The Two-Income Trap - Elizabeth Warren [77]
Moreover, there was a growing body of evidence that even though it was illegal, overt discrimination and “redlining”—the practice by which mortgage lenders refused to lend in certain neighborhoods— was crippling housing markets in minority neighborhoods and denying low- and moderate-income families the chance to build wealth through home ownership. The new solution was to “democratize credit”—make credit available to anyone and everyone, no matter how poor.78 The prediction was for a more perfect world in which home ownership rates would go up, a sluggish economy would begin to boom, and cities would blossom—all thanks to the free flow of credit.
Obviously, that perfect world didn’t come to pass. But politicians may still worry: If America turns back the clock on lending regulation, what will happen to the home-ownership rate? Every time anyone talks about putting restrictions on interest rates, the lending industry puts up one of those heart-warming advertisements that show a family with two kids and a dog moving into their first home. But the hard numbers belie those happy ads. Reregulation of interest rates would have very little effect on home-ownership rates.79 Since the mortgage industry was deregulated in 1980, the proportion of families owning their own homes has increased by less than 3 percentage points.80 Plenty of factors have contributed to these modest overall gains, such as a long-running economic boom, the aging of the population, and a falling inflation rate—and those factors won’t be affected by changes to mortgage regulations. Moreover, since most high-interest subprime mortgages are used for refinancing, not for families trying to buy their first homes, outlawing those mortgages should have little effect on the number of first-time home buyers. In fact, if fewer families were pushed out of their homes by creditors intent on raking in profits through loan-to-own scams and predatory practices, the overall number of homeowners in America might be higher.
What about the “democratization of credit” for which activists fought so hard? If interest rates are regulated once again, will credit become undemocratic, available only to those with realistic prospects for repayment? To answer this, it is time to step back a moment. The original intent of the credit democratization movement was for credit to help more families become financially independent. Credit was not supposed to be an end in itself. But it seems that the original intent has been forgotten. Consider, for example, the motto of one prominent advocacy group: “Access to credit and capital is a basic civil right.”81 Is it a civil right to pay interest on a credit card balance for the rest of a person’s natural life? A family that finances its home with a subprime mortgage can end up paying twice as much for that home as a family that gets the market rate. Is it really a basic civil right to pay double for a home? And foreclosure rates are skyrocketing. Is it a civil right to lose that home in a sheriff’s auction? The dream of democratization of credit was to use credit as a vehicle to expand home ownership, to launch businesses, and ultimately to help build wealth in neighborhoods that are short on it. The point was not to bombard families with more credit than they could possibly afford or to flood the market with complicated loans that only a CPA could understand.
But the mantra of expanding access to credit has been hard for consumer activists and politicians to abandon. As a result, reform efforts have fragmented into a patchwork of measures intended to