Abstract
Houses are everywhere, but remain largely unseen by the social sciences. The readers of Urban Studies are an obvious exception, but aside from urbanists, planners and students of local government and politics, most eyes ignore housing and housing finance, even after the 2008 crisis. Of the approximately 11,000 papers presented at the American Political Science Association annual meetings 2002 to 2008, fewer than 70 dealt with housing, Fannie Mae/Freddie Mac, mortgage-backed securities, asset bubbles or any of a number of similar issues central to the 2008 global financial crisis. Less consistent data are available for papers at the American Economic Association annual meetings, 2005 to 2008. But here, too, papers dealing with housing or mortgages largely had nothing to do with the emerging bubble and, at roughly 1%, accounted for a lamentably small proportion of papers.
These three books raise the visibility of housing and especially housing finance at three different levels of analysis: Fuller at the level of national and international politics; Immergluck at the US national level; Martin and Niedt at the personal and household level. They ask three different but related sets of questions: why so much household debt and why are there differences in the increase in household debt across various countries? What destabilised the US mortgage market in the 2000s, and can it be rebuilt in a stable manner? And, who were the foreclosed in the 2008 US financial crisis, and what happened to them? But, put simply, these questions could be collapsed into how did financialisation happen, and with what consequences for financial stability, housing and people?
Financialisation is a deeply contested concept (see van der Zwan, 2014 for a survey). Analysts have variously used it to describe the excessive share of profit accruing to the financial sector, the rising level of household debt, the emergence of the shareholder value model of corporate governance, particularly in the USA, and a radical shift in the nature of capitalism, among other things. These definitions tend to be either partial or overly general. Here I prefer to define financialisation as a political and social process through which more and more income flows in any given economy begin to flow through a formal financial asset (and thus, implicitly, a formal liability) rather than through simple cash transfers that imply no legal liabilities, and thus carry minimal risks for households and the financial system.
By way of an example that is relevant to housing, consider pensions. When these are constructed as tax-financed pay-as-you-go (PAYGo) defined benefit pensions (such as the US Social Security or British Basic State Pension) they create no explicit liabilities or assets. Theoretically, as Laurence Kotlikoff (1992) has argued in his effort to create a system of generational accounting, an implicit liability exists in the form of a state promise to supply pensions into the future. But Kotlikoff’s concern over the considerable size of these liabilities – he generally estimates them to be in the range of twice current US GDP – is misplaced. First, these liabilities are matched by the implicit asset of government taxation of the economy, which also accrues over the same infinite time horizon he uses to calculate the liability. Second, more importantly, the legal claim that here constitutes on one side the asset and on the other the liability cannot be sold. In this sense these pensions are not true financial assets. Governments that can issue their own currency and that have reasonable compliance with their tax systems do not go bankrupt. And PAYGo defined benefit pensions cannot be an object of speculation in financial markets. They thus do not contribute to financial crises and are relatively immune to those crises. Indeed, their stable flow of payments probably mitigates the effects of a given financial crisis.
The same cannot be said of private, defined contribution pensions (such as the American ‘401k’ or British NEST pensions). These rest on formal financial assets. The difference here is not simply that the probability of bankruptcy is higher, given that inevitably some private actors will not be able to make good on their liabilities (thus devaluing individually held pension assets). Rather, the trade-ability of these assets enables speculation. Speculation, in turn, is the source of Minsky-style (1992) booms and busts in asset prices (see also Toporowski, 2002, on the unsustainability of private funded pensions).
There are four reasons to discuss pensions in advance of houses. The first is to establish that the housing boom and bust of the 2000s was not intrinsically different from any other speculative mania. The second is that houses, like pensions, involve long-lived assets whose management presents cognitive and behavioural difficulties for the average person. The third is that houses and pensions were intrinsically linked through balance sheets at the national and personal level. On the one hand, as a form of forced saving, owner-occupied housing (OOH) can supplement formal pensions by providing rent-free housing in retirement. On the other hand, funded pension plans often directly or indirectly hold mortgage bonds as part of their portfolio. Few North-American professors, for example, realise that the TIAA part of the university professor pension giant TIAA-CREF (Teachers’ Insurance Annuity Association-College Retirement Equity Fund) is essentially built on mortgages and mortgage bonds. Finally, houses, like pensions, are a major part of the welfare state. The slow erosion of pension security through the shift from defined benefit to defined contribution pensions runs parallel to the slow erosion of housing security that occurred when people began treating homes as a liquid investment and when investment banks began turning mortgages into liquid securities.
