Financial TimesBy Simone Baribeau
Published: September 12 2009
The game of finding someone to pin the blame on for the US housing market collapse has gone on long enough. Are the bankers responsible? The analysts who didn’t see it coming? The McMansion mums who bought homes that they couldn’t afford? No. I did it. It was me. In 2003, I worked for one of those well-meaning organisations that promoted home ownership in low-income communities. Our line – like that of hundreds of non-profit organisations across the US – was that people who bought their own homes could gain increased financial security, freedom from the landlord … the American dream.
But I was not like the people running the organisation. I knew full well that buying a house could be a financial time bomb. I hadn’t drunk the home-ownership-leads-to-prosperity Kool-Aid. But I had drunk enough cola to rot my teeth. I led people down the road to financial collapse – and I did it for the dental insurance.
It all started out innocently enough. In March 2002, fresh out of college, I got a job at the Center for Economic and Policy Research (CEPR) in Washington, DC. Soon after, one of the co-directors, Dean Baker, began looking into soaring housing prices, and, by the end of the summer, he had begun railing against the housing bubble....
Dean’s argument was compelling: if house prices rose significantly faster than rents, that meant people were buying homes as an investment, not for shelter. As more people saw housing as an investment vehicle, prices would rise, even though the underlying value of the property would not. It was the textbook definition of a bubble – and even if others weren’t taking him seriously, I was. But after more than a year at CEPR, I had itchy feet. I had gone straight from the suburbs of Washington to an Ivy League university to an economic think-tank. For a fist-in-the-air activist, it was all a bit ivory tower. I wanted experience working with the people getting screwed by bad economic policy before – inevitably, I assumed – I spent my life as a policy wonk.
So, like any good leftie from a privileged background, I started my job search on idealist.org, where I ran across a posting for an associate position at an Individual Development Account programme in Los Angeles. IDAs are an anti-poverty measure to encourage low-income individuals to buy “productive assets” – purchases meant to provide financial security for the future and encourage a habit of saving. The programmes encourage savings by providing financial education classes and “match savings”. In the case of the LA programme, for every $1 someone saved, up to $1,000, the person would receive a $4 match. Participants, who had to be referred through government-funded agencies serving low-income residents, could use the money to start a small business, go to school or buy a home. The buy-a-home option should have raised a red flag. But I was eager to get a “grass roots” job, and I reasoned that people who met the programme’s incredibly low-income requirements – no more than about $36,200 per year for a family of four – were in no position to buy a home, $5,000 in savings or not.
So I wiped the problem from my mind, unaware that easing lending standards would make loans accessible to people who would never have qualified for a mortgage before. Besides, the job sounded great. ... I was hired as a financial counsellor and flew out to LA to get a sense of the place.
The Community Financial Resource Center (CFRC) is located in South Los Angeles [4600 S. Figueroa, a couple of blocks from the LA Coliseum, home of the USC Trojans. It's right off Martin Luther King Blvd. but now most of the billboards are in Spanish)] – formerly known as South Central, a name that conjures up images of gangs and riots. The almost-windowless building stood across from a windowless food-aid office. Barbed wire protected the parking lot. ...
It didn’t take long for reality to set in. By the time I joined the centre, many of the clients had been roped in to the programme by their case managers. “To buy a home or to start a business sounds too good to be true, too hard to believe!” one letter told members of a family development network – and that they were eligible for an “exciting opportunity” where they could be helped to do just that.
But the programme still wasn’t full, so my manager and I gave orientation sessions. Mostly, we’d describe the programme, but invariably the benefits of home ownership would come up. We sold the American dream to willing buyers. We even told them, on a fact sheet about the scheme, that “this same thinking has been behind government initiatives like the Homestead Act of the 19th century and the GI Bill following World War II”.
A productive asset – the focus was most frequently on a home – was “something of value that is likely to return substantial long-term benefits to its owner – benefits like security, stability and opportunities for more income”. And not all of the benefits were financial – home ownership gives you freedom. Buy a home and you can have a yard! You can paint your walls any colour you want! You can have a pet! Little wonder, then, that half of the people participating planned to buy a home.
Yet people’s finances were worse than I had imagined. Few of our clients even approached the income cap. They tended to have a lot of debt. Encouraging people who had so little to buy what to me was clearly overpriced property was unconscionable, I thought. I decided to quit. I would load up my car and drive back to DC, consequences be damned. Two weeks after I had started my job, I would take the same type of principled stand that had got me arrested at a protest in the lead-up to the Iraq war, except this time it wouldn’t be futile. I would live my ideals. Of course, this was all in my mind. In reality, my teeth hurt.
... But since I was a new employee, I wouldn’t qualify for dental insurance for another three months. I started giving the financial education classes.Participants had to start saving $30 to $60 a month and attend six 90-minute classes. Later, if they were interested in home ownership, they’d give up a Sunday to learn about buying a house. But in the meantime, the financial-education classes had some value. We helped participants develop plans to pay off bills, and if we found mistakes on people’s credit reports, we’d help to rectify them. I clearly amused the clients in my classes. I hadn’t a clue how to teach, and much of the material was so basic I couldn’t figure out how to stretch it out to fill the lesson. And I hated actually giving out advice. In the budgeting class, we talked about cutting down on unnecessary expenses, but our backgrounds were so different, and their luxuries so modest – cable television, for instance – that I felt it wasn’t my place to suggest where they cut back.
