Where the Other Three-Quarters Live : U.S. Mortgage Finance and Economic Inequality

This paper addresses questions critical to Congressional action to restructure U.S. residential finance. First, which policy factors make sustainable home ownership still less viable for lower and moderate-income Americans, as well as for younger households contemplating their first house? Then, what can now best be done to remove policy incentives that exacerbate this critical cause of economic inequality without stoking a 2008 repeat?The U.S. has long had a commitment to “affordable” housing even as many policy-makers have asserted that the U.S. housing market has fully recovered since the crisis. Nonetheless, despite years of direct and indirect subsidies and aggregate data suggesting overall market improvement, the gap between the housing haves and have-nots has only increased, doing so most alarmingly in the decade since the great financial crisis began in 2007. This paper demonstrates the extent to which housing-market inequality has worsened, the link between mortgage disparities and overall economic inequality, and the specific financial-policy factors since the crisis with demonstrable inequality impact. Policy actions to remedy these inequality drivers without creating new sources of market and borrower risk are then proposed as Congress and the Administration redesign U.S. housing finance.A recent book on income inequality concludes that, “Only all-out thermonuclear war might reset the existing distribution of resources.” If so, the cure is surely worse than the disease, but there is no need to contemplate such extremes. Several of the most important drivers of U.S. economic inequality can be meaningfully remedied by near-term policy change, as this paper will demonstrate with specific respect to housing finance. As Thomas Piketty's already-classic book on 21st-century income inequality demonstrated, history has shown that economic inequality derives from the gap between macroeconomic growth and the return on capital. The Federal Reserve has struggled in concert with problematic fiscal policy to renew U.S. economic growth since the crisis, but its monetary policies and post-crisis regulatory reforms have at the same time altered return on capital to favor the rich still more exclusively