Dump the Mortgage Interest Deduction

Is it possible there's an outbreak of Common Sense underway?

Feds rethink policies that encourage home ownership

With Fannie Mae and Freddie Mac on shaky ground, a restructuring of the mortgage giants is in the works.

AID FOR HOUSING

Federal support for housing in 2009, in billions:

Homeownership: Tax breaks $127; Spending $103; Total $230

Rental housing: Tax breaks $13; Spending $47; Total $60

Source: Congressional Budget Office

RISE, FALL AND REBOUND? : Charts show the housing industry's boom and bust this decade and forecast the possible course of its recovery the next three years.

MORTGAGE RATES

National overnight averages Today +/-
30 yr fixed mtg 4.53%
15 yr fixed mtg 3.96%
5/1 ARM 3.56%
$30K home equity loan 7.55%
$30K HELOC 5.03%

COMPARING HOMEOWNERSHIP RATES

Canada, where home buyers are required to make bigger down payments than in the United States, still has a higher homeownership rate than the U.S. How different countries stack up:

Country Homeownership rate -- Year

Spain 86.3% -- 2005

Italy 80.0% -- 2002

United Kingdom 70.0% -- 2005

Canada 68.4% -- 2006

U.S. 66.9% -- 2010

Russia 63.8% -- 2003

France 56.5% -- 2004

Germany 43.2% -- 2002

Sources: Statistics Canada, EMF Hypostat, U.S. Census Bureau

Just how much should Uncle Sam do to help Americans buy their own homes?
For 70 years — and for the last 15 in particular — the answer has been: Whatever it takes.

Now, policymakers are pausing to reconsider. In the next few months, they'll weigh whether there can be too much of a good thing when it comes to helping families finance the American Dream.

The rethink could mean a shake-up for a mortgage market addicted to government subsidies.

"This process of figuring out the government's role is going to involve some hard choices," says Alyssa Katz, author of Our Lot: How Real Estate Came to Own Us. "The moment you start changing the nature of what is guaranteed by the government, what is subsidized, you start to change the alignment of winners and losers. ... We took for granted that anyone could get a mortgage."

Using guarantees and tax breaks, the government pushed homeownership past 69% in 2004. Then it all came crashing down.

Housing prices started crumbling in 2007, panicking financial markets, forcing the government to seize mortgage giants Fannie Mae and Freddie Mac, and pushing the economy into the worst recession since the 1930s. Homeownership has fallen below 67%.

Now, Washington is preparing to rebuild the national mortgage market atop the ruins of Fannie and Freddie. The proposal, due early next year from the Obama administration, could make it harder to buy a home by reducing available credit or requiring bigger down pay-ments. Low-income renters might get more government help.


BAILOUT: Freddie Mac, Fannie Mae ask for more aid after 2Q losses
OWNING: Homeownership rate continues to slide

Congressional Republicans doubt the administration has the nerve to make bold changes. They say the White House squandered an opportunity to deal with what they see as the No. 1 problem — limiting taxpayer losses on Fannie Mae and Freddie Mac — in an overhaul of financial regulations Congress passed last month. "What you've seen is two years of lip service," says Rep. Spencer Bachus of Alabama, ranking Republican on the House Financial Services Committee. "The administration and the congressional Democrats have not shown any willingness to address the issue other than to talk about it and have planning sessions."

Other critics say eliminating or overhauling Fannie and Freddie isn't enough: The government must reconsider such bedrocks of housing policy as the mortgage interest deduction and the tax exemption of most capital gains from home sales.

They say these misguided or outdated government policies encourage the United States to massively overinvest in housing, shortchanging other parts of the economy. "There's only so much subsidy to go around at the end of the day," Katz says.

The administration isn't tipping its hand in advance of a conference next Tuesday on housing finance reform in Washington. But officials insist that big changes are coming to housing finance. Treasury Secretary Timothy Geithner has said the reforms must: continue to make mortgage credit widely available; promote affordable housing for home buyers and renters alike; protect consumers from predatory lending; and promote financial stability.

