勝者
The world of global finance is often
depicted as one that is, to a very large degree, detached from the realities of
everyday life. In the wake of the 2007-9 financial crisis one of the complaints
made by critics of the financial system, and of the economic damage wrought on
the US economy through the credit crunch and recession that followed, was that
a divide had opened up between “Wall Street” and “Main Street” with the interests
of the former taking precedence over those of the latter (French, Leyshon, and
Thrift 2009). The communities that worked in the leading global financial
centers of New York and London were depicted as living in a world apart,
characterized by extreme wealth and power, replete with collective intelligence
and glamour, and not a little greed. But while the crisis pivoted on the
unraveling of markets in collateralized debt obligations (CDOs), credit default
swaps (CDSs) and other complex and opaque financial instruments, it also
revealed the ways in which such transnational markets were themselves founded
on one of the most mundane and quotidian of financial transactions: the residential
mortgage and its monthly payments. The speed and ease by which localized
problems in the US mortgage market—rising rates of foreclosure in the subprime
mortgage market—metamorphosed into a full blown international financial crisis
served to highlight just how important an engine of the financial system
mortgages had become. Mortgage repayments not only provided income in their own
right but, as we shall see, also acted as a foundation upon which a complex—and
highly fragile—transnational financial architecture has been built. More
particularly, it was the catalyst for the development of a shadow banking
system that grew to an enormous size during the 1990s and 2000s on the back of
the securitization of loans made to subprime borrowers in the United States;
that is, to individuals and households with socioeconomic profiles that
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So
pervasive is housing finance within economies such as the United States and the
United Kingdom that it is difficult to imagine a world without mortgage
markets. Nevertheless, in the context of the long history of finance, the
mortgage is a relatively recent social innovation that has its roots in the
rise of building societies in eighteenth- century Britain (Boddy 1980), and was
gradually adopted in other industrialized economies over time (Ball 1990).
While in the “property-owning democracies” of the US and the UK the opportunity
to be able to purchase your own home has become akin to a badge of citizenship,
it is easy to forget that there remain many other economies where markets for
housing finance are still only partially developed. Even in Britain, which
today has one of the highest rates of homeownership in the world, homeownership
is only a relatively recent phenomenon; as late as the early twentieth century
90 percent of the population were tenants, paying rent rather than making
mortgage repayments (Allen and McDowell 1989).
This
chapter looks at the ways in which housing finance has become incorporated into
the heart of the capitalist economy, and does so by focusing on the United
States, a country in which housing finance casts a very long shadow. Our
analysis is bracketed by two financial crises that have played important roles
in the evolution of US housing finance: that of the late 1920s and early 1930s
on the one hand, and the crisis of the late 2000s on the other. By tracing out
the shifting historical and geographical contours of US housing finance the
chapter seeks to illustrate not only how mortgage markets are premised upon
what Gotham (2009), following Lefebvre, calls the “production of space,” but
also how money more generally is as much a geographical as a sociological
phenomenon. We argue that an understanding of finance demands attention not
only to the geographical contingencies of different monetary forms, financial
instruments, and markets, but also more fundamentally to money’s ability to
allow the extension and coordination of social relationships across time and
space (Leyshon and Thrift 1997). Much of the power of money and finance lies in
the promise of the mastery, for a little while at least, of time-space (French
and Kneale 2009).
In making
this argument the chapter is organized as follows. The second section provides
a geographical account of money in general and of housing finance in
particular. In facilitating the bridging of time and space, money and finance
allow for an acceleration and extension of economic and social relations.
However, the fungibility and mobility of financial capital has created in its
wake a highly uneven, unstable, and spatially variegated socioeconomic landscape.
In the case of the uneven geographies of housing finance in the US two factors
have been of particular importance. These have been, first, attempts by the
state over a long period of time to geographically marshal financial capital
and, second, the endeavors of financial capital to escape such regulatory
constraints and seek out a new, more profitable “spatial fix.” The third
section looks at the rebuilding of the system of finance and its regulation in
the US after the crisis of the 1920s and 1930s, and the central role afforded
to housing within Keynesian growth models. A key aim of the US regulatory fix
was to “hold down” money by restricting its power and geographical mobility,
not least through regulations that restricted spatial competition.
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Section four looks at the period from the mid-1970s onward when there was what Dumenil and Levy (2004) claim amounts to a financial coup d’etat following the abandonment of Keynesian ideas, a shift to neoliberalism, and the empowering of financial capital through reregulation. During the financial revolution that began in the 1980s housing markets and housing finance played an important role in providing a model of securitization for the financial system as a whole, which in turn was based on the circumvention of the spatial constraints on financial capital put in place in the 1930s and, in particular, the alchemic transformation of spatially fixed housing assets into mobile and fungible financial securities. The fifth section examines the social and geographical disparities of the subprime mortgage market and the disproportionate concentration of lending in nonwhite communities. The production of racialized financial ecologies was central to the attempt to forge a new housing finance spatial fix: one that was premised on the extraction of class-monopoly rents. Section six concludes the chapter by arguing that the story of subprime not only reveals the ways in which financial innovation has enabled the spatial and temporal stretching of the social relations of housing, but also highlights the unequal power relations that are at work in mortgage markets.
