Senate Banking’s GSE-reform hearing this week looked closely at how reform would affect small mortgage lenders.  Fair enough, but there’s a far more important question here than which industry sector wins or loses in what Congress does to Fannie and Freddie.  As a forthcoming FedFin paper will demonstrate, the U.S. housing-finance system is profoundly unequal, contributing importantly to the sharp drop in U.S. economic equality in the post-2008 period.  Redesigning Fannie and Freddie into something new will make equality even worse if reform efforts do not now take equality as a top-priority objective.  Our new paper will show not only why GSE reform could be structured as a positive force for greater economic equality, but also how to do so on a bipartisan basis.

Before turning to how to fix housing inequality, I need to start with a premise some may dispute:  that housing finance is indeed unequal and thus requires an urgent fix.  On July 6, FRB Gov. Powell said that, “Although there are significant regional differences, national data show that housing prices have fully recovered from their gut-wrenching 35 percent drop during the crisis.”  Actually, I think the regional differences are themselves gut-wrenching and, when one adds in the wealth-sector dimension, truly sickening.  How can we say housing has “recovered” when only one in three houses across the country is now worth more than it was a decade ago?  Sure, inflation-adjusted coastal cities saw house-price appreciation of forty percent since 2000 but rust-belt and southern city prices have depreciated as much as 46 percent over the same period.  And then there’s the question of younger housing wannabes – our paper shows just how far behind the housing curve they already are as well as what this means to their long-term chance for upward mobility.  In short, nothing good.

Home valuations are the principal source of wealth for all but the wealthiest Americans.  As a result, when value appreciation divides sharply by house price, wealth inequality grows still more acute.  Our new paper will show again how the Fed’s huge portfolio affects economic inequality by driving up the value of financial assets such as stocks and bonds even as house prices for lower-income households fall farther and farther behind.  No wonder the top one percent of Americans now are sixteen percent wealthier than they were in 2004, holding a still larger percentage, 38.6 percent, of net national wealth.

Housing-finance inequality isn’t, though, solely the fault of the Fed’s portfolio.  Our paper will show how ultra-low rates also play a destructive role in concert with specific housing-policy decisions such as the lack of income targeting for federally-subsidized housing guarantees.  Equity extraction also plays a large role here, as does the overall thrust of post-crisis policy that makes it harder and harder for banks to conduct their basic business of gathering deposits and making the loans essential for economic equality.

U.S. housing policy has long recognized the urgent macroeconomic benefit of ensuring that the less-affluent among us are able to borrow for and then sustain long-term home ownership.  Trillions and trillions of direct and indirect taxpayer subsidies already support this goal even as it falls farther and farther out of reach.  The critical question Congress must answer now is what happened since 2008 to make housing affordability so much worse so fast.

It’s time for Congress to move past tired arguments about whether GSE affordable-housing goals caused the financial crisis or if new-style GSEs need to be forced still more firmly to focus only on affordable housing.  The entire structure of post-crisis U.S. housing finance is making us more and more unequal when it comes to the most basic wealth-accumulating asset of all:  a home.  GSE-reform policies should be carefully constructed to ensure that it does not make matters still worse, housing inequality still more profound, and American voters still angrier.  GSE reform may seem a back-bench issue, but economic equality is anything but.