The Dilemma's Innovator

Friday's New York Times op-ed page contains a necessary, albeit anachronistic, criticism of the tax credit for first-time homebuyers, a "proposal" supported by Senator Chris Dodd. John Carney of ClusterStock and The BusinessInsider argues against extending and expanding the credit. Evidently, he didn't realize that Congress has already done just that: President Obama signed a bill into law last week that delays the program's termination and makes the credit available to all homebuyers.

Still, Carney's worry that the tax credit "enable[s] some of the worst mortgage practices of the recent past" remains valid. The credit is poorly targeted because it now applies to families making up to $225,000 a year who purchase homes worth up to $800,000. But, as Carney suggests, at the lower end of the pricing spectrum (below $228,000), the credit also incentivizes home purchases by buyers who put no money down- buyers who are more likely to foreclose on their homes.

Carney's op-ed brings up an issue vital to the current debate about financial regulation and ensuring that consumers are protected from the abusive mortgage practices that precipitated the foreclosure crisis. One of the primary arguments against a Consumer Financial Protection Agency, which would watch over financial products like mortgages and credit cards and perhaps sanction "vanilla" products, is that it would stifle innovation. As an unintended consequence, the argument goes, low-income consumers who would not qualify for, say, a "normal" mortgage would not be able to obtain a riskier one and, in turn, would be shut out of homeownership.

Yet, data from the recent subprime boom suggests otherwise. A recent paper (via The Stash) demonstrates that financial innovation in fact harmed low-income consumers:

Somewhat surprisingly at first glance, agents born with low income prospects benefit the least from mortgage innovation. The reason for this is that in all likelihood they will remain renters their entire life. The gains are so small, in fact, that in a model where house prices respond to demand for housing, mortgage innovation is likely to have a negative impact on agents who are born poor. Mortgage innovation primarily benefits the agents who are at the margin between renting and owning or need some financial help to buy bigger houses.

This conclusion provides good cause to be suspicious of arguments that regulation of financial products would by nature harm lower-income households who in recent years came to depend on cheap and risky credit to obtain homes. To the extent that Carney is right and the tax credit perpetuates practices similar to those used by subprime loans, the homebuyers' credit not only benefits wealthier households, but also has the potential to harm lower-income ones.

Instead of perpetuating the federal government's over-subsidization of homeowners and under-subsidization of renters -- the feds provide four times the support to the former as the latter -- Congress should work to develop a housing policy that helps, not hurts, low-income households. A Consumer Financial Protection Agency that roots out harmful mortgage products, even at the expense of expanding homeownership, would not be a bad start.

 

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Comments

[olephart]

Current tax law subsidizes home ownership for the well to do, those in “high cost states” and McMansions. The more house you have the greater the tax savings. Moderate income families must overcome the standard deduction in order to receive tax benefits. Thus lower priced homes yield little or no tax benefits. The tax code also subsidizes inflated home prices putting more Americans out of reach of home ownership.

The tax code should be changed to give a TAX CREDIT of 20% of mortgage interest and taxes capped at about $2,500. An example would be a $200,000 mortgage at 5% and $2,500 in taxes. Twenty per cent of $12,500 would be $2,500. Those with greater costs would get no extra benefits. Those with lower costs would receive slightly less. This credit would still allow the full benefit of the standard deduction. Thus it would benefit all equally but those on the lower end to a greater proportion than those on the upper end.

[therealredstateblues]

A similar thing happens with Indianas property tax structure - those with newer more expensive homes saw breaks of up to 30% on their property taxes, while those of us with older homes in established neighborhoods saw our property taxes increase significantly to make up the difference

preperty taxes are regressive

this structure encourages sprawl and people buying new and discourages buying exisiting homes - hurting neighborhoods

[Incorrect Assumptions]

We should make law that cuts private bankers out of the middle of mortgages. This would help all homeowners. We would have no need for any so called "financial innovations" that are nothing but methods to transfer wealth and income to an elite under the guise of ownership. I suggest we:

- Write the American Dream into law and cut everyone's mortgage in half

How? By absorbing the private Fed into the public Treasury (public money creation, as the constitution stipulates) and giving Americans what banks now get - direct access to the discount window. We should end private mortgage banking and provide credit worthy Americans the ability to refinance into one near interest-free mortgage with our own newly created US public bank. We already own everyone's mortgage already anyway (Freddie/Fannie and the toxic waste that Obama/Congress allowed onto the Feds books, marked to fantasy).

By cutting the private bankers out of the middle, we could cut everyone's mortgage in half, reduce the "math problem" of compound interest, fix the toxic waste issue, stimulate housing and the economy, provide shelter, save enormous amounts of interest, a real ownership society, revive trust in markets, etc.

Each of us would feel this BIG TIME!

Who loses? The bankers that make money on money by cheating, stealing, fooling, bribing, foreclosing etc.

Attack the root cause!

[sonofsamphm1c]

What is the current balance discount window lending? What is the current outstanding balance for all residential mortgages? I think there is quite a gap there.

[Incorrect Assumptions]

Here in lies the misconception about money. Do you think commercial banks have actual capital when they lend? For the most part, they do not. There simply is no reason to cut banks in the middle of mortgages. Boy would they freak out if we cut them out. Since the crash, all lending starts and ends with the discount window. All prior mortgage debts have been sumarily transferred to us taxpayers in the form Freddie/Fannie receivership, toxic waste, and the like. We have more given/lent­/guarantee­d to Wall Street than all mortgages combined. It's a crime.

[Deltau]

Further to your point, isn't a mortgagor who will NEVER payoff the mortgage in fact a renter? Isn't it clear that the purpose of the program is to incentivize buyers, and the objective is to sell mortgages and houses - the objective CANNOT be to benefit low income mortgagor.

[dadw5boys]

Well many get Equity in their homes then borrow to buy a 2nd home that is smaller and cheaper.

Then when retiement comes around you sell the big house and pay off the 2nd home and try to live quitely.