The Obama administration has proposed a number of new tax increases. The President deserves credit for recognizing that the ballooning federal deficit, resulting both directly and indirectly from the subprime mortgage crisis that preceded his election, must be addressed. It cannot be addressed by the needed budget cuts alone, and unfortunately some tax increases will be necessary. However, reducing tax system support of home ownership by cutting home mortgage interest and real estate tax deductions for high-income individuals and couples for housing is the wrong way to raise taxes.
Allowing the Bush tax cuts for high income individuals (over $250,000 per couple) makes more sense. At that income level those couples currently pay about 20% of their income in federal income taxes after deductions. Not that taxing people is a desirable goal, but the average total federal income tax currently paid by U.S. couples in that bracket is among the lowest in developed countries. While the wealthy owe President Bush their thanks for cutting their taxes by much more than they were cut for an average taxpayer, the expiration of the Bush tax cuts will only raise the effective tax rate on the wealthy to 22%. This should not cause an undue hardship on individuals at that income level, and they will still pay among the lowest federal income taxes compared to their peers in other countries. The new tax rates will also help home values and encourage home ownership in one respect, because the mortgage interest deduction will be worth more to high income individuals and couples at the higher tax rates.
While the expiration of the Bush tax cuts will raise the value of mortgage interest and real estate tax deductions for high income individuals, the Administration's proposal to cap those deductions for those high income individuals and couples is not a smart idea timing wise in the current weak real estate market. It is also unfair to those who had bought their home with the reasonable historical expectation that the mortgage interest and tax deduction would remain sacrosanct. Better revenue generation alternatives are to raise the capital gains rate on high income individuals after first giving them a reasonable time to dispose of fairly liquid capital assets, such as stocks and bonds. However, such capital gain tax increases should not be applied to residential real estate investments, whose values have dropped substantially in the current market, for the aforementioned reasons.
Home equity has historically been the single largest form of savings for most homeowners. With home values down dramatically, their savings rates at near all time lows, and their stock market and retirement plan investments devastated by irresponsible financial services sector practices, this is not the time to adopt any tax policies that would discourage home ownership.
The new federal government home mortgage finance rules requiring better disclosures to consumers beginning 1/1/2010 are a step forward, but more improvement is needed. They were watered down over the many years it has taken to develop the current rules. At the end of the day HUD officials in both the Bush and Obama Administration deserve the thanks of consumers for stiffening their resolve in the face of intense lobbying pressure from mortgage brokers, lenders, title insurers, and real estate brokers to abandon the process. They were able to get nearly half of Congress to sponsor legislation that would have prevented the new rules from being implemented. Lead sponsors of that legislation, Reps. Judy Biggert, R-Ill., and Ruben Hinojosa, D-Texas, failed recently in their last ditch attempt to delay the implementation of the new RESPA rules. Last October they sought unsuccessfully to amend the bill that would create a Consumer Financial Protection Agency.
I learned of one of the remaining problem areas when I went to settlement on the refinancing of the mortgage on our home this past Wednesday. Our new monthly mortgage payments turned out to be about $200 per month more than the estimated amount in our Good Faith Estimate. The difference was that the estimated property tax and hazard insurance figures in our GFE were $200 less than the actual amount we have been paying. We provided our current real estate taxes and property insurance numbers to our mortgage broker before he gave us the GFE. We assumed he would use those numbers in his estimate and therefor didn't bother to check them. As a result the low GFE monthly payment estimate he gave us made us smile, and certainly reinforced our decision to go forward with the refi.
One thing the new rules do not address is problems like this. Curious as to whether there is a tendency for mortgage brokers to low ball taxes and insurance to make their GFE new mortgage payment numbers look better than they actually will be, I asked the settlement service executive what share of the refis that come to her with GFEs in which the mortgage brokers used very low and obviously incorrect real estate tax and insurance amounts rather than the homeowners current actual payments. "Most of them", she told me. This and a number of other RESPA problems need to be addressed, but at least we're making a start.
Fannie Mae has announced a new "Deed for Lease" program to allow homeowners facing foreclosure to remain in their homes and rent them for up to a year. Typical rents today are far less than the mortgage payments on the same home. This new program will allow many homeowners who have seen their incomes reduced because of the economy stay in their homes. The Administration has tried several programs to reduce foreclosures through refinancing, but private mortgage lenders have been largely uncooperative.
