According to government data, 89% of single-family detached houses are owner-occupied. Meanwhile, 83% of apartments are rented. There is a certain logic to this. An apartment building provides an economy of scale for a landlord that a suburban housing development doesn’t.

The answer: Probably not individuals who cannot afford to own their homes and pay their mortgages anymore. (Of course, many individuals do rent out their homes. But it does require some work, and some willingness to deal with the hassle of it. What if the tenant breaks things? What if they do not pay their rent on time? Who do you go to for legal work? etc.)

The question becomes whether big rental companies and developers, with the credit to purchase lots of properties and the savvy to make a business of it, will be willing to step in. Of course, the government has all sorts of carrots to convince them to do so. And it seems many subsidized rental programs are going well, if they are oversubscribed.

But the recession has forced cuts to the program, meaning it serves far fewer families than need it. Katz writes about the panic the shortage has created:

[I]n a suburb of Atlanta last week, the near-riot took place in a very, very long line, estimated at 30,000 people or more, for a government rent-aid program. … The applicants converged at a shopping plaza in East Point, just south of Atlanta, in the hope of obtaining a copy of the coveted form. East Point is a quick train ride from Atlanta, where voucher waiting lists have been closed for years. Wednesday’s release of applications for East Point’s 455 available vouchers drew a crowd from all over the region and even out of state, a mass of people almost the size of the entire population of East Point itself. Those at the head of the line had begun to gather days earlier.

But it’s not just low-income families that benefit from the program. More vouchers might improve housing market overall, making them an even better public subsidy:

Neighborhoods south of downtown Atlanta have been decimated by foreclosures, with abandoned houses sprouting kudzu on virtually every block. Real-estate investors are buying these homes in bulk from lenders or at courthouse auctions for pennies on the dollar and fixing them up, hoping to rent them out to Section 8 voucher families. …

In Atlanta, investors can potentially get an annual Section 8 income of $10,000 or $15,000 a year for houses that currently sell for little more than that. Voucher holders can browse on gosection8.com to look at current listings, like an attractively renovated two-bedroom house that an investor bought at a foreclosure auction for $17,000 in May and is now trying to rent at $895 a month. These real-estate investors are counting on a steady supply of customers.

TransUnion said that serious delinquencies fell for the first time in three years in the first quarter, to 6.77 percent from 6.89 percent of all home loans. And Fitch said that for subprime loans bundled into mortgage-backed securities, the proportion of seriously delinquent mortgages fell to 45.2 percent in April, down from 46.3 percent last month but still up from 40.1 percent a year ago.

The statistics are particularly positive because neither depends much on the Obama administration’s extraordinary interventions in the housing market, whether via the Federal Reserve’s buy-up of mortgage-backed securities or the homebuyer tax credits. (Both do, however, depend on the country’s near-zero interest rates.)

That said, a Fitch analyst warns that the fall in delinquencies might be temporary, due to tax refunds rather than improving fundamentals. It also notes that while loan modifications are picking up, helping to ease delinquencies and foreclosures, there is a strong chance of redefault on modified subprime loans.

Diane E. Thompson, a lawyer with the National Consumer Law Center, begs to differ. As part of the Federal Reserve’s Consumer Advisory Council, she and other consumer advocates alerted him to the looming crisis in mortgages starting in the early 2000s. We spoke earlier today; the interview transcribed below is lightly edited for length and clarity.

Greenspan’s testimony seemed to contradict even the Fed’s own reports on the housing bubble.

I was surprised to read what he said, because he articulated a view that’s been thoroughly discredited over the past several years. There was no meaningful regulation [in housing by the Fed] between 2000 and 2008. Statements were issued, but they weren’t binding — they were advisory and worked around the edges of the problem. Plus, there weren’t even any such statements during the height of the crisis! When things were gathering steam and hens were coming home to roost, the Fed did nothing. And it did nothing despite the fact that many consumer advocates were warning about loans in the subprime market. He says that he believed the sub-prime market was so small it wouldn’t matter to the broader economy. But obviously it did.

I also found it interesting that he said the problem was the demand for those loans. To some extent I agree with him. There was demand for these loans, of course, but had there been meaningful restrictions in place, this would not have become the crisis it did. The Fed finally put those restrictions into place in 2008.

