Ed Koch's Lesson for Today’s Mortgage Crisis





Mr. Soffer is Associate Professor of History at NYU-Polytechnic and is writing a biography of New York Mayor Ed Koch currently under review at Columbia University Press.

With the takeover of  defaulted mortgages by the government, the American people, like John McCain, now have no idea of how many homes they own.   The lessons of Mayor Ed Koch’s ten year housing plan suggest that this crisis can be turned into an opportunity. As Barack Obama has insisted, Main Street must be helped along with Wall Street. Koch’s plan provides one successful precedent.

We, the American people, are going to own thousands of delinquent mortgages and foreclosed homes. The buyers of bundled mortgages were so far removed from the actual lives of struggling families that they couldn’t value what they were getting, and relied on valuations that were produced by intermediaries engaging in either self-deception or deceit. The government should sell these houses to working families at subsidized rates of payment they can afford.

Treating houses as mere financial abstractions can have serious consequences. Such practices contributed to the destruction of the South Bronx by arsonists in the 1970s.   In that instant, high interest rates made it profitable for insurers to rake in a few months of premiums, collect profitable interest, and sell reinsurance contracts on the world market.  These distant buyers, with little acquaintance of conditions in New York wound up having to pay off landlords who burned their buildings.  The local insurers had little incentive to pursue difficult arson investigations, because they profited without having to pay the losses. The British and Brazilian investors who bought the reinsurance contracts on the open market had no idea of local conditions in the Bronx or Bushwick, just as contemporary investors around the world failed to understand the risks of sub-prime mortgages in Sacramento or Fort Lauderdale. They wound up holding the bag, So did New Yorkers in the 1970s and 1980s, who had to live with the destruction of large tracts of what had been their city.

It would be a tragedy to misunderstand those homes and homeowners as isolated financial transactions and even worse to treat them as undifferentiated bundles.  The social value of stable families and neighborhoods, of avoiding another round of widespread arson, crime, and disorder needs to be a priority. Mayor Ed Koch’s ten year housing program, first announced in 1985, rebuilt a city that Ronald Reagan’s virtual abolition of federal housing subsidies would have further rotted. Once Koch restored the city’s credit, he used the city’s capital budget and funds diligently scrounged from other agencies, to renovate and construct tens of thousands of housing units.  The program continued under subsequent mayors, and now it is hard to find areas of New York that are full of vacant lots and burned out buildings.  

While the city rented many units, Koch promoted home ownership for working families. Instead of the false promise of subprime mortgages—seductive, easy, expensive credit, Koch, and the many non-profits his administration worked with, built subsidized housing with payments geared to what working families could afford. Instead of a handout, these subsidies were a partnership with families, who had to pay the city a portion of any profit they realized when they sold the house.  

Now that the federal government own a lot of houses, it should treat these as potential family homes, and as essential parts of neighborhoods that need to be preserved.  Capital is short, but let’s use some of it to make sure that families can own homes with payments they can afford, in neighborhoods that are stable and crime free. We can pay for it by making these new homeowners partners of the American people.  Everyone will reap the profits.


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William J. Stepp - 10/13/2008

...high interest rates made it profitable for insurers to rake in a few months of premiums, collect profitable interest, and sell reinsurance contracts on the world market. These distant buyers, with little acquaintance of conditions in New York wound up having to pay off landlords who burned their buildings. The local insurers had little incentive to pursue difficult arson investigations, because they profited without having to pay the losses.

Where did you get this information?
What's your source?
Insurers typically don't break even on policies for several years because of the high up front commissions they pay to their agents. For example, life insurers don't break even on whole life contracts for six to eight years.
The break even period on property and casualty contracts is shorter, but it's still several years.

I find it impossible to believe they had to pay out the claims of owners whose properties were destroyed by arsonists, and still earned a profit. Their reinsurers would have posted loses on these segments of business, and would have stopped doing business with them. They also would have complained to the NY State AG, and probably would have called for an investigation.

The British and Brazilian investors who bought the reinsurance contracts on the open market had no idea of local conditions in the Bronx or Bushwick, just as contemporary investors around the world failed to understand the risks of sub-prime mortgages in Sacramento or Fort Lauderdale. They wound up holding the bag, So did New Yorkers in the 1970s and 1980s, who had to live with the destruction of large tracts of what had been their city.

There were several factors that caused the destruction of large tracts of housing in New York in the 1970s and 80s. First and foremost was rent control, the disastrous effects of which were exacerbated by high inflation and high taxes. This toxic mix made being a landlord in the Big Apple an unprofitable business for many entrepreneurs. There were many hundreds, probably even thousands, of abandoned properties by 1980. Odd thing that this didn't happen in cities without rent control.

The social value of stable families and neighborhoods, of avoiding another round of widespread arson, crime, and disorder needs to be a priority.

