Wednesday, July 21, 2010

I see some parallels...

In the wake of the housing (mortgage) meltdown, some economists looking back are questioning the very basis of the "ownership society".  I think they make some sense.
The formula, however, changed dramatically at the end of the 20th century. From 1994 to 2005, the homeownership rate reached record highs, thanks largely to innovations in the mortgage-finance market that reduced down payments and minimized equity. This shifted the basic wealth-building proposition of homeownership away from savings to an almost exclusive focus on capital gains. Average down payments fell, reducing the savings required to “get in the door.” More significant was the rise of mortgages that involved no forced savings: the interest-only loan, in which no equity is built because the principal is never paid down, and the “negative amortization” loan, in which payments are so low that they do not even keep up with the interest, leaving homeowners more indebted, rather than less, each month. By 2006, more than one-third of subprime mortgages had amortization schedules longer than 30 years, nearly half of Alt-A mortgages were interest-only, and more than one-fourth were negative-amortization loans.

One effect was to reduce the social benefits of homeownership, because the benefits are a product of equity and not of the mere fact that a contract has been signed and a mortgage taken out. The relationship between homeownership and social goods had been misunderstood: The traits that enabled households to build up the savings necessary for significant down payments — hard work and the deferral of gratification — were misattributed to homeownership itself. Paying a mortgage did nothing to improve children’s educational outcomes; instead, the factors that gave rise to homeownership also led parents to raise children in a manner that led to greater educational attainment.

Without substantial down payments and conservative amortization schedules, the entire proposition of homeownership as a social good is turned on its head. Think of a homeowner with a zero-down, negative-amortization mortgage: The balance would equal at least 100 percent of the value of the house at origination and would steadily grow, putting him ever deeper in debt unless the market value of the house grew at an even faster rate. Rather than being a source of wealth, the mortgage would actually reduce the net worth of this homeowner below what it would have been had he rented.

Rather than providing a social benefit, then, homeownership without equity imposes costs. Andrew Oswald of the University of Warwick has argued that such homeownership can exacerbate unemployment by making workers less likely to move from one labor market to another. Labor mobility is badly undermined when homeowners in a depressed market can’t sell their property for anything approaching the principal balance of the mortgage they originally took out to buy it.  [More]
This may not be the minefield it first appears. Rather than saying we allowed the wrong people to borrow too much money betting on always-rising home prices, I believe the authors correctly suggest the housing policy was a gigantic subsidy to the wealthy and housing-specific businesses (construction, RE, finance, etc.) that actually harmed low-income people by diminishing the social goods associated with home ownership. 

In fact, what has been viewed as a causal relationship (home owners become better citizens, etc.) was probably a correlation.  As they illustrate, the behaviors that got a 20% downpayment and other underwriting criteria met are the same ones that cause more civic participation, education, social mobility, etc.

So far so good.  But tell me why this reasoning should not apply to the numerous farm ownership efforts or beginning farmer programs?

Back in the day when I served on the old FmHA local board, I wondered at the cases that clearly would never "graduate" to economic "adulthood".  I also began to question whether we actually helped with low interest, low downpayment, etc. tools.  It would be interesting to see the persistence of ownership from beginning farmer loan programs that subsidize first-time buyers with public funds.  How many still are farming or own the land in say 10 years?

Are there any records of the outcomes (with privacy protected, of course) for agencies such as IFDA? None that I can see from their minimal website.

Without such followup data, we could be fooling ourselves as to whether these programs are helping folks or simply employing transaction agents.


Anonymous said...

How many 2nd and 3rd "investment" farms got begining FHA money? Not any that I saw.
The meltdown was caused by bad administration and terrible regulation. The need for private ownership and commitment it brings is needed now more than ever.
Fix the problems and don't throw the baby out with the wash.

Anonymous said...

Working as a FSA loan officer, I believe there are definately individuals who have worked with FSA in our service area and are successful farmers, owning their own farms, and possitively contributing to the ag commuity in which they live. They may have eventually gotten there without FSA assistance, but clearly they would have taken longer to get where they are today.
To be able to assist a widow and her family keep the operation together when she woke up one morning and found her husband had died in his sleep during the night and their oldest of 6 children was 14, I belive is a valuable service. They have moved on and are now purchasing the farm they operated as tennants and are paid ahead on their loan. No need to add to the grief of a lost spouse and father with the loss of the farm.
To take a chance and assist a dairy farm family transition their operation to a robotic dairy facility to reduce their labor demands and allow them to experience their children's school and church activities, because the robot will milk the cows during the times of these events is a valuable contribution to the community, and again, payments are being made as agreed.
Remember to be able to highlight and value successes, not succeeding must also be an option, so yes there are cases in hindsight that do not always work out, and there will always be individuals looking to abuse the system.

Dean said...

I was able to purchase a farm through the beginning farm loan program in the mid 80s. I am still farming and have since bought two more farms. That loan is what changed my operation from "survival mode" to equity building. I am grateful for the help that got me going.

Anonymous said...

I worked in a local ag bank for 3 years. Thing that I always found amusing was that the only people who ever got the FSA loans were the children of "well-to-do" farmers that were coming back to start their farming career. Seems this was a good way for Dad to buy a piece of ground and get a good interest rate. I remember siging papers on one deal and watching father & son drive away in Junior's new F-150...but hey, the bank got credit at review time for that 'young & beginning farmer' loan...what a joke!!

Great thoughts on this one, John!!