The Sociology and Geography of Mortgage Markets: Reflections on the Financial Crisis

Traditionally, the mortgage market has been the domain of economists. Other social scientists, most notably geographers, sociologists and political scientists, have studied it, but generally they were considered to be outside the mainstream and their work has largely been ignored by economists. There have been times when geographers and sociologists have contributed greatly to the understanding of mortgage markets. Usually this was at times of turmoil and change, as well as when exclusion in these markets was an important issue. One explanation for this may be that mainstream economics, with its obsession with equilibriums, has trouble understanding change. As the economist Thorstein Veblen observed 75 years ago: ‘The question is not how things stabilize themselves in a “static state”, but how they endlessly grow and change’ (Veblen, 1934: 8). It is here that some forms of heterodox economics shake hands with sociology and geography. It is, to some degree, also the difference between ‘clean models’ and ‘dirty hands’ (Hirsch et al., 1987): while mainstream economics prefers ‘clean, abstract, and parsimonious modeling’, sociology and geography: produce empirically rich accounts of concrete and socially situated economic processes; they each emphasize the essential diversity of economic phenomena, favoring context-rich explanations in which history is taken seriously; they each attach greater significance to plausibility and explanatory power than to elegance and predictive power; and they each strive to explain, and often improve, the characteristically messy economic worlds that they encounter (Peck, 2005: 132). This is not, as some may interpret it, a clash between quantitative and qualitative methods. Although clean models are generally very quantitative (and often have to do more with mathematics than with statistics), not all quantitative work fits the idea of clean models. Indeed, a lot of sociologists and geographers have been getting dirty hands by presenting both quantitative and qualitative research on issues like redlining and predatory lending. Many of them, in particular in the US, have also got involved with local communities and the wider national community reinvestment movement (e.g. Squires, 1992). Among the various non-economists that have worked on mortgage markets, the work of David Harvey from the late 1970s and early 1980s is probably best known (e.g. Harvey, 1977; 1985). It forms part of a broader interest among sociologists, geographers, political scientists and urban planners in redlining and related forms of discrimination in mortgage markets from the 1970s onwards (e.g. Bradford and Rubinowitz, 1975; Marcuse, 1979; Shlay, 1989; Wyly and Holloway, 1999; Gotham, 2002; Aalbers, 2007). (There is a lot more work by social scientists on homeownership, but only a small part of this deals primarily with mortgage markets.) Presently we are living through another episode of turmoil and change in mortgage markets, and again the work of geographers and sociologists sheds new light on what is actually happening there. In that sense, this symposium on ‘The Sociology and Geography of Mortgage Markets’ is part of a long tradition. The first article following this introduction, by Hernandez (2009, this issue), is most strongly embedded in this tradition, as he not only presents a historical perspective dating back to the origins of redlining (see also Jackson, 1985; Hillier, 2003; Crossney and Bartelt, 2005), but also discusses the work of David Harvey and looks at exclusion and discrimination in the mortgage market through redlining and predatory lending. Currently, sociologists and geographers are interested in another crisis — a crisis that started in the mortgage market, but has spread to other financial markets and to other parts of the economy. This symposium will not so much focus on how this crisis has spread, but will instead look at the mortgage market itself. Changes in the mortgage market have a central place in all the articles. Some present evidence of the changes that have resulted in what is often called the subprime mortgage crisis; others are more focused on some of the structural changes in the mortgage market than on the crisis itself. The name ‘subprime mortgage crisis’ is misleading, not only because the problem has spread throughout and beyond the mortgage market, but also because the problems did not start with subprime mortgages. Subprime loans have been one important ingredient in the present crisis, but other ingredients go beyond subprime lending. The problem has many roots that can be discussed in many different ways. Here, I will briefly address it as a combination of a number of interrelated causes, including: (1) deregulation and re-regulation, (2) financialization and globalization, and (3) bubbles and wrong incentives. Different media and most economists have focused mostly on the latter, but one cannot explain what went wrong without paying attention to the first two, as they, together, explain the context in which bubbles could develop and how the wrong incentives were created. I do not present a full theory of the crisis here — an introduction to a symposium is not the place for this, although it is the right place to lay out the framework within which the contributors move and within which we have to look not only for the causes of the crisis, but also for the solutions to it. Land underlies all real estate. The use of land, the desire to acquire it, and the need to regulate its transfer were among the fundamental reasons for the development of states. But land is also at the base of both power and wealth. Because land transaction administration and land surveys established the security and value of land, land not only became a secure investment, but it also became possible to borrow money based on the value of one's land. This is the basis for the formation of mortgage markets. A mortgage is ‘a conveyance of an interest in real property given as security for the payment of a debt’ (Dennis and Pinkowish, 2004: 386); it ‘gives a lender contingent property rights over an asset of the debtor, and in the event of default the lender may activate those rights’ (Carruthers, 2005: 365). Although the mortgage system has changed tremendously throughout the centuries, and continues to change, the idea of the mortgage loan is