The distributional effects of getting rid the home mortgage deduction

This is another typical biased New York Times story on economics.  There is another simple reason that is ignored by the Times for why lower income people get a smaller benefit from these tax deductions: they face much lower tax rates.

. . . For those households, by the center’s calculations, the tax benefit of the deduction amounts to about 1.5 percent of after-tax income. By way of comparison, the value to households earning $40,000 to $50,000 is closer to 0.3 percent of after-tax income; for households earning $50,000 and $75,000, it is 0.7 percent. 

Why is this so? One reason is simply that people who have more money are more likely to have expensive homes and bigger mortgages. They may also have second homes, and under the current rules, mortgage interest may be deducted on those as well, up to a cap of $1 million in debt. 

The other factor is that the value of the subsidy increases along with your tax bracket.
For households in the 15 percent bracket, the tax benefit for every $1,000 of mortgage interest deducted is $150. That benefit rises to $350 for households in the 35 percent tax bracket. . . .

Yet, what this study shows (assuming that it is correct) is that a large portion of taxpayers would not lose very much from losing this deduction.

Obama used landmark lawsuit to force banks to make subprime loans to those who couldn't afford them

With all the false claims about so-called predatory lending, we may have found the person initially responsible for the problem.  From the Daily Caller:

President Barack Obama was a pioneering contributor to the national subprime real estate bubble, and roughly half of the 186 African-American clients in his landmark 1995 mortgage discrimination lawsuit against Citibank have since gone bankrupt or received foreclosure notices. 

As few as 19 of those 186 clients still own homes with clean credit ratings, following a decade in which Obama and other progressives pushed banks to provide mortgages to poor African Americans. 

The startling failure rate among Obama’s private sector clients was discovered during The Daily Caller’s review of previously unpublished court information from the lawsuit that a young Obama helmed as the lead plaintiff’s attorney. [RELATED: Learn about the 186 class action plaintiffs] 

Since the mortgage bubble burst, some of his former clients are calling for a policy reversal. 

“If you see some people don’t make enough money to afford the mortgage, why would you give them a loan?” asked Obama client John Buchanan. “There should be some type of regulation against giving people loans they can’t afford.” . . .

Democrats frustrated that one of their own won't forgive billions in mortgages

After all, it is just taxpayer money.  What can DeMarco be hesitating about?  Krugman wants DeMarco fired, so he must be doing something right.  From Politico:

Treasury Secretary Timothy Geithner and congressional Democrats blasted the Federal Housing Finance Agency on Tuesday after the regulator announced it would not allow Fannie Mae and Freddie Mac to offer loan principal reductions to struggling homeowners, as tensions over how to improve the sluggish housing market remain high before the November elections.
Democrats have been pressuring the FHFA, the independent agency in charge of overseeing the taxpayer supported mortgage giants, for months to back off its opposition to allowing Fannie and Freddie to provide some debt forgiveness to homeowners.
The regulator’s acting director, Edward DeMarco, has been unmoved by their arguments, and has infuriated some Democrats.
“It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners stay in their homes,” Rep. Elijah Cummings of Maryland, the top Democrat on the House Oversight and Government Reform Committee, said in a statement on Tuesday.
In the latest effort to entice DeMarco to move in the Obama administration’s direction, Treasury had proposed earlier this year allowing Fannie and Freddie to participate in a program where the cost of loan writedowns would be covered with remaining funds from the 2008 bank bailout law — the Troubled Asset Relief Program (TARP).
On Tuesday, DeMarco rejected the idea, arguing that his agency’s job is to protect taxpayers from losses resulting from the government’s rescue of Fannie and Freddie in 2008 and the proposed use of TARP funds does not address that concern.
“I have concluded that Fannie Mae and Freddie Mac’s adoption of [the Treasury program] would not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers,” DeMarco wrote to lawmakers on Tuesday. . . .

Notice the objective headline on this over at Bloomberg.com: "Regulator Leaves Underwater Homeowners High and Dry"

DeMarco, acting director of the Federal Housing Finance Agency, said today that he won't allowFannie Mae and Freddie Mac to engage in debt relief for borrowers who owe much more than their homes are worth.
In doing so, DeMarco clearly put ideology ahead of economics, hindering the housing market's recovery in the process. . . .

You have to love the claims that giving away money is the way to save it.

The most mind-boggling aspect is that FHFA's own analysis shows principal reduction would save the taxpayer-backed mortgage giants as much as $3.6 billion compared with other modification efforts. . . . . 