The other point that struck me was his description of how involved the Fed was. He has cited the Consumer Advisory Council, but it was created by statute. The Consumer Advisory Council doesn’t exist by the good of the Fed’s heart. The years I served on it, it was dominated by industry. The Fed governors would say, “We have all these meetings with the Consumer Advisory Council! We get an interchange of views!” But my experience was that it was difficult to get consumers heard.

And the crisis was easier to see from the end-user, consumer side of it than the banking side?

The problem was obvious to those of us who worked in the communities where the housing bubble originated, particularly the African-American and Latino communities that were just obliterated by subprime lending. I think that there was this understanding that this was a minority-community problem — deplorable, but not exportable to the rest of the economy. That was wrong.

How often and how strongly did the Consumer Advisory Council warn the Fed about the housing bubble?

The council meets three times a year, and I was on it for three years, in 2003, 2004, and 2005. I know that during my time on it, as well as before me and after me, there were consumer advocates who said, “There are problems in the subprime market, and they could impact the entire mortgage market and the entire economy.“

That isn’t to say — I will not claim to have predicted the financial meltdown. To be honest, I was shocked, because I assumed that investment bankers had a better grasp of risk management. But, I know for years before I came on, and for years after I went off, at least from 2001 to 2007, at every meeting, people said, “There are problems in the subprime market. These policies aren’t promoting home ownership. If anything, they’re going to end up doing the opposite.”

I have heard statements from Greenspan in the past two years that seem to me more reflective of the role the Fed played and more cognizant of the fact the Fed missed signs of the crisis, which he did not say here.

What else surprised you in the testimony?

I was surprised at the attack on the GSEs [government-sponsored enterprises, Fannie Mae and Freddie Mac]. I was particularly surprised that he said that the banks weren’t the problem, but that the GSEs were. They got into the subprime boom late — and they aren’t what is driving the current foreclosure crisis. They contributed to the volume for some bad loans, but so did the large banks.

And so ultimately, as a consumer advocate…

There’s an assumption that runs throughout his testimony that these toxic products were in fact affordable products that increased home ownership. That continues to be a popular view among bankers. If you get rid of these toxic products you will reduce homeownership; these products help increase homeownership. That is contrary to all of my experience. There is just a weird tautology in saying there wasn’t a problem in the origination of the loans, but the demand for them.

There’s tremendous demand for cocaine — it would be like saying the issue isn’t the sale of cocaine, but the fact that there’s tremendous demand for cocaine. It is just bizarre. Can you imagine our drug enforcement focusing exclusively on drug users rather than drug dealers?

House Financial Services Committee Chairman Barney Frank (D-Mass.) (WDCpix)

As a House committee begins tackling major financial regulatory reform, consumer advocates find themselves shaking their heads over why something that should have been a slam dunk — reining in the financial industry in the wake of the subprime crisis — has turned into a hard-fought battle instead.

Proposals for a Consumer Financial Protection Agency, a new federal authority to regulate mortgages and other financial products, and for oversight of the private and unregulated market for derivatives, risky financial instruments cited in the subprime collapse, are under debate by the House Financial Services Committee this week. In the immediate aftermath of the financial crisis, it seemed to many consumer advocates that those proposals, and other efforts at financial regulatory reform, would have been already been in place by now.

Illustration by: Matt Mahurin

But what seemed back in 2007 like a clear path ahead was upstaged by the health care battle, which stalled momentum on the biggest overhaul of financial regulations since the Great Depression. Yet there’s even more to the reform slowdown, noted Kathleen Engel, a Suffolk University law professor who specializes in predatory lending and subprime securitization.

A weakening economy has left homeowners worried about paying their mortgages and keeping their jobs, leaving less time and attention for larger problems in the banking system. Regulating mortgages and securitization are complex issues that are difficult to translate, making it hard to get the public engaged in the debate.  And banks are in a better position to fend off regulation, now that their bottom lines are stronger and the government needs them to modify as many mortgages as possible to bolster the economy, she said. “They really have the federal government over a barrel right now,” Engel said.