Money has long garnered considerable attention in the social sciences. However, questions of space and place have been relatively neglected in such debates, which is surprising given the inherently geographical nature of money and finance. Space matters, not just in terms of geographical context, but in the much more profound sense that the power of money lies in its ability to bridge time and space. To illustrate this point it is useful to begin by considering money’s historical antecedence. One of the principal, but certainly not only, explanations for the emergence of a monetary economy was the limitations of pre-monetary barter systems. A major weakness of barter systems, where one good is directly exchanged for another, is the double coincidence of wants or the mutuality of needs problem. Not only does barter require that both parties to an exchange bring their goods to market, but, in addition, for an exchange to successfully take place a seller needs to be able to find, or often quite literally locate, a buyer who has goods that the seller actually needs or wants, and vice versa. Barter thus entails significant search and transaction costs, and places considerable economic, social, and spatial constraints on commerce. In contrast, the adoption and recognition, in historical fits and starts, of particular commodities (initially precious metals such as silver or gold deemed to possess an “intrinsic value”) as universal equivalents, against which the value of all other goods might be calculated, reduced many of the barriers to exchange associated with early barter systems. 2
At least two major economic benefits accrue from money. First, only one party to an exchange, the seller, is required to bring goods to market. The buyer only need bring money (Leyshon 1995).
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Second, not only does money
greatly reduce search and transaction costs, but the institutionalization of a
trusted medium of exchange and of a store of value has played a crucial role in
addressing one of the persistent problems of commerce: How can economic
activity be coordinated over time-space? A defining feature of financial and
monetary history—from the development of standardized coinage by Greek city
states to facilitate trade in the Aegean in the first millennium bc, to
the commercial bills of exchange written in the fifteenth century in London and
other European ports to underwrite growing international maritime trade,
through to the invention of complex derivatives contracts in the late twentieth
century—has been the creation of ever more complex and sophisticated
instruments to facilitate long-distance trade (Leyshon 1995; Leyshon and Thrift
1997).
The
financial bridging of space-time has, of course, proceeded in a highly uneven,
differentiated, and contested fashion. As finance has become an increasingly
important motor of what David Harvey (1989) has called time-space compression,
so space is stretched and folded at an ever increasing rate, but while some
people and places have as a result been brought much closer together, so others
have found themselves pushed ever further away in relative financial and
economic space (Leyshon 1995). On the one hand, finance has greatly reduced the
friction of distance such that money can, at the proverbial touch of a button,
circumnavigate the globe in an instant in search of new investment
opportunities. The result of this has been that international financial centers
such as Wall Street and the City of London have grown both increasingly
powerful and interdependent as they have moved markedly closer together in
relative time and space. On the other hand, those people and places that are
deemed to offer few opportunities for the generation of profit or are deemed to
be “high risk” as a consequence of poverty, and social and economic precarity,
have either found themselves excluded from the mainstream financial system or
have increasingly been forced to pay a substantial “poverty premium” for
access to financial services. Whether expressed physically in terms of the
closure of bank branches and other forms of financial infrastructure
withdrawal, or in processes of financial “redlining” poor and deprived
communities in the UK, US, and other developed economies have, in particular,
become increasingly distanced and excluded from the circuits of contemporary
finance (Leyshon, French, and Signoretta 2008).
In
recognizing the inherently (uneven) geographical nature of finance, writers
such as Dodd (1994) and Leyshon and Thrift (1997) have mobilized the network
metaphor, suggesting that the financial system be conceptualized as a network
or set of overlapping networks that exhibit varied topologies. More recently,
the concept of the financial ecology has also been proposed to capture the
institutionally and spatially variegated nature of financial systems.
Financial systems, it is argued, are composed of sets of arrangements or
ecologies that evolve in relation to, and are constitutive of, geographical
difference and are more or less reproducible over time (French, Leyshon, and
Wainwright 2011). Monetary networks and ecologies are in turn understood to be
constituted and shaped by multiple factors. In the case of housing finance,
two are of particular significance.
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First, the
power of money, or financial capital, lies in its fungibility and
mobility, particularly in relation to other economic phenomenon. The ability of
financial capital to escape problematic conditions that might curtail
opportunities for the generation of profit and to relocate elsewhere where
conditions for capital accumulation are more favorable is what David Harvey
(1982) has described as the “spatial fix.” However, by escaping one location
for another, money once more becomes locked into place and then exposed to
place- based problems similar to those which it had previously fled. Second, in
an effort to prevent destabilizing episodes of financial crisis and to ensure
its own reproduction, both in economic terms and in terms of the government of
its citizens (Langley 2008), the state has sought to regulate and marshal
financial capital, to mold monetary networks and align their spatial
topologies to state interests.
