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Home loans in the US: the biggest racket since Al Capone?

Posted: Thu Feb 19, 2009 5:11 am
by annarborgator
Excellent rant by Willem Buiter over at FT's Maverecon blog...I'll snip some of my favorite parts but it's worth reading in its entirety, IMO:
All this is rather insane. Through the deductibility of mortgage interest from taxable income, the US tax payer gives vast subsidies to borrowing secured against a particular type of collateral - residential real estate. What so special about this borrowing and this collateral? Fortunately, the UK has abolished this boondoggle. In the US, other forms of preferential treatment for home ownership are piled on top of the mortgage interest-deductibility.

Over half the stock of home loans, and virtually all new home lending in the US are heavily subsidized by the lending and guarantees of Fannie Mae, Freddie Mac, Ginnie Mae and assorted aller smaller government agencies. The direct interventions of the Fed and the Treasury in the market for residential mortgage-backed securities, announced as part of the credit-easing policies of the FEd represent further quasi-fiscal subsidies to housing finance. This is on top of the creation by the Fed of at least a dozen facilities that accept RMBS as collateral for Fed loans in the earlier stages of the financial crisis. All these quasi-fiscal interventions by the GSEs and the Fed are deeply non-transparent as regards the magnitude of the subsidies involved. They also evade the normal scrutiny and accountability to Congress that is associated with explicit subsidies by the Treasury.

The only priviliged treatment of residential housing that makes a modicum of sense from the perspective of encouraging owner-occupancy (as opposed to borrowing to fund whatever expenditures using residential housing as collateral), is the ability to postpone capital gains taxation on the sale of one’s principal residence, and to have one capital-gains-tax-free realisation during one’s lifetime (taken generally when people size down on retirement or when the kids have flown from the nest).
http://blogs.ft.com/maverecon/2009/02/home-loans-in-the-us-the-biggest-racket-since-al-capone/

Interesting stuff.

Home loans in the US: the biggest racket since Al Capone?

Posted: Thu Feb 19, 2009 5:13 am
by annarborgator
Further down in the article...
The Obama administration is going to ease the burden on existing financially challenged mortgage borrowers. As much as $75 bn will be used to compensate the lenders - the banks or to bribe them into accepting easier financing terms for financially stressed borrowers. That’s nice. It will, of course, encourage moral hazard. People who have mortgages that have become too large for them to service and who have not bothered to purchase the right kind of mortgage protection insurance are getting ex-post free mortgage protection insurance from the tax payer. It will encourage future reckless borrowing by would-be home-owners with residential ambitions larger than their wallets. It is tax on the prudent to subsidize the imprudent. It is both inefficient and unfair. Fannie and Freddie will expand their lending and guarantees thanks to the addition capital provided by the Treasury.
Great stuff.

Home loans in the US: the biggest racket since Al Capone?

Posted: Thu Feb 19, 2009 5:23 am
by annarborgator
And he drops the death knell:
The quasi-socialised, opaque system of residential mortgage financing in the US is wasteful and distortionary to a degree that is truly staggering. How can this grotesquely distortionary and deeply unfair system be killed off when so many undeserving over-indebted homeowners who also happen to be marginal voters, so many politically well-connected interest groups and so many influential politicians all have their snouts in the trough? It is clear that the Obama administration far from using the opportunity sent by the crisis to cut the mortgage monster down to size, is instead feeding it and beefing it up further.

The fiscal and quasi-fiscal costs of this massive subsidization of residential mortgages will become apparent during the years to come, as mortgage related government expenditures rise and revenues fail to materialise. But that will be then – sometime in the future. This is now. And now always wins. Myopia, opportunistic behaviour and insider protection: welcome to US home financing policy.
http://blogs.ft.com/maverecon/2009/02/home-loans-in-the-us-the-biggest-racket-since-al-capone/

Wow. Just wow. Great rant, IMO, and on point.