Wednesday, August 24, 2011

America's Unique, Unsuccessful and Dangerous Housing and Mortgage Policies

The Richmond Fed has an interesting cover story in its second quarter publication titled "Foreign Housing Finance," with some interesting comparisons of U.S. housing finance, mortgage markets, and housing policy to other countries.  Here's an excerpt: 

"It is common for developed-country governments to intervene in the provision of housing services. Many have state-owned rental properties for example, and most have housing programs targeted to lower-income families. Nearly every industrialized country also encourages the direct ownership of homes through tax breaks and other policies — but none does so to the extent of the United States. 

“Compared to other developed countries, only a couple come even close,” says economist John Kiff, who in April 2011 published a comparative analysis with colleagues at the International Monetary Fund (IMF). “You’ve got interest payment deductibility, nonrecourse [mortgages] in some states, special protections in bankruptcy courts,” among other things, he says. Then there’s the support of mortgage finance by Fannie Mae and Freddie Mac, the creatures of statute known as government-sponsored enterprises (GSEs). “Everything you could possibly name for supporting homeownership for everybody regardless of whether they can afford it, it’s all in place in the U.S.”

Given that the United States pours relatively more public resources into promoting homeownership, one might expect an obvious reflection in homeownership rates. This is not quite the case. At about 67 percent, the U.S. homeownership rate — defined as the ratio of occupied housing units that are owned by the resident — falls squarely in the middle of the pack among developed nations, although it should be noted that many factors affect homeownership, from rental policies to zoning regulations to intangibles such as culture (see chart above).

By some measures, we actually perform worse. The United States experienced a greater percentage of mortgage defaults during the recent global housing market decline than any other developed nation, despite some occurrences of larger housing booms and busts elsewhere. About 8 percent of U.S. mortgages were in default at the end of 2010, down from almost 10 percent a year earlier. Countries differ in what legally count as mortgage defaults, or “arrears,” but according to local definitions, almost 6 percent of Irish mortgages were 90 or more days in arrears in late 2010. Spain and the United Kingdom trailed at about 3 percent and 2 percent of mortgages, respectively, and defaults in most other developed countries hovered below 1 percent.

Whatever benefits the government’s support of homeownership has bought for the United States, its costs are evident. The government has injected more than $150 billion so far toward rescuing housing agencies Fannie Mae and Freddie Mac, whose support of the mortgage market resulted in record losses. U.S. housing policies heavily encourage consumers to build housing debt (as opposed to equity), which some data suggest may have helped to turn the unprecedented housing decline of the late 2000s into the major recession that followed."

MP: There are two excellent sidebar articles that accompany the main article, one on how U.S. housing policies encourage excessive debt (over equity), and another one on the 30-year fixed rate mortgage, both are worth reading.

One conclusion from the article might be that even with our political obsession and public policies directed towards increasing homeownerhsip, we still never achieved the levels of homeownership in countries like Canada, Australia, Ireland and Italy that don't promote homeownership as aggressively as in the U.S.  And it was the political obsession with homeownership that was largely responsible for the housing bubble, deterioration of credit standards, mortgage meltdown, and financial crisis.  So the political obsession with homeownership failed by every measure.   


At 8/24/2011 6:23 PM, Blogger Mike said...

Couple thoughts:

As I suspected, a quick Google search confirmed my suspicion; Hungary has no property tax. Curious about the policies of other countries....

Secondly, and I haven't thought this all the way through, but it seems to me that the tightrope the US is trying to walk is a method of 'buying' tax payers. If you are a renter in an income bracket that pays little or no fed tax, with deductions for children, wouldn't it be better to make renters into home owners (property tax payers) to cut down on federal-to-local transfers?

At 8/24/2011 6:27 PM, Blogger Craig Howard said...

I seriously doubt any substantive changes will be made to the government's policies of encouraging home ownership. I do suspect, however, that the days of considering a house as an investment are over -- at least until QE10 or 11.

At 8/24/2011 6:36 PM, Blogger Benjamin Cole said...