One part
of the financial system that is a particularly good illustration both of the
spatial fix and the role of the state is housing finance. It revolves around
the residential mortgage, a financial instrument which performs the same
function of any debt- based financial product: it brings the future into the
present, albeit at a price. Mortgages do this by linking savers to borrowers,
by pooling and transforming savings (liabilities) held by financial
institutions—invariably on terms that allow the saver to withdraw their money
on demand or within a relatively short period of time—into loans (assets) for
those that are willing and able to take on a long responsibility for a large
debt. For most people this will normally be the largest financial transaction
of their lives and is paid back over a long period of time, often up to 30
years (French and Leyshon 2004). Until the debt is repaid the legal ownership
of the property remains with the provider of the mortgage, but the borrower is
classified as an owner-occupier, and is thus responsible for the upkeep of the
property and benefits from any appreciation in value at the end of loan term or
prior to that if the house is sold to another buyer. However, except at times
of economic distress, when rates of repossession or foreclosure soar and draw
attention to the issue, it is often forgotten that the majority of individuals
who are officially classified as owner- occupiers do not in fact have full
legal ownership of their houses as they are still paying off their mortgage.
Acts of repossession and foreclosure by financial institutions are expressions
of the true ownership of houses with debt secured upon them (Aalbers 2009a). Therefore,
in place of the historical norm of a mass of tenants paying monthly rents to
landlords in most industrialized economies there now exists a mass of
households making monthly payments to financial institutions to repay loans
taken out to buy their home. Indeed, in the case of subprime mortgagees Wyly et
al. (2009) have gone as far as to argue that while
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local
brokers and lenders, transnational banks, investment houses and hedge funds,
worldwide MBS [mortgage-backed security] investors . . . have for the most part
replaced the slum landlords and land-installment speculators of a previous age
. . . “owners” have only the most precarious ability to “have, possess”
according to the etymology of the Old English agnian and agen. [Thus] millions of home “owners” drawn
into the subprime system are, in material and housing- class terms, barely
distinguishable from renters. In the subprime market,
homeowners
are simply paying rent to the new landlord, subprime mortgage capital. (Wyly et
al. 2009: 338)
p.362
By entering into this process, it is
clear that many people have made significant financial gains through the
appreciation of property values over time. However, as Hamnett (1999) reminds
us, the rise of homeownership has led to highly unequal outcomes. The personal
gains enjoyed by some have been offset by the losses of others, many of whom
have failed to enjoy increases in the value of their property; others have lost
money through the phenomenon of negative equity, or even found themselves
unable to maintain the regular payments required to be a homeowner, prompting
the mortgage provider to evict the “owner-occupier” and take control of the
house as a financial asset. These variable outcomes—gains for some and losses
for others—are temporally and geographically contingent, so that one’s fortune
in the housing market often depends on when and where it is entered.
But the
trajectory of the housing market and the system of finance that supports it has
implications that go well beyond the particular fortunes of certain individuals
and families. There are at least four reasons for this. First, the volume of
debt linked to housing has grown inexorably since the beginning of the
twentieth century so that it now accounts for a large proportion of the
financial system. Second, housing finance has been a highly political
phenomenon, because of the role it plays within broader economic growth models,
the centrality of housing in everyday life, and the systems of regulation that
have developed to prevent financial crisis. Third, political intervention
around housing finance has largely been informed by an implicit long-term objective
of financial inclusion, inasmuch as homeownership and the accumulation of
housing-based assets have been seen as desirable political goals. This has
helped move housing finance to the center of the financial system. However, the
longer-term political objective of building “property-owning democracies” has
been periodically tempered by disputes between the interests of borrowers and
savers, particularly in relation to interest rates and levels of inflation,
which have served to make housing finance and housing markets more volatile.
Fourth, and finally, there are important geographies of housing finance, not
least because housing ties money to place. Housing finance presents particular
difficulties for financial capital’s attempts to escape problematic conditions
and forge a new “spatial fix,” for while broader macroeconomic signals like
interest rates and economic growth can influence the price and value of houses,
these assets are also strongly relational and highly dependent on local
“spillover effects,” which means prices and values can differ markedly between
neighborhoods that are relatively close in terms of geographical proximity,
but often markedly different in their social makeup. These local fluctuations
in value between neighborhoods are often exacerbated by “financial dynamics,”
whereby mortgage finance institutions use risk criteria to discriminate in
favor of some areas at the expense of others, causing spatial volatility in
house prices and values (Wyly, Atia, and Hammel 2004), which leads to uneven
urban development and the formation of distinctive financial ecologies
(Leyshon et al. 2004).