"We have committed to having a proposal in place by early next year," says Federal Housing Administration Commissioner David Stevens. "This is not about delaying. This is about being thoughtful."

Policymakers are moving cautiously because the housing market is on government life support two years after the worst of the financial crisis. "Even today, private capital has not yet fully returned to this market," Jeffrey Goldstein, the Treasury Department's undersecretary for domestic finance, wrote recently. "Fannie Mae, Freddie Mac and other government entities guarantee more than 90% of newly originated mortgages. They are practically the only game in town." (In 2005, they accounted for just a third of the market.)

Square 1: Fannie & Freddie

Whatever Washington does in the next few months will likely focus on Fannie and Freddie.

The housing giants buy mortgages from banks and other lenders. Usually, they package the mortgages into securities and sell them to investors. Sometimes, they keep the mortgages in their own portfolios. The idea: to create a thriving secondary market in mortgages. By selling their mortgages to Fannie and Freddie, banks clear room on their balance sheets to make more loans, ensuring a plentiful supply and making it easier for home buyers to find financing.

Fannie (established by Congress in 1938) and Freddie (1970) were private, profit-seeking companies, but they operated with the implicit understanding that taxpayers would bail them out if they ran into trouble. That assumption gave them access to low-cost financing. They made enormous profits, paid their top executives extravagant salaries and accumulated outsize influence in Washington. They used their clout to lobby for bare-minimum levels of capital to cushion against losses.

Thin capital proved lethal when Fannie and Freddie caught the virus that infected the rest of the financial system in the mid-2000s: irrational exuberance about housing prices. The mortgage giants had strayed from conventional mortgages. In 2000, they held few securities backed by subprime or undocumented Alt-A loans from private lenders; by 2007, those mortgages accounted for nearly a quarter of their portfolios.

When housing prices collapsed, Fannie and Freddie were sitting on huge losses. The government seized the two companies, making explicit Uncle Sam's implicit guarantee. Geithner says regulators couldn't just let the mortgage giants fail without risking "devastating consequences for the housing finance system and the broader economy." The Congressional Budget Office estimates that bailing out Fannie and Freddie will cost taxpayers $389 billion between 2009 and 2019.

Just about everyone agrees that Fannie and Freddie, known as government-sponsored enterprises or GSEs, were built around a fatally flawed model — one in which investors and executives pocketed profits and taxpayers absorbed losses. "After reform, the GSEs will not exist in the same form as they did in the past," Geithner told Congress in March. "Private gains will no longer be subsidized by public losses."

House Republicans are calling for Fannie and Freddie to be put out of business within four years. Democrats don't go that far: "We know we have to replace them," says Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. Whatever supplants Fannie and Freddie in the mortgage business, Frank says, should be either 100% private or 100% public, not a hybrid.

In April, Treasury and the Department of Housing and Urban Development asked various players in the housing market, from lenders to advocates for the homeless, to weigh in on reform proposals. Many call for Fannie and Freddie to be replaced by private firms that enjoy straightforward government support but have a narrower mission and are far more tightly regulated than the failed housing giants.

Tinkering with housing finance is like playing with political dynamite, says Raj Date, executive director of the Cambridge Winter Center for Financial Institutions Policy. Fannie and Freddie "actually do provide a very large subsidy to homeowners who borrow money," he says. "Here's the thing about upper-middle-income suburban homeowners: They vote. When you take away a huge housing subsidy, they notice."

30-year mortgages

One example: Freddie and Fannie, with their government backing, allowed the proliferation of 30-year, fixed-rate mortgages — a product that lenders would otherwise shun. Reason: Long-term, fixed-rate loans struggle in any interest rate scenario. If rates rise, banks are squeezed, because their revenue remains fixed even though they have to pay more for deposits and other funding. If rates fall, homeowners refinance. "No rational market participant is going to bear that risk," Date says.

Long-term fixed-rate mortgages make sense only if the government is absorbing some of the risk. Reforming housing finance, Date says, could jeopardize the future of long-term, fixed-rate mortgages or raise interest rates on them, perhaps a quarter to half a percentage point.

