The deeper roots of the mortgage crisis: employment instability

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The immediate roots of the current mortgage crisis have been much discussed. Overly-aggressive lenders, overly optimistic borrowers and inadequately regulated financial industry players have all received a portion of the blame.

But there is another dimension that bears discussion if we are to devise meaningful solutions: Long-term mortgages assume that borrowers have reliable and long-term employment relationships. Due to fundamental changes in the nature of economic life over the past two decades, that kind of employment stability is no longer the norm.

For most of the 20th century, America’s great middle class was comprised of blue-collar workers who enjoyed long-term, stable jobs and predictable promotion paths that extended from hiring to retiring.Auto companies, insurance companies, the steel industry, banks and other industries dominated by large firms offered their workers de facto job security, orderly promotion opportunities, a rising wage trajectory, dependable benefits and a reliable pension upon retirement.

Such jobs were by no means universal – they eluded most African Americans, women, rural Americans, and many other groups – but they formed the template upon which 20th-century social policy was built.

Over the past two decades, the reality of long-term stable employment has vanished for all but a lucky few.From IBM to Enron, workers who believed they had a secure job until retirement have been bitterly disabused.Employment has become episodic and insecure in large firms as well as small, and younger employees no longer expect, or even desire, a career-long job with a single firm.

Employers have created new types of employment arrangements that do not rely on a stable and loyal workforce, but which seek to provide them flexibility. This change is not all nefarious – it has unleashed creativity and enabled many to escape the deadening drone of dull, repetitive work.

On the other hand, the change in the nature of employment has undermined many crucial elements of our social safety net. One of those is our housing policy.Until recently, home ownership for most Americans was financed by long-term self-amortizing mortgages. But that was not always the case.

Prior to the 1930s, homes were financed by short-term interest-only balloon loans, usually five years or less in duration.Homeowners typically rolled over their loans when they became due by taking out new ones. In the early 1930s, however, banks were faced with a crisis because borrowers were out of work and unable to refinance loans.Banks were reluctant to offer new loans in the midst of the depression, and owners had no equity to pay off their loans.

The era witnessed massive foreclosures.In order to avoid this in the future, the New Deal’s Home Owner’s Loan Corporation developed the concept of the 20-year (later changed to 30-year) self-amortizing mortgage.The idea was that workers with long-term mortgages would also have stable jobs so they could repay the mortgage with interest over the life of their career, and pay off their homes just about when they retired.The plan assumed long-term jobs, and mortgages were made available to those who had them.

In the 1980s, adjustable mortgages became commonplace and most mortgages ceased imposing prepayment fees, so that homeowners gained flexibility to adjust their debt level as interest rates changed.But that flexibility did not address the deeper source of instability – the danger of joblessness.

The problem now is that few people have the kind of long-term job security that our housing policies take for granted.According to the Bureau of Labor Statistics, the median length of time a worker spends with a particular employer has decreased in every age group.Today people have a more episodic experience in the labor market, moving from employer to employer, with periods of employment often followed by periods of unemployment and transition.When unemployment strikes, mortgage payments that once had been manageable become impossible.

What this means is that we need to redesign our housing policy (as well as other social policies, such as health insurance, which assume long-term employment) to meet the new reality of people’s work life cycles.For example, we should explore redesigning mortgages to have flexible resets that permit mortgage holidays during spells of unemployment.

Some commercial loans currently have this feature for businesses that are in temporary difficulties.Because the nature of employment has changed profoundly, it is time to revisit the structure of housing finance, as well as the many other social institutions that were built on a foundation that is no longer there.