The Great Depression of the 1930s was a
pivotal moment in the economic and financial history of the twentieth century
in general and of the United States in particular. The United States was the
locus of the international financial crisis that broke at the end of the 1920s,
and it experienced some of the worst outcomes of the ensuing Depression, so it
is perhaps not surprising that it was here that the most comprehensive overhaul
of the financial system took place. A new regulatory architecture for the financial
system was built in the 1930s as part of the New Deal reforms, the main aim of
which was to tame and control financial capital by limiting its ability to move
both systemically and spatially within the economy, and within this the
restructuring of the US housing finance market featured prominently. As
Fligstein and Goldstein discuss in detail in this volume, during a relatively
short period of time a series of highly significant regulatory reforms were put
in place—including the Glass-Steagall Act, the Securities and Exchange Act, and
the Federal Home Loan Bank Act—that sought to bring financial activities under
Federal control and would influence the direction of the US financial system
for most of the twentieth century. In this way the 1930s represented a
significant “regulatory fix” for the US financial system (Florida 1986) and one
which was to have significant impacts on the organization of housing finance
because the domestic banking and savings and loans (S&Ls) institutions
that dominated the residential mortgage market had been badly damaged in the
crisis. More particularly, the state sought to exert increased regulatory
control over the financial system in the United States, putting in place
significant institutional and spatial constraints on financial capital, in
order that housing and housing finance could be enrolled within a broader
growth model as part of the economic recovery process.
There were
four key pillars to such a regulatory fix (Ball 1990; Moran 1991). First, there
were restrictions on price competition and, in particular, the imposition of
interest rate ceilings through the legislation known as Regulation Q. Second,
deposit insurance was provided for savers and tax breaks for house buyers.
Third, new institutions were established to facilitate the flow of funds
through the housing market that enabled S&Ls and other mortgage
providers to sell on the mortgages they wrote, freeing up their balance sheets
so that they could make more loans. In particular, the establishment of the
Federal National Mortgage Association (the FNMA, but more commonly known by its
sobriquet, Fannie Mae) created a secondary market in mortgage debt that made
it possible for lenders to move assets off their books, clearing the way for
more lending (Poon
2009).
Fourth, and of
most significance in the context of the present argument, there was a
tightening of Federal and state restrictions on spatial competition. The US has
a long history of seeking to constrain the geographical mobility of financial capital
in the form of intrastate and interstate restrictions on banking and branching.
Such endeavors to “hold down” financial capital have been based on “the fear of
excessive concentration of financial power, the desire to promote close
relationships between bankers and borrowers, and the aspirations of
communities to control their economic development” (Mulloy and Lasker 1995:
255-6). The 1933 Banking Act, which amended the earlier McFadden Act of
1927, assigned the power to control national banking to individual states and
severely limited the opportunities for banks to open interstate branches and
thus operate nationally (Mulloy and Lasker 1995; Moran 1991). Such
restrictions on the establishment of interstate branch networks were not only
intended to create spatial firebreaks in the event of a financial crisis
similar to that of 1929-30, but also encourage and protect local financial
ecologies and economies. As a consequence, banking in the US remained highly
geographically fragmented and decentralized until the mid-1990s. The geographical
fragmentation of financial institutions in combination with an interest rate
ceiling served to limit competition for funds and to ensure that financial
institutions would accumulate supplies of relatively low-cost savings that
could be recirculated through the rest of the economy.
p.364
The range
and scope of the new regulations initially had the effect of reducing the power
and influence of the financial sector, which was both divided and then hemmed
in by new regulatory oversight. Rather than operating in its own interests, the
financial services sector was marshaled, not least through restrictions on
spatial competition, to facilitate economic recovery and growth, particularly
through housing finance which, as Florida and Feldman (1988) argue, was one of
the cornerstones of postwar recovery. But, by encouraging growth through the
encouragement of homeownership through housing finance, in the longer term this
also brought about the recuperation and empowering of the financial sector
through the “churn” that the housing market brings to the financial services
industry:
Owner-occupation
generates a much greater demand for mortgage finance. A dwelling in this tenure
is brought to market many times throughout its life and sold at prevailing
market prices. Much of the resale value each time is financed through a new
mortgage, so in this tenure mortgage demand does not depend on the rate of new
house building. (Ball 1990: 15)
As a result, although Keynes had called
for the euthanasia of the rentier—generally read as code for financial capital
in general—and Keynesian ideas became increasingly influential on both sides
of the Atlantic following the crash of the 1920s and the Depression of the
1930s, by the 1950s the financial community was sufficiently emboldened to
begin mobilizing against the New Deal regulation and to look to open up new
freedoms for the movement of money and profit-making activities.