Fuller’s Great Debt Transformation looks at this last issue by examining differences in the rate of and degree of financialisation in three European economies, Britain, France and Germany. For Fuller, the great transformation is the reversal of the classic identities of savers and borrowers. Historically, households were net savers and corporations were net borrowers. That relationship began to invert in the 1980s. Households became net borrowers and corporations became net lenders. This transition had both supply and demand side elements.
On the supply side, the liberalisation of banking and finance more generally pressured traditional banks’ margins. Funding costs went up and lending margins went down. For investment banks (i.e. merchant banks), this motivated a search for volume that would culminate in the originate to distribute mortgage model of the 2000s. Commercial banks and savings and loans (i.e. building trusts) also began detaching themselves from their traditional customers. Instead of local banks recycling funds into local housing markets, and holding mortgages to maturity, they began sourcing funds nationally and selling mortgages off as quickly as possible. Competition among banks forced all of them to expand their balance sheets.
On the demand side, households in rich countries faced stagnant wages by rising consumption norms. From 1995 to 2013, average household consumption rose by 7.3% annually, but wages rose by only 5.7% (Fuller, 2016: 31). Increased borrowing bridged the gap emerging between consumption and income. And housing-related financial debt necessarily filled that gap, given that housing-related debt everywhere is the single largest component of household debt. In the USA, mortgages and home equity loans typically comprise about 72% to 75% of household debt. Public policy reinforced this recourse to housing-related debt. In many countries, mortgage interest has been tax deductible or otherwise tax-privileged. And home equity is typically most household’s largest asset.
Although the reversal of savers/borrowers occurred everywhere, it did not occur at the same degree and speed. Why? Fuller argues that differences in ideas about the proper role of financial institutions and credit, in the institutional structure of financial firms, and in the articulation of interests politically affected the speed and intensity of financialisation in his three countries. This is a standard explanatory trinity in comparative political economy, so Fuller offers nothing novel here. That said, the institutional differences to which Fuller points seem to be the most significant factor, as interests at least in part derive from those institutional differences. The institutional structure of finance differed significantly across his three cases (and across the USA for that matter), reflecting subtle but important differences in pre- and post-Second World War political compromises. At the same time, virtually every rich country in the OECD carved out some regulated and often monopoly space for housing finance after the Second World War, often building on some prior distinction between commercial banks and building societies.
A fundamental functional logic drove this separation of commercial and mortgage banking. For the average household to be able to afford to buy housing, they needed to amortise the loan over a long time horizon, and thereby lower their monthly payment. Banks could not make long duration loans of 20 to 30 years without some stable source of deposits or finance. Otherwise banks would find themselves funding long-term assets with short-term liabilities. While one purpose of banks is to effect this maturity transformation, this mismatch in maturities was historically the source of bank runs. States that wanted higher rates of homeownership thus had to find some way to stabilise mortgage banks’ deposit base. Deposit insurance, savings schemes that qualified borrowers for mortgages only after they accumulated a down payment at the bank over a long time period, and outright state ownership stabilised the deposit base. For example, public housing banks in Norway and Iceland borrowed from their respective finance ministries. Private banks in Denmark and Sweden sold bonds to funded pension plans. In the USA, Fannie Mae and then Freddie Mac issued bonds to insurers and pension plans, used the funds to buy up mortgages from banks, and thus removed the maturity mismatch from banks’ balance sheets. In Britain, mutually owned or cooperative building societies provided mortgage capital. In Germany, bausparkassen did exactly the same thing, and the post-war reconstruction of the German state by the USA reinforced this by giving each German state (länder) its own publicly owned bank. Both entities used tied savings plans to secure a patient deposit base. In France, by contrast, the large and erstwhile state-owned Crédit Agricole and Crédit Foncier (which helped create the modern mortgage) played a major role in mortgage finance. These also managed large contract savings plans to secure stable funding.
Deregulation broke down the walls between different segments of the financial sector. But in Germany, the landesbanken fiercely resisted incursions by larger universal banks into their territory, operationalising opposition via the länders’ representation in the Bundesrat. Market shares remained largely stable over the entire post-war period (Fuller, 2016: 170). And to the extent that commercial banks did have market shares, they tended to park mortgages on their own books as covered bonds. This partial form of securitisation did not create fully trade-able assets, as banks insured these bonds and, as noted, retained them on their books. By contrast, at the other end of the spectrum, successive waves of deregulation in Britain created a wild west exceeded only by the transformation of mortgage banking in the USA. Building societies demutualised, merged and began aggressively marketing both mortgages and other credit products. Each round of deregulation created new political pressure for more deregulation as newly enlarged banks sought to outgrow competitors by expanding into new product markets. The explosion of mortgage debt was balanced through sales of equally large securitised loans (Fuller, 2016: 93). France took a different path that did not simply split the difference. Instead, consistent with the long-standing planning orientation in France (Shonfield, 1965), firms shifted from bank to bond finance. Rather than turning households into net debtors, French firms increasingly lent to each other, to banks and abroad (Fuller, 2016: 159). Like their German neighbours, though to a lesser extent, French households resisted accumulating debt and bidding up housing prices, at least until after the 2008 crash. Instead, French, like German, financial institutions exported debt to their southern neighbours.