For the most part, I enjoyed teaching. The students were smart and hard-working – and badly wanted a home. I started trying to find ways to justify the programme. Maybe, I thought, the housing bubble didn’t apply in low-income areas. So I went about investigating. The most reliable information I could find was from Rand California, but it was expensive. I could get it free on a limited-use computer at the public library, but I couldn’t e-mail it to myself. Instead, I’d have to print it up. So, after a trip to the library, I spent my spare time typing in years’ worth of monthly data from hundreds of zip codes into an Excel spreadsheet.
A couple of weeks later I had an answer. Even in the lowest-income areas in LA, real home prices had, on average, risen by more than 20 per cent over the previous seven years. I e-mailed Dean, the CEPR economist, who immediately suggested we write a short paper on it. What do I have to lose? I thought. Just my teeth.. . .
I wasn’t yet qualified to teach the home-ownership class, but I went along anyway to observe and help out. The teachers explained how to get approved for a mortgage or types of insurance, and again and again the people attending heard about the financial benefits of buying a home. First, there were the tax breaks for home owners. But they would almost certainly not apply to the low-income clients of the IDA programme. And non-existent tax advantages were barely a blip on the financial mess that home ownership – in my mind – would so clearly become.
It wasn’t as though Angelinos – as Los Angeles residents are known – were unfamiliar with real-estate bubbles. Housing prices rose by more than 67 per cent between 1987 and 1990 – and then plummeted by 21 per cent during the next five years. Those who bought at the height of the bubble would have to wait a full decade to see their houses recover even their nominal value. But still attendees were told that housing was a good long-term investment. Paying rent was like throwing money away each month, but with a mortgage, some of your payments went towards equity. When it became clear that a client would be unable to afford a mortgage, he or she was encouraged to consider the other options in the programme. And no one at CFRC encouraged people to take out an adjustable-rate mortgage (ARM), wait until it was due to change and then refinance or sell, taking out the inevitable equity that would have built up. In South LA, such advice was the norm, and CFRC steadfastly eschewed it. No one at CFRC denied that in the short term, house prices could fall.
But nobody seemed to take seriously the idea that there were times when housing prices had inflated to a level that buying a home was not a good investment. Housing prices were seen as inherently unpredictable and also of little importance, since, over time, there was a general upward trend. Fed chief Alan Greenspan was calling any analogy between a stock-market bubble and a housing-market bubble “pretty stretched”, and said it was “really quite unlikely” that house prices would fall nationally.
Meanwhile, in June 2002, with the September 11 terrorist attacks still fresh in the national consciousness, President George W. Bush began tying home ownership and economic security to national security. “Part of being a secure America is to encourage home ownership so somebody can say, ‘This is my home. Welcome to my home’,” he had said, introducing a new programme designed to narrow the racial home ownership gap by getting 5.5 million new non-white Americans into homes by 2010. It was exactly the wrong moment.
If the people in the programme weren’t going to benefit, I was convinced someone was. Banks, I was sure, must want foreclosed property on their books – to what end, I had no idea. But there was profit in it for them somehow. (I had no idea about the complex securitisation which – for a short time – would allow banks to profit from riskier and riskier products.) Banks used the IDA classes to find an audience to pitch their products to. One volunteer recalls a bank pitching a zero-down-payment mortgage to one of the classes.
“Several banks affiliated with CFRC wanted to present the products. We’d allow them to do that,” said Tara Taylor, now CFRC’s chief financial officer. But, she said: “When it came time for people to make their loan decisions, we weren’t there to steer people anywhere.”
They advised people away from the zero-down-payment products – which, they were concerned, would quickly leave people in negative equity. Instead, they felt they’d be safer if they took out mortgages where they’d put 1 to 3 per cent down....
I couldn’t quit, but I couldn’t stay silent either. Teeth be damned. I was going to convince people that buying a home was a bad idea. I made a chart plotting Los Angeles home prices versus rents over several decades. It showed that every time home prices rose significantly above rental prices, they’d fall back in line with rentals again. It showed that – even including the late 1980s – never had home prices been so far out of line with rental prices.
I started showing it to my classes. I showed it to them whether their case managers were there or not. I showed the chart to my manager and told her I was explaining it to my class. It felt like open mutiny, but nobody seemed to mind. There I was, a 23-year-old telling a group of mainly middle-aged women that little they had ever heard about home ownership was true. The graph, which I labelled “LA housing prices versus rents”, proved it. In fact, it showed that financial devastation was looming for anyone who bought a home.
My classes listened politely. I also added a table to my presentation, showing how much money could be lost on a home when housing prices started falling. Occasionally, one of the people in my class would mention investing for the long term. Mostly, people said nothing. I was being a financial counsellor in the only way I knew how – and I sounded like an economics textbook.
In mid-August 2003, a few days after Dean published “Homeownership in a Bubble: The Fast Path to Poverty?”, and put me down as a co-author, I headed to a Hilton Hotel in Washington for a five-day course that would qualify me to teach the homebuyer education classes. I had hoped to leave before having to do this training, but the dental insurance wouldn’t kick in until September 1. I knew that many of the attendees at the conference would be working for non-profit organisations looking for ways to recruit people into homebuying. But I wasn’t prepared for the orgy of homebuying promotion that I sat through over the next five days. Try to get ministers to talk about the benefits of home ownership during their sermons … Tell people that a house is like a savings account, whereas when you pay rent it’s like throwing your money away … People can now use their section 8 vouchers – housing-welfare payments – to buy a house. Hoorah – even the homebuyers manual was called “Realizing the American Dream.”
What a mess, I thought. My manager called me on the last day of the course to find out if I had passed the certification test. I had. She sounded relieved that I’d be able to start teaching the homebuyers class. Meanwhile, I was plotting my resignation.
The day I got my dental insurance, I gave two weeks’ notice.
Simone Baribeau works as a web editor at the FT’s offices in New York