Pressure
to deregulate came in the form of two developments that were to become motifs
of the financial services industry’s efforts to avoid regulatory oversight: geographical
relocation and financial innovation. By the early 1960s the restrictions of
Regulation Q had already encouraged many holders of US dollars to invest their
money in overseas banks, creating the new and highly important pool of offshore
dollars known as the Euromarkets, where interest rates on dollar deposits were
higher than was permitted in the United States. The circulation of large
volumes of dollars outside the US heralded the winding down of the Bretton
Woods agreement that had emerged at the end of World War II and which was
designed to establish an international financial framework to facilitate stable
multilateral international trade, extending the control over financial capital
into the global financial system. It acted as an international counterpart to
the New Deal and similar forms of financial regulation in other industrialized
economies (Leyshon and Thrift 1997). These developments served to shift power
away from borrowers and toward savers who could now seek a market price for
their money, which eventually led to the repeal of Regulation Q and signaled
the beginning of an era in which the interests of savers and investors would
take precedent over those of borrowers and debtors. In addition, in the
domestic sphere banks increasingly sought to work around restrictions on
interstate banking and competition through the formation of bank holding
companies in the 1940s and 1950s (Mulloy and Lasker 1995). It is to this new
financial era that we now turn.
p.365
Despite the pressures on the housing
growth coalition, it continued to play a key role within US macroeconomic policy
during the post-war period as interest rates remained low and demand for
housing high (MacDonald 1992). However, the growth policy began to break down
in the 1970s as inflation increased, became more pervasive and was accompanied
by much lower levels of economic growth, increasing levels of unemployment.
The emergence of “stagflation” was the catalyst for the rejection of the tenets
of Keynesianism and a turn to the ideas of monetarism and the broader political
project of neo-liberalism. From the mid-1970s onwards governments began to
reassert the value of money and the power of investors and savers over
borrowers by raising interest rates to record levels to bring down inflation.
This period marks a significant break in the history of financial capitalism,
described by Dumenil and Levy (2004) as nothing less than a coup in
the interests of financial capital, and identified by others as the beginning
of the era of financialized capitalism (Foster 2007). By making the fight
against inflation a primary macroeconomic management goal, governments became
committed to the preservation of invested wealth over the long term, while the
mobility of capital and the promotion of free trade under neo-liberalism
ensured that financial capital would have no constraints in seeking out the
highest returns on investment.
Increasingly
able to escape the spatial and institutional constraints both of Bretton Woods
and the New Deal financial reforms of the 1930s, financial capital became more
geographically mobile and supranational, a shift underpinned by growing levels
of financial innovation and the disintermediation of credit creation (French
and Leyshon 2004; French, Leyshon, and Thrift 2009; Leyshon and Thrift 1997).
And, in turn, the explosion of new financial instruments and market
arrangements offered new solutions to the pressing problems unleashed by the
crisis of postwar Fordism, not least those of faltering economic growth and
deindustrialization. The new world of deregulated finance provided the means by
which such problems might, as Harvey (1989, 2010) has suggested, be displaced
in time and across space. New credit and debt instruments were developed that
proffered ever more complex and sophisticated ways in which the future might be
brought into the present, as well as transforming previously spatially fixed
assets such as mortgages into liquid and tradable financial assets through the
process of securitization (Aalbers 2009a; Gotham 2009). The enormous
opportunities afforded by the housing market for financial “churn” and for the
identification of “new territories and spaces as sources of investment and
profit” (Gotham 2009: 368) ensured that mortgage markets would play a central
role in a new era of financialized capitalism.
From the
mid-1970s up until the crisis of 2007-9 mortgage markets played three crucial
socioeconomic roles that helped underpin the rise of financialized capitalism.
First, residential property ownership became, in the wake of efforts to roll
back the postwar welfare state, a central plank of the new neoliberal regime of
asset-based welfare (Sherraden 2005). By taking a firmer line since the 1970s
on organized labor, as part of a broader strategy to combat inflation,
governments first slowed and then froze the real increase in incomes, leading
to what Harvey (2010) has described as three decades of wage repression. As he
argues, by holding down incomes in real terms individuals and households have
increasingly had to have access to credit and debt to compensate, and, during
the 1980s, the deregulation of the financial system encouraged financial
institutions to compete to extend credit to consumers. In particular, by
borrowing against the appreciation of the value of residential property, and
thus bringing forward the projected future gains from the sale of an asset
that the “home owner” has yet to own, householders in the US, UK, and other
financialized economies have increasingly mobilized property to offset declines
in real wages and living standards (Leyshon and French 2009; Montgomerie 2009).
