Housing policy, home mortgage lending, and the role of the construction industry

Weiss (1989: 253) argues that the real estate business “revolves around money,” and yet “surprisingly few” scholars engage in “tracing funds through the financial system.” Weiss (1989: 253) lists a number of areas of research demanding scholarly attention, including “mortgage insurance, secondary mortgage markets, impacts of taxation policies, and public subsidies and programs.” As Min (2018: 900) notices, “[hjousing finance naturally produces liabilities that function as money.” That is, the production of housing, which is the business of the construction industry, actively participates in capital formation. Schwartz (2012: 37) says that mortgage debt, securitized or not, constitutes the largest, or one of the largest, assets in most Organization for Economic Cooperation and Development (OECD) countries: “Housing and more particularly housing finance was an important systemic component of the postwar welfare state by virtue of the balance-sheet connection between long-duration liabilities and long-duration assets.”

The role of mortgage lending in capital formation is based on a variety of premises. First of all, housing is a “social necessity” (Min, 2018: 921), and it is costly to develop and purchase, and has a very long depreciation period. Second, housing is part of the welfare state programme, so policy-making actively supports the production of housing. Consequently, home ownership campaigns and progressive housing initiatives have been part of equally centre-right and social democratic and left-leaning governments’ economic policies over time. First, home ownership serves as what Ansell (2014: 384) refers to as a “self-insurance” inasmuch as “housing provide a stock of wealth independent from the dynamics of the labor market.” Household wealth is estimated on the basis of housing prices, and a downturn in the economy can thus be mediated by private wealth stored in home ownership. Second, this sense of being insured against economic hardship tends to modify the preferences of voters who own property, which makes them less supportive of redistribution policies and “social insurance spending” (Ansell, 2014: 387). To some extent, for equally left-and right-leaning governments, this relieves the state from expectations that can be complicated and costly to fulfil (Levitin and Wachter, 2020). At the same time, low-income households, students, and labour market entrants (e.g. immigrants), who are less capable of affording home ownership, tend to suffer the consequences of this shift in policy. Conley and Gifford (2006: 56) found “an inverse relationship” between the levels of economic equality and “widespread home ownership,” which indicates that home ownership policies have negative externalities as low-income households suffer from the loss in faith in, for example, redistribution policies. Consequently, Conley and Gifford (2006: 78) call for an

The institutional framework 55 extended scholarly research agenda wherein housing policy is treated as an “important part of the welfare state function.” Such a research programme would shed light on what factors and conditions and active participation in, for example, lobbying activities that contribute to the production of housing and real estate, and the accompanying financial activities. For instance, as Ansell (2014: 387, footnote 2) proposes, “Congressional support for mortgage credit expansion is driven as much by mortgageindustry campaign contributions and district demographics as by partisan ideology.” That is, rather than being propelled by a political commitment to welfare programmes or other reforms (e.g. market deregulation or market creation), finance industry interests largely determine housing production. Lawrence Lindsey, a chief economic adviser in the George W. Bush administration, admits that “no one wanted to stop the [housing] bubble” being observed during the first years of the new millennium as “ [i]t would have conflicted with the president’s own policies.” In most OECD countries, housing policy is a key welfare state provision.

To finance home purchases, the state relies on finance industry institutions, or, as in the case of the United States, on so-called government-sponsored enterprises (GSEs) to issue home mortgage loans. In the United States, the two GSEs Fannie Mae and Freddie Mac serve this role (Richardson, Van Nieuwerburgh, and White, 2018). To finance mortgage lending activities, the two institutions have jointly issued approximately $5.3 trillion in mortgage-backed securities, collateralized mortgage obligations (CMOs), and corporate debt. GSE-backed securities “[m]ore than doubled their relative size between the 1970s and the mid-1990s,” Caverzasi, Botta, and Capelli (2019: 1036) write. More specifically, to be able to serve as the principal providers of home mortgage loans to the American public, Fannie Mae and Freddie Mac issue three categories of liabilities: (1) corporate debt (known as “Agency debt”), (2) mortgage-backed securities (known as “Agency MBS”), and (3) collateralized mortgage obligations (known as “Agency CMOs”) (Min, 2018: 912). These liabilities not only offer the possibility to finance housing purchases, which per se fulfils one political objective, but they also have a wider significance within the capital formation process. As these liabilities are understood to “carry an implicit federal guarantee against losses” (Min, 2018: 901), the three categories of liabilities are an important component in the supply of safe assets. GSE-backed assets make up no less than one-quarter of the stock of US safe assets, and one-tenth of the estimated global supply of safe assets (Min, 2018: 901). The safe asset mechanism is examined in greater detail in the following sections.

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