So you think that the housing market is recovering?

The Case-Shiller Index makes it hard to argue that the housing market has recovered. Apparently the results tomorrow are expected to show an additional, if small, further drop in prices. Data is available here.

Home sales fall by 5.4% last month, prices rise only because mix of homes being sold changed

When is the housing market finally going to recovery? With interest rates at record lows, one would have thought that it would be booming right now. From the Associated Press:

Americans bought fewer homes in June than May, indicating the weak economy could make a modest housing recovery choppy.
The National Association of Realtors said Thursday that sales of previously occupied homes fell 5.4 percent in June to a seasonally adjusted annual rate of 4.37 million homes. That's the fewest since October.
Sales are up 4.5 percent from a year ago, evidence that the market is still recovering. But the annual sales pace is below the 6 million that economists consider healthy. The June drop in completed re-sales contrasts with more encouraging data that show gains in new residential construction, higher builder confidence and more signed contracts to buy previously owned homes.
"It is only one month and the rest of the housing indicators have all continued to show improvement," said Jennifer Lee, senior economist at BMO Capital Markets. "Let's hope this June decline is a blip."
The number of first-time buyers, critical to a housing recovery, made up just 32 percent of sales. That's down from 34 percent in May. In healthy markets, first-time buyers make up more than 40 percent of the market.
The median home price rose 5 percent to $189,400. That's mostly because sales of more expensive homes rose, while sales of cheaper homes fell, the Realtors group said. . . .

Banks pressured to buy sovereign debt: When will government realize the problems from forcing banks to make risky loans?

Government forces banks to lend money to risky borrowers.  Now they force banks to lend money to governments.  When will the government learn that forcing banks to take on more risk than they want causes problems?  From CNBC:

US and European regulators are essentially forcing banks to buy up their own government's debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.
Regulators are allowing banks to escape counting their country's debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.
While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.
"Captive bank demand can buy time and can help keep domestic yields low," Lorenzen wrote in an analysis for clients. "However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn't used very prudently." . . .

Housing prices continue to head down

From the WSJ:

S&P/Case-Shiller reported that its indexes ended the first quarter of 2012 at new lows. The national composite, which covers the entire country and is only released on a quarterly basis, was down 1.9% from a year earlier and fell 2% in the first quarter compared with the fourth. The composite 20-city home price index, a key gauge of U.S. home prices, was essentially flat in March from the previous month and fell 2.6% from a year earlier. Eighteen cities posted monthly declines, with just Phoenix and Miami showing increases.

Thirteen of the 20 cities posted annual declines in March, but Phoenix, Minneapolis, Denver, Miami, Detroit, Dallas and Charlotte notched gains. . . . .

Home sales and prices continue falling

Seasonal adjustments are starting to have huge problems and produce misleading information. From the Washington Post:

. . . Without adjusting for seasonal differences, the survey of prices in 20 metropolitan areas fell to its lowest level since the housing market downturn began.
But analysts pointed to bright spots hidden in the data — and some ventured that the housing market may have finally found its low.
. . . . the existing inventory of new homes for sale had fallen sharply since a year ago. The inventory of homes, measured in the number of months they would take to sell, stood at 5.3, down from seven a year ago, according to an analysis by the High Frequency Economics consulting firm. Inventory is considered a key sign of future housing investment.
Through March, sales technically fell, to 328,000, but only because the sales figures reported by the Commerce Department in February were adjusted sharply upward, from 313,000 to 353,000. Without that adjustment, the March data would have registered a 4.8 percent increase. . . .

Housing prices continue to plummet

Washington DC is the one city that continues to consistently show increases in housing prices. From CNN Money:

The housing market started off the new year with a thud. Home prices dropped for the fifth consecutive month in January, reaching their lowest point since the end of 2002.
The average home sold in that month lost 0.8% of its value, compared with a month earlier, and prices were down 3.8% from 12 months earlier, according to the S&P/Case-Shiller home price index of 20 major markets.
Home prices have fallen a whopping 34.4% from the peak set in July, 2006.
"Despite some positive economic signs, home prices continued to drop," said David Blitzer, spokesman for S&P. "Eight cities -- Atlanta, Chicago, Cleveland, Las Vegas, New York, Portland, Seattle and Tampa -- made new lows." . . .