Second,
just as householders have increasingly turned to property and mortgage markets
as vehicles for bringing forward future income so, in a parallel process,
residential mortgage providers have been at the forefront of efforts to
securitize financial assets. Securitization is the process by which financial
assets such as mortgages are transformed into tradable securities that can be
sold off to investors (Leyshon and Thrift 2007). Securitization has not only
allowed providers to bring forward future income streams from mortgage
contracts, leading to a significant increase in the turnover of mortgage
business and the respective fees and profits that can be skimmed off, but, as
Aalbers (2009a) has argued, has also led to a radical separation of investment
from place. As a result a growing spatial contradiction has emerged between, on
the one hand, housing markets that have largely remained local and regional in
nature, reflecting what Gotham (2009: 357) has described as the “local social
relations and networks of real estate activity that generate knowledge about a
home and its distinctive characteristics,” and, on the other, mortgage markets
that operate through much longer, increasingly transnational financial networks
(Langley 2008). The stretching of housing finance networks and the decoupling
of housing markets from circuits of investment is significant, for as Wyly et
al. (2009: 338) argue, it “breaks the ethical and economic interdependencies
between savers, lenders and borrowers” that previous rounds of spatial
regulation had sought to encourage. This was manifest in the 2007-9 financial
crisis in two important respects. First, growing moral hazard in the housing
finance market as the dilution of existing monetary networks acted to greatly reduce
the incentives for mortgage originators to monitor and control for the risk of
default. Second, it has also shaped attitudes to forbearance, with levels of
tolerance for nonperforming loans declining as responsibility slips from the
lending institutions that organized them to other economic actors that are
freed from any bond of social obligation, and who view such loans purely as
assets on a balance sheet.
Competitive
deregulation during the 1980s encouraged the spread of securitization, as it
enabled financial institutions to turn over business more quickly, and in so
doing facilitated a greater link between retail and wholesale finance.
Financial markets took their inspiration from the model introduced many decades
earlier by Fannie Mae. This model became generalized as more mortgages were
securitized and sold off in capital markets, which accelerated still further
the turnover of capital and made more money available to be advanced as
mortgages. The rise of residential mortgage-backed securities (RMBSs) was a
highly significant moment in the evolution of the financial system, as it
brought the world of the everyday much closer to that of globalized finance
(Pryke and Whitehead 1991; Langley 2008). Thus, whereas in the past the
promotion of housing could be seen as being part of broader national economic
and political strategies of growth and inclusion, the rise of RMBSs was
symbolic of a reduction in social commitment to housing and its subjugation to
the vagaries of investor sentiment and the ebbs and flows of global finance.
MacDonald (1996) suggests that in the US RMBSs helped detach housing finance
from its social obligations and was restructured in favor of reducing public
spending, ensuring that liabilities could be sold off to investors. In doing
so, she argued, this would favor a white, suburbanized market, with less
affluent borrowers increasingly becoming excluded from housing finance.
The
breaking of the subprime crisis in 2007 illustrates that MacDonald was wrong
about the financial system retreating to a middle-class heartland but, as we
shall argue in the next section, she was right about the ways in which racial
inequities mark housing finance. A key part of the process of risk abstraction
at the heart of the RMBS is the shift away from a dependence on retail deposits
for funding mortgage provision, known as the “originate and hold” model, toward
a system described as “originate and distribute,” which saw lending
organizations draw on funds from the capital markets to make loans, to then be
packaged into securities, sold off to investors, and so moved off balance
sheets. This enabled smaller and nimbler financial institutions with relatively
low levels of capital to enter the mortgage market than was hitherto possible,
so increasing levels of competition. All of this was in place in the United
States in the 1980s, and was gradually adopted in other economies such as the
United Kingdom (Wainwright 2009). The growth of RMBSs as a means of funding
mortgage finance accelerated during the 1990s, partly as a result of the
emergence of what, particularly from the perspective of the 1970s, appeared to
be a macroeconomic nirvana: the NICE (noninflationary continuous expansion) or
“Goldilocks” (as in “just right”) decade. Policymakers began to believe that
inflation had been conquered, and interest rates fell to historically low
levels. This made repaying mortgages easier for more people and fuelled a property
boom as readily available credit increased the demand for housing. Thus, the
residential mortgage sector created the conditions for its own expansion
because “almost everyone could now afford a mortgage loan” so “the expansion of
the mortgage market resulted in higher prices forcing people to take out ever
bigger loans” (Aalbers 2009a: 286).
However,
while the low interest rate environment appeared to be favorable for borrowers,
it was less good news for investors, and as a result placed a premium on high-
yielding investments for the pools of money circling the globe, which were
being added to by the growth of new sovereign wealth funds from oil-rich and
newly emerging countries that were investing their earnings outside their own
economies in order to “sterilize” them and prevent domestic inflation
(Helleiner 2009). One particularly important type of high-yielding investment
was the subprime market. Subprime mortgages were attractive investments because
they offered a higher yield than normal mortgages due to the higher risk
attached to them. As a consequence of the assurances made by investment banks
that, through innovations like the waterfall structure (Wainwright 2009), it
was possible to separate out and control risk, investment products based on
subprime mortgages became akin to the holy grail of investment finance: high
yield but low risk.
