The Housing Chronicles Blog: Changes to home mortgages seem inevitable

Friday, March 25, 2011

Changes to home mortgages seem inevitable

As I sit here and write this post, the U.S. national debt is climbing past $14.25 trillion, or an average of nearly $46,000 for each citizen. Each day, that national debt rises by about $4.1 billion, as 40% of the 2011 federal budget is made up of borrowed money. Of the Obama Administration’s proposed $3.7 trillion budget for 2012, 30% will go to Medicare and Medicaid, 22% will pay for Social Security benefits, 19% will go for defense-related programs and nearly 13%, or $474 billion, will be used to service the existing debt. So just what does that have to do with mortgage finance? Everything.

For starters, in order to reclaim up to $131 billion in annual foregone tax revenue, the National Commission on Fiscal Responsibility and Reform has the long-standing mortgage deduction in its crosshairs, to be replaced by a 12% tax credit that would help those who don’t itemize their deductions but punish many who do. Not surprisingly, trade groups representing real estate agents and home builders have strongly opposed the idea for a number of very solid reasons.

Meanwhile, however, the leaders over at AARP are also fighting against any changes to Medicare or Social Security that would anger their 40 million-plus members, while lobbyists for defense firms visit Capitol Hill to offer dire consequences resulting from defense cuts. But if no one budges at all and simply throws up walls of discontent at the mere mention of changing the status quo, how do we ever fix this huge – and escalating – problem?

It’s in times like this that true leadership is required, and for the building industry that may require some compromises on not just the tax deduction, but also the nature and duration of home mortgages. Instead of being purely re-active, what if the leaders of NAHB and NAR were pro-active enough to discuss some type of gradual and reasonable changes to the tax code – such as grandfathering in existing owners and leaving it in place under certain conditions to promote homeownership -- but only if commensurate changes are also made to entitlement programs and the defense budget?

Those who want to see the deduction disappear argue that other countries such as the United Kingdom and Italy have phased out their own tax deductions for homeownership and survived – and Canada’s housing market has done quite well without one at all – but those countries’ mortgage markets remain largely the domain of banks, and not of investors buying securities. In the U.S., it’s a different story. That’s also why the fate of the mortgage tax deduction and the market itself – including the phasing out of Fannie Mae and Freddie Mac -- are so closely intertwined.

For a fully private investor such as Bill Gross of Pimco in Newport Beach, CA to buy mortgage bonds, he’s been quoted as demanding a 3% premium to compensate him for his risk. But Moody’s Analytics economist Mark Zandi and a colleague have instead offered up a sort of public-private hybrid solution that would have government insurers act as market intermediaries for mortgage securities but maintain a large bail-out fund and ensure reserve capitals can withstand steep price declines. They claim their plan would keep interest rates competitive while boosting sales, prices and homeownership.

Whatever the outcome, it seems highly unlikely that the system which led to the unraveling of the housing market – and the global economy – will ever return in the same form it was before. Into that vacuum, builders and agents will have no choice but to support eventual reforms that support not just their own businesses, but also the country in which they live. The clock is ticking.

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