Consequently, the reversal of the traditional saver/borrower relationship proceeded farthest in Britain, and least in Germany. British households ended the decade of the 2000s as some of the most indebted households in the rich OECD, with a roughly 31% increase in debt as a percentage of net disposable income from 2000 to 2012. 1 German households ended the 2000s with a much lighter debt burden that was 20% lower than it was in 2000. French households, meanwhile, saw the largest increase in debt relative to disposable income at 53%, but, starting from a lower point than the Germans, essentially caught up with them.
It is precisely at this point, the divergent evolution of household debt, that Great Debt Transformation is weakest. The ideas, interests, institutions trinity has been a standard of comparative political economy since the 1970s. Precisely because of its age, it tends to locate almost all of the casual action within countries. Fuller treats his cases as largely disconnected, aside from diffuse international transmission of ideas. But as Fuller himself shows, the debt transformation was an uneven phenomenon. This could be a function of different internal politics. Or, equally so, it could be a function of simple balance sheet and national accounting logics at the international level. Put simply, just as balance sheet logic means that every financial asset has a corresponding liability, current account balances have to match. If German (and French and Chinese) households are refusing to borrow, and if Germany (and France 2 and China) are running current account surpluses, this means that someone else has to have a current account deficit. Current account surpluses imply capital exports; current account deficits imply capital imports. German financial and non-financial firms that piled up profits in the 2000s could not lend them at home, given cautious German households and investment-deterring slow growth rates. So the money had to flow somewhere else, accelerating the inversion of traditional saver/borrower roles in other countries. For Germany, most notably, this was southern Europe, although German banks happily participated in recycling US-sourced funds into the US subprime mortgage market.
Fuller is thus correct in noting the saver/borrower inversion, but his argument suffers from its relative disconnect to global capital flows – much of which poured into housing – and to a lesser extent from its lack of detailed study of domestic mortgage markets. Put simply, the saver/borrower inversion could not have gone as far as it did unless housing finance, or pensions, or both, became caught up in financialisation. Here is where Immergluck’s Preventing the Next Mortgage Crisis comes into its own.
While the title suggests a forward-looking, policy-oriented examination of the US mortgage industry, Immergluck actually delivers a comprehensive study of the US mortgage market before, during and after deregulation, along with a forensic analysis of the crisis that forms the basis for policy recommendations around rebuilding that market. In this respect, Immergluck’s book is a perfect counterpart to the Europe-centred analysis in Fuller. Immergluck traces the causes and consequences of deregulation of the US mortgage market over four decades. He argues that this deregulation created opportunities for a wide range of actors to abuse investors and borrowers alike. The same market pressures that motivated Fuller’s actors operated with even greater force in the USA. In turn, the sheer size of the US housing market drew in global capital flows. The resulting crash came about not because of public intervention in the housing finance market, but because of the progressive withdrawal of government supervision.
In the absence of Federal supervision, and with the GW Bush administration suppressing state-level efforts at regulation, investment banks in search of yield began encouraging the production of subprime loans in order to have something to repackage in the complex residential mortgage-backed securities that lay at the heart of the 2008 crisis. Shady mortgage brokers and willfully blind credit rating agencies played their part in this. But the investment and emerging universal banks at the heart of this bear the most blame, because they deliberately recreated the dangerous maturity mismatch that post-war regulation and institutional structures aimed at preventing.
Immergluck thus pushes back against a range of narratives put forward by conservative think tanks and investment banks that assign blame primarily to the Community Reinvestment Act (CRA) or mortgage giants, Fannie Mae and Freddie Mac, the ‘Frannies’. The CRA emerged from anti-discrimination legislation in the 1970s and encouraged – but did not compel – banks to lend in neighbourhoods from which they drew deposits. Banks thus could not easily ‘redline’ minority neighbourhoods as they had done systematically in the past. On its face, the CRA might have been a source of mortgage defaults, given the less than stellar credit records and income stability of its clients. But as Immergluck shows, CRA mortgages defaulted less often and later than the privately generated, non-CRA subprime mortgages at the heart of the 2008 crisis. Rather than a leading indicator of problems, CRA mortgages were a lagging indicator.
