April 2011 column for Builder & Developer magazine now online

My column for the April 2011 issue of Builder & Developer magazine is now online. For this issue, entitled "A New Era for Home Finance: The Building Industry Can Either Lead or Follow," I wanted to touch on the very important subject of the national debt and the potential impact on home mortgages and the tax deduction for mortgage interest.

From the column:

As I sit here writing this column, 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 percent of the 2011 federal budget is made up of borrowed money. Of the Obama administration’s proposed $3.7 trillion budget for 2012, 30 percent will go to Medicare and Medicaid, 22 percent will pay for Social Security benefits, 19 percent will go for defense-related programs and nearly 13 percent, or $474 billion, will be used to service the existing debt. So just what does that have to do with mortgage finance? Everything...

To read the entire column, click here.

To read the entire April 2011 issue in digital format, click here.

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.

PBS' Frontline takes on the growing national debt

For those fans of the excellent PBS documentary show "Frontline," tonight they're taking on the subject of the $10 trillion -- and growing -- national debt, made even more serious given the calls by both China and Russia for a new worldwide currency. From the Frontline Web site (hat tip: Patrick.net):

The journey begins as FRONTLINE correspondent Forrest Sawyer takes viewers to a secret location: the Treasury's debt auction room, where the U.S. government sells securities backed by the "full faith and credit of the United States."

On this day, the government is auctioning $67 billion of Treasury securities. The money borrowed will be used to fund services and programs that the government cannot pay for through tax revenues alone.

Observers warn that the United States' reliance on borrowing to fund essential programs is a dangerous gamble. For the first time, investors are beginning to question the ability of federal government to meet its growing financial obligations, and fading confidence can have dire consequences. "You might have a situation where there is one day when the government says we need to sell several billion dollars of bonds, and nobody shows," Economist reporter Greg Ip tells FRONTLINE. "No money to pay the Social Security checks, no money to give to the states for their Medicaid programs. Cut, cut, cut, cut, cut."

Yet more borrowing is exactly what the Obama administration plans to do: hundreds of billions to bail out the banks and other financial institutions; tens of billions more for the auto industry; $275 billion for homeowners and mortgage lenders; and a giant $787 billion stimulus package to jump-start an economy spiraling downward. Just like the Bush administration before it, Obama and his team are going to borrow big.

"That's the paradox of the situation that we're in now," observes Matt Miller, author of The Tyranny of Dead Ideas. "Government has got to run big deficits to stimulate the economy, deficits that would have been unthinkable ... because government's the only entity with the wherewithal to prop up a demand in the economy when businesses and consumers are all pulling back."

Can't catch the show on your local PBS station? You can watch it online here.

Welcome to the IOU States of America

Without any fanfare such as Presidents landing on aircraft carriers, the national debt just exceeded $10 trillion -- and that's before the costs for the financial bailout have been factored in (hat tip: Andrew Sullivan).

Here's the math:



From the Chicago Tribune's Washington Bureau site, "The Swamp:"

President Bush signed legislation in July that raised the debt ceiling to $10.615 trillion. Meanwhile, the financial bailout legislation passed by the Senate last night would raise the debt ceiling further to $11.315 trillion.

Here's something else worth knowing. The gross national debt as a percentage of the gross domestic product has, under the Bush Administration, hit a 50-year high:

An inconvenient national debt

Sure, Al Gore might have had penguins and polar bears to show for his documentary on global warming, "An Inconvenient Truth," but poor former Comptroller General David Walker only has people to protect. In his new film "IOUSA," Walker and the Concord Coalition's Robert Bixby go on a 'fiscal wake-up tour' to explain to U.S. citizens of the perils of ignoring a mounting federal debt -- which now exceeds $9.6 trillion and rises at a rate of $1.85 billion per day (and that's before adding in future entitlements for Medicare and Social Security, which brings it up close to $53 trillion, but who's counting?). Scared yet? You should be! From a Wall Street Journal article:

In the movie, which is co-written by "Empire of Debt" co-author Addison Wiggin and directed by "Wordplay" filmmaker Patrick Creadon, Messrs. Walker and Bixby argue that unless the government alters its policies and spending habits, the U.S. will be in for a serious financial meltdown.

According to Mr. Walker:

"...our concern, quite frankly, is that too much attention has been placed on short-term economic concerns and not nearly enough on a number of large and growing structural problems that will have serious adverse consequences if they're not addressed...

f you look at this year's deficit, as a percentage of the economy, it's not that disturbing. The problem is that we're heading in a wrong direction. When the baby boom generation starts retiring, that will bring a tsunami of [government] spending that we are not prepared for. We are in a $53 trillion hole. And that hole gets deeper $2-3 trillion a year automatically, even if you have a balanced budget. Honestly, since the budget controls expired on December 2002, I think Washington has been totally out of control. They've wanted guns, butter, tax cuts and entitlement expansions...

We're going to have to re-impose tough budget controls -- tougher than the ones we had in the '90s -- because we're in worse shape. Secondly, we're going to have to reform Social Security, Medicare, and the entire health-care system. Thirdly, we're going to have to engage in comprehensive tax reform. And lastly, we're going to have to look at the base of the federal government, because it's grown very much out of shape.

I think there is also a cultural problem here. I think the federal government is doing an extremely poor job of managing its finances, and unfortunately, too many Americans have been following this bad example, spending more money than they make, and mortgaging their future. And there has to be a behavioral change. One of our biggest concerns is also the savings deficit. Generally, Americans are very prolific at spending and not very good at saving, and that's caused us to increasingly rely on foreign lenders to finance our deficits. That's not in our [best] long-term economic or geopolitical interests...

Neither one of the presidential candidates has addressed fiscal responsibility and intergenerational equity. We are hopeful that as a result of the film and a number of other efforts, that these issues will be a higher priority in the election campaign. There has been some talk of a commission proposal, and taxes and health care, but it's been piecemeal...

It's fine for them to talk about what needs to be done in the short term, but not to the exclusion of what needs to be done to address the real disease. Leadership is all about helping people look broader and longer. For me, we haven't learned the lessons from the past. And the most recent lesson is that the factors that resulted in the current mortgage-based subprime crisis exist with regard to the federal government's finances. And we're not addressing them. The type of economic disruption we can get is much, much, much greater than what we're currently facing. It's time that we had some leadership to start addressing it...

In the case of "The Inconvenient Truth," you had the penguins and the polar bears to help visualize the consequences. In ours, we're talking about human beings. Hopefully, people care about them, too."