Housing

Bernanke: Home Ownership Is Great. Except When It Isn't.

Ben Bernanke
Jose Luis Magana/AP

The Fed is joining a bunch of other regulators looking into the foreclosure mess, Ben Bernanke said in a speech this morning.

He didn't add much to what we already know about the mess, but he did give a useful quick history of the idea of homeownership in America (and how it's taken a beating in the past few years):

Home ownership is great!

For many of us, owning a home signaled a passage into adulthood that coincided with the start of a career and family. High levels of homeownership have been shown to foster greater involvement in school and civic organizations, higher graduation rates, and greater neighborhood stability.

So the government should reward people for buying houses.

Recognizing these benefits, our society has taken steps to encourage homeownership. Tax incentives, mortgage insurance from the Federal Housing Administration, and other government policies all contributed to a long rise in the U.S. homeownership rate—from 45 percent in 1940 to a peak of 69 percent in 2004.

Oh, wait. There's also a downside.

Home purchases that are very highly leveraged or unaffordable subject the borrower and lender to a great deal of risk. Moreover, even in a strong economy, unforeseen life events and risks in local real estate markets make highly leveraged borrowers vulnerable.

Especially when lenders start giving out crazy mortgages and people buy houses they can't afford.

It was ultimately very destructive when, in the early part of this decade, dubious underwriting practices and mortgage products inappropriate for many borrowers became more common. In time, these practices and products contributed to problems in the broader financial services industry and helped spark a foreclosure crisis marked by a tremendous upheaval in housing markets.

Now millions of people are either underwater or almost underwater on their homes — an ugly picture that may last for a while.

Now, more than 20 percent of borrowers owe more than their home is worth and an additional 33 percent have equity cushions of 10 percent or less, putting them at risk should house prices decline much further. With housing markets still weak, high levels of mortgage distress may well persist for some time to come.

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