Twenty years ago, banks had a reputation for being very conservative. Then came the high flying world of casino banking, with its high roller, risk-embracing culture. Beneath it all, though, the core of the banking industry mentality is deeply conservative -- not the good kind of conservative that makes sure that loans are collateralized and deposits are protected. Rather, it is a conservative mentality produced by an out-of-date understanding of the world in which the loans -- particulary mortgage loans -- operate. And that misunderstanding will continue to spell trouble for all of us.
Here is one telling case in point. In their new efforts to be cautious, banks and other mortgage-lenders are reportedly refusing to give loans to pregnant women. (Tara Siegal Bernard, Need a Mortgage? Don't Get Pregnant, New York Times, July 20, 2010) The refusals are based on the lenders' fear that pregnant women may decide not to return to work, or may not have a job to return to, after childbirth. What this policy reveals is not that the banks are sexist or family-hostile -- which they are -- but that they are about seriously of touch with the reality of the labor market. When was the last time any applicant for a thirty year mortgage had the same job, and income, for thirty years? Fixed-rate, self-amortizing mortgages were designed for a workplace in which workers stayed with their employers for their entire careers. These types of mortgages arose in the 1930 and 1940s, a time when employers wanted workers to stay with them a long time so they could develop loyalty, learn in-house skills and progress gradually up an orderly job ladder until retirement.
Long-term mortgages assume that borrowers have reliable and long-term employment relationships. For much of the 20th century, this was true, much of the time. America's great post-war middle class was comprised of blue-collar workers who enjoyed long-term, stable jobs and predictable promotion paths that extended from hiring to retiring. Auto companies, insurance companies, the steel industry, and other industries dominated by large firms offered their workers de facto job security, orderly promotion opportunities, a rising wage trajectory, dependable benefits and a reliable pension upon retirement. Such jobs were by no means universal -- they eluded most African Americans, women, and rural Americans -- but they formed the template upon which 20th-century social policy was built.
Over the past two decades, the reality of long-term stable employment has vanished for all but a lucky few. Employers have created new types of employment arrangements that do not rely on a stable and loyal workforce, but which provide them flexibility instead. Sometimes this means using temporary workers or independent contractors to perform tasks previously performed by regular employees. But more frequently it means altering employees expectations and repudiating the culture of permanency that employers used to foster. Employers want to be able to bring in new employees with new skills at any level, eliminate those with obsolete skills, and reassign incumbent employees across departmental and functional lines. These changes are not all nefarious -- they have unleashed creativity and enabled many to escape the deadening drone of dull, repetitive work. However, the change in the nature of employment has undermined many crucial elements of our social safety net, including our housing policy.
The problem now is that few people have the kind of long-term job security that our housing policies take for granted. According to the Bureau of Labor Statistics, the median length of time a worker spends with a particular employer has decreased in every age group since 1980, except for women ages 35-44, who saw a slight increase. Today, more and more people have an episodic experience in the labor market, moving from employer to employer, with periods of employment often followed by periods of unemployment and transition. When unemployment strikes, mortgage payments that once had been manageable become impossible.
So banks that refuse loans to pregnant women for fear that childbirth will disrupt the employment relationship are worrying about the wrong problem. Almost no one has safe, reliable employment these days. All workers are at risk of termination and seeing their jobs outsourced to temporary workers, independent contractors, or simply to new blood. The answer is not to single out one group whose employment relationship is precarious -- nearly everyone's is. Instead, banks and other lending institutions need to rethink their lending practices to meet the new reality of people's work life cycles. For example, they should redesign mortgages to have flexible resets that permit mortgage holidays or interest rate dips during spells of unemployment. Some commercial loans currently have this feature for businesses that are in temporary difficulties. Because the nature of employment has changed profoundly, it is time to revisit the structure of housing finance.
Katherine V.W. Stone is the Arjay and Frances Miller Professor of Law at UCLA School of Law. She specializes in labor and employment law, and her book, From Widgets to Digits: Employment Regulation for the Changing Workplace was awarded the Michael Harrington Award for linking scholarship to current issues of social policy.