City Journal senior editor Stephen Malanga has written an excellent, accessible, and concise history of federal efforts to boost homeownership since the 1920s. He does a nice job of showing how the current housing morass is the product of nearly a century of federal meddling by both Democrats and Republicans, each enamored with the holy grail of increasing homeownership.
One gem from the essay is a history of a New Deal program that tried to clean up a mess created during the 1920s by then Commerce secretary Herbert Hoover when he attempted to increase homeownership through the Own Your Own Home campaign. As homeowners became oversextended, foreclosures increased and skyrocketed after the runs on banks sent banks into bankruptcy at the outset of the Great Depression. The federal solution was to create a new program that would prop up homeownership and subsidize mortgages and loans.
The HOLC [Home Owners' Loan Corporation] was a massive new federal agency, employing at its height some 20,000 people—appraisers, loan officers, auditors. By 1936, the agency’s total payroll was $26.2 million, the equivalent of $388 million today. The HOLC eventually received 1.9 million applications for mortgages and approved 1 million. Despite the more favorable terms that the HOLC offered, however, about one-fifth of the new mortgages defaulted, a failure rate that would sink a private-sector bank. Many who failed to pay might have been able to, but chose not to work out any arrangement with the government and essentially challenged the feds to kick them out—which officials were reluctant to do in the face of public opposition. HOLC loan officers classified about 65 percent of the defaults as resulting either from borrowers’ “noncooperation” or “obstinate refusal,” according to an analysis by Columbia University economist C. Lowell Harriss. “This type of noncooperation could sometimes be attributed to a desire to obtain free housing . . . an object that, in view of HOLC’s nature, was not difficult to realize,” Harriss wrote.
The solution? Let the market determine homeownership rates based on the natural growth of the economy and income.