In fact, at the height of the boom, there was plenty of private residential mortgage-backed securities being sold, rated by S&P et al. to private-sector buyers. The fastest growing part of the market.

The commercial real estate market, without the government interventions, had a nearly identical collapse. Office buildings are worth half of what they were....

Other nations had real estate tumbles...

All of this suggests a global real estate boom, across sectors, than ran into the buzz saw of declining demand. Remember, in the US 2008 fourth-quarter GDP fell at nine percent annual rate. You think any values would hold up? Remember what happened to stocks?

That said, I would like to see the home mortgage interest tax deduction eliminated. And phase out Fannie and Freddie. And simplistic GOP dunceworks.

At 8/24/2011 6:53 PM, Blogger Larry G said...

keep in mind that the states have the right to regulate mortgages also and, in fact, Texas and Vermont have fairly strict home equity requirements that some say played a significant roll in Texas and Vermont not being nearly as badly effected as other states.

just saying...

the States were not kept from having their own tighter standards....

At 8/24/2011 6:58 PM, Anonymous Anonymous said...

"And simplistic GOP dunceworks."

Help me out here, please. What are you referring to?

At 8/24/2011 7:16 PM, Blogger Benjamin Cole said...


The dunceworks that insist on a single convenient partisan reason for anything untowards that happens.

So, spending $4 trillion in Iraqistan had no bad effect on the economy? How about the home mortgage interest tax deduction? The ethanol program? Siphoning $400 billion extra a year out of the private-sector to finance a huge expansion of the defense-homeland security-VA megaplex?

How about private speculators leveraging 100-to-1 in some financial instruments?

How about ratings agencies that gave triple-AAA to CMBS? (Now trading at 60 cents on the dollar)

The blame Fannie and Freddie rant for causing a global economic rout may have some merit--but it is only a fraction of the whole story. It is simplistic sing-songing, good for the radio talk show hosts.

At 8/24/2011 7:39 PM, Blogger Mike said...

If the government that backed the mortgages was rated AAA, wouldn't you have rated them AAA if you were selling them?

At 8/24/2011 9:49 PM, Blogger Stephen Purpura said...

Thanks for pointing out the report.

One of the things that is striking to me is the data on Spain. My uncle owns a home there and I help him with financial issues. The culture supports generational home ownership with limited mobility. Children stay with the parents in the home into their late twenties until they move out, settle down, and can actually get married and get a home loan. The culture feels a lot different than the U.S., where we would stigmatize adult children living at home as a failure to launch.

At 8/24/2011 10:30 PM, Blogger Benjamin Cole said...


There was an even larger amount of commercial mortgage backed securities (CMBS) issued, that is now worth 60 cents on the dollar. These were privately financed, and privately bought, all by sophisticated investors.

And a increasingly large slug of RMBS were private/private.

Look, I am all for phasing out Fannie, Freddie and the home mortgage interest tax deduction.

But we have had private real estate busts in global history before, and we will have them again. Private markets can boom and bust, and they did in this case.

Sheesh, remember the tech-IPO boom-bust of the 1990s? Private markets often bust. In fact, creative destructionism is part of capitalism.

I still think there is a government role in maintaining sound financial markets. If our financial system tanks, it does tend to drag everything down with it, and deflationary depressions can be self-generating. Sure, if you have a few decades, maybe you can work your way out of it.

I prefer not to wait that long.

At 8/25/2011 12:03 AM, Blogger Unknown said...

Some observations:

Some of the housing policies of the US subsidize ownership of multiple homes or investment properties. So our subsidies may be less effective at increasing the home ownership rate, all else equal. Policies in some states, such as Prop 13 for property taxes, slow housing turnover and provide a de facro subsidy for renting out properties.

What is the "correct" rate of home ownership? It is correct to buy a home when the expected benefits outweigh the expected costs. Even in one country this is a moving target. Since each country has different parameters affecting the buy vs rent decision, comparing ownership rates between countries is completely uninformative. You would have to control for every explanatory variable to draw meaningful conclusions.