Even if the government doesn't make radical changes in the way housing is financed, it likely will shift emphasis away from encouraging homeownership and toward helping low-income families find affordable apartments to rent. "We have to be very pro-homeownership," Housing Commissioner Stevens says. But "we strongly believe in a balanced housing policy. ... Not everybody was prepared to own a home."

Until now, government policy has been lopsided in favor of putting people into houses of their own. The Congressional Budget Office reports that government subsidies for homeownership, including the mortgage interest deduction, reached $230 billion last year. That compares with $60 billion in tax breaks and federal spending programs supporting the rental market.

A lot of renters could use the help, the CBO says. In 2007, 45% of tenants spent more than 30% of their incomes on shelter — the threshold for affordable housing — compared with 30% of homeowners.

Things are worse for the poorest renters, households earning 30% or less of the median income in their area: The National Low Income Housing Coalition found that 71% of the poorest households spent more than half their income on rent in 2008.

Rent consumes half of Dorotha Allamand's $1,300 monthly Social Security check. The retired nurses' aide lives in Gridley, Calif., alone except for her three cats. She's on a two-year waiting list for Section 8 rental housing assistance and faces a three-year wait for a senior citizens' housing program. "So here I am, hoping from month to month that I have a roof over my head and enough to eat," she says.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., asked recently "whether federal policy is devoting sufficient emphasis to the expansion of quality affordable rental housing." Owning a home, she said, might not work for everybody.

A post-WWII push

Before World War II, would-be home buyers faced huge obstacles. Banks demanded 50% down payments for mortgages that would last just five or six years; then, the homeowners would have to cough up the balance in a balloon payment. Homeownership remained mired around 40%.

Then came government support for homeownership through Fannie, Freddie, the Veterans Administration and the Federal Housing Administration, a government agency that insures mortgages. The new long-term, fixed-rate mortgages, encouraged by Fannie and later Freddie, made housing payments affordable to ordinary families. The mortgage interest deduction, which cost the Treasury $80 billion in 2009 alone, made homeownership even more attractive.

Housing has an enormous impact on the economy: Harvard University's Joint Center for Housing Studies reports, for instance, that cutbacks in home building and remodeling slashed a full percentage point off economic growth in 2007 and almost that much in 2008.

But urban studies specialist Richard Florida, author of The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity, says that federal programs to promote homeownership don't make as much economic sense as they used to. When families bought suburban homes after World War II, the benefits rippled throughout the economy: U.S. manufacturers cranked out refrigerators and ovens for the kitchen, televisions and sofas for the living room, dressers and vanities for the bedroom, cars to carry Dad from the suburbs to his office downtown.

"It worked fabulously," says Florida, a professor at the University of Toronto's Rotman School of Management. "It really primed the pump of America's industrial machine."

These days, not so much: Appliances and furniture usually aren't Made-In-America anymore. Neither, increasingly, are cars. A housing boom doesn't deliver the bang for the buck that it used to, Florida argues.

High homeownership rates also impose economic costs. They lock workers into houses that can be tough to sell, especially in recessions, so it's harder for them to move to find new jobs. The percentage of Americans changing addresses hit a record low 11.9% in 2008 before bouncing up a bit last year; the so-called moving rate exceeded 20% as recently as 1985.

Florida has found that U.S. cities with high homeownership rates tend to lag behind other cities in job creation and earnings. He argues that the government should nudge the homeownership rate lower, perhaps to around 55%, by cutting the subsidies that prop it up.

Would anyone in Washington risk political hara-kiri by killing housing subsidies to the middle class?

"What really causes the decline of nations is when they become sclerotic, when they get locked into public policy approaches that don't work," Florida says. "I'm an optimist. ... We have reinvented ourselves before."

But for now, he says, "Everybody is talking around the problem. We need to wake up."

Jimmy Carter -- Obama's Guide to a One-Term Presidency

Obama Is Going the Way of Carter

Monday, 02 Aug 2010


President Obama is heading for a one-term presidency like Jimmy Carter’s, Dave Keene, chairman of the American Conservative Union, tells Newsmax.

Liberal commentators like to cite downturns in support for Presidents Bill Clinton and Ronald Reagan in their first terms as evidence that Obama could still gain re-election. But Keene points out a number of factors that are different in the case of Obama.