I agree. That's why New York should abolish rent control, ditch the NYCHA (New York City Housing Authority), and get out of the residential real estate business altogether. New York should also take a page out of Maggie Thatcher's book and let NYCHA tenants own their homes. They should also be given a permanent property tax moratorium, and pay for whatever services they use the way they pay for any other service.

Mayor Ed Koch’s ten year housing program, first announced in 1985, rebuilt a city that Ronald Reagan’s virtual abolition of federal housing subsidies would have further rotted.

According to a Cato Institute report by William Tucker, Reagan only slowed the growth of federal housing subsidies. He didn't end them. Why did unsubsidized housing not rot?
What was the opportunity cost of Koch's housing program, including the unintended consequences?

Once Koch restored the city’s credit,...

Which had been destroyed by his Democratic Fun City predecessors.

he used the city’s capital budget and funds diligently scrounged from other agencies, to renovate and construct tens of thousands of housing units. The program continued under subsequent mayors, and now it is hard to find areas of New York that are full of vacant lots and burned out buildings.

True, but the market would have solved the problem faster and at lower cost, including lower cost to taxpayers.

While the city rented many units, Koch promoted home ownership for working families. Instead of the false promise of subprime mortgages—seductive, easy, expensive credit, Koch, and the many non-profits his administration worked with, built subsidized housing with payments geared to what working families could afford. Instead of a handout, these subsidies were a partnership with families, who had to pay the city a portion of any profit they realized when they sold the house.

Defining a subsidy as a "partnership with families" is truly Orwellian.
I suppose it's also a "partnership" with New York City taxpayers too, of whom I am one.
NYC working families didn't need Ed Koch to promote housing for them. They would have done okay in a market with no rent control, no zoning laws, no byzantine building restrictions (which were put in by bureaucrats working hand in glove with real estate developers to crush small competitors) and lower taxes.

Now that the federal government own a lot of houses, it should treat these as potential family homes, and as essential parts of neighborhoods that need to be preserved. Capital is short, but let’s use some of it to make sure that families can own homes with payments they can afford, in neighborhoods that are stable and crime free.

Stable and crime free neighborhoods in New York? In the inner city?
Yes, it's possible, but only by ridding the city of the causes of crime, such as the Rockefeller drug laws, the lousy NYC public schools,
government restrictions on employment, the welfare projects, gun control laws ("an armed society is a polite society"), etc.



otis dahn - 10/10/2008

Jonathan Soffer does not understand financial subject matter that he writes about nor the historical roots. Something tells me he doesn't care either.

"With the takeover of defaulted mortgages by the government, the American people, like John McCain, now have no idea of how many homes they own."

Do I detect bias here? Nah... If Mr. Soffer were truly a prof of History, he might be aware of the CRA and how the democrats pushed banks since '75 to make Alt-a loans. Look it up Prof, You may learn something. This is a Democrat scandal. Mr. Obama as a lawyer for ACORN has his hands dirty also for bringing lawsuits against banks under the name of the CRA.

Mr Shcherban - By your comments, I'm sure you read Marx. Reading and understanding are different matters. Move to a communist country for a year, you'll be begging to come back.


Robert Lee Gaston - 10/6/2008

With about 70% of all U.S. housing being occupied by its owner, Is your question why should all these people own their own home? I am guessing there are just too few really rich people to occupy that much housing. I suppose some home owners who resent having to save for a few years to put away a down payment, but I’m guessing most of them are fairly proud of what they have accomplished.

The pity is that what they have worked so hard for is being threatened by some half-baked policy to “encourage” home ownership. Here, encouragement is translated as “encouraging” banks to make unsound loans which are then sold in bulk to two virtually unregulated government (read congressional) sponsored organizations. These were converted to bonds and sold all over the world.

If the government wants to initiate a policy to give housing to everyone then let’s put that out there for public debate. The government’s stealth approach is far too opaque not to be corrupt.

However, before you jump at notion that the government is responsible for housing everyone I would examine its past attempts to do just that. It was called the Great Society and they are called “the projects”.


Arnold Shcherban - 10/5/2008

Why many hard working folks cannot afford having their own houses and the others have dozen of them?
Did the latter work harder than the former? No.
Are the latter smarter than the former? Some of them are but some are not.
So what's the deal here?
It's outrageous socio-economic inequality that runs as a fat red line through the whole structure of this country's ideological, economic, social, and political institutions and in all spheres of life.
The inequality maintained by the elites as a Holy Grail of American capitalism.
The rest is essentually a propaganda.


Robert Lee Gaston - 10/3/2008

1. If you think you can't afford it, you can't.

2. Don't loan money to people who can't afford to pay it back.

Its not all that hard. Our government has been selling home ownership as a right. That is just not true.

As an aside - organizations like Acorn, along with the government have been pressuring banks to make what they knew were bad loans.

Now, entire zip codes are red lined. Neighborhoods in these areas will run down very quickly, and the taxpayer is likely to take a real beating.

You are not doing anyone a favor by selling them something they can't afford. It simply becomes a burden.

At any rate, the old saying has come true again. The road to hell is paved with good intentions.




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