Spain, for example, has onerous laws protecting renters, so the supply of rental properties is artificially low. This has the paradoxical effect of increasing the home ownership rate.

Australia is in an enormous boom in housing - likely a huge bubble, fueled by China.

Mike found an important difference in Hungary.

The most noteworthy omission in the FCIC majority report was any blame on government policies. There was a tiny section mentioning housing policies in passing in the FSOC report.

At 8/25/2011 12:23 AM, Blogger Unknown said...

Benjamin, the GSEs had more than 50% market share of the MBS market for all but two years, and even in those years they still ranked 1 and 2 in MBS issuance. The top private label was a distant 3rd place. In 2006, the GSEs issued more MBS than the top 10 Private labels combined.

The idea that the GSEs faded from the scene is hogwash. They were always and still are the market leaders. They bought the best mortgages and everyone else got what was left over. Other GSEs included the Federal Home Loan Banks which provided high cost funding to banks for both residential and commercial construction.

Yes, we had an equally large bubble in CRE which followed on the heels of housing. Commercial properties always tend to pop up near new housing developments, so the housing subsidies helped fuel the commercial market as a spillover effect. When government ran utilities and roads out to residential developments, they did so for commercial properties too.

Also, when housing starts began to decline in 2006, banks went looking for new profit opportunities in CRE. Shareholders were expecting returns to equity to remain strong, so when profits in housing declined, bankers looked elsewhere. These opportunities included SBA loans that taxpayers were guaranteeing.

We still had a lot of domestic and foreign investors searching for yield to pump up the CMBS market. Some of the CRE was for residential construction.

So no, housing policies dont explain all of the housing and financial crisis, but they sure explain a large part of it, and they also determined where there were bubbles and where there were not. Some states had no bubble or bust. Low price tier housing went through a much bigger boom and bust than high and middle price tiers. Part of that was similar to the idea behind buying small cap stocks. But a large part of it was affordable mortgage products and government subsidies.

The policies hurt the people they were trying to help. But the rest of us get to bail them out.

At 8/25/2011 2:41 AM, Blogger adam l said...

while housing is more complicated, its no different from the university tuition bubble. government subsidies in all their forms, do not make it appreciably easier to buy - they just make it more expensive to buy for everyone, especially in the expensive areas where the tax breaks are worth more. yes, there are exceptions, but the housing market as a whole has always been inflated, the more government support there is. and it got ridiculous in the last decade, and the more prices went up, the culture changed - a home wasnt a place to live - people viewed it as an investment instead. the way for government to support the housing market expansion would be favorable zoning changes, and infrastructure enhancements to in-demand areas.

At 8/25/2011 8:02 AM, Blogger morganovich said...


your argument only holds is capital for mortgages does not flow across borders, which is wildly untrue.

mortgage rates all over the world were driven by US rates, as were lending standards.

this is why you saw such busts in eastern europe, iceland, ireland, and all the places close linked to our system and who adopted our practices, yet not in paces like canada, that did not and where loans are full recourse.

regarding your ideas about AAA MBS's, that was the direct result of the government guarantees through freddy and fannie. (note that it also turned out to be true) the default rates were high, but the feds made them good, just as expected.

absent that federal guarantee, those instruments would never have been AAA.

you are trying to blame banks and S+P for correctly predicting the results of disastrous federal policy.

most of those MBS's would up owned in europe, whose banking system is MUCH more sensitive to short term disruption that ours. we lend 95-98 cents/$1 of deposits. they lend $1.20 and make up the difference in the short term money markets. thus, a disruption in STMM leaves all the european banks immediately illiquid.

At 8/25/2011 9:04 AM, Blogger Junkyard_hawg1985 said...

I find it interesting that Portugal, Italy, Ireland and Spain have some of the highest homeownership rates in the world. Now where have I seen those names together before?

At 8/25/2011 9:28 AM, Blogger Paul said...

"So, spending $4 trillion in Iraqistan had no bad effect on the economy?"

Benji once again spouting this made-up number he pulled straight out of his ass.

