In the course of the last couple weeks I’ve presented findings on asset poverty in Canada. The findings usually evoke a number of responses. One of the most troubling is that asset building policy caused the foreclosure housing crisis in the US. Most recently, on day 2 of the 2013 ABLE, Calgary Mayor Naheed Nenshi said (paraphrasing):
We need to be introspective and self-critical. We have interventions that don’t work. The home and foreclosure crisis showed us the limitations of home ownership and asset building for low income families.
The mayor is absolutely correct about the need to be self-critical. Only through understanding our failures can we develop more effective interventions to reduce financial exclusion and vulnerability. A major problem is that our failures are rarely documented and published. Understanding what goes wrong is probably more important than understanding our successes. (see the excellent Admitting Failure site). Few would disagree with this part of his speech. However, we also need to get the facts correct about the extent to which asset building policies influenced the foreclosure and housing crisis in the US. Consider the following points.
1. To date asset building policies have not reached massive scale in the US. There is no single asset building policy that could cause the scale of the foreclosure crisis (12.5 million foreclosure starts from 2007 to 2012) .
2. Little innovation in mortgage markets was observed in the 2000s and government policy toward the mortgage market did not change much in the 1990s and 2000s. The major mortgage innovations happened in the 1990s and the major government asset building policies of Federal Housing Administration and GI Bill expansions occured in the post-war era 1940’s and 50’s. (See Atlanta Federal Reserve Working Paper)
3. Research has shown that Individual Development Account (IDA) homebuyers were much less likely to experience foreclosure (1/2 to 1/3 lower) than a comparison group of low-income homeowners constructed from government data gathered via the Home Mortgage Disclosure Act. Over a period of 1999 – 2007 3.1% of IDA homes in the sample entered foreclosure compared to 6 – 9% for the comparison group. Importantly, only .2% of IDA homeowners secured subprime loans compared to 10% in the comparison group. Additionally, IDA homeowners were much less likely to have high interest rates.
4. Evidence from an experimental design longitudinal IDA study[gated] (1999 to 2009) showed that home ownership rates for the treatment and control group both increased through the Recession. If asset building policy has provided incentives for otherwise unqualified people to buy homes then we would have seen different ownership trends in the treatment group and not the control group. This did not happen.
5. From the same study the IDA program had no statistically significant effect on likelihood that a homeowner was late on a mortgage payment or went into foreclosure.
Overall, it’s dangerous and counter-factual to blame asset building policy for the home foreclosure crisis. The evidence suggests far more expansive and complex social and economic forces were at play.