With the takeover of  defaulted mortgages by the government, the American people, like John McCain, now have no idea of how many homes they own.   The lessons of Mayor Ed Koch’s ten year housing plan suggest that this crisis can be turned into an opportunity. As Barack Obama has insisted, Main Street must be helped along with Wall Street. Koch’s plan provides one successful precedent.

We, the American people, are going to own thousands of delinquent mortgages and foreclosed homes. The buyers of bundled mortgages were so far removed from the actual lives of struggling families that they couldn’t value what they were getting, and relied on valuations that were produced by intermediaries engaging in either self-deception or deceit. The government should sell these houses to working families at subsidized rates of payment they can afford.

Treating houses as mere financial abstractions can have serious consequences. Such practices contributed to the destruction of the South Bronx by arsonists in the 1970s.   In that instant, high interest rates made it profitable for insurers to rake in a few months of premiums, collect profitable interest, and sell reinsurance contracts on the world market.  These distant buyers, with little acquaintance of conditions in New York wound up having to pay off landlords who burned their buildings.  The local insurers had little incentive to pursue difficult arson investigations, because they profited without having to pay the losses. The British and Brazilian investors who bought the reinsurance contracts on the open market had no idea of local conditions in the Bronx or Bushwick, just as contemporary investors around the world failed to understand the risks of sub-prime mortgages in Sacramento or Fort Lauderdale. They wound up holding the bag, So did New Yorkers in the 1970s and 1980s, who had to live with the destruction of large tracts of what had been their city.

It would be a tragedy to misunderstand those homes and homeowners as isolated financial transactions and even worse to treat them as undifferentiated bundles.  The social value of stable families and neighborhoods, of avoiding another round of widespread arson, crime, and disorder needs to be a priority. Mayor Ed Koch’s ten year housing program, first announced in 1985, rebuilt a city that Ronald Reagan’s virtual abolition of federal housing subsidies would have further rotted. Once Koch restored the city’s credit, he used the city’s capital budget and funds diligently scrounged from other agencies, to renovate and construct tens of thousands of housing units.  The program continued under subsequent mayors, and now it is hard to find areas of New York that are full of vacant lots and burned out buildings.  

While the city rented many units, Koch promoted home ownership for working families. Instead of the false promise of subprime mortgages—seductive, easy, expensive credit, Koch, and the many non-profits his administration worked with, built subsidized housing with payments geared to what working families could afford. Instead of a handout, these subsidies were a partnership with families, who had to pay the city a portion of any profit they realized when they sold the house.  

Now that the federal government own a lot of houses, it should treat these as potential family homes, and as essential parts of neighborhoods that need to be preserved.  Capital is short, but let’s use some of it to make sure that families can own homes with payments they can afford, in neighborhoods that are stable and crime free. We can pay for it by making these new homeowners partners of the American people.  Everyone will reap the profits.

William J. Stepp - 10/12/2008

...high interest rates made it profitable for insurers to rake in a few months of premiums, collect profitable interest, and sell reinsurance contracts on the world market. These distant buyers, with little acquaintance of conditions in New York wound up having to pay off landlords who burned their buildings. The local insurers had little incentive to pursue difficult arson investigations, because they profited without having to pay the losses.

Where did you get this information?
What's your source?
Insurers typically don't break even on policies for several years because of the high up front commissions they pay to their agents. For example, life insurers don't break even on whole life contracts for six to eight years.
The break even period on property and casualty contracts is shorter, but it's still several years.

I find it impossible to believe they had to pay out the claims of owners whose properties were destroyed by arsonists, and still earned a profit. Their reinsurers would have posted loses on these segments of business, and would have stopped doing business with them. They also would have complained to the NY State AG, and probably would have called for an investigation.

The British and Brazilian investors who bought the reinsurance contracts on the open market had no idea of local conditions in the Bronx or Bushwick, just as contemporary investors around the world failed to understand the risks of sub-prime mortgages in Sacramento or Fort Lauderdale. They wound up holding the bag, So did New Yorkers in the 1970s and 1980s, who had to live with the destruction of large tracts of what had been their city.

There were several factors that caused the destruction of large tracts of housing in New York in the 1970s and 80s. First and foremost was rent control, the disastrous effects of which were exacerbated by high inflation and high taxes. This toxic mix made being a landlord in the Big Apple an unprofitable business for many entrepreneurs. There were many hundreds, probably even thousands, of abandoned properties by 1980. Odd thing that this didn't happen in cities without rent control.

The social value of stable families and neighborhoods, of avoiding another round of widespread arson, crime, and disorder needs to be a priority.

I agree. That's why New York should abolish rent control, ditch the NYCHA (New York City Housing Authority), and get out of the residential real estate business altogether. New York should also take a page out of Maggie Thatcher's book and let NYCHA tenants own their homes. They should also be given a permanent property tax moratorium, and pay for whatever services they use the way they pay for any other service.

Mayor Ed Koch’s ten year housing program, first announced in 1985, rebuilt a city that Ronald Reagan’s virtual abolition of federal housing subsidies would have further rotted.

According to a Cato Institute report by William Tucker, Reagan only slowed the growth of federal housing subsidies. He didn't end them. Why did unsubsidized housing not rot?
What was the opportunity cost of Koch's housing program, including the unintended consequences?

Once Koch restored the city’s credit,...

Which had been destroyed by his Democratic Fun City predecessors.

he used the city’s capital budget and funds diligently scrounged from other agencies, to renovate and construct tens of thousands of housing units. The program continued under subsequent mayors, and now it is hard to find areas of New York that are full of vacant lots and burned out buildings.

True, but the market would have solved the problem faster and at lower cost, including lower cost to taxpayers.

While the city rented many units, Koch promoted home ownership for working families. Instead of the false promise of subprime mortgages—seductive, easy, expensive credit, Koch, and the many non-profits his administration worked with, built subsidized housing with payments geared to what working families could afford. Instead of a handout, these subsidies were a partnership with families, who had to pay the city a portion of any profit they realized when they sold the house.

Defining a subsidy as a "partnership with families" is truly Orwellian.
I suppose it's also a "partnership" with New York City taxpayers too, of whom I am one.
NYC working families didn't need Ed Koch to promote housing for them. They would have done okay in a market with no rent control, no zoning laws, no byzantine building restrictions (which were put in by bureaucrats working hand in glove with real estate developers to crush small competitors) and lower taxes.

Now that the federal government own a lot of houses, it should treat these as potential family homes, and as essential parts of neighborhoods that need to be preserved. Capital is short, but let’s use some of it to make sure that families can own homes with payments they can afford, in neighborhoods that are stable and crime free.

Stable and crime free neighborhoods in New York? In the inner city?
Yes, it's possible, but only by ridding the city of the causes of crime, such as the Rockefeller drug laws, the lousy NYC public schools,
government restrictions on employment, the welfare projects, gun control laws ("an armed society is a polite society"), etc.