At 8/25/2011 11:51 AM, Blogger Hydra said...

"Whatever benefits the government’s support of homeownership has bought for the United States, its costs are evident. "


Never mind what the benefits are, they cost too much?

Really? And this from an economist?

At 8/25/2011 11:53 AM, Blogger Hydra said...

The average age of Canadian homeowners is much higher than the average age for American homeowners, and as a result not as much time is avaialble for the benefits of home ownership to accrue.

At 8/25/2011 11:54 AM, Blogger Hydra said...

government subsidies in all their forms, do not make it appreciably easier to buy - they just make it more expensive to buy for everyone


A friend just came back from norway, and this is the situation they described there.

Everybody is rich, so everything is expensive.

At 8/25/2011 1:29 PM, Blogger Mike said...

Benjamin/ Morganovich

Please re-read my first post/theory and tell me where I'm wrong.

Just for example, if you're a single parent making around 50k, your standard and child deductions wipe out much of the mortgage deduction's almost a wash. Encouraging them to become home owners makes them property tax payers instead of non tax payers.

I'd really like someone to tell me where I'm wrong on this.

At 8/25/2011 2:45 PM, Blogger Larry G said...

I'd really like someone to tell me where I'm wrong on this.

the mortgage deduction and the child credits are ADDITIVE.

you get BOTH (if you itemize).

the child credits you get no matter what...

At 8/25/2011 3:52 PM, Blogger Mike said...

You can't deduct past zero liability (except in some rare-ish) cases.

The tax on a 50k earner, minus standard deduction and child deduction makes the mortgage deduction nothing or next to nothing.

At 8/25/2011 4:47 PM, Blogger Hydra said...

Encouraging them to become home owners makes them property tax payers instead of non tax payers.

I'd really like someone to tell me where I'm wrong on this.


They pay property tax either way, only the landlord gets to deduct it if they are renters.

They make more or less equivalen payments and get zero equity.

They may get little or no deduction in the beginning, and more later as their income rises.

One reason their income may rise is that the employer values the sability and responsibility that hoe ownership exhibits.

At 8/25/2011 5:04 PM, Blogger Larry G said...

You can't deduct past zero liability (except in some rare-ish) cases.

when you compute your AGI .. then your tax... the next sections are CREDITS that you get no matter what... and results in REFUNDS

the mortgage deduction offsets your tax liabilities but the credits you get no matter what.

At 8/26/2011 1:45 PM, Blogger Mike said...

I know this can vary by state, but it still seems right to me. The apartment owner is paying property tax regardless - if the unit is full or not (right?).
Someone with little or no tax liability would be paying when they weren't.

Larry brings up credits and deductions, but the reason I brought up the income bracket I did is because the way those numbers work is easy to see zero liability. Just to make this easy for you Larry, let's get rid of the kid and reduce the income just a smidge.... or make it a home business. You would not be entitled to a refund on deductions that bring your liability past zero. The kid was just $1k a year anyway.

At 8/26/2011 2:22 PM, Blogger Larry G said...

Mike - I'm just saying.. that once you do your exemptions and deductions... and figure your tax.. the next rows are CREDITs and you get them even if your tax was zero or getting a refund.

The primary reason that 40 some percent pay no income taxes is the child exemptions, deductions and CREDITS.

A single mom earning 30K a year with 3 kids will get thousands of dollars in tax refund... so she's not only not paying taxes.. she's receiving refunds...

At 8/26/2011 3:22 PM, Blogger Mike said...


That's why I took the kid out of the equation. The tax rate on a single person making (I could be wrong by a couple thousand dollars) $47k is around the dollar amount of the standard deduction. Throw credits out....
Now enter a mortgage interest deduction...if you're already at or near zero, with no credits, the interest deduction is not refundable....and you now pay property tax.

When you look at the states with high foreclosure rates, those states and local areas are in financial trouble because the bank (who now owns them) defers the property tax. These people are now (I'm guessing) renting, and that has no effect since the apartment pays property tax with or without tenants.

At 8/26/2011 3:38 PM, Blogger Larry G said...

