“Under Obama’s proposal, fewer to own homes,” reported the Antiplanner’s local paper. The paper was reprinting an article from the New York Times, whose original headline was the slightly less inflammatory, “Administration calls for cutting aid to homebuyers.”
Is this another smart-growth plot to restrict homeownership only to the wealthy? Or is it a rational response to the recent financial crisis? The article is based on a report from the Department of Housing and Urban Development on reforming the home finance market.
For starters, Obama is proposing to:
- “Wind down” Fannie Mae and Freddie Mac
- Reduce FHA’s share of home loans from the current level of nearly 30 percent to its “historic” level of 10 to 15 percent
- Change loan terms by, for example, requiring larger down payments
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One congressman reportedly responded, “How is Joe Six-Pack ever going to be able to afford a home” if we get rid of Fannie Mae and Freddie Mac? But I don’t have any problem with ending subsidies. Frankly, I suspect government subsidies haven’t really boosted homeownership by all that much.
Brookings, for example, argues most of the benefits are captured by developers; increases in housing costs offset the benefits to homebuyers. Reason’s Anthony Randazzo estimates that each 1 percent increase in homeownership cost taxpayers $60 billion. While I think his arithmetic is overly simplistic, the point is that subsidies haven’t done much.
I do have some other problems with the proposed housing policy. First, proposals to increase regulation are heavy handed and unnecessary. For example, the plan calls for requiring mortgage originators to keep 5 percent of the risk when they sell mortgages to securitizers. But the problem was not who owned the risk but how well the risk was evaluated. If the risk is properly assessed, it doesn’t matter who originates the loan.
Second, the policy is inconsistent. For example, even as the paper proposes to increase down payments, it proposes to give down-payment assistance to “qualified low- and moderate-income homebuyers.” Why?
The plan also proposes to subsidize rental housing using some of the same tools — loan guarantees, etc. — applied to owner-occupied housing. If we are going to subsidize housing, we probably should be fair and subsidize rental and owner-occupied housing equally. But why subsidize it at all?
One subsidy isn’t affected by the policy: the mortgage interest deduction. The policy only states, approvingly, that “the mortgage interest deduction and other tax credits can also encourage investment towards housing over other sectors in the economy.” But it isn’t clear why we would want to do this.
Although HUD has a program aimed at making housing more affordable by reducing land-use regulation, this isn’t mentioned in the new policy paper, which is aimed at finance, not housing affordability. But I suspect that land-use regulation has reduced affordability by far more than federal housing subsidies have increased it, at least in those states that have such regulation. I would be willing to trade off the mortgage interest deduction and all other federal subsidies to housing for eliminating state and county land-use regulation.
The Antiplanner wrote:
For example, the plan calls for requiring mortgage originators to keep 5 percent of the risk when they sell mortgages to securitizers. But the problem was not who owned the risk but how well the risk was evaluated. If the risk is properly assessed, it doesn’t matter who originates the loan.
From what I have read in the media, many of the sub-prime mortgages that went bad (and contributed to the current severe recession) went bad fast, within a few months to a year of settlement.
What would make more sense (to me) would be to hold back half of the sales commission that real estate agents (and the brokers that they work for) for 12 months from settlement, and if a mortgage default happens in those first 12 months, then listing and selling agents forfeit half of their sales commission.
That would provide a powerful incentive for agents to “know their customers.”
Is this another smart-growth plot to restrict homeownership only to the wealthy?
One would think…um…”rational” libertarians would cheer the end of subsidized ticky-tack and celebrate allowing more housing choice.
You would be wrong, of course, to think that but it is a nice sentiment.
DS
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That makes no sense at all. Why hold the real estate agent responsible for a mortage gone bad? It’s like making a used car salesman responsible for a customer’s missed payment. The loan-issuing bank determines the credit-worthiness of an applicant — it’s what they’re in business for.
The real estate agent merely brings a potential buyer to the deal. And, full disclosure, I am not, nor am I related to, a real estate agent or a banker. Let’s not muddle the market any more than we have already.