Lacar Musgrove & Jacob Shwartz-Lucas
On a July night in 2009, Sophia Ramos and her two grandchildren pitched a tent on a family-owned patch of property in a rural area of Hawaii. The two boys were crying. These weren’t spoiled kids reluctant to go camping –they were homeless.
The Ramos family lost their home amid the mortgage foreclosure crisis that began in 2007. The story is a familiar one. Like so many homeowners’, the roots of Ramos’s troubles were in a loan she took out against the value of her home. She was, at the time, free of debt, having bought her family a modest house in Florida outright with the proceeds of the sale of her mother’s home back in Hawaii. Ramos, her three grandchildren, and her elderly parents shared the three-bedroom home. In 2004, Ramos took out a loan against the property to buy a lawn-care business to support the family. She was a hard worker and enjoyed mowing grass. Everything was going well until 2005, when driver pulled out in front of her minivan.
Ramos suffered a broken arm and other injuries, rendering her unable to work. Six months later, she fell behind on her mortgage payment. Bills piled up. Collections agencies started calling. Ramos was desperate. And then help came—in the form of another mortgage. Less than a year later, still unable to work and after months of financial struggle, Ramos took out yet another, much larger, loan. At this point, she owed $240,000. This may seem like an alarming amount of debt for someone with no job, but at the time, Ramos’s home was valued at around $400,000 and expected to keep gaining value at $40,000 a year. In that light, her loans seemed conservative. She just needed a little help until things turned around. It was December 2006, and Ramos’s financial world was about to collapse, along with that of the entire country.
Ramos’s plight is one of millions that followed similar trajectories in the mortgage foreclosure crisis. Last week, at Columbia University, I (Jacob) attended a screening of Rahman Bahrani’s thriller film 99 Homes, which dramatizes the human toll of the foreclosure crisis through the fictional story of Dennis Nash, an Orlando construction worker supporting his mother and son. Dennis falls behind on his mortgage payments when he becomes unable to find work in the construction industry. In the beginning of the film, Dennis pleads with a judge, explaining that the bank said it was trying to modify his mortgage. In the next scene, the Sheriff arrives and the family is forcibly evicted from their home. As the panicked family packs up everything they can in the few minutes they are given, Rick Carver, the real estate agent in charge of the eviction, drawls, “This ain’t your house anymore, son.”
Following the screening was a panel that included Nobel economist Joseph Stiglitz, whom I had the pleasure of meeting after the event. Dr. Stiglitz discussed the causes and conditions of the mortgage meltdown. From 2004 to 2006, housing prices skyrocketed in a bubble fueled by frenzied speculation and the availability of cheap loans. Like so many Americans, Ramos pulled funds from the rapidly growing equity in her home. In those two years, Americans extracted 1.5 trillion dollars from the value of their property. Just as Ramos did, a large portion of them did so through subprime loans. Subprime loans are loans made to risky borrowers, usually at high interest rates. Subprime loan brokers encouraged homeowners to borrow huge amounts of money against the speculative rise in the value of their homes–to pay off debts, improve their properties, to start businesses, or just to spend on luxuries such as vacations and new cars.
Keep in mind that to say people were speculating on “homes” is somewhat misleading. Often times, the lot a house is on is worth more when the structure is removed. This is because structures, like all physical assets, depreciate over time, while the location of the property appreciates, as it did rapidly in the years preceding the crash. So, it was really the land–or more precisely the location of the home–that was being speculated on, not the home itself. We’ll talk about the importance of that later.
The loans for such land speculation came with variable interest rates that could double or triple, as well as large penalties for paying them off early. In many cases, the borrowers could not afford the loans, and the brokers knew it. Unscrupulous mortgage brokers had incentive to make bad loans, as they could simply take their hefty servicing fees and then sell the loans off to investment firms. Often they used fraud, including falsifying people’s incomes, to get the loans approved. Then, such loans were packaged with hundreds of others and sold and resold. A block of subprime loans might be owned by thousands of investors in mortgage-backed securities.
