Fannie, Freddie, and shrinking cities

 

Cleveland and other cities that have suffered sustained disinvestment over the last 30 years face unique challenges and opportunities from the prospect of federal housing finance reform. As the federal government transforms its role in the mortgage market, it must develop structures that both enhance the operation of the private market as well as maintain historical commitments to fair housing. In doing so, it can also promote reinvestment in central cities and reduce the incentives for perpetual sprawl.

To promote reinvestment, housing finance reform must bolster community bankers and community development financial institutions (CDFIs). Doing so will reduce the concentration of mortgages in the too-big-to-fail banks and increase the ability of low- to moderate-income households to access credit that allows them to pursue homeownership. In 2008, the most recent data available, a quarter of all mortgages in Cleveland were high-cost, subprime mortgages– more than twice the national average. For African-Americans here, the proportion was 32%, and in some neighborhoods the proportion was over forty percent. This unsustainable structure decimated this city and others like it that already were experiencing massive population loss. Through processes such as redlining and, more recently, reverse redlining, the private market has demonstrated historically that there is little market appetite to provide credit to these areas on equitable terms.

Given this, there is clearly a role for alternative financial institutions to play, yet the Administration’s draft proposals for reform barely mentions them, noting only on page 25 that “government support can also increase access to secondary markets for smaller lenders and community banks.” Instead, the focus is on the role of the Consumer Financial Protection Bureau. However, the CFPB is unlikely to have any rulemaking power for the balance of Obama’s term because it will have no director, and in the medium- to long-term its enforcement power is likely to be weakened by Republicans and conservative Democrats. The Administration cannot ignore this reality as it thinks about how to modernize housing finance.

Moreover, housing finance reform has implications well beyond the terms on which credit is available: it has implications for the way our neighborhoods and metropolitan regions are patterned. Eliminating federal support for “jumbo” mortgages and increasing the cost of credit could reduce the incentives for homebuilders to continue to build new subdivisions in rural areas and make redevelopment of existing developments more competitive in the market. The Administration has, smartly, proposed elimination of subsidies for so-called “jumbo” mortgages and raised the possibility of reducing the ceiling for support even further. Taken together with the specter of increased requirements for down payments, the market for “McMansions” on the fringes of urban areas may be crippled. While homebuilders would not welcome such an outcome, it could be a boon for central cities and inner-ring suburbs that have solid housing stock that has been rendered unattractive to homebuyers who can currently buy much more house while incurring a disproportionately lower financial burden. Although it is unlikely to bring a massive influx of residents back to central cities, this change could at least begin to limit sprawl.

Finally, we must remember that homeownership was the primary route to wealth-building for European ethnics and a segment of the African-American population after WW2, bringing them for the first time into the economic mainstream and creating the modern middle class. It is likely that homeownership will remain the primary vehicle for wealth-building for the foreseeable future, so it is imperative that housing finance reform not close off this avenue for a new generation that faces a high degree of economic uncertainty as well as the persistence of racialized wealth gaps. The remaining residents of cities like Cleveland are disproportionately people of color and low income. Just as wealth-building for the baby boom generation was heavily subsidized by the government, this generation of Americans must have robust, creative public support. The Administration’s proposals for housing finance reform all include reducing the role of the Federal Housing Administration in the mortgage market. Any such proposal must be evaluated not just in the context of discriminatory practices, but in the context of promoting equal opportunity. If housing finance reform improves the financial prospects for these underserved communities, the subsequent economic growth will bolster the nation as a whole and indirectly strengthen financial markets far into the future.