The National Association of Realtors (NAR) exists to preserve the free enterprise system and protect home ownership in America for today and tomorrow. Is this fact or fable? For 90 years the NAR (and its predecessor organization) has supported expanding the government’s role in housing finance. Today, the government guarantees upwards of 90 percent of all new mortgages.

It is easy to reconcile the NAR’s interest in home ownership and its support for the expansion of the government’s role in housing finance. It is as basic as Economics 101. The marginal buyer is the one who is just willing to pay the price in the marginal transaction undertaken with the marginal seller. Sales in a housing market occur at this marginal or equilibrium price. It is in NAR’s and its members’ interest to lobby the government for loose and highly leveraged lending policies in order to “qualify” more marginal home buyers in an effort to increase marginal prices. Since the primary goal is to create more buying power today, little or no concern is paid to the fact that these new highly leveraged buyers are exposed to abusive levels of delinquency and foreclosure risk in the future.

For decades, the FHA and HUD promoted ever increasing levels of leverage in the US housing market. Increasing leverage serves to expand the pool of marginal buyers.  From 1954 to 2006 FHA’s compound leverage (the combined effect of lower down payment, a longer loan tern and higher debt-to-income ratios) increased 16-fold while its incidence of foreclosure also exploded, increasing 13-fold. But the leadership at FHA/HUD would not be content until the entire housing market had followed suit and levered up.  Enter the National Homeownership Strategy (1995), with the lynchpin being the elimination of down payments. By 2004 HUD was able to boast: “Over the past ten years, there has been a ‘revolution in affordable lending’ that has extended homeownership opportunities to historically underserved households.”

In my research I have not come across a single instance where the NAR has stated that lending standards should be tightened. To the contrary the NAR has almost always called for loosened lending standards and continued or increased government involvement, no matter the market conditions. Rather than protecting free enterprise and homeowners, the result was the creation of a dangerously synchronized market consisting of an unprecedented numbers of overleveraged loans made to an unprecedented number of overleveraged borrowers–a housing finance market ill-equipped to absorb the potential shock of declining prices.

Given its business model, the NAR finds it immensely profitable to lobby for the addition of higher risk marginal buyers to the market. First, real estate commissions are paid in a lump sum at closing, leaving the real estate agent with no skin in the game—if the loan defaults that is someone else’s problem. Second, commissions are generally paid as a percentage of a home’s sales price, so as prices increase, so do commissions. Third, marginal buyers generally enter the market by moving from rental to home ownership. This sets off a chain reaction of sales. The renter buys an existing home at say $140,000, allowing the seller to move to another home, one that is generally more expensive. The chain of sales continues perhaps for a total of 4 or 5 times, until the last seller either rents or buys a new or vacant home. While the real estate commission at 5 percent of the first sale is $7000, the 4 subsequent sales in the chain might generate another $35,000 in commissions, for a total of $42,000 generated from adding just one higher risk marginal buyer.

The reason for the NAR’s fervor for the FHA and other government financing agencies now becomes clear. It is also the reason the NAR is not deterred by the FHA’s more than 3 million foreclosures over the last 3 decades.

Based on these incentives, the NAR’s self-described interest in preserving the free enterprise system and protecting home ownership in America for today and tomorrow is a fable.