Equity With Publicly Financed Coops

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My skepticism of the 30-year mortgage to finance homeownership has grown and become an intuition that even if it could not be proven that the scheme has created more problems than it has solved, it is a system of financing in dire need of an alternative. I’ve come to think that the alternative could be cooperative ownership models, hybridizations of the monetization of property ownership with communal concepts of collectivization. I half-jokingly call my thinking on this “experiments in limited forms of communism;” can we created equity for individuals and families without extraordinarily risky forms of financing that are impossible for some to get and then once attained, have a distortionary effect on economics and politics? I can’t fully answer that question here, but I want to start.

Last year I wrote a post titled, Is Home Ownership Still a Good Idea? that considered the thought that mortgages tie people down to a payment scheme for years as well as consuming land inefficiently. When I say “risky forms of financing” think about the disaster of 2008 and 2009. What happened then is that politician’s big promises about the “American Dream,” owning a home, facilitated lending practices which inflated a bubble of mortgage debt that swallowed many millions of dollars and people when it collapsed. Without going into the details of that collapse, it’s worth noting as I did that the collapse,

“Tapped deep rooted American populism on both the left and the right. On the left, this populism took the form of the Occupy Wall Street movement, an atavistic return to the socialism of the 1930s. It’s almost amusing to think back to the days when the word “socialism” was whispered about Obama and was considered widely as a smear, something to be rejected as strongly as questions about his birth. Today, the left is embracing socialism. On the right, the Tea Party movement sunk the legacy of Alexander Hamilton and Henry Clay — finance and infrastructure — behind nativism and paranoia.”

There are also structural problems with mortgage lending that lead to wide disparities in ownership by race that are persistent enough to warrant concern. Here’s what the National Realtors Association found about the gap between Black and White ownership in the United States:

“While the U.S. homeownership rate increased to 65.5% in 2021, the rate among Black Americans lags significantly (44%), has only increased 0.4% in the last 10 years and is nearly 29 percentage points less than White Americans (72.7%), representing the largest Black-White homeownership rate gap in a decade.”

According to the Urban Institute, the gap was 27% when the Fair Housing Act was signed in 1968. What’s going on? It is impossible to ignore the consistency in racial disparity in the data. I looked at loan origination in one market, Albuquerque, in one year, 2021 and at the lowest levels of income the gap between Black applicants for a mortgage loan and White is about 11%.

But when looking at loans for mortgages at 120% of Area Median Income, about $90,000 of pretax income for a family of 4, the gap persists at about 8%.

As I’ve pointed out before, poverty is concentrated among people of color, and poverty means having to manage fewer dollars which often means unpaid bills. Unpaid bills result in poor credit scores which adversely impacts mortgage applications.

And what pushes up equity and drives the politics of housing? Scarcity. Simply put, a home mortgage only makes sense if home values are appreciating rapidly and that means a market with high demand and little supply. The basis of the 30-year mortgage is that the massive interest charge paid will be offset by inflationary pressures which means higher rent costs for poor people. That is, when single-family neighbors organize to oppose new housing, including apartments, they are really transferring wealth from the poor into the value of their home. When those apartments don’t get built, rents rise but so does equity in mortgaged homes.

How can cooperatives help dismantle this form of equity building? I wrote about cooperatives recently, an ownership model that essentially pools cash from many households to buy housing and then manage it efficiently. Imagine buying shares in a piece of property with friends and family, say a 10-acre lot for $100,000 divided among 10 buyers at $10,000 a share. When the property appreciates, say by $1,000, then each owner’s share increases by $100. Take another step or two. What if a local government sold revenue bonds on a local tax, say on cannabis, used the proceeds to build a project then collected housing payments from a cooperative to help retire that debt. It would look something like this.

I need to do more work on this, but what this sort of ownership model would do is allow people to use their monthly housing payment to buy down public debt, and with each payment the household would be getting closer to ownership with very low interest. Most important here, the pooled resources of households could handily pay down the bonds over a 15-year period, half the time it takes to retire a mortgage. And this form of equity building is dependent on families working together to offset operating costs; there is a sweat equity component that is based on social capital not measured by conventional risk and asset measures. Also, if a city uses all the tax revenue to retire the bonds, homeowner payments can go into a revolving fund that can be put to work to build more projects.

What I also like about public financed cooperatives is that people working everyday are borrowing from other working taxpayers. Those taxpayers see their money returned and they can see visible progress on producing more housing for people who need it. Yes, it does sound a little bit like the slogan from Marx’ Critique of the Gotha Program: “From each according to his ability, to each according to his needs!” So what? The collectivized public risk of government backed mortgages isn’t working for many families, it promotes bad public policy, and it ties families that do qualify to a lifetime of debt service. I’m happy to monetize social capital and embrace the collectivist branding if it leads to an outcome that builds more housing, more equity, closes the persistent gap between Black and White ownership, and reduces the incentive for housing inflation.

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