Federal Restructuring of Fannie and Freddie Ignores Underlying Cause of Crisis

I agree with Chris that a demographic structural change is afoot and that it is a primary cause of the real estate meltdown. I would, however, like to offer a second structural change as a primary cause: cheap, abundant and subsidized fossil fuel energy (particularly liquid petroleum). Indeed, it is the underpinning of the US's economy. As goes energy prices, so goes the economy and hence real estate. This structural change has even more profound implications than demographics. I believe it will be the defining issue of the 21st Century. It will put an end to the out-migration from urban cores, the predominant development pattern for much of the last century. I don't believe that this will be such a bad thing though. A doubling of suburban densities from 2 1/2 DUs per acre to 5 can create the kinds of walkable communities that have demonstrated their resilience during the real estate meltdown. It is the only sustainable way forward.

I agree that the market has fundamentally changed, and we need an avenue to balance demand with supply with regards to urban development. Relying on federal government entities for 90% of our real estate financing is a huge problem. What we need to do is create new models that distribute financial risk and forge a stronger relationship between customers and investors. If we could find a way to increase true community investment, for example, we can start to build diversity instead of relying on Fannie and Freddie to wield one version of what urbanism should and probably will look like in the future.

Since I have been an ULI member for 30 years and the organization is dedicated to open exchange, I will respond to these comments...even though a couple of them verge on being rants. Mr. Knight is from a metro area that is in the middle of the mortgage maelstrom so it is to be expected that it is hard for him to understand the structural forces that undermined the housing industry from all of the debris flying around him. Plus there are only a few walkable urban places in metro Phoenix so far and those that are there are in a fledgling phase. But there are some hopeful developments, though with many adolescent learning curve problems, in Tempe and downtown, especially the major move of most of ASU's expansion downtown via the first phase of the light rail system that opened a couple years ago. Mr. Knight will see many more examples of walkable urban development over the next cycle in Phoenix and I hope he makes a lot of money pursuing them. Mr. Skelley, I did not know of the "radical TOD developer" mentioned in your link and I disagree with some of his economic assertions but he is on the right path from a development perspective. LA will probably see more transit oriented than any metro area in the country, thanks to the explosive construction of rail transit over the last 10 years and the Measure R funding for future expansion. As the most dense major metro area in the country, TOD will be a relatively easy fit with the existing land use patterns, combined with the historic streetcar suburb layout of the many suburban towns from the late 19th century. LA will economically benefit from this rail transit investment over the next generation every bit or more than the freeway investment of the late 20th century. I certain agree with Mr. Freedland's comments about the other causes of the mortgage meltdown...there are always many causes of any event as broad and deep as the financial crisis. However, I always look for the underlying, fundamental market-based reason for changes. My research and others have shown the fundamental reason for the collapse is the structural shift in the market, only comparable to the last structural shift, which took place after WWII. See my personal web site (www.cleinberger.com) or my Brookings web site (www.brookings.edu/walkableurbanism) for my writing on this matter. Many of the very people Mr. Freedland mentioned (school teachers, cops and nurses) were suckered into inadvisable mortgages but mainly in "drive until you qualify" fringe locations, which is where most of the collapse occurred. I completely agree with Mr. Diamond on what needs to be done with the FMs. I did not mention these points since posting a blog limits you to what you can comment on. All of the issues raised by Mr. Diamond exacerbated the crisis caused by the collapse of the fringe drivable housing market...and it is not to say that some inner city housing, particularly the poor, did not get trapped in the collapse as well, but the majority was on the fringe. As I write this, many metro area housing markets are beginning to unfreeze from the crisis...lead by rental housing. It is hoped that ULI developers will have learned the painful lessons from the past four years and not go back to "business as usual". The market, lead by the Millenials, are demanding something very different from us...let's not do the same thing and expect different results. Chris Leinberger

This article is completely inaccurate and in fact nonsense.

You will get a lot of push-back on this argument, saying that lack of walkable developments was one more symptom, not the cause. For another look, see my recent Q&A with this radical TOD developer, discussing to what degree was the collapse of the sprawl housing market responsible for this recession. In The Architect's Newspaper: http://www.archpaper.com/e-board_rev.asp?News_ID=5115.

I agree the future of development will be in walkable, people friendly, mixed use, urban areas. However, the crisis was not primarily caused by a lack of smart urban development. Unqualified buyers, teaser rates, poor underwriting, greed on the part of builders, buyers and lenders...all were the forces which caused the housing market to collapse. I recall being at the Pacific Coast Builder Conference and confronting one of the senior executives from Countrywide when I said, "You are lending to people who will not be able to make their payments. School teacher, cops and nurses are being sucked in to buying homes they cannot afford." The execs response, "We're just trying to service our customers." Had the buyers described in the article above bought "as much house as they could afford" in an urban area, they still would have defaulted with their no-doc loans, teaser ARM's and the like. Certainly, the future of housing should be higher density, less travel, live-and-work, etc., but to blaim the current crisis on community design seems most inaccurate.

As much as I respect your expertise, to ignore the lack of underwriting, accountability and "skin in the game" in the mortgage and MBS market is just silly. Those were the major causes of the mortgage meltdown. I would agree that housing choices are changing and that we all have to adapt and change the product, but phasing out Fannie Mae and Freddie Mac--the envy of the rest of the world--is no solution. How about just phasing out the "implicit" federal guarantee and allowing Fannie Mae and Freddie Mac to become what they purported to be--well-run private companies that served as intermediaries between originators and MBS investors? Obviously, both companies would have to return to rational underwriting. Phasing them out will only result in widening the gap between the big banks and the regional and community banks by enhancing the advantage of the big banks. What do you think Chris?