still the same as it was thousands of years ago: the state secures property rights, including land ownership and homeownership, and owners can get relatively cheap loans (i.e. low interest rates) because in case of default the lender can take possession of the property. To cut a long story short: no state regulation, no property rights, no mortgage market. In other words, regulation is a necessary component of (semi-) capitalist societies (Polanyi, 1944). The mortgage market is the outcome of an institutionalization process and a large part of this process is finding ways to stabilize and routinize competition, which is an inherently political process (DiMaggio and Powell, 1991; Polanyi, 1992; Fligstein, 2001). Thus, mortgage markets are not only shaped and reshaped by mortgage lenders, but also by state institutions. Immergluck (2004) speaks of ‘the visible hand of government’ as many of the mortgage market institutions of today were designed by government and its agencies. Mortgage loan securitization, to which I will turn soon, is essentially an invention of government and government-erected institutions like Fannie Mae and Freddie Mac. The article by Gotham (2009, this issue) and to a lesser extent those by Wyly et al. (2009, this issue) and Newman (2009, this issue) in this symposium show how the US mortgage market is politically constructed and reconstructed. They show how the state has been instrumental in designing and successfully implementing secondary mortgage markets and the use of securitization, but also how it has enabled subprime and predatory lending. As the articles by Wainwright (2009, this issue) and Aalbers (2009b, this issue) show, American conceptions of risk and securitization not only needed to be adapted to fit European markets, but European mortgage markets also needed to be re-regulated — and not just deregulated — to enable securitization. The banking crisis of the late 1980s was a decisive moment that opened up the mortgage market for widespread securitization, due to the new regulatory framework laid out by state institutions, e.g. in the Financial Institutions Reform, Recovery and Enforcement Act of 1989 that indirectly forced many lenders to convert from portfolio lending to off-balance-sheetlending. Deregulation also removed the walls between the different rooms of finance, thereby enabling existing financial firms to become active in more types of financial markets and providing opportunities for new mortgage lenders. Many of these new ‘non-bank lenders’ had different regulators than traditional lenders and were also contained by other, i.e. weaker, regulatory frameworks, and could therefore provide riskier loans without being monitored. In addition, it is not always clear which regulator watches what, and even in cases where this is clear, there is no guarantee that regulators will actually execute their regulatory powers, sometimes due to a lack of interest and sometimes due to a lack of manpower. Some similar re-regulation took place in the UK, as described by Hamnett (1994) and Wainwright (2009). In addition, global regulation by the Basel Committee on Banking Supervision in the so-called Basel Accord I (1988), established capital requirements for banks that encouraged them to place mortgages off-balance sheet, thereby stimulating securitization. The Basel Accord II (initially published in 2004 and to be fully implemented by 2015) has repaired this flaw, but with its Anglo-American bias it now stimulates risk management techniques that could lead to an increasing use of credit scoring and risk-based pricing. In sum, the separate mortgage market of US Fordism (Florida and Feldman, 1988) with its specialized, often regional, portfolio lenders working with an ‘originate and hold’ model has been transformed into a neoliberal, financialized mortgage market characterized by a wider diversity of nationally operating mortgage lenders, including different types of banks and non-banks, which — since they are working with an ‘originate and distribute’ model — increasingly rely on the secondary market for equity and which, in their search for yield, have expanded both lending and securitization beyond the borders of what was sensible. The expansion of the mortgage market is not so much meant to increase homeownership, but to further the neoliberal agenda of private property, firms and growing profits. Few mainstream economists had expected a crisis in the mortgage market. Some, most notably Robert Shiller, had argued that there was a housing bubble that would explode one day, but few realized the mortgage market was sick. In fact, most economists saw a blossoming market, thanks to financial liberalization. Several sociologists and geographers, but also a number of heterodox economists, had been warning about what was wrong with the mortgage market. For more than a decade some had been working on subprime and predatory lending and had suggested problems were on the rise. Defaults and foreclosures were rising year after year and, so they argued, would continue to rise due to the way the mortgage market was organized. The crisis of 2007–8 came as no surprise to them, although it is fair to say that probably none of them had expected this crisis would threaten to bring down the entire financial A crisis was also no surprise for another financial the of as an of financial since and and financialization are not the same but will often them globalization, and globalization, in in part place through is a of in which increasingly through financial than through and The financialization of mortgage markets that not just but also become as It is by the securitization of mortgage but also by the use of credit scoring and risk-based The mortgage loan was in the US by and institutions and one the Mortgage known as Fannie the Mortgage known as Freddie and the Mortgage known as of these is beyond the of this introduction (see and 2002; 2003; but briefly they they a in mortgage markets throughout the US into one mortgage market, and were instrumental in implementing and other important changes in mortgage secondary mortgage markets, credit scoring and risk-based pricing. 