Analysis of Liberal Oppression III

Housing

In Part One and Two I've set forth some of the oppressions that the liberal ruling class has committed. As I wrote,

To paraphrase Marx, it is high time that the ordinary middle class sets forth an indictment of the current ruling class, and enumerate the vile oppressions and dominations and injustices it has created during its rule of about 100 years.

So I have discussed ruling-class injustice committed with respect to socialism, big government, the war on the middle class, the war on religion, education, welfare, and government pensions. Now let's look at:

Housing. All humans need shelter, but shelter is expensive, and so humans have expended extraordinary effort to obtain shelter. They have developed many ways in which to obtain shelter from the elements. One way is to live in the house of your liege lord. Another is to board in the house of a widow. Another is to rent a dwelling or a part of a dwelling from its owner, popularly called a "landlord." Finally, due to the modern western idea of private property in land, people can own a parcel of land and the dwelling that stands upon it.

It seems to be the ambition of very many people to "own" their own home. Even the socialists appreciate this, as George Bernard Shaw writes of the first Adam seizing the most fertile and favorable patch of land he can find. But there is a problem. The time of life at which humans need to obtain shelter, in young adulthood, is also a time when they are hardly equipped with the financial means to do so. Thus, in the Middle Ages in Britain, young people could not get married unless they could obtain resources from both families, either by right of inheritance or by dowry or both.

In our time, young people can live in the house of their liege lord, as in public housing. They can rent space from a landlord. They can buy a house by borrowing a down payment from their parents and by pledging the house as collateral for a loan, a home mortgage. The culture of widows operating boarding houses seems to have gone out of fashion.

Now, we know from the rather young social science called economics that there are two ways to distribute things of value. You can do it with the price system, which basically balances the prices, purchase-wise or rent-wise, of houses against the amount of money that buyers and renters are willing to bid. Or you can resolve the matter by force, with government or liege lords establishing prices and rents by force. Government also has the option of meddling with the price system with subsidies and interventions in the credit system: semi-force.

The ruling class of the last 100 years has made many interventions in the housing market. It has devalued the currency; it has instituted rent control; it has subsidized mortgage credit with government-subsidized loans; it has instituted building codes to prevent the construction of "jerry-built" houses and latterly to require expensive "environmentally friendly" features; it has limited housing construction in environmentally sensitive areas. All these government actions are actually or potentially unjust, and simply enact the agenda of the ruling class without regard to the welfare of the nation.

But let us unpack the subsidization of home mortgages. As usual, a program advertised as creating "affordable housing" has achieved the opposite.

Let us start before the Great Depression. In the United States, you could borrow money to buy a house. Typically you had to put down about 50 percent of the purchase price and get a 10 year mortgage.

Do you see what this means? It means that the price of houses had to balance with the fact of buyers that could only borrow 50 percent of the purchase price and had to put down 50 percent of the purchase price as a down payment. It means that prices would tend to be low, low, low. It would, of course, privilege young people who could borrow down payments from their parents.

But after the Great Depression the FDR administration created the Federal National Mortgage Association to provide a secondary market in mortgages. Perfectly harmless, except that, with the government's backing, FNMA could buy 30-year fixed rate mortgages and sell them bundled to widows and orphans and pension funds.

Do you see what this means? It means that people are now able to bid more for houses, because 30-year mortgages mean lower monthly payments. This means that house prices will go up.

Is this a good thing? I don't think so.

After World War II the federal government enacted other housing programs, mortgage loans from the Federal Housing Administration with lower down-payments. And of course, the Veterans Administration created the zero-down VA loan for veterans. The result, you can see, is to raise housing prices because the government low-down-payment policies allow buyers to bid up prices for housing.

Is this a good idea? I don't think so.

In the 1970s the feminists discovered that the practice of banks to count only the income of the husband in qualifying home buyers for a loan was male chauvinism. And so lenders were now required to count the income of both partners to a housing loan. The result, you can see, was to raise housing prices because the non-chauvinist rule allowed buyers to bid up the price of houses by qualifying them for bigger loans.

Is this a good idea? I don't think so.

In the 1930s, after the creation of FNMA, the bureaucratic mindset invaded the home loan market and the regulators started grading neighborhoods for creditworthiness. You can see that this is an inevitable result of government intervention, because once you have government subsidies then you have an opportunity to scam the system and therefore you have to have regulations to stop the scam artists. Certain neighborhoods were "red-lined" and often enough these were black neighborhoods. So activism organizations like ACORN pushed to pass the Community Reinvestment Act of 1977 to stop redlining and increase the availability of mortgages to minority borrowers. Good idea, you may say. And I'll agree, up to a point.

But activism never stops with its victory. And so the war against redlining kept escalating, through the 1990s and into the 2000s. The federal government kept lowering the down-payment on mortgage loans and started requiring lenders and FNMA to increase the proportion of loans to people with lower credit scores. You can see that this kind of policy increases the number of people who can bid for houses and increases the amount they can bid with. So it tends to increase housing prices.

Is this a good idea? I don't think so.

You know what is coming next. By the 2000s the federal government was pressuring FNMA and Government National Mortgage Association to increase mortgages to "sub-prime" borrowers. And they were pushing 100 percent loans. What could go wrong? A couple of things. First of all, "liar loans." I can't imagine what that means. Also, because pension funds are often required to buy only the highest rated bonds, financial speculators figured out how to buy bundles of mortgages with high-risk loans and convert the high-risk bonds into lower-risk bonds with financial instruments called "derivatives."

That’s fine, except that the government’s subsidies to the housing market violated the foundations of a solid credit market: properly collateralized loans and borrowers able to service their loans. You can’t do that when the government is supporting low down payment loans and encouraging sub-prime borrowers. Thus, in the 2006-08 bear market people in the credit market started to stay away from outfits like Bear Stearns and Lehman Brothers that had invested heavily in housing-related derivatives that were trying to improve the ratings of low-down loans issued to sub-prime borrowers. Both financial houses failed.

Is this a good idea? I don't think so.

Next Up: The Homeless