Posts Tagged ‘mortgages’
Ed Glaeser says it’s time to kill – or at least maim – the tax deduction for interest paid on mortgages.
The Great Depression provided an opportunity to rethink old policies in a major way. In the current morass, everything should, once again, be open for debate. One sacred cow that has long been in need of a good stockyard is the home mortgage interest deduction. So, in the spirit of libertarian progressivism, I suggest gradually reducing the upper limit on the deduction to loans of up to $300,000, and then refunding the tax revenues in a more productive manner.
He’s right – especially on the broadest point. Do away with the mortgage interest deduction. But the reset provides the opportunity to really rethink and restructure the housing system more broadly.
The only way toward long-run and sustainable recovery is a dramatic change in where and how we live. What ultimately got us out of the Long Depression of the late 19th century and the Great Depression of the 1930s wasn’t just new technology, or creative destruction, or government spending, it was a phase-shift in the way we live – in our economic geography. The recovery after the Long Depression took shape around the rise of the industrial city and its streetcar suburbs. The recovery after the Great Depression was powered by suburbanization. We need a massive shift not just in our infrastructure but in our housing system.
The reform and restructuring of the housing system needs to be much deeper and go much further than reigning in the mortgage interest deduction. We need to bring our mortgage-lending practices into line with those of other advanced countries, like Canada or Sweden or most of Europe. That means much larger downpayments and penalites on prepayments; shorter term loans; and all the rest – just like my very own mortgage in Canada. Sure that means increased cost and shared risk, but it comes with a much more stable housing market (where you can still get a mortgage and buy and sell homes) and a much more stable banking system. And we have to encourage other forms of housing tenure, like renting, which are in sync with the labor market flexibility and residential mobility the adavnced creative economy requires.
If you own a home, chances are you are racing to refinance and mortgage brokers are calling you. Lots of folks are taking advantage of record low rates on vanilla-flavored 30-year loans. Cash in your pocket! Some are wondering, is it time to pick up a second home? Invest in a downtown condo?
Moreover, oil has crashed and there is little that OPEC or traders on global and virtual exchanges can do about demand reality. Is it time to pull that SUV back out and drive it around town? Maybe take a weekend trip with the kids? (There are lots of hotel deals!)
Is this how its gonna play out? Are we gonna stumble out of this recession and back into our old habits? Remember in about two months the Fed will be writing out a lot of checks. Record spending + cheap money + cheap commodities = ? What do you think? Happy Holidays to all!
David Leonhart is absolutely right. While bailing out U.S. homeowners strikes the right chord politically, it is fraught with all sorts of problems.
There are two separate groups of people who are at risk of foreclosure, and they often get muddled in any discussion of the housing crisis. The first group is made up of people who, for whatever reason, will not be able to make their monthly payments. Some took out mortgages with initial monthly payments that they couldn’t afford. Others took out adjustable-rate mortgages whose monthly payments have ballooned to an unaffordable level. Still others have lost their jobs. …
The second group is quite different. It is made up of people who are at risk of foreclosure not because they won’t be able to keep up with their monthly payments — but because they may decide they don’t want to continue making them. These are the homeowners who are “under water,” which is to say their houses have lost so much value that they’re now worth less than the underlying mortgage. Homeowners with an underwater mortgage face a choice. Many will stay put and keep making their monthly payments … Others, though, are going to look at their home purely in economic terms and see an investment that may never pay off. Some of them will choose to walk away …
The problem with this approach — and it’s the heart of the problem with any big-time homeowner rescue — is probably obvious. As soon as the government announces that it will help everyone at risk of foreclosure, a lot of people are suddenly going to decide they’re at risk of foreclosure.
Homeowners who are under water will have an incentive to think of their homes in cold economic terms and threaten to walk away, while those who can just barely afford their monthly payments will have reason to slide into delinquency. Multiply 19 million mortgages by a couple of hundred thousand dollars, and the government could be left with $4 trillion in obligations.
Yep. Not just struggling homeowners, but people who speculated on Miami or Scottsdale or Las Vegas real estate will now be in for a bailout. Plus, the economy will never correct itself if the government keeps artificially propping up real estate assets.
When I tell friends in Europe or Canada that Americans can simply walk away from mortgages, they are in shock. One key reform has to be to make U.S. mortgages a permanent, binding contract that can’t be walked away from.