Our Lot: How Real Estate Came to Own Us

A story as big as our recent real estate meltdown must contain thousands of smaller stories, filled with heroes and villains, wrong turns and missed opportunities. Alyssa Katz begins Our Lot: How Real Estate Came to Own Us, her enlightening investigation of the housing bubble and ensuing bust, with Gale Cincotta, a Chicago housewife turned neighborhood activist. Cincotta gained national prominence — and hero status — fighting the practice of redlining, the refusal of mortgage lenders to loan to minorities and the poor. During the 1970s, she and her allies helped pass the Home Mortgage Disclosure Act, which forced banks to reveal where they made their loans, and the Community Reinvestment Act, which required them to meet the lending needs of all segments of their communities. In 1988 she and hundreds of activists stormed the Washington headquarters of Fannie Mae to demand that the government-subsidized mortgage buyer invest in low-income neighborhoods.

But in the absurd real estate market whose collapse has left our economy in tatters, even people with noble intentions ended up being part of the problem. By the 1990s, Cincotta was lobbying Congress in favor of low-down-payment loans for low-income buyers. Congress subsequently passed legislation requiring 40 percent of Fannie Mae and Freddie Mac?s home loans to be made to those earning less than the average income of their area. On its face, that sounds all right, as does Bill Clinton?s National Homeownership Strategy, which, in the interest of increasing the national homeownership rate, promoted loans to first-time buyers. But many of these buyers had wobbly finances, which meant they took on vast amounts of debt, borrowing more and paying less up-front.

Katz lucidly describes how these factors — a president looking to increase the homeownership rate, a mortgage industry on the hunt for new customers — helped set the stage for the subprime mortgage crisis. (She covers other factors as well, including Reagan-era deregulation, Alan Greenspan?s devotion to free markets, and, importantly, the work of Lewis Ranieri, the Salomon Brothers trader who, during the 1970s, innovated the practice of pooling mortgages into securities that could be bought and sold like bonds by investors.) Subprime loans were given to unsound borrowers, with higher interest rates and tacked-on fees to balance out the risk. But as Katz observes, “There was little reason for lenders or investors to care about that risk. The borrowers may have been broke, but over time their homes had become worth quite a lot…. For lenders, the prospect of foreclosure was actually a chance to make money, by setting up borrowers to fail and reselling the house when they did.”

Because investors kept profiting from the resale of foreclosed homes, the ratings on mortgage-backed securities rose higher and higher, even as borrowers were failing to make their payments. “As long as real estate prices kept going up…, lenders and investors would make money no matter what happened to the borrower,” Katz explains. So would everyone else up and down the line: the mortgage brokers paid on commission, who had a vested interest in pushing through reckless loans, and the appraisers, who in many instances agreed to provide inflated appraisals to mortgage companies in exchange for future work. Thus, while the mortgage industry hid behind the pretense that subprime lending would empower the poor, Katz instead likens it to “malt liquor and the lottery” in its false promise of escape. Recent investigations suggest that many buyers sold on sleazy subprime loans would have qualified for ordinary loans, which would have spared them predatory interest rates and might have offered some a chance to hold on to their homes.

While the author explains the real estate crash with clear analysis and measured outrage, she also gives it a human face. Katz, a journalist with an easy, engaging writing style, crisscrossed the country meeting people on all sides of the issue. She devotes chapters to the Slavic Village neighborhood of Cleveland, which has the highest foreclosure rate in the country; the sprawly exurbs of Sacramento, where the race to satisfy the market for new subdivisions meant that, bizarrely, the higher home prices rose, the more shoddy the construction became; the rampant mortgage fraud that plagued the most exclusive neighborhoods in Atlanta; and real estate speculation gone wild in southwest Florida. That chapter describes a Pennsylvania buyer who convinced her friends (most of whom no longer speak to her) to go in on a Florida land deal, certain they?d all be rich. She and her husband, before taking on massive debt to buy eight houses that they now can?t sell, were reassured of the area?s potential by learning that Lee County, Florida, had the nation?s fastest-growing job market — what they didn?t realize, Katz notes ruefully, was that most of those jobs involved “building, financing, or selling houses to speculators.” As with much of the boom, there was no there there.

Throughout Our Lot, Katz persistently questions whether homeownership, long credited with building “stronger families, more pleasant communities, financial security, a sharing of wealth through the generations,” deserves its vaunted status as a pillar of the American Dream. “While some moved up in the world,” she notes of subprime borrowers, “often the new homebuyers were purchasing the worst housing in the worst neighborhoods with the worst schools — hardly a solid investment.” And in a chapter on New York City?s deranged real estate market, she observes that the city?s history, which until recently included robust protections for tenants, “offers a surprising rejoinder to the standard wisdom…that homeownership makes a neighborhood more stable.”

But it’s instability that plagues the areas Katz visits. Sitting in at a foreclosure auction in Atlanta, she writes of a house on the auction block, “This sad structure was bought and sold eighteen times in eight years, going into foreclosure four times along the way,” adding that in Atlanta, in as few as two months after a mortgage goes into default, “houses get spit right back into the market, where they?re prone to getting mugged again for their mortgage money.” Her evocative language makes you feel as sorry as it?s possible to feel for a house.

In fact, it?s likely that by the end of Our Lot you?ll feel more sympathy for the houses than for the people building, flipping, and moving in and out of them. It?s a given that lenders and investors acted out of avarice, but even the borrowers, she allows, were largely motivated by “greed, recklessness, ignorance, desperation, criminal intentions…ovine temperament, or magical thinking.” In her acknowledgments, Katz reveals her hope that she has turned “decades of obscure and convoluted history” into an enjoyable story. She has. But sadly, the tale is long on villains and pitiably short on heroes.