Archive for Mortgage Crisis
Fannie, Freddie, and the Mortgage Interest Deduction
Posted by: | CommentsTomorrow, the White House will release its ideas for overhauling mortgage giants Fannie Mae and Freddie Mac. While there is little agreement in Washington over just what to do, there is broad bipartisan support for big changes. In large part that’s because when the implicit government guaranty behind Fan and Fred turned explicit in the wake of the 2008 housing collapse, taxpayers were socked with a bill of $130 billion.
Pols are shocked that we’d add $130 billion to the nation’s burgeoning debt to subsidize owner-occupied housing this way. Except we spend far more than that each year buying down the cost of home ownership through the tax code. The one-time $130 billion cost to taxpayers of the failure of Fan and Fred is a fraction of the $210 billion annual cost of the mortgage interest deduction, the deduction for state and local property taxes, and the exclusion of capital gains taxes on owner occupied housing. Over a decade, those tax subsidies will cost more than $2 trillion.
The single biggest housing subsidy is the mortgage deduction, which will add $130 billion to the deficit in the coming year alone. But even worse, at a time when both Democrats and Republicans claim to worry about the long-term deficit, the MID is a case of government acting as a reverse Robin Hood—the biggest subsidies go to those who need it least. The Tax Policy Center estimates that more than 70 percent of the benefit of the mortgage and property tax deductions go to the highest-earning 20 percent of households—those making $104,000 or more.
This happens mostly because the tax break on home loans is structured as a deduction. Imagine, for instance, that you and I both pay $1,000-a-month in mortgage interest. If you are in the 10 percent bracket (a married couple with adjusted gross income of $36,000 or less), your after-tax interest cost is $900. If my wife and I are in the 35 percent bracket (with taxable income of $379,000 or more), our after-tax cost is just $650. And that’s after federal taxes. The benefit is even more dramatic when you figure state income tax breaks.
This upside down subsidy also encourages the purchase of more expensive houses. I understand that some communities have very high housing costs. I live in one. But the average sales price in the U.S. last year was just $270,000.
Fan and Fred can guaranty loans up to $729,750 and there seems to be general agreement to allow that cap to fall back to the pre-recession level of $625,500. Yet the mortgage deduction is available for loans up to $1 million (and can even be used for vacation homes). And hardly any politicians are talking about cutting that.
Oh, and keep in mind that while we are spreading $200 billion-plus in tax largess among the those lucky duckies in their mini-mansions , the feds spend less than one-quarter as much for direct housing assistance (aimed mostly at low and moderate income households). And that spending will almost certainly be frozen or even cut as a part of coming broad reductions in domestic spending.
The chairs of Obama’s fiscal commission proposed addressing the upside down tax subsidy by reducing the limit on deductible mortgages to $500,000, barring the subsidy for second homes, and turning the deduction into a 12.05 percent credit. With a credit instead of a deduction, homeowners with a $1,000 monthly interest payment would lower their tax bill by $1205, no matter what bracket they were in.
About these ideas, Obama has said…nothing.
In a rational world, the president and Congress would sit down and figure out how government should assist home buyers in an era of severe fiscal constraint. I’m no housing expert so just how to do that is far beyond me. But providing the biggest subsidies to the highest income buyers in the biggest homes isn’t where I’d start.
Talk of the Homebuyer Credit: It’s Baaaack
Posted by: | CommentsPlease tell me it isn’t true: Washington is buzzing with talk of Homebuyer Tax Credit III. Like the killers in those really bad slasher movies, this tax subsidy wreaks havoc wherever it goes, appears to meet its demise in the last reel, yet returns to create more misery.
The latest round started on Sunday, when HUD Secretary Shaun Donovan said it was “too early to say” whether the White House would support another round of credits. Donovan and the Obama Administration have been backtracking ever since. But the damage is done.
Members of Congress and congressional hopefuls have leapt on the bandwagon. There is even a facebook page called “Extend the $8000 Federal Tax Credit until 2011 for 1st Time Homebuyers.”
Congress has run the homebuyer credit experiment twice in the past two years. And the dismal results were exactly what economists predicted: In the months before the credit expired, buyers scrambled to get a deal from Uncle Sam. The frenzy boosted demand and drove up prices. Until the day the credit expired. Then demand collapsed and so did those prices.
