In its final installment of the Big Think's "Went Went Wrong" Series on the financial crisis, they interviewed Financial Services Committee Chairman Barney Frank (D-MA). Much of the interview was predictable: Frank mostly explained what anyone closely following the financial regulation push in Congress already knew. But there was one fascinating gem in discussing where Fannie and Freddie went wrong. Frank views ushering the poor to own homes as a mistake and believes they should rent instead.
Frank was responding to the question about how Fannie and Freddie could be structured to avoid moral hazard and a too cozy relationship with the regulators. After stating that we should separate the liquidity creation function from the subsidy objective (which we already knew he supported), he said:
I think the answer is you separate out the function of providing the equity in general for the mortgage market and doing some subsidy and in my judgment, the subsidy again, as I said before, should be focused on affordable rental housing, not in pushing low income people into owning homes that they can't afford.
Can I get an "Amen!"? If someone cannot afford a house, they should not be encouraged to purchase a house. The logic couldn't be simpler. And yet, over the past decade it was utterly ignored. I've never understood why renting is viewed as so shameful or low class. I've rented my entire adult life. I once had a supervisor pushing 50-years-old with a wife and two kids that probably made over a million-dollars-per-year, and he still rented.
Not to say there's anything wrong with owning a home either. There may be reasons why some individuals would prefer buying over renting, despite the fact that buying a home is often not a very good investment. But I think people need to get past the view that you can't have a successful life without one day owning a home. It's a bizarre psychological barrier that, frankly, helped lead us into the worst financial crisis in about 80 years.
For low income people, the argument for owning gets even thinner. By definition, they will have trouble purchasing a home, since in most markets it's more expensive to buy the same property you could rent -- especially when you have to worry about homeowner's insurance, risk-based interest rates and maintenance. Sometimes, these individuals also have a more irregular income stream, which can lead to trouble paying on-time each month, leading to foreclosure and wrecking their credit. They would also be better off having better labor mobility, which is provided if you can more easily pick up and leave a rental.
So it's perfectly acceptable if someone in a low income band wishes to try to buy a home. That's certainly their right. But the government shouldn't be subsidizing it. If it really wants to help Americans with relatively lower incomes, it would be better off focusing on affordable rental housing, as Frank suggests. From his lips to President Obama's ears.