In the popular imagination, the American foreclosure crisis is a morality play in which comeuppance has landed on greedy people who had it coming. Homeowners gorged on the wealth they took out of their properties like gluttons at a Vegas buffet, using exotic mortgages to fill living rooms with home theaters and garages with new cars.
Such judgments form the crux of the argument against using taxpayer money to help homeowners who can no longer make their mortgage payments: People chose to live in brazen disregard of their limited means. Why should responsible neighbors be forced to bail them out?
This view has always been hard to square with the facts, given that millions of Americans used home equity loans to start businesses, pay for health care and send children to college. Now, a new study adds a powerful insight into the reality that scarce incomes and rising costs for middle class life played a decisive role in putting homeowners in deep financial trouble.
The study -- the work of the Metropolitan Policy Program at the Brookings Institution -- focuses on the yawning gap between the price of housing in communities whose public schools boast high test scores, and those in places where the local schools are behind the curve. Mining housing and school testing data from metro areas across the country, the study adds the imprimatur of authority to something most people already knew without looking at a spreadsheet: It costs a lot more to live in a place that has good schools.
Indeed, the study takes a stab at quantifying just how much more, calculating that in the nation's 100 largest metropolitan areas, housing costs in communities with public schools whose students test well above the state average run 2.4 times higher than those in areas with lower-achieving schools. Homes in areas with top schools are worth on average $205,000 more than those located in places with lower-achieving schools.
The value of real estate is crucial, because home ownership tends to be the price of admission to top-quality public education: Communities with high-scoring schools have a much smaller percentage of rental homes than those with lower-scoring schools.
What does all this have to do with troubled homeowners and relief from unaffordable mortgages? A great deal. Though the study is principally concerned with the impact of restrictive zoning policies (which tend to exclude lower-income and minority households), it serves as a potent antidote to the phony notion that people threatened with foreclosure are largely undeserving of help because they squandered their dollars on unnecessary pleasures. It brings home the fact that many people now behind on their mortgages got there not because of stupidity or gluttony, but because of the high cost of satisfying a societal imperative: They wanted to put their children in good schools.
"There's a lot of pressure on low- and even moderate-income families, really up and down the income ladder, to spend as much money as they can to buy access to high-scoring schools," says Brookings senior research analyst Jonathan Rothwell, the study's author.
Many people now in trouble knew perfectly well that they were paying absurd, bubble-inflated prices for their homes while relying on mortgages with dangerous terms, but they also grasped that the only alternative was to compromise the quality of their children's education. In an era when the reach for Harvard begins at conception, economizing and accepting mediocre schooling is a choice that could seemingly subject a parent to risk of child abuse accusations.
For lower-income and minority households in particular, aiming for better schools amounts to the cornerstone of a rational strategy for upward mobility. Academic literature has found that low-income and minority students who attend schools boasting higher test scores tend to succeed far beyond their counterparts in lower-achieving schools.
Consider the choices confronting a family with school-age children in a major American metro area such as New York, Los Angeles, Philadelphia or Baltimore, where the study finds that housing costs in areas with high-quality schools reach roughly triple those with low-achieving schools. Unless that family is fortunate enough to boast an income at the top of the pyramid, they must either accept lower quality education for their children or take on potentially alarming debt to buy something in a better neighborhood.
The study relies upon data from 2010 and 2011, well after housing prices fell back to earth in many markets. But consider the same family during the height of the real estate bubble in late 2006 in a place like Los Angeles, where the median home price had roughly doubled over the previous four years, according to the S&P/Case-Shiller Home Price Index.
That family confronted home prices that had been pumped into the stratosphere by other people's willingness to sign off on mortgages with exotically lenient terms. They either had to do likewise, accepting the attendant risks, or settle in a more affordable area -- which is to say, consign their children to substandard educations and, by extension, lean college and career prospects.
A major reason for the real estate bubble that drove prices far beyond American incomes was that seemingly anyone with a signature could qualify for a loan. This was in part the result of lax lending standards employed by Fannie Mae and Freddie Mac, the two mortgage behemoths whose reckless pursuit of market share and profits led to a bailout whose cost to taxpayers is now estimated at about $150 billion.
Fannie and Freddie today are wards of the government. Their regulator, Ed DeMarco, refuses to allow them to cut mortgage balances as a means of enabling troubled borrowers to avoid foreclosure, a step that many experts maintain would do much to stabilize the housing market and the broader recovery.
DeMarco's intransigence is costing the taxpayer money, according to Fannie and Freddie's internal studies, which have concluded that writing down principal balances would limit future losses. As I have argued here before, he is doing this for patently ideological reasons. In a speech earlier this month in Washington, DeMarco made clear that he is catering to those he views as the responsible borrowers who avoided getting carried away.
"Many households got overextended financially," DeMarco said. "Some accumulated debts they couldn't afford when hours or wages were cut or jobs were lost. Others withdrew equity from their homes as house prices soared. Others bought houses at the peak of the market, often with little money down, perhaps in the belief that house prices would continue to climb. Yet, there are other Americans that did not do these things. There are families that did not move up to that larger house because they weren't comfortable taking the risk. Perhaps they had to save for college or retirement and did not want to invest that much in housing."
But in practice, distinguishing the responsible borrowers from the supposed deadbeats is not so simple. The guy who bought a house in Los Angeles in 2002 in a neighborhood with affordable schools is a solid citizen worthy of praise. The guy whose kids happened to be born four years later and who had to pay twice as much to get them into the same schools -- this, thanks to Fannie and Freddie's indiscriminate lending -- if that guy happened to have lost hours at work and can no longer pay, he is a degenerate who took on more house than he could afford.
Yes, of course, some people did tap their home equity to fly themselves to Tahiti. The nation is littered with examples of unbridled consumption leading to ruin. That is certainly part of how we got here. But as the Brookings study underscores, plenty of Americans landed in trouble by trying to do what they were supposed to do -- secure decent housing and education for their families.
The ultimate argument against rescuing distressed homeowners is the oft-heard assertion that no one ever forced a borrower to sign off on a lousy mortgage. But the new study implicitly suggests otherwise. Ordinary life forced people to sign. It was either that, or condemn their children to compromised futures.