The Deed for Lease program is an outstanding idea. It allows the government to generate fair market rent revenue from foreclosed properties it would lose money on if sold in today's market. It helps many homeowners who are innocent victims of mortgage fraud or job losses/cutbacks as a result of a mortgage lender-induced recession. Home values continue to drop, and this program, like the home buyers tax credit extension just passed by Congress, will help prevent home values from tanking even more and possibly setting off another economic meltdown.
Many of these homeowners will at some point find another job or go back to full work weeks . They can then afford to buy their home back directly from Fannie, which will also save taxpayers the 6% real estate commission Fannie would have to pay if it sold through traditional channels.
Mortgage lenders should consider a similar program. Growing numbers of underwater homeowners who are innocent victims of job losses/cutbacks are simply moving out and mailing the house keys back to the mortgage lenders. Consumers who own financial services firms through their IRAs, 401Ks, pension plans or investment portfolios are being poorly served by financial services firm executives who do not take steps similar to Fannie's to protect their shareholders' assets. They hurt stockholders and the economy previously by lending the stockholders' money to home buyers without documenting their income or assets, or otherwise ignoring sound underwriting practices. It is time for the mortgage lenders to step up to the plate and help undo the mess they created.
A Congressional Oversight Panel recently concluded that the Obama administration's Home Affordable Modification Program (HAMP) is not going to be able to address many troubled mortgages. The program was not designed to address foreclosures caused by unemployment, and many borrowers also have loans that aren't eligible for the program. requirements. Even if it meets its goal of making 25,000 to 30,000 loan modifications each week, half of expected foreclosures won't be addressed. Many of the HAMP modifications are unsuccessful because lenders are not making modifications that are affordable to borrowers.
The Panel missed a possible fourth fundamental weaknesses in the HAMP program - fraud. A government witness at a recent House Financial Services Committee hearing testified that some mortgage modifications scored as HAMP loan mods were really normal refinancings of healthy mortgages. The lenders motivation for doing so would be to get the government to pay for the administrative costs (they are subsidized by HAMP) and earn points with the Obama administration for "doing the right thing". Both Congress and the Congressional Oversight Panel should investigate this allegation because it would have a significant impact on the actual success of the program.
The lack of support for HAMP by the lender community suggests that the best alternative is to let independent third parties decide whether it is in the interest of the lenders' stockholders to rework troubled mortgages. This is a traditional and appropriate job for bankruptcy judges, and Congress should enact bankruptcy reform legislation to empower them to do so.
We applaud Senate Majority Whip Dick Durbin's decision to consider resurrecting the bankruptcy bill if the financial services industry is not able to complete 500,000 mortgage modifications by November. Foreclosed homes are nonperforming assets whose liquidated values are 8-10% less than their current market values after selling costs. If the homes aren't kept up or are vandalized their values will be even less than current market values. Once the real estate market stabilizes we will be lucky to return to historical 2-4% annual appreciation rates. Subtract carrying costs (taxes and insurance) and the measly net return makes holding foreclosed homes a poor long term investment for financial service firms' stockholders.
It is therefore very much in the interest of the industry and its stockholders to complete those modifications whenever it makes economic sense, and taxpayers are even underwriting the administrative costs of modifying those loans. It makes economic sense any time financial services company can restructure the mortgage for at least the homes current market value and the borrowers new payments will be 31% or less of their current income. The financial services firm would save the selling costs and future holding costs (taxes and insurance). With the likely measly net rate return if they held the asset, it would take many years of appreciation before they could liquidate the home for more than that.
There are many homeowners who can't afford their current mortgage payments, but could afford to make the payments on a reduced mortgage principle equal to or greater than their home's current market value. Creditors should be voluntarily and aggressively reducing those mortgage balances to such levels because it is in their stockholders' interest, but most are not. Bankruptcy judges are also charged with protecting the interest of creditors. If the bankruptcy bill passes they would have the ability to restructure the mortgage when it is the interest of the lenders, and the responsibility to order a foreclosure when a homeowner is unable to make payments sufficient to provide lenders a reasonable return on the current value of the home. This is not a cramdown for mortgage lenders, it is a helping hand.
Mandated arbitration between borrowers and servicers prior to foreclosure is also a good idea provided steps are taken to assure arbitrators are totally independent of industry influence. Allowing homeowners to stay in their homes for some time while they pay fair-market rent and creating financial penalties for firms that fail to meet the administration's foreclosure-reduction standards are also good options.
