Recently, Treasury Secretary Timothy Geithner, who is increasingly assuming a more pro-Main Street stance, told Congress that the federal government must continue supporting homeownership through subsidies.
As every wealthy American and banking lobbyist knows, America has done more to subsidize homeownership by the affluent than any nation in the world. Last year $104 billion in tax subsidies were granted directly to homeowners who deducted their mortgage interest payments. In addition, $25 billion or more was lost to the Treasury through related property tax deductions.
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 $1 million in deductible interest payments. For some wealthy families, this amounts to $30,000 a year in tax benefits from homeownership, or nearly $1 million during the life of a 30-year mortgage.
But homeownership is not higher in the U.S. as a result. In neighboring Canada, with lower per capita income and no tax subsidy, the homeownership rate is more than 68%, versus 67% in this country. And in Great Britain, which recently phased out its tax subsidies, the homeownership rate is 73%.
We urge the administration — consistent with Secretary Geithner's March 23 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 rate as high as Great Britain's and help close the minority homeownership gap.
The first proposal is to give all homeowners with 120% or less of the median income a $5,000 annual mortgage subsidy. The subsidy would be limited to homes bought at a price no higher than 120% of the median sales price in the region and would disallow any deductions. This could benefit up to 20 million low- to moderate-income homeowners and prospective homebuyers. It would do so at a cost below the present subsidy that primarily benefits affluent people who would own a home with or without subsidies.
To minimize the cost of this program, current homeowner tax subsidies could be phased out, beginning with limits on income and mortgage size. For example, cut the maximum mortgage eligible for a deduction to twice the median cost in a region and disallow deductions for families with incomes above $250,000.
A $5,000 annual subsidy could also be used to ensure families meet lenders' 20% down payment requirements. Eligible homebuyers could assign to the lender their right to the subsidy until the down payment amount is met. For a median-priced home ($165,000 at present), this could be accomplished in less than six years.
A second, interrelated proposal would be to offer a 4.5% "plain-vanilla" 30- to 40-year mortgage to all homebuyers with 120% or less of the median income to buy any home at 120% or less of the median home price in the region.
Such easily understood mortgages satisfy the original Obama administration position that all financial institutions should offer plain-vanilla primary mortgage products. They would minimize the need for a fully independent Consumer Financial Protection Agency to shield consumers from predatory lending and confusing adjustable-rate mortgages like the discredited option ARMs.
Another reform would be to revamp our unreliable and unworkable credit scoring system. This 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 jobs.
Instead of this flawed system, we would suggest that a national long-term financial education and credit counseling program be mandated as a condition of homeownership for those who seek to qualify for the $5,000 homeowner subsidy or the 4.5% plain-vanilla mortgage.