The American Banker
Recently Secretary of the Treasury Geithner, who is increasingly assuming a more pro-Main Street stance, informed Congress that the federal government must continue to support homeownership through federal subsidies.
As every wealthy American and banking lobbyist knows, America has done more to subsidize homeownership of the affluent than any nation in the world. Last year, a $104 billion in tax subsidies was granted directly to homeowners who deduct their annual mortgage interest payments. In addition, $25 billion or more was lost to the Treasury through related property tax reductions.
Unfortunately, these tax subsidies are misdirected and rarely have any impact on homeownership. This is because the primary beneficiaries are those in the highest tax brackets with up to one million dollars in deductible interest payments. For some wealthy families, this amounts to $30,000 a year in tax benefits for homeownership or a value of almost a million dollars over the lifetime of a 30 year fixed rate mortgage.
But homeownership is not higher in the US as a result. In neighboring Canada, with a lower per capita income and no tax subsidies, homeownership is over 68% versus 67% in the US. And, in Great Britain, which recently phased out its tax subsidies, homeownership is at 73%.
We urge the administration, consistent with Secretary Geithner’s March 23rd Congressional report emphasizing the need for widely available mortgage credit, housing affordability and consumer protection, to consider two Main Street proposals. These could help produce a homeownership level as high as in Great Britain and help close the minority homeownership gap.
Due to their direct stimulus on new homeownership, up to 2 million new jobs a year and help create far more tax revenue for local communities presently facing severe essential service cutbacks.
The first proposal is to permit all homeowners with a mortgage who are at 120% or below median income to receive an annual $5000 per year homeownership subsidy. This subsidy would be limited to homes purchased at a price no greater than 120% of the median sales price in the region and disallow any deductions. This could benefit up to 20 million low/moderate income present and future homeowners. It would do so at a cost below the present annual subsidy that primarily benefits the affluent who would own a home with or without subsidies.
To minimize the costs of this program, all present homeowner tax subsidies could be gradually phased out beginning with limits on income and mortgage size. For example, reduce the maximum mortgage eligible for a deduction to twice the median cost in a region and disallow deductions for families with over $250,000 in annual income.
This $5000 annual subsidy could also effectively be used to ensure that families can meet the 20% down payment requirements. That is, the eligible homeowners could assign to the lender their right to the subsidy until the 20% down payment is met. For a median- priced home (presently $165,000) this could be accomplished in less than six years.
The other interrelated reform necessary to help close the minority homeownership gap, and encourage responsible homeownership rates as high as in Canada and Great Britain, would be to provide a 4.5 percent “plain vanilla” 30 to 40 year mortgage to all homeowners at 120% or below the median income for any home at a 120% or below the median home price in the region.
This easily understood “plain vanilla” mortgage has a number of other advantages. It meets the original Obama administration position that all financial institutions should offer as their primary mortgage instrument a “plain vanilla” option. Second, it minimizes the need for a fully independent Consumer Financial Protection Agency to protect consumers from predatory lending and confusing adjustable rate mortgages such as the generally discredited option ARMs.
One other reform that would help promote homeownership, create jobs, and restore the stability of home prices and neighborhoods would be to revamp our presently unreliable and unworkable credit scoring system. This badly flawed system has failed to protect against the affluent who walk away from their homes when they are deeply underwater and it has been unable to predict who will lose their job. Instead of this flawed system, we would suggest a national long term financial education and credit counseling program be mandated as a condition for future homeownership for those who seek to qualify for the $5000 annual homeowner subsidy or the 4.5% “plain vanilla” mortgage.
Founder and CEO, Mabuhay Alliance