I'm not sure the property taxes are deferred for the banks....

I don't know.

but if you ignore the child credits.. (and other credits in that list)... you are correct..

you cannot write off more than your tax liability...

so if you don't earn much ( and there are more people in this situation than you'd think).. then you don't have any tax liability.. and itemizing is a useless strategy...

People who benefit from Schedule C are people who have significant tax liabilities.. and usually have significant assets....

At 8/26/2011 4:12 PM, Blogger Mike said...

I don't know how much I 'benefit' from schedule c. I have very real costs (and, of course, I pay both sides of my fica up $108k) and in my business, many of my deductions are only a percentage of the actual cost. When I have no choice as to the bars/restaurants/entertainment I must visit with clients, I can only deduct 50% of those costs.

I still think my original theory has something to it. If you're in a position that the standard deduction exceeds your mortgage deduction, getting these people into owning property makes them tax payers at the same out of pocket cost to them as renting with the 30-year-mortgage.

And I did check on the bank/tax thing. According to a couple sources I read, they defer the tax to the new buyer and negotiate a settlement at purchase.

At 8/26/2011 4:39 PM, Blogger Ron H. said...


"If you are a renter in an income bracket that pays little or no fed tax, with deductions for children, wouldn't it be better to make renters into home owners (property tax payers) to cut down on federal-to-local transfers?"

Property taxes are paid by the owner of the property. Ideally - for the property owner - a renter or renters pay enough in rent to cover all expenses and payments associated with the property, including property taxes. So, you could say that a person pays the property taxes whether they rent or own.

As to bank owned properties, there's no reason to believe banks can defer payment of taxes. If you have something that indicates otherwise, I would love to see it.

At 8/26/2011 4:57 PM, Blogger Mike said...


Right, but the same tax is paid whether the unit is occupied or not. So I don't think you can really say the renter pays the tax when you go micro.

The bank thing is unverified, but seeing this site is what got me thinking. I haven't had time to really dig, so I admit, this is a theory and I could be wrong. But that's not my main point....anyway, this is what I saw and where I got it....

"Taxes not paid... tax assessor sends notice to "owner"..they are gone, so the notice is returned.. then the assessors' office has to notify the "real owner"..the bank/mortgage company.. They then are "asked" to defer the taxes, until the property is sold, at which time the taxes owed will be added to the price and "settled" at that time..."

At 8/26/2011 5:08 PM, Blogger Ron H. said...

"People who benefit from Schedule C are people who have significant tax liabilities.. and usually have significant assets...."

Actually, people who benefit from schedule C are those with any level of business income and expenses, especially if business activity generates losses, regardless of their income level. There is no connection between schedule C and assets, or level of tax liabilities, so it's not clear why you brought up the subject.

In fact, it's not clear why you brought up schedule C at all, considering it's irrelevance to the discussion up to that point.

At 8/26/2011 5:32 PM, Blogger Larry G said...

My county won't defer them.. because if they do.. they have to raise the tax rate on everyone else to cover the shortage OR they have to cut something..

needless to say.. the banks are then motivated to get rid of the property quickly..

In our area, as a result, teachers and deputies for the first time in years have been able to buy homes.

At 8/26/2011 5:33 PM, Blogger Ron H. said...


"Right, but the same tax is paid whether the unit is occupied or not. So I don't think you can really say the renter pays the tax when you go micro."

You're correct that property tax will be paid whether a housing unit is occupied or not, but property tax collections won't increase just because a renter becomes an owner. A tax revenue increase requires an increase in population as well as an increase in the number of housing units.

If the number if renters decreases due to some of them becoming homeowners, the number of rental units available will adjust downward over time to reflect that lower demand, so there's no benifit, from a tax revenue standpoint, to making renters into homeowners.

Ultimately, each of us as individual consumers and/or taxpayers, pay all costs for everything, including taxes.

At 8/29/2011 4:09 PM, Blogger Mike said...

Based on the income group I'm talking about...borderline renter/home owners. If you can convert a small percentage, tax revenue does go up with no population change.