We know what’s happened to home sales since the credit ended on April 30—they plunged to their lowest levels in four decades. While we don’t have good price data yet, there is growing anecdotal evidence that in some markets, house prices fell by more than the value of the $8,000 credit. Thus, buyers would have been better off waiting until it expired. Of course those sellers who rushed to take advantage by putting their homes on the market got hammered if they couldn’t find a buyer in time. Such is the madness caused by an on-again-off -again tax subsidy.
As Steve Cook, author of the blog realestateeconomywatch.com, notes, even talk of a credit has perverse effects on the housing market. That’s perhaps one reason why Cook says the real estate industry is divided over whether to bring it back. The problem: The Siren song of a new tax deal on the way may well drive potential buyers back to the sidelines while they await its return. Thus, administration-fueled rumors of a new credit could further slow sales in the coming months, the last thing either real estate agents or Democrats need right now.
The ever-popular solution to this problem is to make the credit retroactive so that those who bought after the expiration of Homebuyer Credit II will get the tax break. It is only fair, supporters of this terrible idea say. But such a step is a pure windfall for those who have already bought, and while it surely will increase the national debt it will do absolutely nothing to encourage new sales or new jobs.
The other day a reporter asked if, for all its flaws, the credit was better than nothing. No, it isn’t.
There may be good ways to reduce the supply of unsold houses, which after all is the real problem. But those solutions lie far beyond the realm of tax policy, which aims to boost demand by heavily subsidizing home ownership.
The Homebuyers Credit: Is It Better to Laugh or Cry?
Posted by: | CommentsFor two years, the homebuyer credit has been in the running for Washington’s worst tax policy idea. Now, new evidence about this bit of legislative bilge suggests it may be time to retire the trophy.
The Commerce Department reports the new homes market collapsed in May after booming in March and April (chart). Why? Well, in early spring, in response to an intense marketing campaign by the real estate and mortgage industries, tens of thousands of buyers accelerated home purchases to take advantage of this sweet tax give-away (as much as $8,000 for some buyers) before the credit expired on April 30. Then, just as most sentient economists predicted, the market dried up. Actually, it didn’t just dry up. It became the Death Valley of housing.
Monthly new home sales (which are seasonally adjusted) had been running about 350,000 in early 2010. As buzz about the credit heated up, purchases spiked to about 390,000 in March and to 450,000 in April. Then, the credit disappeared and so did the buyers. Sales in Mayplunged to 300,000, the lowest level in four decades.
As the chart shows, this was–entirely unsurprisingly–exactly the same pattern we saw when the credit was first scheduled to expire at the end of 2009: A big run up in sales in October and November followed by a sharp decline thereafter.
Total amount of permanent job creation from this timing change: pretty close to zero. Cost to taxpayers: $12.6 billion just through last February—even before the latest buying frenzy. What a deal!
As my Tax Policy Center colleague Ted Gayer has been warning, at least 85 percent of those buyers would likely have purchased a home anyway. For them, the credit was a pure gift–courtesy of a government running a $1.4 trillion deficit.
But that’s not all. Yesterday, the Treasury Department’s inspector general issued its second report on homebuyer credit fraud. And the scams are worthy of a Carl Hiasson novel. Among the lowlights: 1,295 prisoners received $9.1 million in credits for houses they claimed to buy while incarcerated. Two hundred forty-one were serving life sentences at the time. Hiasson—the bard of two-bit Florida hustlers– will be pleased to learn that almost two-thirds of these frauds occurred in his home state, where ripping off federal taxpayers appears to be about as common as shuffleboard.
And it wasn’t just cons running the hustle. Sixty-seven different people claimed the tax break for one house. More than 2,500 got almost $18 million for homes they bought before the credit was effective. In all, the IG unearthed 14,132 people who received erroneous credits of $17.6 million.
The hardest bit to swallow is not so much that the homebuyer tax credit is a boondoggle. It is that it was a totally predictable waste of money. Economists warned Congress in 2008 that the credit would do little more than shift timing decisions by a few months. But lawmakers ignored the advice again and again. Remarkably, the Senate may be about to give buyers still more time to close on homes they put contracts on before April 30. That way, they can squeeze the last few dollars out of a failed credit.