President Obama, apparently after much deliberation, has made a determination not to effectively reform the housing market before the presidential elections of 2012. We believe that the president has missed a unique opportunity to create a vibrant but responsible future housing market without government guarantees.
We concur with most experts that the Obama proposal to "reform" the government-sponsored enterprises is not really a plan since it fails to endorse any single option. Unlike the president, we do not intend to punt on this issue.
The future of homeownership for most Americans and the future of housing demand ride on effective and bold leadership.
Fannie Mae and Freddie Mac are probably in no position, due in large measure to bipartisan criticisms of their failure to lead our nation forward in terms of responsible homeownership, to assist in protecting the homeownership needs of most Americans.
There is, however, an option that Congress could exercise that is consistent with the recommendation of the president's bipartisan commission on debt reduction. It is a creative option that has rarely been discussed but is consistent with American homeownership values. This option could allow us eventually to have a homeownership rate that is almost as high as that in Western Europe (73%) without a Fannie or Freddie. (The U.S. homeownership rate for whites is presently almost 73%.)
We could do so without regard to any proposed reformations of Fannie and Freddie just by eliminating the present mortgage interest deduction.
Congressional leaders contend that this deduction will cost as much as $130 billion annually in lost revenue by 2012. The present deduction primarily benefits the small percentage of affluent homeowners who would purchase a home even if there were no homeownership deductions, much as is case today in Canada and Great Britain.
Our proposal is to allocate a maximum of 25% of the value of these mortgage deductions, or approximately $30 billion annually, to encourage responsible homeownership among the 70% of Americans who are at 120% or below median income (a disproportionate percentage are minorities, and within a generation more than half will be minorities).
Any family at 120% of median income or below who purchases a home at the median price or below in their region would be eligible for a refundable tax credit of up to $5,000 per year for seven years.
Assuming up to 2 million eligible Americans exercise this option in 2012 and 1 million Americans in each succeeding year, the cost would average less than $30 billion a year. This would permit a debt reduction of at least $700 billion over the next seven years.
Since the median price of a home is approximately $170,000, seven years of tax refundable credits would amount to the equivalent of a 20% down payment. The originator of the loan, assuming the financial institution retains an interest in the loan, would be able to secure the equivalent of a tax lien on the $5,000 annual tax credit to meet the down-payment requirement.
This would allow families who start with as little as 5% down to eventually provide the lender with the equivalent of a 25% down payment by year seven. This percentage exceeds the highest median down payment required since World War II.
The result of this one action, which is consistent with the recommendations of the president's own commission on debt reduction, could do more than any conceivable actions Fannie and Freddie might take to shore up the housing market.
This is especially necessary since prices are expected to decline by another 5-10% due to lack of demand and the number of American homeowners underwater could rise from 12 million to 15 million.
Assuming half or more of families eligible for this refundable tax credit would otherwise not qualify for homeownership under the newly constricted bank credit policies, American homeownership could rise within five years or less to the 69% level under former President George W. Bush — and, possibly within 10 years, to the 73% level in many Western European nations.
If we fail to take this action to reduce the budget deficit and shore up housing demand, we will not only fail to stem the tide of declining home prices, but radically widen the gap between white and minority homeowners. Recent HMDA data, for example, demonstrates that nationally the number of home loans originated for blacks declined from a market share of 6% in 2004 to 2% in 2009.
For Latinos the decline was equally grave, from 11% to 4%. And these gaps will further widen as we seek to end the 30-year, fixed-rate mortgage and require higher credit scores and far larger down payments.
We will be visiting with Democratic and Republican congressional leaders within the next few weeks to urge them to focus on what is doable and bipartisan rather than on what Fannie and Freddie should ideally be.
From the perspective of the 70% of Americans at 120% of median income or below, we do not necessarily need government-guaranteed mortgage originators. What we need is just the type of tax incentive that has routinely been given, generally at far higher amounts annually to the affluent who purchase McMansions. (The mortgage tax deduction for these families is often $60,000 a year or $1.8 million in tax deductions over the life of a 30-year mortgage.)
