Mero Moment: It’s A Complicated Life

This week I want to talk about the ongoing housing crisis. Utah has been one of the four states most flattened by the mortgage crunch, exceeded on a proportional basis only by California, Florida and Nevada. It is true that in recent months the pace of foreclosures has slowed, although this seems due mainly to legal and accounting delays in the foreclosure process. Ten percent of Utah’s households – some 50,000 – are still either at least 30 days late on their payments or in some stage of foreclosure.

Do you remember this movie dialogue?

Savings and loan owner Henry Potter says to his employee Peter Bailey, “Have you put any real pressure on these people of yours to pay those mortgages?”
Bailey reminds Potter, “Times are bad, Mr. Potter. A lot of these people are out of work.”
Potter screams, “Then foreclose!”
Bailey says, “I can’t do that. These families have children.”
Potter responds, “They’re not my children.”
Bailey presses, “But they’re somebody’s children, Mr. Potter.”
Exasperated, Potter exclaims, “Are you running a business or a charity ward?”

Mr. Potter’s questions from the 1946 film It’s a Wonderful Life continue to haunt American politics. The contemporary mortgage crisis is now in its fourth year. It has destabilized the American and global economies, brought down vast banking enterprises, and seen millions of American households lose their homes.

It’s more like a complicated life. Mortgage contracts are real. But Congress, through Freddie Mac and Fannie Mae, invented an American Dream for many people – a dream that didn’t really exist. Now those people find themselves upside down in a dire financial predicament. So what do we do? Foreclose or show mercy?

As Peter Bailey’s more famous son, George, would declare in another dialogue from It’s a Wonderful Life:

Just remember this, Mr. Potter, that this rabble you’re talking about … they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath?

Some real history may help here. The mortgage industry went from community-based loans to more nationalized lending in 1932. Fannie Mae was created in 1938. Following World War II, the mortgage business soared. Veterans loans were established and the sweeping Housing Act of 1949 committed the country to providing “a decent home … for every American family.” FHA loan guarantees also came into play. In 1949 alone, the industry recorded over 1.4 million housing starts, an unprecedented number.

This housing boom had its own sociology. More than 98 percent of the new VA- and FHA-insured loans went to young married couples starting their families, and Americans responded to this favorable policy environment. Between 1945 and 1960, there was a 90-percent increase in the number of owner-occupied homes. The increase was even higher in Utah. The marriage rate climbed sharply, the fertility rate soared, and even the divorce rate fell steadily after 1946. By the early 1960s, the government’s pro-family housing policy could be judged a success.

So what ultimately went wrong? The answer is twofold. First, American culture changed, and then the mortgage model followed suit. The problem, in my opinion, was that family-based policies only work when we properly define the idea of family. If the original idea was to help create grounded families in more stable communities, incentivizing everyone else outside of this family model was doomed to failure.

Here’s another way to say what I mean: incentivizing family formation is good, common-sense policy; incentivizing everything is socialism.

For Sutherland Institute, I’m Paul Mero.