And the winners are…

Jillian Olinger, Research Associate with the Kirwan Institute for the Study of Race and Ethnicity

In housing finance, we’ve run the privatization scenario—we’ve seen it at work, and we’ve seen it fail miserably. This housing and credit crisis was twenty-plus years in the making, with its roots in the deregulation-mania that gained steam in the 1980s and has been running ever since. And we still don’t get it.

The Administration’s proposals for reforming the housing finance system almost exclusively call for the privatization of the housing finance system and so rely heavily upon oversight and consumer protection reforms proposed under the Dodd-Frank Act to be extremely robust. And on some points, the Dodd Frank Act may well improve these. Unfortunately, Dodd-Frank is under attack from House Republicans threatening to cut the budgets of the oversight agencies in the name of deficit reduction, but don’t be fooled—it really just amounts to deregulation by “defunding.”

Still, it is all but clear that the legislation itself markedly changes the housing finance system. Even with the regulatory reforms and oversight proposed under the Dodd-Frank Act, another crisis is inevitable because the system is not fundamentally changed. If anything, the increased concentration of lending in a small number of banks promises such an occurrence because of their “too big to fail” status. And in fact, “the billions of dollars in taxpayer money allowed institutions that were on the brink of collapse not only to survive, but to flourish. These banks now enjoy record profits and the seemingly permanent competitive advantage that accompanies being deemed “too big to fail.” It is a curious result that the competitive advantages from the implicit government guarantee—a primary criticism brought against Fannie and Freddie—has simply been transferred to the Too Big to Fail banks.

In short, the various features included in housing market reform, especially further concentration of lending power in the big banks, invite the private market back into the housing and credit markets on very favorable terms, almost as if they were being rewarded in spite of the fact that they were largely responsible for the crisis in the first place. Don’t be mistaken, 4 of our biggest banks (JP Morgan, Bank of America, Citigroup, and Wells Fargo), which by the way account for approximately 70% of the mortgage originations, were not innocent bystanders in the run up to the meltdown. Indeed, three of these four big banks had subprime lending units: Wells Fargo ranked number 8 out of the top 25 subprime lenders, JP Morgan and Chase ranked number 12, and Citigroup ranked 15. One analysis found that 21 of the top 25 subprime lenders were financed by banks that received TARP bailout funds.

Following the TARP bailout, the five largest financial institutions are 20% larger than they were before the crisis. Wall Street has bounced back from the recession with remarkable speed, posting near-record profits and bonuses. And yet, lending remains anemic. The Wall Street Journal reported that total lending in 2009 fell by 7.5%, the largest decline since 1942.

There are definite losers in this debate, and they are the individuals and communities of color that have already born the worst of the housing crisis and lost billions in home equity. These people and communities have taken a massive hit the impact of which will be felt for generations.

Homeownership is a significant source of wealth for families of color. For example, in 2006, 60% of Black homeowners’ and 66% of Latino homeowners’ wealth resided in home equity, compared to 49% of white homeowners’ wealth (noting that less than 50% of Black and Latino households were homeowners in 2006). The proposals set forth by the Administration that favor privatization, and the proposed QRM rules to require minimum down payments as high as 20% (among other questionable proposed requirements, such as debt-to-income restrictions), would arbitrarily restrict access to this fundamental lever of opportunity and wealth-building for the families that need it most, and at a time of continuing economic stress.

The wealth gap has only grown more uneven as a result of the recession. For example, analysis by the Economic Policy Institute shows that the share of wealth for the top fifth of American households grew by 2.2 percentage points during the recession, to 87.2%, while the remaining households maintained 12.8% of all wealth. The top 1% of households has a net worth that is 225 times that of the median American household. In fact, the millionaire class has emerged from the recession wealthier than it was in 2007, before the recession hit. The racial wealth gap has quadrupled in the last twenty years. In 2009, Black households had a median net worth of just $2,200 compared to $97,900 for white households (2.2%).

Homeownership is the key lever for addressing these wealth disparities in the US, yet the government wants to pull back from the housing market, and place its faith in the private market—a private market which, left to its own devices, has historically left major parts of the housing market either underserved or has outright exploited vulnerable communities and borrowers.

As this debate over housing finance reform continues, let us at least be honest about who the real winners—and the losers—are.