The same is true for the Frannies. Conforming, prime mortgages comprised the vast majority of their portfolios and insured mortgage bonds. Given that a good credit history and a relatively stable income are required to qualify for a prime mortgage, it would be very surprising if those mortgages and bonds failed in advance of privately generated subprime loans. And in fact, the Frannies only got into trouble when prime mortgages began failing at a rate ten times their historical rate. But this happened well after the sharp uptick in privately originated subprime loans, and well into the post-crisis recession. And even so, the default rate on private subprime mortgages was eight times the rate for prime mortgages. Which is not surprising given the Bush administration’s non-existent regulation of the mortgage market.
In several of the most depressing chapters of the book, Immergluck details a range of failed Federal responses to the human costs of the crisis. While the Federal Reserve and Treasury Department were quick to bail out the banks that had created the crisis, a wide range of programmes designed to help homeowners with unsustainable mortgages were underfunded, underutilised or abused by mortgage servicers intent on extracting as much cash as possible from defaulting debtors before pushing them into foreclosure.
Immergluck also details the ferocious fights over recreating stability in the mortgage market. Banks and non-bank financial institutions resisted much of the new Dodd-Frank regulations, including and especially the requirement that they ‘eat what they cooked’ – that is, retain a 5% stake in any mortgage-backed security they generated. The purpose of this rule was to assure that originators had a stake in the quality of the mortgages they originated and sold onward. Immergluck is correct in arguing for the re-establishment of the old Federal government role in the mortgage market and against the (re-)privatisation of the Frannies. The fundamental problem of maturity matching means that the beneficial holder of mortgages either has to have a very long time horizon or a source of guaranteed deposits. Without a stable deposit base or guarantee, no rational bank would make a US-style self-amortising, fixed interest rate, 30-year mortgage. This is why the Frannies were always perceived to have an implicit guarantee, and why roughly 80% of securitised debt in the USA has a government guarantee.
Immergluck’s desire for a stable mortgage market also reflects his sensitivity to the human costs of the 2008 crisis. Immergluck perceives OOH to be the best form of pension saving available to Americans. But this is a second-best solution to the problem of pensions, given regional variation in housing prices and the risks involved in amortising a mortgage. OOH do enjoy imputed rent if they enter retirement mortgage free. But this comes at the cost of a very illiquid asset. On the other side, the mortgage market itself can be a source of financial instability. Owner-occupier retirees thus end up being doubly exposed to housing, as a significant part of the bond market, and thus private pension saving, is mortgage-backed securities. Put as simply as possible, only those who have stable employment and income can amortise a mortgage in a market without government guarantees (and in the USA, the implicit cross-subsidisation that the Frannies produced). As Immergluck argues, only a fully regulated mortgage market can produce housing and retirement security.
On the other hand, an unregulated market is a recipe for disaster, as Martin and Niedt show in Foreclosed America. This slim volume analyses the demography and experiences of the victims of the 2008 crisis and the often systematically fraudulent marketing of subprime loans at its heart. Like Immergluck, Martin and Niedt take pains to dismiss the false idea that poor minority borrowers somehow tricked banks and brokers into making loans on houses with inflated values and on terms with exploding interest rate adjustments. They use data from the US National Suburban Survey of over 4500 households to show that the majority of foreclosures affected white, nominally middle-class borrowers; in effect these were the borrowers who brought down the Frannies. The average foreclosed household was demographically average, though skewed somewhat towards young, female, black and latino households. How could it be much otherwise, given that ultimately 5% of US households, roughly 10 million people, were in foreclosure (Martin and Niedt, 2015: 4, 24–27)? That said, the subprime crisis disproportionately affected poor and minority households.
Like Immergluck, Martin and Niedt examine the Obama administration’s too little, too late efforts to help bail out homeowners, but with more granular detail on the individual costs. Families and communities bore the brunt of the negative consequences of foreclosure more so than banks. While homelessness did not rise significantly in the USA, doubling up on households did. A substantial overhang of 20- and 30-somethings still lives with mom and dad, and the number of blended households is also higher than before 2008. Meanwhile blight, crime and other social problems increased in neighbourhoods with high foreclosure rates. Although foreclosures increased everywhere in the USA after 2008, the ‘sand states’ – Florida, Arizona, Nevada – as well as California and the industrial Midwest were the hardest hit. Martin and Niedt thus provide an important supplement to the largely dry academic writing on the 2008 crisis.
These three books provide an important corrective to the general blindness to housing that social science exhibits. Housing and housing finance markets are central to people’s lives and to the working of the US and global financial system. Though more attention could have been paid to the globalisation of capital flows into housing finance, and to the relationship of housing to the broader welfare state, these three books together provide a detailed picture of the origins and consequences of the 2008 financial crisis.