America's Exploding Mortgage Crisis Reveals That Home Ownership Isn't Paradise for Everyone

By Howard Karger, Dollars and Sense. Posted June 14, 2007.

Anyone who has given the headlines even a passing glance recently knows the subprime mortgage industry is in deep trouble. Since 2006 more than 20 subprime lenders have quit the business or gone bankrupt. Many more are in serious trouble, including the nation's number two subprime lender, New Century Financial. The subprime crisis is also hitting Wall Street brokerages that invested in these loans, with reverberations from Tokyo to London. And the worst may be yet to come. At least $300 billion in subprime adjustable-rate mortgages will reset this year to higher interest rates. CNN reports that one in five subprime mortgages issued in 2005-2006 will end up in foreclosure. If these dire predictions come true, it will be the equivalent of a nuclear meltdown in the mortgage and housing industries.

What's conspicuously absent from the news reports is the effect of the subprime lending debacle on poor and working-class families who bought into the dream of homeownership, regardless of the price. Sold a false bill of goods, many of these families now face foreclosure and the loss of the small savings they invested in their homes. It's critical to examine the housing crisis not only from the perspective of the banks and the stock market, but also from the perspective of the families whose homes are on the line. It is also critical to uncover the systemic reasons for the recent burst of housing-market insanity that saw thousands upon thousands of families getting signed up for mortgage loans that were highly likely to end in failure and foreclosure.

Like most Americans, I grew up believing that buying a home represents a rite of passage in U.S. society. Americans widely view homeownership as the best choice for everyone, everywhere and at all times. The more people who own their own homes, the common wisdom goes, the more robust the economy, the stronger the community, and the greater the collective and individual benefits. Homeownership is the ticket to the middle class through asset accumulation, stability, and civic participation.

For the most part, this is an accurate picture. Homeowners get a foothold in a housing market with an almost infinite price ceiling. They enjoy important tax benefits. Owning a home is often cheaper than renting. Most important, homeownership builds equity and accrues assets for the next generation, in part by promoting forced savings. These savings are reflected in the data showing that, according to the National Housing Institute's Winton Picoff, the median wealth of low-income homeowners is 12 times higher than that of renters with similar incomes. Plus, owning a home is a status symbol: homeowners are seen as winners compared to renters.

Homeownership may have positive effects on family life. Ohio University's Robert Dietz found that owning a home contributes to household stability, social involvement, environmental awareness, local political participation and activism, good health, low crime, and beneficial community characteristics. Homeowners are better citizens, are healthier both physically and mentally, and have children who achieve more and are better behaved than those of renters.

Johns Hopkins University researchers Joe Harkness and Sandra Newman looked at whether homeownership benefits kids even in distressed neighborhoods. Their study concluded that "[h]omeownership in almost any neighborhood is found to benefit children. ... Children of most low-income renters would be better served by programs that help their families become homeowners in their current neighborhoods instead of helping them move to better neighborhoods while remaining renters." (Harkness and Newman also found, however, that the positive effects of homeownership on children are weaker in unstable low-income neighborhoods. Moreover, the study cannot distinguish whether homeownership leads to positive behaviors or whether owners were already predisposed to these behaviors.)

Faith in the benefits of homeownership -- along with low interest rates and a range of governmental incentives -- have produced a surge in the number of low-income homeowners. In 1994 Bill Clinton set -- and ultimately surpassed -- a goal to raise the nation's overall homeownership rate to 67.5% by 2000. There are now 71 million U.S. homeowners, representing close to 68% of all households. By 2003, 48% of black households owned their own homes, up from 34.5% in 1950. Much of this gain has been among low-income families.

Government efforts to increase homeownership for low-income families include both demand-side (e.g., homeowner tax credits, housing cost assistance programs) and supply-side (e.g., developer incentives) strategies. Federal housing programs insure more than a million loans a year to help low-income homebuyers. Fannie Mae and Freddie Mac -- the large, federally chartered but privately held corporations that buy mortgages from lenders, guarantee the notes, and then resell them to investors -- have increasingly turned their attention to low-income homebuyers as the upper-income housing market becomes more saturated. Banking industry regulations such as the Community Reinvestment Act and the Home Mortgage Disclosure Act encourage homeownership by reducing lending discrimination in underserved markets.

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Howard Karger is professor of social work at the University of Houston and the author of Shortchanged: Life and Debt in the Fringe Economy (Berrett-Koehler, 2005).

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