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America banks too much on bank housing policies

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POSTED January 7, 2010 2:18 a.m.
The major banks – the real players in shaping America’s housing market – should not be allowed to return to their old ways.

Liar loans and no down loans with artificially low payments for the first three years was not the real root of the housing bubble and subsequent burst. It was the banks’ collective attitudes in shaping the market.

Developers essentially build what the banks finance which means the vast majority of new home buyers buy what the banks dictate.

Bank of America – in a late 1990s white paper on California development patterns – noted that lending practices fueled the onward march of suburbia as they favored tract homes over investing in already developed city cores where housing projects would involve investing blighted areas or on infill parcels. That subsequently overextended our infrastructure that runs the gamut from freeways to even sewer and water lines. The standard five homes to an acre are twice as expensive to serve as 10 housing units to an acre. At the same time a suburbia development pattern in growing communities like Manteca make mass transit and even walking to access community amenities difficult.

How the banks dictate development is through general investment policies. Major banks, for example, want tract homes to have a garage – not a car port – even though a car port would suffice especially given that most people don’t park vehicles in the garage. At the same time, it would reduce the cost of housing.

Of course, banks will tell you they adopt policies because they want to invest in tract developments that have the highest probability of selling. It makes sense since they are on the line for the loan and are even party to most subsequent resales of those homes. Eventually, it becomes a self-fulfilling prophecy.  Close to 90 percent of all housing built in Manteca since the late 1960s are basically the same thing – single family homes plopped down in the middle of a lot. The only difference is size.

Even the remaining mix of apartments, duplexes, and even mobile home parks isn’t really much of a departure.

It is true that local jurisdictions often codify the market by requiring single family homes to have garages and making standards regarding everything from setback to footprint coverage on a lot to essentially fit only one type of housing that people can buy that isn’t a townhouse or condo. But then again, they’re just following the lead of the banks.

Banks – instead of encouraging developers to pursue other housing types – kept feeding the monster. When less and less people could afford the homes, the banks didn’t modify their lending rules for housing development designs to try and bring costs down so more people could afford to buy them and create more business for themsleves. Instead, they modified the loan process to the point that people who couldn’t afford to buy homes at the prices they reached or couldn’t prove adequate incomes were able to continue buying the preferred bank housing style.

Looking back, wouldn’t it have been nice if banks – who obviously realized builders couldn’t secure qualified buyers for the same-old tract home approach that they were McSizing in size and profitability – had insisted on other approaches to at-market housing.

Maybe everyone wouldn’t have been buying a McMansion but the housing market – and economy - would have been sustainable.

Back in the days when thrifts and credit unions made home ownership possible for many in the working class, the homes built often reflected individual needs and weren’t to  any standards.  People built what they needed and could afford which is why homes of yesteryear – or even just 30 years ago – were much smaller. But while thrifts, credit unions, and community banks are much more personal in nature, monolithic national banks aren’t.

In the truest sense, the majority of homes in America today are the product national banks’ interpretations of the market. And like many things where everyone ultimately is forced into the same game because there are no other options it becomes a self-fulfilling prophecy that everyone needs – and wants – a McMansion.

Banks created a situation where the only way to correct things is for massive bloodletting. That is now happening with foreclosures. It isn’t right, though, that the institutions that essentially created the housing mess are allowed to continue doing business as usual after being propped up by taxpayers.

It adds some validity to a point being made by some that allowing more homes to be built is only depressing prices. A direct correlation is true only for the segment of housing that is being duplicated – namely homes built in the past 10 years or so. Even so, it is a heck of a point.
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