Thus, the
third and final way in which the system of housing finance in the US helped to
underpin the emergence of financialized capitalism was by providing a “spatial
fix” (Harvey 1982; Wyly et al. 2004) to the declining yields by being willing
and able to go beyond the established suburban geographies that had provided
the feedstock for the mortgage market since the 1930s (Florida and Feldman
1988) and, in particular, by opening up territories that had previously been
seen as too risky for mainstream financial services. In identifying new
opportunities for the extraction of profit, the growth of subprime made a
virtue of the highly uneven social and urban geography produced by the previous
model of housing finance (French et al. 2009; Wyly et al. 2004), which had been
seen to mark a boundary to the formal financial system. More particularly,
subprime mortgages were taken out in new urban spaces, be they inner-city areas
or in speculative developments in what the industry described as the “sand
states” (Lewis 2010)—and in California and Florida in particular—where the
housing booms of the 1990s and 2000s were strongest, and where many
middle-income and even high-income borrowers took out subprime mortgages to be
able obtain larger than normal loans, “enabling the purchase of larger homes or
homes in more desirable areas” (Immergluck 2009: 342; Burton et al. 2004).
p.368
In 2007 the contradictions of a subprime
mortgage model that was built on cheap credit and a growing tolerance of risk
finally began to become clear as growing numbers of householders who had taken
out subprime mortgage loans became increasingly unable to make their repayments
following a sharp uptick in US interest rates. The subsequent drop in mortgage
income reduced the returns that investors in mortgage-backed securities could
now expect to receive, calling into doubt the true value of such investments
and sparking panicked selling of RMBSs and associated CDOs. However, viewed
from a regulatory perspective, the breaking of the subprime crisis can be seen
as a logical outcome of a long-term process of facilitating more competition
and innovation within the financial services sector. In the early 1980s new
financial regulation was implemented in an attempt to transform the mortgage
sector and specifically to liberate deposit-taking institutions from interest
rate controls. And in 1994, under the auspices of enhancing the global
competitiveness of US banks, promoting the spatial diversification of loan and
asset portfolios, and enhancing consumer choice, the Riegle-Neal Banking Act
removed the restrictions on spatial competition (Dymski 1999; Mulloy and Lasker
1995). These reforms were intended to help local banks and S&Ls, which
were particularly vulnerable to the tendencies toward financial innovation and
disintermediation that had begun in the 1960s.
As
MacDonald (1992: 126) argues, the banks and S&Ls were able to mobilize
support for these reforms by appealing to consumer groups who argued that the
prevailing regulatory system penalized savers, and “small” savers in
particular, who were unable to find a “work-around” to the existing interest
regulations in the way that more affluent and financial sophisticated investors
could. At the same time the 1977 Community Reinvestment Act (CRA), which
expressed concerns about financial exclusion and sought to ensure fair and
equal treatment in the provision of loans to individuals, households, and
business in low-income areas of the US, was subsequently strengthened by the
Financial Institutions Reform Recovery and Enforcement Act (FIRREA) of 1989
(MacDonald 1992). The CRA was a sister act to the Home Mortgage Disclosure Act
(HMDA) of 1975, which made it possible to obtain the geographical data on the
loans made by banks and other lending organizations. This legislation was prompted
by concerns over redlining, and a growing recognition of the relationship
between financial discrimination and the problems associated with the uneven
development of US urban areas. It recognized that the “housing home-finance”
growth coalition had exclusionary tendencies. While it had brought benefits to
a core majority, there was a periphery that was excluded. These groups would
later be identified by the financial services industry as prime and subprime
customers, with distinctive geographies and ecologies.
Although
both the CRA and the HMDA have been unable to prevent the persistence of social
and geographical inequalities in the housing market, they did seek to prevent
egregious discrimination in terms of access to housing finance. However, in the
wake of the subprime crisis the CRA in particular was singled out for criticism
by some neoliberal commentators as the cause of the problem by forcing banks
and savings and loans institutions to override good lending practice by
advancing loans to borrowers that were simply incapable of paying the money
back. This claim has been forcefully dismissed by Aalbers (2009b) among others,
while Wyly et al. (2009) have argued that the overwhelming motivation for the
creation of the subprime market was the extraction of profit and, more
specifically, the exploitation of what they, following Harvey, describe as
class-monopoly rents: that is, an exploitation of the structural power that
financial institutions providing housing finance enjoy over mortgagees, especially
those socially and economically marginalized, by virtue of the former’s
privileged position as the ultimate owners of property.
More specifically, Wyly and
colleagues have mounted a powerful critique of what they describe as the “flat
world” defense of subprime: “The spatiality of subprime credit is assumed to be
a Pareto-optimal response to the geography of demand among consumers unable or
unwilling to meet the standards for the prime market. Put simply, after
controlling for consumer qualifications, the subprime world is [assumed to be]
flat” (Wyly et al. 2009: 334). Conducting a forensic analysis of subprime
originations in the US, Wyly and colleagues highlight the highly geographically
and socially uneven landscape of subprime lending and, in particular, the fact
that subprime lending was disproportionately concentrated on “racially and
ethnically marginalized people and places” (Darden and Wyly 2010: 425, emphasis
in original).