“Reagan came in during a recession, and by 1982, we were still in the middle of that,” Keene says. “We had high unemployment. We had inflation.” But, he says, “Even people who disagreed with Reagan in the polls at that time said that they had confidence in him.”

With Obama, “They don’t like what’s going on,” Keene says. “They think it’s wrong. They’re scared to death. Not scared of the unemployment, which is bad, but they are scared about the future.”

Keene is one of the country’s most astute political observers. The American Conservative Union, with 1 million members, runs the annual Conservative Political Action Conference (CPAC) in Washington and publishes an annual "Rating of Congress," the gold standard for ideological assessments of members of Congress.

What concerns ordinary citizens is “runaway spending and whether the country is changing,” Keene says. “That is very different than just being concerned about the immediate economic environment.”

On top of those concerns, Obama is ideologically driven and will not change course toward a more moderate agenda, as did Clinton.

“He’s a true believer,” Keene says. “He an ideologue, and he’s going to try and get what he can get regardless of public opinion.”

While Obama’s approval ratings remains higher than approval of his policies, that’s because he is personally likeable, and people don’t like to admit to themselves they made a mistake in voting for him, Keene observes. “The last thing to go is approval ratings.”

When they do turn against a president, “It’s irreversible. And that’s what you are seeing among the independents, the real swing voters last time. They are now leaving him in droves.”

At the same time, Obama is losing support within his base and among Democrats in Congress.

“I don’t think that he has friends on the Hill,” Keene says. “He doesn’t get involved in all of that, and he doesn’t really care about them. They are there to pass his junk, and if they have to pay a price for that, that’s their problem, not his. You can understand why a lot of these Democratic House members are really upset saying, Didn’t we just walk the plank for you 16 times, and now you don’t even care.”

Keene says Republicans will regain a majority in the House, possibly by big margins.

“The Senate is a real long shot,” he says. “I would expect the Republicans to win five or six or seven seats, which is not bad.”

In the meantime, Obama’s handling of the Gulf oil disaster and other issues is “leading people to conclude that maybe this guy isn’t up to it,” Keene says. “When that happens, there’s really no way out because even if they like you, they are not going to keep you.”

As a result, Keene says, “Obama is on the verge of being an unelectable president like Jimmy Carter.”

Closing the Gulf Oil Leak -- Almost There

It's remarkable the way the Obama administration is demanding BP develop back-up plans for its back-up plans. The government is worried about more failures at BP's leaking oil well. It is right for the government to worry about the success of BP's efforts, and thus fair to expect the company to develop alternative plans should something else go wrong.

Ironically, when crafting emergency plans for the entire nation, the government ignores this piece of clear thinking. Unlike BP, at any time the government can declare success. It does exactly that.

Imagine BP declaring its efforts to cap the leaking well were successful while observers were recording the spreading of the oil slick across the Gulf waters. While tar balls are collecting on beaches. But Joe Biden has repeatedly announced the success of the Obama Stimulus Plan. Really? Even though the economy is in dire straits -- painfully evident to all -- Biden and other members of the Obama Administration are claiming we are on the mend. Please.

Who you gonna believe? The Obama Administration or your lying eyes?

BP Sets New Spill Target

Aims to Cap Well by July 27 Earnings; Backup Plans as Obama, Cameron Meet

BP PLC is pushing to fix its runaway Gulf oil well by July 27, possibly weeks before the deadline the company is discussing publicly, in a bid to show investors it has capped its ballooning financial liabilities, according to company officials.

At the same time, BP is readying a series of backup plans in case its current operations go awry. These include connecting the rogue well to existing pipelines in two nearby underwater gas and oil fields, according to company and administration officials.

Much of the additional planning has been pushed by the U.S. government, which has urged BP to develop what one official called the "backup to the backup plan." Both BP and the federal government are concentrating on their next steps, particularly because of uncertainty caused by the imminent hurricane season and the protracted political and financial damage caused by the endless spill.

