By Henry Cisneros
The scandals associated with Goldman Sachs’ trade in below prime mortgages that proliferated the global market place rekindles new interests in curtailing mortgages for many Americans and Australians. While there is a need to regulate mortgage markets, this should not become a move towards curtailing the intended goals of mortgages — home ownership.
Home ownership is the aspiration of most American and Australian families. Since the Great Depression, the US government has used a number of devices to increase home ownership. By 1990 as a result of strong demand coupled with national support for home purchasing such as interest deduction on residential properties and mortgage backing by Fannie Mae coupled with veterans home loans, the US reached a home-ownership rate of more than 66 per cent. Similar levels of home ownership were achieved in Australia in the same era.
In the US, as the economy expanded, the Clinton administration made a concerted effort to extend home ownership to a new group for whom the combination of higher home prices in urban markets, higher deposits and the cost of borrowing made it almost impossible for them to buy a home.
Expansion of home ownership was an economic imperative for many American cities. As cities changed ethnic composition, home ownership levels for immigrants and minority groups was only 49 per cent. And as, the economy expanded, millions of teachers, firefighters and other key personnel who wanted to live near or in the communities they served could not afford to buy in these communities.
In these same communities, the cost of new construction combined with other factors made expanding the supply of housing difficult. Australia has gone through the same cycle with a proliferation of new lending institutions and new lightly regulated loan products.
So, Fannie Mae, the US government’s home mortgage support agency, developed new programs to reach previously un-financeable groups by creating small down payment programs and low interest pay back plans.
After the Clinton administration, a new set of lending and mortgage institutions emerged to sell housing and various lending programs luring millions into the housing market with so-called sub-prime mortgages.
These unscrupulous lenders were the result of little or no regulation in the finance industry. Moreover, the credit rating agencies, the very institutions that could have put a damper on these practices, recognised these securitised exotic mortgage with code names such as CDOs and SIPs — names for no document, no down payment and special interest only lending.
As a result, the new American home owners became the victims of unscrupulous practices that robbed them of their savings, their new homes and their dreams as the global finance behind them fell apart.
Good Americans and Australian pursuing the same dreams of building quality neighbourhoods through gaining a piece of the dream are left stranded because the global markets collapsed on good and bad borrowers. Even more cruelly as lower income American and Australian home ownership dreams and opportunities eroded, the victims were blamed for the financial crisis for participating in obtaining these mortgages.
We cannot and should not blame good American or Australian citizens for pursuing the goals of home ownership, which are central to our national aspirations. We cannot withdraw the good programs aimed at increasing home ownership for Americans and Australians at lower incomes.
We need these programs but we need better regulation of global security markets to protect home buyers. In Australia and the US, home ownership is still the best means of assuring savings for working families as they build equity in their homes. Home ownership makes good neighbours and good neighbourhoods.
We must make sure that the kind of practices that were used to harm the economy are dealt with quickly. President Barack Obama remains committed to dealing with the excesses that caused the financial crisis and to make sure the American dream of home ownership is restored.
There are lessons here for Australia too. Housing for the same groups of key workers, teachers, police and public servants, as well as new immigrants, is critical to the wellbeing of Australian cities. Great cities are the core of the changing global economy.
So, as Australians cities grow new instruments with good regulation must be fashioned to insure all Australians can participate in the nation’s new economy. We all share the same dreams.
Henry Cisneros is a former secretary of the US Department of Housing and Urban Development under president Bill Clinton, adviser to President Barack Obama on Urban Policy and was recently a Visitor of the US Studies Centre.