Wyly and
colleagues acknowledge that subprime was invented precisely to provide housing
finance to people and places that were previously marginalized. However, even
after controlling for demand-side factors such as income levels and debt
leverage their analysis found that ethnic minorities were much more likely to
have a high-cost, subprime loan than whites with identical characteristics. In
fact, “African Americans and Latinas/Latinos approved for credit were still
twice as likely as otherwise identical non-Hispanic whites to wind up with
high-cost loans in 2006” (Wyly et al. 2009: 349). Moreover, in many urban areas
such inequities were even more pronounced. Figure 18.1 shows, for example, that
in metropolitan counties of the Midwest, African- Americans were four times
more likely to have a subprime mortgage than whites, again with identical
financial characteristics. While this racial disparity might be attributed
partly to the scale effects of regional racial composition—one in five
African-Americans live in the Midwest, for example (Darden and Wyly
2010)—Darden and Wyly argue that the severity of such disparities amounts to a
racial tax on African- Americans and Latinos: “It is a form of White privilege
when a White applicant receives a competitively priced, fairly structured prime
loan (and escapes subprime exploitation) when the applicant’s financial
qualifications are no different from Blacks and Latinos targeted for subprime
loans” (Darden and Wyly 2010: 426). They conclude that the subprime mortgage
market has “flourished by exploiting the interdependent American inequalities
of race, ethnicity, class, and place” (Darden and Wyly 2010: 425), and in
particular by the implicit or explicit targeting of African-American and Latino
communities by subprime mortgage providers and brokers even when many such
applicants would qualify for better-priced prime mortgages. Rather than
ameliorating the disparities of the post-1930s mortgage market model, subprime
lending and the risk-based pricing on which it is founded have, they argue,
simply transformed the “old inequalities of exclusion” into “new inequalities
of stratified inclusion” (Wyly et al. 2009: 339). Moreover, in seeking to
understand the highly racially striated landscape of the US mortgage market
they stress the crucial role of the social relations of profit, property, and
ownership rights, as it is such social relations that determine the ability of
financial capital to produce distinct local credit environments or financial
ecologies from which class-monopoly rents might be extracted.
p.372
Since the mid-1970s housing finance in
the United States has undergone a radical shift in the ways in which it
operates and is organized, migrating from a largely regionalized, “originate
and hold” model of mortgage provision, to an “originate and distribute” model
in which mortgages are securitized and traded in transnational financial
markets. Securitization and risk-based pricing have, in turn, allowed for the
creation of a new, subprime mortgage market, one which promised the
significant extension of property ownership in the US, based on the
recognition that there were limits to the earlier housing-based growth model,
both politically and geographically. However, the growing problems that have
beset the US subprime sector since 2007 and the ensuing financial and economic
crisis that resulted from rapidly rising rates of subprime mortgage foreclosure
serve to illustrate the continuing social and spatial disparities that mark the
provision of housing finance.
On the one
hand, the story of the securitization of residential mortgages and of the
growing transnational trade in RMBSs is an exemplar of the ways in which
finance can enable the extension of social relations across time and space. As
Gotham (2009) makes clear, securitization holds out the promise of the
transformation of the residential mortgage—a spatially fixed, messy, and
illiquid commodity—into a tradable, mobile, and liquid financial asset. The
complex layers of mortgage securitization, and the processes of credit scoring
and bond rating upon which securitization and the “originate and distribute”
model rely, represent an endeavor to annihilate space through time—providing
innovative new ways in which property futures (for example, calculations of the
likelihood of future monthly mortgage payments, and of future property values)
can be made present and thus investment be decoupled from place.
On the
other hand, while the new model of housing finance has enabled the channeling
of investment into previously marginalized spatial markets, the transformation
of the local social relations of housing and of mortgage provision into
transnational circuits of mortgage capital in the pursuit of profit has failed
to address previous rounds of uneven urban development. Rather, as Darden and
Wyly (2010) illustrate, it has produced new, highly racialized landscapes of
social and spatial inequality. The story of the rise and fall of the US
subprime mortgage market serves to illustrate that the work that finance
carries out in bridging time and space must be understood in the context of a
wider web of power relations that are highly unequal. In this chapter we have
suggested that the trajectory of US housing finance has been shaped by a
broader political struggle between capital and the state, between borrowers and
savers, between debtors and investors, and between different conceptions of
growth and its outcomes. This struggle has had significant geographical
outcomes, not least because geography was seen to be part of the solution to
the crisis of the 1920s and 1930s, and it was financial capital’s ability to
escape its geographical ties that helped to undermine the New Deal system of
regulation, while the subprime crisis was founded in distinctive geographies,
and in particular in those marginal and excluded spaces of the mainstream
financial system.
p.373
Notes
1. Mortgage
is a word of French origin which literally means dead pledge: if the mortgage
is repaid then the debt is “dead," but if not then not only does the
mortgagee lose their property but they also become “dead" to the lender
(Dunkling and Room 1990: 68).
2. In
making this narrow economic argument we acknowledge that it does not explain
the initial emergence of commodity money, which was strongly connected to the
cultural significance of precious metals such as silver and gold, which is
explained partly by their durability and malleability.
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