As high prices & interest rates make homeownership impossible for more Americans, look to the past for solutions
Great-Depression-era Home Owners’ Loan Corporation solved a much larger problem. Fannie Mae and Freddie Mac could replicate its strategy today.
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Did you hear? Chris was on Wisconsin Public Radio’s Central Time in December talking about length of tenure protections for renters.
According to Black Knight’s most recent data, of all homes bought in 2022, 8% are underwater and 40% have so little equity they are nearly underwater.
Voters approved rent control measures in Richmond and Orange County, California. Both are rent stabilization type of rent controls, wherein landlords are limited in the amount they can increase rent from existing market rent levels, rather than a more effective hard cap on rents based on the cost to responsibly run and maintain a unit of rental hosuing. Some tenant protections were also approved by voters in Portland, Maine (which also recently passed a rent control measure, which we covered here).
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Over the course of 2022, interest rates for mortgages exploded. In October and November, the market rate for 30-year home mortgages actually surpassed 7%(!). The last time rates exceeded 7% was in 2002. By contrast, rates in June 2021 – scarcely a year earlier – sunk to just 2.96%. The difference of 4 percentage points might not sound like much, but the monthly payment for a $300,000 30-year mortgage at a 3% interest rate is $1,264.81. For a mortgage at 7%, a monthly payment is $1,995.91, or a whopping 63% higher. Furthermore, over a 30-year term, a borrower would pay a total of $155,332.36 at a 3% interest rate; at 7%, a borrower would pay a total of $418,526.69 interest. (Calculations done on MortgageCalculator.org and historical interest rates taken from Freddie Mac data).
Moreover, average home sale prices have also skyrocketed. In Q2 of 2020, the average home sold for $374,500. For the most recent quarter for which data is available, Q3 of 2022, the average home sold for $542,900 – an increase of an astonishing 69%.
Meanwhile, rents have skyrocketed at astounding rates: over the course of 2021, rents increased an incredible 17.6% and about 4.6% over 2022. In other words, even if interest rates and home prices were at more manageable levels, high rents make it increasingly difficult for renters to save up enough money to actually become homeowners.
Our position is that homeownership is not inherently better than renting. But in the US, homeownership is unquestionably a far better option. Renting in the US is expensive and unstable; homeownership is more affordable and secure. It’s doubly unjust to have a rental housing system that is both terrible and difficult to escape.
We’ve been here before: the Great Depression and the Home Owner’s Loan Corporation
With the private market unable to provide affordable homeownership opportunities, it’s worth looking at how similar issues were dealt with in the past. During the Great Depression, the Roosevelt administration created the Home Owner’s Loan Corporation (HOLC), a public mortgage lender, to offer affordable mortgages during the depths of the Great Depression. The mortgages HOLC provided to American homeowners were so generous that it was not possible to obtain such favorable terms on the private market, no matter how creditworthy the borrower. HOLC offered fully amortizing, 20-year mortgages at a 5% interest rate. By contrast, the private market only offered balloon mortgages*, upwards of 8% interest rates, and 1-7 year terms.
*Lenders did not accept any principal payments. So if you borrowed $150,000 for a 6-year term, at the end of 6 years you would still owe $150,000. If you couldn’t find a new loan for $150,000 in time, you would lose your home. By contrast, HOLC loans were fully amortizing: if you borrowed $150,000 for the 20-year term, after 20 years your loan balance would be exactly $0.
We took a deep dive examining the housing crisis of the Great Depression and HOLC in episode 3 of the Housing for All podcast, and you can learn a lot more there. But the short version is that through HOLC, the government stepped in and provided subsidized mortgages that were affordable to a typical, struggling American.* This strategy worked: even though HOLC only bought mortgages already in foreclosure, 80% of borrowers regained their financial footing and didn’t lose their homes. In other words, of the millions of people the private market had failed, HOLC was able to rescue 80% by offering loans with fair terms. Despite offering generously subsidized loans and serving only borrowers who were already in foreclosure, HOLC still ran a small profit in its short existence.
Clearly, if this strategy worked during the economic cataclysm of the Great Depression, it could work again today. Over the course of the Great Depression, 25% of all Americans lost their homes to foreclosure and a third of all banks failed. At the worst point in the crisis, nearly 10% of all American homes were in foreclosure, all at once. Obviously, the economic challenges we face pale in comparison; imagine what HOLC could accomplish now.
Fortunately, Fannie Mae and Freddie Mac – government institutions created in the New Deal alongside HOLC to help with the housing crisis – are still around. Together, Fannie and Freddie own well over $6 trillion in assets, or nearly half of all American mortgages. The detailed workings of Fannie and Freddie are also a topic of episode 3 of the Housing for All podcast.
By law, Fannie and Freddie are barred from making mortgages directly to borrowers; they can only purchase mortgages after private lenders have made them to borrowers. But what if we changed the law so ordinary people could apply directly to Fannie Mae or Freddie Mac for a mortgage? And what if we also required Fannie and Freddie to offer affordable interest rates? Instead of facing the impossibly high interest rates of the private market, homeowners could have subsidized, affordable rates like their great-grandparents did in the Great Depression. Like HOLC before it, Fannie and Freddie would serve Americans in need of housing far better than the private market while running a small profit to reinvest in more affordable homeownership opportunities.
The out-of-control interest rates for prospective homeowners proves yet again that housing should never be subject to the for-profit free market. Fortunately, we’ve been here before and the HOLC offers the perfect model for how to proceed. Moreover, with over $6 trillion in assets, Fannie and Freddie are in the perfect position to become a 21st-century HOLC – no money needed, just a change in the law allowing them to issue mortgages.
*HOLC’s legacy of racial discrimination is atrocious. Clearly, Fannie and Freddie can do better
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