Homeowner's Blog

Go Bravely Forward

President Obama and Congressional Democrats are headed for a fight with the GOP and  Wall Street over financial services regulatory reform. The results of the financial meltdown have been disastrous, and clearly strong regulation is needed to prevent similar irresponsible actions by financial services executives. At the same time it is also possible to go too far, and some types of regulation could indeed hurt the economy more than they could contribute to preventing another meltdown.

Opinions on the latter vary greatly, and those opinions are mainly conjecture no matter which side they fall on. In the opinion of the financial services sector, all substantial regulatory changes are risky. If we heed their opinion, there will very little protection against another meltdown in the future. We've seen the results of the meltdown, and we would rather risk over-regulation than leave ourselves exposed to another financial meltdown. Besides, any regulatory excess will soon be corrected anyway. We can trust the financial services sector to get right to work on correcting any such excesses, even before President Obama signs the bill! That would be a productive use of their time and money. For that matter, even if the bill was virtually toothless, we can also count on the financial services sector to get right to work on watering it down further before President Obama signs the bill. Better that they productively spend their time and money bringing the measure back to neutral rather than gutting a weak bill entirely. At least that way we'll buy ourselves a couple extra years before the next meltdown.

Ultimately we are looking at the same math as the health care bill. If the Administration and Senate Democratic leadership want to pass the bill they will need 61 votes, and will need to make such compromises as necessary to get those votes. That's fine with us. The financial meltdown was real, but the risks of over-regulation are a matter of opinion. We should all support the Administration and Senate leaders who appreciate the gravity of the risks in this effort. Supporters of substantial regulatory reform have differing views amongst themselves on what will work best. We should recognize the challenge of getting the needed votes and should temper our own respective opinions regarding specific provisions in order to facilitate the immense task of getting the kind of financial services reform we need through Congress.

Regardless Of The Health-Care Summit Outcome, The Political Math Is Pretty Easy

The political math on this issue is really very simple. The public supports a health care bill, but believes the current Democratic alternatives are too expensive and the current Republican alternatives are too stingy. The public wins if both sides meet each other half way and Congress passes a consensus bill, which would also give Congress and both parties a badly needed boost in the public's eye. This would be the safe route for both parties. In alternative scenarios, either party could lose big time at the polls this fall, depending on how things play out.

Democrats will certainly lose a lot of seats this fall if they game the reconciliation process in order to pass a bill that the public perceives is too expensive. Republicans will hammer them mercilessly on both the cost of the measure and the unfairness of the process. Moderates will desert the Democratic party in droves, whether the healthcare bill passes or not. Conversely the Republicans risk losing their current polling advantage on this issue if they refuse to meet the Democrats in the middle and the Democrats then take the more moderate approach in order to pass a health care bill without gaming the process. The risk for Republicans is that the Democrats might voluntarily reduce the cost and coverage of their bill as much as it takes to get 60 votes in the Senate, which would require the vote of one moderate Republican and make it a "bipartisan bill" in Washington parlance. The bill would only have to be affordable and just a little better that the Republican alternatives to achieve wide public support, and that is not a big challenge.  If the Democrats took the latter approach and succeeded, the current Republican polling advantage on this issue would evaporate.

Of course the latter approach also assumes that the liberal House Democrats would support such a Senate bill. Betting against such an outcome could be a smart move from a Republican perspective. The resulting bill could easily fail because of Democratic intraparty fights, and the outcome could be a disaster for the Democrats in November. Democrats would deserve the punishment because of their failure to respond to the need for moderate support.

The risk for Republicans of betting on Democratic self destruction is that the Republicans then have no control over the outcome. If the Democrats do manage to pass a bill that is broadly perceived as both affordable and better than the Republicans are offering, they will recapture public support on this issue. The polling advantage could turn against the Republicans if the public also perceives the failure to reach a compromise in the current discussions was more because of Republican inflexibility than Democratic inflexibility.  

As the Olympic games in  Vancouver wind down, the health care policy game finals are starting in Washington. Step right up and place your bets, folks. The final score will be announced this November.

Some Proposed Administration Tax Increases are Needed; Others are Bad Policy

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.

A New Stimulus Program

President Obama outlined new incentives to ease the unemployment and strengthen the economy on December 8. Among the components are a "cash for caulkers" proposal that would provide tax incentives for home weatherization. With only the slightest progress towards economic and job recovery so far, it was important to the national psyche that the President reaffirm the commitment to whatever steps are necessary to avoid risks of further economic erosion, and to create confidence that more will be done to start reducing unemployment. It was also important to the national psyche that the President reaffirm that some of the repaid TARP funds will be allocated to budget deficit reduction, an objective that is critical to our long term economic health.

Congress won't start seriously looking at the President's recommendations until early next year. That's also appropriate, because we'll then have a better idea of how the funds from the previous stimulus package that are only now beginning to impact the marketplace are working, and Congress will be better able to gauge how to balance deficit reduction goals with the need for more stimulus as it exists at that time. Best news of all would be that the current stimulus program is beginning to significantly reduce unemployment by then, and much more of the money could be used for deficit reduction.  All in all, there was only upside in the President's announcement.

Healthcare: The Art of the Possible

Healthcare legislation is in the news a lot these days. Popular support for President Obama's plan is eroding according to the polls. Faced with that challenge, Congressional supporters have been expected to either go for broke or else cut out some of the controversial parts. The latter would include reducing the total cost (one of the big sticking points), as well as removing relatively minor provisions that have become very controversial (insurance coverage for end-of-life counseling, for example).

A third alternative has been gaining momentum the last several days. Senate democrats are thinking about dividing the bill into two parts. A less controversial bill with little or no budget impact would be voted on first. It would include such generally popular provisions as prohibiting insurance companies from denying coverage to consumers based on pre-existing conditions. That should pass easily, probably with significant Republican support. The big fight would be over the far more expensive second measure. Some parliamentary procedures could make it possible to pass the bill with only 50 votes. However Senate Democratic leaders would still have to consider the public opinion polls. Even if they could pass a very expensive bill, that could come back to haunt them in the 2010 mid term elections.

Whatever course Congress follows, we hope that they will keep in mind that the vast majority of homeowners support healthcare reform in one form or another. Some want it all right now, while others support only parts of the proposals that have been offered. A lot of homeowners are both moderates and pragmatists. We want to see the situation improved this year, and would rather save some fights for later than have the effort fail because the extremists of either party were unwilling to compromise.

The two prong approach is starting to look pretty attractive. If Congress can pass a widely supported package with substantive improvements most homeowners will be happy. They can then relax, make some popcorn, and sit back and watch the next fight between the extremists of both parties.

Obama Weighs Oversight of Mortgage, Consumer Financial Products

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.