She added that people feel “relieved” that banks are stable these days, which contrasts with their emotions when the subprime collapse first hit. “I was really hopeful at the beginning that the rage that people felt about the banks getting us into this mess would lead to needed regulation,” she said. “But people are so strapped right now, they’re stressed out how to get a loan mod, or how to get a job, that they’re not able to focus on what the government should be doing.”

Banks, for their part, continue to argue that new regulations aren’t needed, and will only choke off financial innovation. The American Bankers Association, the Financial Services Roundtable, and even small and community bankers are opposing the agency, saying it presents a new and unnecessary layer of regulation. Those arguments have gained a foothold because of a long-held distrust of any new rules coming from Washington, noted Cathy Lesser Mansfield, a Drake University law professor and consumer law expert.

“For the last 20 or 30 years, we’ve kind of bought this notion that all regulation is bad regulation,” said Mansfield, who also chairs Americans for Fairness in Lending, a nonprofit consumer advocacy coalition that supports reforms. “The reason the banks are getting away with this is they’re saying, ‘We’re already regulated. We already have a regulator.’”

Lax regulation, however, is often cited as one of the contributors to the financial crisis. And the nation’s top banking regulator, John Dugan, the Comptroller of the Currency, recently gave a speech arguing that banks weren’t responsible for the financial crisis.

As overhaul begins to move forward, the financial industry remains an enormous influence on Capitol Hill, causing committee chairman Barney Frank (D-Mass.), to dilute his proposal to get industry defenders on board.

In order to win wider support from conservative Democrats and others for the consumer agency, Frank already has dropped from the proposal a “vanilla” option which would have required mortgage brokers and banks to offer consumers a plain, 30-year fixed mortgage, along with more exotic mortgage products. Frank also eliminated a reasonableness standard, which would have required bankers to ensure consumers understood their products, and could afford them. He proposed that an oversight panel for the agency be staffed by top bank regulators, and said he would exempt most non-financial businesses, including retailers, merchants, and real estate agents and brokers, from oversight.

The committee is likely to end up approving some sort of consumer financial agency, “but we’re worried about how watered down it will be,” said Lauren Saunders, a lobbyist with the National Consumer Law Center. She also said it’s hard to believe that the banking and financial industry has any credibility regarding its arguments against regulation, given its role in the financial crisis. But the sector has managed to mount an aggressive opposition effort, with the U.S. Chamber of Commerce in particular putting its clout into fighting the proposal with a multi-million dollar ad campaign.

“The banking industry is highly profitable,” Saunders said. “They’ve put a lot of money into this, both through lobbying and campaigning. We can’t even come close to them.” For the 2010 election cycle alone, commercial banks already have contributed $3.7 million to members of Congress, according to the Center for Responsive Politics.

Said Alan White, a Valparaiso University law professor who studies subprime loan modifications: “What saddens me the most is the extent to which Congress still allows the bank lobby to veto legislation it doesn’t like, and this includes the Democrats. You would think banks would have lost some credibility on Capitol Hill, but money still talks.”

For White and others, the ability of the finance industry to benefit from loopholes in the current regulatory system adds to the frustration. Goldman Sachs managed to refinance some of the toxic mortgages it controlled into Federal Housing Administration-backed loans, shifting the risk to the government. Former top executives of failed subprime lender Countrywide Financial, whose toxic loans were a major contributor to the subprime collapse, stand to earn millions of dollars by buying delinquent home mortgages that the U.S. government took over from other failed banks, sometimes for pennies on the dollar, and reselling them. Bailed-out insurance giant AIG is once again under fire, after a government report on Wednesday found that controversial retention bonuses intended to retain key employees went instead to workers in the firm’s troubled financial products unit, with even a kitchen assistant receiving a $7,700 bonus. “They’re totally taking advantage of the system,” Saunders said.

Advocates aren’t giving up. They noted that both the Federal Reserve and the Federal Trade Commission have been more aggressive regarding consumer protection lately, although they pointed out their actions may be due to fear of giving up power to a new agency. Congress also approved credit card reform, and some Democrats want to move up the timetable for putting new rules in place.

Frank has vowed to bring a reform package to a floor vote in the House by November. In the Senate, Banking Committee Chairman Christopher Dodd (D-Conn.), also strongly supports the creation of consumer agency, but there is significant Republican opposition to the idea. Dodd also has proposed merging four bank agencies into one super-regulator, an idea that goes beyond the scope of the Obama administration’s proposals. Dodd has said he hopes the Senate will act on some kind of financial reform before the end of the year.

