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.