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Do you really need such a big house?

WATU2

I.T.S. Hall of Famer
May 29, 2001
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Kudos for the "Ownership Society"?Michael Milken: How Housing Policy Hurts the Middle Class
Many buyers decided that the largest-possible house was a better idea than a retirement fund or a child's education.




























By



Michael Milken, Wall Street Journal









March 5, 2014 6:39 p.m. ET




The American dream traditionally meant that
anyone could get ahead based on ability and hard work. But over the past
few decades, the United States government created incentives through
housing programs and the tax code that changed the dream for many
Americans. Middle-class families began to think of homes as investments,
not just shelter. When the housing market crashed, everyone
suffered?homeowners, investors, wage-earners and taxpayers.
Aggressive
housing programs have not always helped the poor and middle class. The
median net worth of American adults is now one of the lowest among
developed nations?less than $45,000, according to the



















Global Wealth Databook. That compares with approximately $220,000
in Australia, $142,000 in France and $54,000 in Greece. Almost a third
of American adults have a net worth of less than $10,000. Those
statistics don't convey the pain endured by millions of American
families who lost their homes.



































































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ED-AR922_milken_D_20140305175404.jpg











































































As recently as 1980, government-sponsored Fannie Mae and Freddie Mac




















held, guaranteed or securitized fewer than 10% of U.S. mortgages
or less than $100 billion. Today, it's $4.7 trillion. Add Ginnie Mae's
mortgage guarantees, and the number exceeds $6 trillion. Since 2008,
these agencies have been involved in more than 95% of all new mortgages.
This massive exposure has been justified by cliches: Housing should be
affordable; ownership creates financial independence; government
programs sustain the economy by increasing ownership. But did ownership
increase?
According to the Census
Bureau, 65.6% of households owned a home in 1980. More than three
decades and trillions of dollars later, the needle hasn't budged?it's
still about 65%. Subsidized mortgages did create three things, none of
them good:
1. The largest housing price bubble in American history. Research by Nobel economist



















Robert Schiller shows that U.S. housing prices declined in about half of the
years since 1890. While U.S. stocks during those years enjoyed an
average real rate of return of about 6% a year, the annual
inflation-adjusted return on houses was a meager 0.18%. Factor in real
estate's heavy transaction costs and that number turns negative.
Nevertheless, in the housing-boom decade before 2007, many buyers
decided that the largest-possible house (with an equally large mortgage)
was a better idea than a retirement fund or their children's education.
By
contrast, according to CLSA Asia-Pacific Markets, middle-class
households in 11 Asian nations spend an average 15% of income on
supplemental education for their children?nearly as much as the 16%
spent on housing and transportation combined. Americans spend only 2% on
supplemental education and 50% on housing and transportation. For
American home buyers taking on big loans, there was no margin for error
if they lost their job or the roof leaked.
2. Misguided economic priorities.
Uniquely among nations, the U.S. gives mortgage borrowers a trifecta of
benefits: extensive tax advantages, no recourse against the borrowers'
nonresidential assets if they walk away, and typically no protection for
the lender if the borrower prepays the loan to get a lower rate.














































These policies long seemed like a
great deal for borrowers, but they wreaked havoc on the financial
system. People with marginal credit were encouraged to finance more than
90% of the purchase price with 30-year mortgages. If interest rates
later fell, they could refinance. If rates rose, they could congratulate
themselves for locking in a low rate. If prices rose, they enjoyed all
the upside and could tap the equity. If prices fell and they faced
foreclosure, their other assets were protected because the loans were
usually non-recourse.
The Consumer
Financial Protection Bureau now wants to tip the scale even more against
lenders by asserting the legal theory of "disparate impact." Consumers
can sue if the volume of loans to any racial group or aggrieved class
differs substantially from loans to other groups. No intent to
discriminate is required, and it's illegal for a mortgage application to
ask the borrower's race. Financial institutions trying to avoid making
bad loans by implementing prudent underwriting practices can
inadvertently get in trouble. A bank forced to pay a fine one year
because it irresponsibly made "predatory" loans to people with bad
credit can be fined the next year for not making similar loans.
3.Damage to the environment and public health.
As the nearby chart indicates, the size of the average American house
grew by more than half?about 900 additional square feet?over the past
three decades while the number of people in the average house decreased.
Larger houses need larger lots that are usually farther from the home
owner's job. Construction, heating, cooling, landscaping and extended
commutes consume more natural resources. Because breadwinners spend more
time in cars, they have less time for their families.
As
someone who helped finance several of the nation's leading residential
builders, I understand the important role the industry plays in the
economy. Homebuilders didn't create the problems. Policies made in
Washington distorted the banking system and discouraged personal
responsibility by subsidizing loans that borrowers couldn't otherwise
afford. This encouraged housing speculation supported by financial
leverage. Ultimately, taxpayers got the bill.
Housing's
2008 collapse led to the U.S. Treasury takeover of Fannie's and
Freddie's obligations even as the Federal Housing Administration
increased its guarantees to more than $1 trillion and the Federal
Reserve stepped up purchases of mortgage-backed securities. Federal debt
surged.
Americans will eventually have
to pay for that through some combination of inflation, higher taxes,
higher interest rates or reduced benefits and services. For now, the Fed
is doing what the savings and loan industry did in the 1980s: borrowing
short term while lending long term. When interest rates rise, the value
of the government's mortgage holdings will decline.
Many
housing experts believe that the solution is to reduce the government's
role by attracting private capital. That's the centerpiece of proposals
presented to the Senate Banking Committee last fall by



















Phillip Swagel,















a senior fellow at the Milken Institute's Center for Financial
Markets. Rather than hold or securitize mortgages, Fannie and Freddie
would retain only a limited role as secondary guarantors. With the
government as a backstop and private capital risking the first loss,
mortgage interest rates would undoubtedly rise. But the taxpayer subsidy
would fall. It's a reasonable tradeoff to transfer risk from taxpayers
to investors and let the market determine rates. Congress appears to be
moving in that direction as it debates various proposals.
Fortunately,
the private sector is well-positioned to assume much of the
government's role. Thanks to booming capital markets and accommodative
central banks, there is tremendous liquidity worldwide. Fannie and
Freddie have now paid the Treasury more in dividends than they received
in the bailout. Private capital already plays a substantial role in
commercial real estate and has the capacity to make comparable
residential commitments.
Investments in
quality education and improved health will do more to accelerate
economic growth than excessive housing incentives. That will give
everyone a better chance to achieve the real American dream.




















Mr. Milken















is chairman of the Milken Institute.
 
We Do, You dont.

Sincerely,

The Gores,
The Clintons,
The Obamas,
Hollywood Elite
 
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