Beginning in 2007, the bottom fell out of the housing market and the economy tanked. As unemployment climbed, people defaulted on their mortgages, many of them subprime loans that they couldn’t afford in the first place. With housing prices on a steep decline, people could no longer sell their homes to pay off the debt. All too often, those homes were now worth less than what they owed.
This all became a self-perpetuating cycle as the value of mortgage-backed securities dropped, the economy crashed, and more and more people lost their jobs—especially those in the construction industry. As people struggled to make payments on their mortgages, it fell to the mortgage service companies (often banks) to deal with the avalanche of defaults, which cost them money to actively manage. They also saved on payroll by under-staffing the offices handling the defaults, often with under-qualified employees, leading to massive mismanagement of paperwork and wrongful foreclosures.
In 2009, the Obama administration launched the Home Affordable Modification Program, a $75 billion program meant to help homeowners avoid foreclosure by offering banks incentives to modify mortgages for borrowers who were in trouble. However, applications for loan modifications were egregiously mishandled by the loan servicers in the form of delays, errors, and lost paperwork. According to sworn statements by Bank of America employees, they dealt with the glut of paperwork by routinely denying applications en masse with made-up reasons such as missing documentation. Foreclosure proceedings went on in parallel with the mortgage modification process, meaning homeowners who qualified for the program lost their homes before they could be approved.
As this catastrophe unfolded, fingers pointed in all directions–mostly to “irresponsible” homeowners or “predatory” lenders–to cast blame. Hands were wrung and barrels of ink spilled by economists trying to explain just what went wrong and how we could prevent it in the future, including many reasonable proposals such as not lending money for land and avoiding the inflation of location values caused by artificially low interest rates. All of this, however, could have been prevented by a simple fiscal measure –taxing the value of land. Taxing land value would have stopped the bubble from inflating in the first place. This is because a strong land value tax would have reduced land’s selling price in the same way that our current low property taxes do to a small degree–by creating a liability on the part of the de facto owner, the holder of the deed or the bank that owns the mortgage, to regularly pay a tax. Think of it this way: the greater the tax you will have to pay for holding onto land, the less you will be willing to pay up front. Pay more now, pay less later. Pay less now, pay more later. For this reason and others, Dr. Stiglitz is a supporter of the land value tax as a means of keeping such bubbles from inflating in the first place.
“One of the most important but underappreciated ideas in economics is the Henry George principle of taxing the economic rent of land…” -Joseph Stiglitz
Behind all the statistics, terminology, and tangled interplay of economic mechanisms that caused the foreclosure crisis are the tales–each unique in the manner of snowflakes–of families whose worlds were turned upside down in their pursuit of the fabled “American Dream” that, in those two heady years of economic boom, seemed so vivid. In 99 Homes, Dennis and his family find themselves living in a motel filled with other families in like situations. Desperate to save them from this fate and get his house back, Dennis goes to work for Carver, the unscrupulous real estate agent who had evicted them. Under Carver’s direction, he starts by cleaning up foreclosed homes and stealing the appliances only to replace them–for a cut of Carver’s ill-gotten gains. In an ironic twist of fate, Dennis is groomed to carry out evictions himself. The morality play of the film unfolds as Dennis accepts handfuls of cash from Carver to show up to door after door and throw people just like him out of their homes.
In one scene, Carver places the blame for his decisions on the system. His father, he says, was “a sucker,” a construction worker who played by the rules but lost his home anyway. Carver is determined to “survive.” While we must hold the Carvers of the world morally accountable for their decisions, we also need to turn a critical eye to the system that pushes them toward such despicable tactics in the first place. If people can make more money speculating on the rising value of land than they can working an honest job, then we have a problem much deeper than a group of greedy bankers.
We need to attack the root of the problem–taxes on wages and subsidies for owning land. In this drama, we are the serfs, and the financial institutions are acting as lords of the manor. We pay taxes on our earnings and pay the rest to them in the form of rent and mortgages. But who rightfully owns the land? We the people, or the oligarchs? By forcing them to pay a tax on land value, we can take back our earnings and fix the root of the problem.
Note: The story of Sophia Ramos was taken from Paul Kiel’s article on ProPublica, The Great American Foreclosure Story: The Struggle for Justice and a Place to Call Home.