By Edward J. Pinto,
February 5, 2016, - A recent Associated Press
poll found more than six in 10 respondents expressed only slight
confidence — or none at all — in the ability of the federal government
to make progress on important issues facing the country.
The public's skepticism is well
founded, especially when it comes to federal housing policy.
Notwithstanding an alphabet soup of government agencies and federally
backed companies — Federal Housing Administration, Fannie Mae, Ginnie
Mae, Freddie Mac, Federal
Housing Finance Agency, etc. — and trillions spent on
government-mandated "affordable housing" initiatives, our homeownership
rate today is no higher than it was in the mid-1960s. What is best
described as a nationalized housing finance system has failed to
achieve its two primary goals: broadening homeownership and achieving
wealth accumulation for low- and middle-income homeowners.
The U.S. homeownership rate as of the fourth quarter of 2015 is 63.8%, the same as in the
fourth quarter of 1966, and only marginally higher than the rate in
1956. More troubling, our housing policy has been unsuccessful at
building wealth — the antidote to poverty. Between 1989
and 2013, median total accumulated wealth for households in the 40th to
60th percentiles has decreased from $76,100to $61,800, while median
wealth for households in the 20th to 40th percentile has decreased by
more than 50%, from $44,800 to $21,500. It was
precisely these groups that were targeted to be helped by affordable
housing policies.
For the last 60 years, U.S.
housing policy has relied on looser and looser mortgage lending
standards to promote broader homeownership and accomplish wealth
accumulation, particularly for low- and middle-income households.
Leverage first took the form of
low down payments combined with the slowly amortizing 30-year term
mortgage, which resulted in
rapidly accelerating defaults, foreclosures and blighted
neighborhoods. Since 1972, homeowners have suffered between
11 million and 12 million foreclosures. During the 1990s and early
2000s, new forms of leverage were combined with declining interest
rates.
With demand increasing faster than supply, the result was a price boom
that made homes less, not more affordable, necessitating even more
liberal credit terms. We are all familiar with the outcome—a massive
housing bust and the Great Recession.
Today, in the shadow of Fannie
and Freddie's continued existence, taxpayers are again driving home
prices up much faster than incomes — particularly at the lower end of
home prices. U.S. housing policy has become self-justifying and
self-perpetuating — loved
by the National Association of Realtors, many housing advocacy groups,
and the government-sponsored enterprises, but dangerous to the very
homebuyers it is supposed to help.
To help achieve sustainable,
wealth-building homeownership opportunities for low- and middle-income
Americans, our current government-backed command and control system
should be replaced with market-driven antidotes. For most low- and
middle-income families,
the recipe for wealth-building over a lifetime contains three
ingredients: buy a home with a mortgage that amortizes rapidly, thereby
reliably building wealth; participate in a defined contribution
retirement plan ideally with an employer match; and invest
in your children's college education.
Here are three steps to make the first goal — quickly amortizing mortgages — more of a reality:
First, housing finance needs to
be refocused on the twin goals of sustainable lending and
wealth-building. Well-designed, shorter term loans offer a much safer
and secure path to homeownership and financial security than the slowly
amortizing 30-year mortgage.
Combining a low- or no-down-payment loan with the faster amortization
of a 15- or 20-year term provides nearly as much buying power as a
30-year FHA loan. A bank in Maine offers a 20-year term, wealth-building
loan that has 97% of the purchasing power of an
FHA-insured loan. By age 50 to 55, when the 30-year-term loan leaves
most homeowners saddled with another decade or more of mortgage
payments, the cash flow freed up from a paid-off shorter-term loan is
available to fund a child's post-secondary-education
needs and later turbocharge one's own retirement.
Second, low-income, first-time
homebuyers should have the option to forgo the mortgage interest
deduction and instead receive a one-time refundable tax credit that can
be used to buy down the loan's interest rate. Borrowers who participate
in a defined contribution
retirement plan might receive a larger tax credit, enabling them to
lower their rate even more.
The one-time tax credit would
support wealth-building by being available only for loans with an
Reductions
in the Department of Housing and Urban Development's budget and other
budgeted amounts supporting "affordable housing" should also be used to
fund LIFT Home. Better to provide
the dollars directly to prospective homeowners, than to be siphoned off
to bureaucracies and advocacy groups.
initial term of 20 years or less. To avoid pyramiding subsides and
reduce taxpayer exposure, only loans not guaranteed by the federal
government would be eligible.
This would provide a big start to weaning the housing market off of
government guarantees. With the Low-income First Time Homebuyer — or
LIFT Home — tax credit in place, the Fannie and Freddie affordable
housing mandates could be eliminated, ending the race
to the bottom among government guarantee agencies.
Third, the home mortgage
interest deduction should be restructured to provide a broad, straight
path to debt-free homeownership. Today's tax code promotes a lifetime of
indebtedness by incenting homeowners to take out large loans for
lengthy terms so as
to "maximize the value" of the deduction. Current law should be changed
to: limit the interest deduction for future home buyers to loans used
to buy a home by excluding interest on second mortgages and cash-out
refinancing; for future borrowers, cap the deduction
at the amount payable on a loan with a 20-year amortization term; and
provide a grandfather on the deduction cap for existing home loan
borrowers with 30-year loans as long as their interest savings go toward
shortening the loan's term.
A 21st-century market approach
to wealth-building offers a safe and secure path to homeownership and
financial security, something we haven't had for decades.
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