Apartment rates go up when fully occupied, not down. Meaning that the supply demand pricing has very little to do with the property tax paid via rent. Based on my experience as a renter, then owner - there is no way that renters pay the same tax rates per capita (after the apartment pays for true expenses, maintenance, profit, etc). If every apartment in my county lost 5% of their renters to home ownership, the apartment would be just fine (probably cheaper) and the taxes paid (I believe) would be more.

At 8/30/2011 12:02 AM, Blogger Mike said...


2 other things:

It may vary by state, but I asked a real estate guy about the banks deferring property taxes and he said that was incorrect once they take full possession….at least in Texas.

Also, it occurred to me that apartments have many more deductions than home owners. I’d love to know how their insurance deduction alone compares to their property tax….?

At 8/30/2011 4:03 AM, Blogger Ron H. said...


I'm not sure exactly what you mean by "I’d love to know how their insurance deduction alone compares to their property tax….?", but owning and renting apartments, or single family houses, is a business. Every dollar spent is a business expense, and therefore a tax deduction. If you know the amount of the insurance premium, you know the amount of the tax deduction. The same is true for the amount of the property taxes.

As for your previous comment about morphing renters into homeowners, you are correct that a larger population isn't necessary for an increase in property tax revenues, but an increase in the amount of taxable property is. If renters buy an existing house, no increase in taxes will occur. Only if they buy a newly built house, will the tax base change. The tax on apartment buildings has no bearing on the number of occupied units, and won't change as tenants move in and out.

For the sake of simplicity, I'm ignoring the possibility of an existing home being reappraised at a higher value when it is sold to a new owner.

At 8/30/2011 1:38 PM, Blogger Mike said...


As we touched on yesterday (using this site to improve my writing skills) I'll try to sum up what I'm trying to say in one post and see if you think my point makes any more sense.

The whole premise is basically this:

The 30 year mortgage + mortgage deduction....some think the 30 year & mortgage deduction is a waste.

My premise was that if the govt could entice (5%?) of borderline renter/owner with the income of around $47k to become owners you would
a) possibly see new construction, either for them or the people moving out of their starter home (building/improvement jobs = taxes).
b) more property taxes - at that income, your standard deduction brings your federal tax to near zero, so the mortgage deduction is minimal if anything. Any other deductions would be wiped out due to liability already being zero. However, out-of-pocket is about the same as renting and, now, you own a home.

As you said, apartments are businesses and their deductions and advanced depreciation have to be a negative on the over-all taxes recovered when compared to the potential home owner I described.
And that buyer would need the 30 year mortgage to make this happen.


At 8/30/2011 6:00 PM, Blogger Ron H. said...


If I understand you correctly- and I'm not sure I do - I have several thoughts:

Government promoting homeownership is one of the major causes of the recent housing bubble, which has burst with disastrous effects for all of us. Government shouldn't be involved in any way in this form of social engineering.

Government "entices" people by offering them tax breaks. How is more revenue generated in this way?

Federal government has no interest in increasing property tax collections, as that is typically a county concern.

No one should be trying to find ways to increase government tax revenues at any level, but should be working to remove government from as many areas of our lives as possible, and reduce taxes we must pay.

A preference for renting or owning is a very personal and subjective one. There are advantages to each, and homeownership is not automatically better for everyone.

Many times, good tenants become bad homeowners. A good credit rating as a renter is more valuable than a default on your record as a homeowner.

If you claim the standard deduction on your federal income tax return, you cannot also claim a home mortgage interest deduction.

The home mortgage interest deduction is like icing on the cake. It makes a good thing better, but is of no value by itself. Those who claim they don't want to pay off their mortgage because of the deduction, are claiming that they are better off paying $3 to a lender and getting $1 back from the IRS, then they would be paying nothing and getting nothing back.

The deduction merely lowers your effective interest rate.

The 30 year mortgage, without recourse or prepayment penalty, is great for borrowers, and terrible for lenders. Without government support it wouldn't exist. Who can predict the economic climate 30 years in advance?


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