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The of mortgage markets is not only a of the financialization of and markets, but also of the of mortgage lenders, although the latter, to Aalbers in this is empirically important than the first It is the combination of financialization and that has been instrumental in the way the mortgage crisis in the US has into a financial crisis and a crisis, not only in the US but the It is the state that re-regulated the mortgage market to enable the US government was involved in the in in from and in thereby opportunities for both and Wyly et al., Because securitization increasingly the mortgage market to the market, securitization the financialization of the mortgage market. It the of the mortgage market (and as the crisis it also in the wider credit because markets by their very are markets. The of both and financial markets has resulted in a risk in which are increasingly on financial markets for their due to the financialization of housing are increasingly financial market these — and that become more therefore need to be so they can be in in secondary mortgage markets. the of the part of the secondary mortgage market was the in subprime The problem is now the mortgage bubble has (and not just subprime — which in theory are to be very — have become because have about their Subprime lending and predatory lending — a of lending of loans designed to and — are at the of many articles in this most notably those of Hernandez and Wyly et al. predatory loans are to could have for loans Wyly et al., are loans that are more than the risk of the would they are mortgage that they often do not even As Wyly et al. ‘the theory of risk-based has become and for well over a decade to for the of an to a that as and to the of an by predatory This to mortgage foreclosures at the and housing at the as article But it is not just being it is also lenders more risk in their as both default risk and risk have as a of the of the mortgage market 2007). predatory lending is although have been to up by the of the for a number of years and Squires, The media have the subprime crisis as one in which took out loans that were by loan and lenders did not about the of these loans as they would be and as They continue to present a of have not attention to not just and lenders, but also and agencies. 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There were had an for first in so-called loans because their risk was to that of state But a few years they also an interest in subprime loans as in an search for of market development a of based on to riskier and loan in by their of mortgages in so the bubble their were Subprime loans were considered but this was by and since the still were as saw the of default on but like the lenders they this as a more as an In addition, get by the firms they have to It is to that this the of they were also on other financial and they to all of them, they would not be taken what did to be so late in the risk of these as I suggested they did not the risk as they in rising just like lenders and the media — like the had become so involved with that their now on more and more of over the years the most were by more that few had understanding not even the in which It is sometimes argued that the cannot be for this as others in the mortgage did not the and of these But since it is the to and financial it could be argued an that the are for as were now on global markets that are in like and and Aalbers, in the a mortgage bubble a housing bubble would the through the of these bubbles the not just through but also through financial markets. Because lenders are now national and in this no only some housing markets, but all housing markets throughout the markets may still be local regional, mortgage markets are mortgage markets are the bubble in the national mortgage market all local and housing markets, although it housing markets with a greater bubble more than those with a In addition, secondary mortgage markets are global markets, which that a crisis of mortgage securitization that the and therefore the are — from to and from banks to in the of securitization, have borders Wainwright but thanks to re-regulation it can these In the the mortgage market crisis the US on both of the mortgage lending — through and through financial markets — while it other in the mostly through financial markets, not just because the have in but also because the mortgage market has a of that have and this even in financial markets that have been involved in In this symposium we attention to how the mortgage market crisis has into a global crisis, but many of the articles look at the different and of the structural changes in the mortgage market. This symposium with a article by Hernandez based on of of subprime and predatory lending in a of mortgage lending. article is by on subprime lending and foreclosures in the of and Wyly et which, based on an of subprime and predatory lending the US, (1) the of risk-based (2) the and (3) the idea of a mortgage market. Gotham the crisis in a of and regulatory taken in the 1980s and we move to Wainwright how securitization had to be and re-regulated to fit the financial market, while Aalbers that all the of globalization, mortgage markets and most mortgage lenders national in and only the market for has become European articles with the crisis as European mortgage markets and as I argued in the are primarily through financial markets. The global market also has a central place in research that securitization has housing into an for The articles in this symposium are by sociologists, geographers and a political (2009, this issue), a heterodox went through the articles and an has been one of those the mortgage market years it went research agenda with that of the other contributors to this For these it is that he a for a symposium ‘The Sociology and Geography of Mortgage of and research have that and place are that on one a mortgage and, on what The of the mortgage market may have changed and the problem may have from exclusion to but as Newman and Wyly et al. all show, both and place are still in the on which one a and the by them are more to be by subprime and predatory lenders. This has to do with the of among from and more with of Hernandez ‘The evidence that and capital in a way that cannot be by traditional market Although and markets are real markets The mortgage market crisis some and some than others the US government and its institutions of in the of the market, while only like the with due to often is needed is a of and not just of financial The is a in the right but it may be since foreclosures for may up to are still a system than it by another