Unless there is substantial financial regulatory overhaul, however, the opportunity for reform presented by the financial crisis will have been lost for good. “We would never have gotten into this financial crisis if the financial industry and these products had been regulated in the first place,” Engel said. “If we don’t manage to get reform done now, then we haven’t learned any lessons here.”

But via Felix Salmon, here’s a look at why toxic mortgages spill over onto us all, courtesy of Mike from Rortybomb:

If I was a degenerate crackhead who snuck into your neighborhood and mugged you for $50, the Wall Street Journal Opinion Page would want me thrown in jail. Now imagine that I’m a degenerate crackhead who took out a subprime loan to move next door to you, in an arrangement that I’m likely not going to pay off. I might not even make one payment. If I default you’ll lose 10% of the value of your home from the externality effect. Assuming your home is worth $300,000, there’s a 20% chance I default in 2 years (realistic numbers), and you lose 10%; 300,000*.2*.1 = I’ve just robbed you for $6,000 while the Wall Street Journal Opinion Page cheered me on. And that’s one house – I’ll have a dozen neighbors. Now mind you, the product was great for me – I got to smoke crack indoors, in a house I could never realistically afford, which was a big plus. The subprime lender sold my loan to a pension fund in Denmark for a nice fee. It goes in the win column for us.

Plus, if your crackhead neighbor walks away from the house, and the bank delays foreclosing on it, then you’re sitting there with an abandoned property next door – something that happens all too often these days. That also doesn’t do much for your property values.

All of this also explains  why there’s not exactly a groundswell of opinion pressing Congress to bail out homeowners in trouble. Banks, for whatever reason, don’t come across as badly as the crackhead homeowners do when it comes to possible subprime stories like this. And no one wants to be seen as enabling an addict, even if it means their own property values take a hit.

As Mike detailed, there are some pretty good reasons for labeling these mortgages toxic. And none of them offer much consolation to the homeowner next door.

Congress doesn’t know what its next step will be in regulating Wall Street after the financial meltdown. But the House Oversight and Government Reform Committee accomplished an authoritative takedown today of the credit ratings agencies. Through documents obtained by the committee and unusually sharp questions from committee members, we learned this:

• During the housing bubble of 2002-2006, there was virtually no government regulation of the credit-rating agencies. The Securities and Exchange Commission proposed rules in 2002 to monitor them. That’s when bond issuers were securitzing subprime mortgages and collateralized debt obligations at ever increasing rates. By the time Congress finally passed a reform act, it was 2006 and the housing bubble was about to burst.

• The credit-rating agencies were even more tardy in responding to the housing market collapse than the SEC and Congress. Moody’s CEO Raymond McDaniel continually issued reassurances that the mortgage-backed securities and credit default swaps his firm was rating AAA deserved the rating.  Even privately, McDaniel only began to identify the problem in Sept. 2007.

A transcript (pdf) of a Moody’s “town hall” company meeting shows that McDaniel told his employees in September that it was time “to speak as candidly as possible about the subrpime market.” But the discussion mostly centered on “extensive outreach to the media” to disentangle the rating company from the subprime mess.

Just one month later, McDaniel wrote to his board of directors (pdf) that the company’s business model needed to have a “careful postmortem” evaluation.

• The credit rating agency industry is in tatters. Moody’s has been around for 100 years, but it wasn’t until the late 1970s that the company had to rely on the issuers of bonds for its profits. The obvious conflict of interest– will an issuer come back to a credit-rating agency if the agency unfavorably rates the bond?– finally caught up with the industry in the subprime mortage market.

None of the rating companies developed a credible model to rate mortgage instruments, and there was a race to the bottom to rate risky bundles of subprime loans as AAA.

“In my [Baltimore] district,” said Rep. Elijah Cummings (D-Md.), “students are not able to get loans, businesses are closing and seniors are going back to work. You’ve lost our trust.”

The CEOs didn’t respond to Cummings’ remarks or numerous other accusations that they have lost the public’s trust.

But it was clear that the credibility of an entire financial industry had been destroyed in just five hours.