity in the first place than those who lost homes through foreclosure). Some of those who have stayed current and in their houses now have negative equity and would have preserved more of their wealth had they defaulted.

  5. “You get a lower rate by saying you plan to live in the home, so speculators will often lie about that.”

    Many of those who claimed to be owner-occupiers were investors (veteran as well as sudden), who were buying multiple homes in subdivisions/planned communities where rules allowed purchases only by ‘owner occupiers.’ Many of these communities sought explicitly to avoid the problems that come when an investor buys a bunch of homes (ten to twenty wasn’t uncommon in the era of the zero down loan) in the same subdivision and then leaves them empty when plans to flip fall apart. It’s still fraud, just with a slightly different back story.

  6. “1. From a wealth-destruction perspective, you cannot just look at the people who lost their homes. People who stayed current on their mortgages nonetheless experienced wealth destruction.”

    Let’s assume we have two persons, A and B, each of which purchased a home for $200K and financed it with a $200K mortgage. Further assume that 3 years later, the FMV of each home as declined to $150K. Arguably, at this point in time, both A and B’s “net worth” has declined by $50K.

    Now, let’s assume that A is then foreclosed on. A likely kept on living in the home even though he was not current on his payments (this seems to be a quite common foreclosure scenario).

    Being able to live “rent free” is actually a windfall to A (who could use those funds for other consumption). Meanwhile, B has been current on his mortgage. Even if A’s mortgage is recourse, which is not likely and even if it were as a practical matter the banks rarely have access to personal assets. Thus, A’s net worth is unchanged (unless he had actual equity in the home, which is not the common foreclosure scenario). B, on the other hand, in addition to being out of pocket for his mortgage payments, still has a home worth $150 subject to a mortgage of $200. B’s “net worth” has declined by $50K.

    Note that in the above example, under law prior to the Mortgage Foreclosure Debt Relief Act of 2007, if the loan were recourse the debtor would have been subject to income tax on $50K. The prior rule was based on the very rational rationale that the debtor had experienced an *increase* in net worth of $50K. After the Act, the amount forgiven is tax free up to $2 million.

    Many who defaulted on their mortgages and thus were subject to foreclosure made very rational short-term economic decisions (but perhaps irrational long-term ones): My net worth will be *higher* if I don’t make my mortgage payments and the bank forecloses on the home.

    (This seems also to be the gist of Slocum’s comment).

    From this perspective, on average, those who held on to their homes rather than submit them to foreclosure likely suffered a *greater* reduction in “net wealth”.

    Of course, none of the above has anything to do with race.

    And,

    ” “Basically, we have gone from an average minority family owning 10 cents to the dollar compared to the average white family to now owning less than a nickel.”

    I wish someone could explain that to me.

    .

  7. Oh, the irony.

    Consider this: banks used to redline districts, resulting in minorities unable to own homes because they didn’t have the wealth needed.

    The government policy intended to address this has now resulted in minorities unable to own their homes and if they had owned their homes, saw their wealth decimated because of the unintended consequences of a series of laws designed to make things better.

    Sure, it’s an oversimplifaction. But the result is the same.

    Suggestion: perhaps the government should but the hell out of how markets work. If they want more of something, subsidize it, rather than try to screw around how the market worked. Stop being so bloody clever by trying to get someone else (in this case the banks) to foot the bill. That’s worked out so wonderfully well.