Post-Mortgage Meltdown, Where Do We Go Now?

For more than 20 years, the mantra in Washington has been "more, not less" when it comes to Fannie Mae, Freddie Mac and the expansion of homeownership.

But in light of the financial crisis and Fannie and Freddie's near-collapse, policy leaders are also rethinking the government's role — and many Americans are starting to question whether homeownership is the only path to the American Dream.

Fannie and Freddie function by buying, bundling and then stamping a government guarantee on mortgages. Then they sell them to investors. It keeps the banks happy because it keeps capital flowing, and it keeps consumers happy because it makes low, fixed-rate mortgages possible.

At least that how things were supposed to unfold. But the two mortgage finance giants "made astonishing mistakes," Raj Date, executive director of a financial policy think-tank called the Cambridge Winter Center, told NPR's Audie Cornish.

'It Has All Come Back To Haunt Them'

"As normal people everywhere in the country realized that housing prices seemed to be growing straight into the stratosphere, instead of becoming more conservative about lending against those ridiculously high values, Fannie and Freddie just continued to make the same kind of loans and indeed made more aggressive loans during that period of 2005, 2006, 2007," Date said. "And it has all come back to haunt them."

So instead of rationally-priced credit, he said, the country wound up with a $6 or $7 trillion bubble in housing values. And all of Wall Street and most of the country's banks made the same sort of mistakes, Date said.

Policy makers are at a bit of a crossroads, said Date, who was among a number of industry leaders who huddled with Treasury Secretary Timothy Geithner this week to figure out a new way forward on housing.

Fannie and Freddie have dramatically scaled back their level of aggressiveness in underwriting credit, Date said. But, he added, "the fact of the matter is that on average and over time, Fannie and Freddie represent an economic subsidy from the public at large to middle and upper middle-income homeowners."

Despite talk on Capitol Hill of dismantling the two organizations, it might be tough to get rid of them. That's because Fannie and Freddie, along with the Federal Housing Administration, are responsible for some 95 percent of the mortgages in the country today, Date said.

"If you think that the fall of 2008 was calamitous, believe me, you haven't seen anything yet if you were just somehow to turn off the lights on Fannie and Freddie today," he warned. "That said, I think the policy makers are trying to be thoughtful about the right long-term answer is for housing finance more broadly, and that involves revisiting some issues that have been treated as sort of untouchable for quite some time."

Ultimately, Date said it might be time to rethink homeownership as an American ideal.

The White Picket Fence Reconsidered

"The world we live in today is not quite the world that existed in 1950," he noted. "The nature of households and the rate at which they dissolve and reform, the nature of work and its transient nature across geographies are all things that suggest that maybe, just possibly, a middle-class American shouldn't stake themselves to an illiquid, very large, concentrated, leveraged asset —- that is to say, a house."

Alyssa Katz, author of Our Lot: How Real Estate Came To Own Us, also thinks America needs to reconsider the American Dream.

"Homeowenership has gone from being pretty much an unmitigated good — something that would provide stability — and instead has thrown a huge cloud of doubt over the value of homeownership for a lot of people."

Even so, there also are downsides to renting, she said.

"Some of the common beliefs about renting are absolutely true," Katz said. "Being a renter has very little security. They don't have any promise they'll be able to live in the apartment or home for more than a year or two. Renting is also perceived as something that really divides Americans by class. So I think for a lot of potential renters, or people who own and are thinking of making that transition to renting, they have to overcome this sense that they are giving up a sense of status."

That's a tough thing to shake for many Americans, she said.

If more people rent, the benefits of homeownership will only increase for those who own homes because the pool will shrink, Katz said.

"Those who have access to homeownership and the benefits that it brings, as a result of policy, will be even more privileged than they are now."

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