Both BP and the Coast Guard continue to state publicly they're aiming to have a fix in place in early to mid-August. BP has discussed its backup plans only with administration officials, who in turn have briefed President Barack Obama.

The July 27 target date is the day the company is expected to report second-quarter earnings and will speak to investors. BP also wants to show progress by July 20, the day U.K. Prime Minister David Cameron is scheduled to visit the White House.

"In a perfect world with no interruptions, it's possible to be ready to stop the well between July 20 and July 27," said the head of BP's Gulf Coast restoration unit, managing director Bob Dudley, in an interview. He added that this "perfect case" is threatened by the hurricane season and is "unlikely."

On Wednesday, on a visit to the Discoverer Enterprise, the ship that's collecting oil from the well, Mr. Dudley got word of a nine-day period of clear weather starting Friday, a period that could prove critical to the effort.

BP is drilling two relief wells through which it will pump material designed to seal the leaking well. One is now 12 feet horizontally and 300 feet vertically from the target spot.

Billy Brown, president of Blackhawk Specialty Tools, a BP contractor helping with the relief-well process, said Wednesday the effort is progressing ahead of schedule.

Mindful of prior snafus, BP has quietly crafted backup plans. The first would force spewing oil to a depleted gas field on the ocean floor two miles away. The second would move the oil to an existing underwater oil field nine miles away. Both require laying flow lines, either flexible or hard steel piping, to connect the leaking well to existing wellheads on these older sites.

The engineers described their plans at a seven-hour meeting last week featuring BP engineers and Energy Secretary Steve Chu, held at BP's Houston crisis center. Mr. Chu said he told them: "Force yourself to think each one will fail." In an interview, he added: "We're in new territory full of perils, and nothing is a slam dunk."

BP's Mr. Dudley reviewed Wednesday the company's engineering work with retired Coast Guard Admiral Thad Allen, who heads the Obama administration's effort.

Flying by helicopter to the ship collecting oil, the two men discussed the backup options. All around the ship, 43 miles offshore, the ocean was tinged orange.

The stakes are huge for BP, which has lost nearly half of its market capitalization since the explosion aboard the Deepwater Horizon rig April 20.

The company's board is setting up a "Gulf of Mexico" committee for a few directors to delve deeply into the disaster's safety and financial implications.

When they announce earnings July 27, BP officials hope to provide investors with more information on the estimated liabilities from the Gulf spill.

One official said the company wants to be able to describe the oil spill as finite, not infinite, a moment that would allow it to start calculating the total potential liabilities under U.S. law.

To prepare Prime Minister Cameron to speak with Mr. Obama about one of the U.K.'s largest companies, British Ambassador to the U.S. Nigel Sheinwald last Friday attended BP briefings in Houston and New Orleans and then toured the damaged Florida coast. He also met Coast Guard officials.

Support ships are seen near the Discoverer Enterprise drilling rig, right, as they continue the effort to recover oil from the Deepwater Horizon spill site on July 3, 2010 in the Gulf of Mexico off the coast of Louisiana.

At Wednesday's trip to the spill site, Mr. Dudley and Adm. Allen evaluated a prospect for controlling the spill—a newly designed cap to replace the leaky one currently directing oil to ships on the surface.

The risk: removing the old cap could exacerbate the spill in the short run.

At the administration's prodding, BP created a new device called an "autonomous subsea dispersant system." Environmental Protection Agency head Lisa Jackson told BP to create such a capability to monitor and measure chemicals used underwater to break up the oil. The large volume of dispersants used has concerned scientists and some government officials.

House Panel Notes Gaps In Cleanup Research. Access thousands of business sources not available on the free web. Learn More .In recent days, the company has installed new battery-powered equipment on the ocean floor that will inject dispersant into the flowing well. Typically, the dispersants are controlled by ships on the surface, but they may have to move if storms hit.

Separately, the BP-dominated consortium that operates the Trans-Alaska Pipeline, Alyeska Pipeline Service Co, said Chief Executive Kevin Hostler will retire in September.

Mr. Hostler, a former senior BP executive, had faced accusations from U.S. lawmakers that efforts to cut costs put the integrity of the pipeline at risk.