House Financial Services Committee Chairman Barney Frank, (D-MA), has introduced a bill to create an independent agency to regulate financial services. The legislation, HR 3126, would consolidate many regulatory functions spread among other agencies and would give it the authority to make and enforce rules that would hopefully prevent another meltdown in the mortgage finance sector as well as address many other financial services practices that may be injuring consumers.
Consolidation of the oversight of financial products that is now split between the Fed, the Securities and Exchange Commission, the Federal Trade Commission, and others can potentially improve regulatory efficiency substantially. It can also reverse the process of "regulatory capture" by the regulated industries that appears to have undermined the independence some of these agencies did have. However assuring that the oversight organization is free from political influence and staffed with competent professionals dedicated to protecting consumers is more important than where the authority resides. In designing the new institution we need to study the reason for regulatory failures at the Fed, SEC, OFHEO, and other agencies, and build protections against politicization into the new organization.
The American Homeowners Grassroots Alliance believes that the legislation is badly needed and also creates an opportunity to create more rigorous examination of other financial services areas that are badly in need of more oversight. For example the anticompetitive practices of many real estate services organizations are forcing real estate consumers to pay much higher real estate commissions than they pay in other developed countries. The new Consumer Financial Protection Agency should be given additional oversight of real estate services and the power to roll back industry and state regulations and laws that are stifling competition in real estate services and costing home buyers and sellers vast amounts of money.
In a May 27 Wall Street Journal article, writer Brett Arends concluded that very safe long-term inflation protected government bonds are better investments than buying a home. The bonds will likely provide a higher annual return than historical long term home appreciation rates, which are just above 4% (that historical average, by the way, has been changed very little by the combination of unprecedented run up in home prices during the first half of this decade, followed by the unprecedented retreat of those prices in the second half). The author did not consider other important factors that make homes a much better investment in reaching his conclusion, however.
The Obama administration is considering giving a single federal agency authority to regulate mortgages and other consumer-oriented financial products as part of the Administration's broader overhaul of financial regulation. Consolidation of the oversight of financial products that is now split between the Fed, the Securities and Exchange Commission, the Federal Trade Commission, and others would greatly improve efficiency. Assuring that the oversight organization is free from political influence and staffed with competent professionals dedicated to protecting consumers is essential. In designing the new institution we need to study the reason for regulatory failures at the Fed, SEC, OFHEO, and other agencies, and build protections against politicization into the new organization.
Congress will hold a hearing tomorrow on legislation to reform mortgage lending. The Mortgage Reform and Anti-Predatory Lending Act of 2009 (H.R. 1728) deserves our support! This bill is an important component of mortgage finance reform. Along with bankruptcy reform legislation, it will prevent the future destruction of the savings, investments and home equity of American homeowners. The Act would:
President Obama announced the "Making Home Affordable" program on Wednesday, March 4, 2009. It will contribute to the housing recovery, but won't be a panacea because of its numerous restrictions. According to an analysis by Zillow, a real estate website, about 25% of homeowners nationwide will be eligible. Any step forward is a good step, so we should welcome it and also understand that more steps will likely be needed.
The program has two parts. The Home Affordable Refinance program will enable those who have an existing mortgage owned by Fannie Mae or Freddie Mac to refinance at lower rates. The Home Affordable Modification program provides incentives to lenders to help at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. Homeowners can go to FinancialStability.gov to find out if they are eligible, and monitor the site to keep up with details as they become available.
Other parts of the housing crisis solution, such as federal bankruptcy reform legislation, are also in process. We are also optimistic that the Administration and Congress will be willing to take additional steps if they are needed.
We must find a way to reduce the inventory of unsold new and foreclosed homes before the housing market will stabilize. A 10% home buyers tax credit to offset home buyers very real fear of further price declines is the most logical way to approach the challenge. The economic stimulus bill included such a provision, limiting the credit to a maximum of $8,000 for first time buyers only.
Unfortunately, limiting the credit to first time buyers and to $8,000 is too restrictive to accomplish the task. It's modification could be done at a relatively modest cost, and should be considered as part of President Obama's budget plan.
The American Homeowners Grassroots
Alliance is a nonpartisan consumer advocacy organization dedicated to assisting
homeowners understand significant policy issues affecting homeowners and
homeownership, and helping them make their voices heard by state and federal
officials.
The American Homeowners Foundation is an
educational and research foundation providing information and tools to help
consumers make wiser decisions when they buy, sell, remodel, finance or invest
in homes.