"Dems push Fannie, Freddie regulator on mortgage write-downs"

Do Democrats have any idea what these types of policies will have on new loans being made? If you can have a loan you make marked down dramatically after you make it, why would you ever make that type of loan? From The Hill newspaper:

Congressional Democrats are expected to continue pushing a federal housing regulator to write down mortgage principal for government-backed loans if a settlement with banks doesn't help out enough homeowners.

The federal government is "very close" to an agreement with mortgage servicers that could help about a million homeowners, Housing and Urban Development Secretary Shaun Donovan said this week.

The deal, which also includes states' attorneys general, would require the nation's five largest banks — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial — to spend upward of $25 billion to help borrowers caught up in so-called robo-signing practices where servicers signed-off on foreclosure paperwork without properly reviewing documents. . . .

Newest Fox News piece: Obama Has Learned Nothing From the Mortgage Meltdown Mess

My newest piece at Fox News starts this way:

Just days before Christmas, the Obama administration gave Bank of America a big lump of coal, levying a hefty $335 million dollar fine on the company for discriminating against minorities in its lending practices. 

Supposedly Countrywide, a mortgage company bought by Bank of America in 2008, had not given out enough low interest rate loans to minorities from 2004 to 2008.

What the large fine reveals is that President Obama hasn’t learned anything from the recent financial crisis. 

What the president sees as discrimination in awarding a mortgage, lenders saw as wise business decisions. 

If a borrower can’t afford a down payment, Obama appears to view charging a higher interest rate as discrimination. Lenders also think that they shouldn’t treat borrowers whose sole source of income is welfare or unemployment insurance, the same as those applicants who have a job. But Obama, again, appears to view this as discrimination.

There is obviously a problem with no down payments: if the price of the house falls so that it is worth less than the loan, some people will default and walk away. Similarly, when unemployment insurance or welfare runs out, borrowers might find they can’t keep paying their mortgage.

The Equal Credit Opportunity Act the Obama administration used to impose this fine was exactly what helped cause the mortgage crisis by forcing lenders to make risky loans that they didn’t want to make. 
Yet, just last month, Obama put the blame for these risky loans going bad on banks for their “breathtaking greed” that “plunged our economy and the world into a crisis.”

Countrywide, a leading lender of subprime mortgages, was already issuing too many risky loans. Indeed, it was the poster child for doing what the government wanted. 
In 2002, Countrywide adopted its “No Income/No Asset Documentation Program.” Borrowers could get a loan with just 5 percent down. The big government mortgage bundlers, Fannie Mae and Freddie Mac, bought these mortgages and encouraged Countrywide to expand the program. By the first half of 2006, almost two-thirds of Countrywide’s subprime loans lacked any down payment. . . .

So how bad has the crash in housing prices actually been?

The Obama administration learned nothing from the financial crisis

Remember how the pressure to give loans to individuals who couldn't afford them lead to the financial crisis (see here and here)? Failure to count welfare or unemployment payments as income is viewed as evidence of discrimination. Now the Obama administration forces Bank of America to pay record $335 million penalty for supposedly discriminating against minorities:

Bank of America Corp. will pay $335 million to settle allegations that its Countrywide Financial Corp. unit discriminated against black and Hispanic borrowers, in the largest residential fair-lending settlement in history.

The agreement, announced on Wednesday, involves more than 210,000 minority borrowers who were charged higher fees or who could have qualified for a prime mortgage, one offered to borrowers with the best credit histories, but instead were steered into a more costly subprime loan.

The case is the first by the Justice Department that accuses a lender of steering borrowers to more costly mortgages. The agreement also ends a separate discriminatory lending lawsuit filed by Illinois Attorney General Lisa Madigan in state court in June 2010.

Bank of America neither admitted nor denied the allegations in the settlement. The bank said it settled to resolve issues tied to Countrywide's practices before Bank of America's July 2008 purchase of the lender. The bank said it is "committed to fair and equal treatment of all our customers." . . .

The SEC sues Ex-Freddie, Fannie CEOs over Fraud

Now even the SEC is accusing Fannie and Freddie of committing fraud.

The lawsuits filed today in Manhattan federal court were followed by an SEC statement that it had entered into “non- prosecution agreements” with each company. Fannie Mae, the government-sponsored enterprise which issues almost half of all mortgage-backed securities, and Freddie Mac, the McLean, Virginia-based mortgage-finance company, had “agreed to accept responsibility” for their conduct, the SEC said.
In the lawsuits, the SEC said Syron, Mudd and other executives understated exposure to subprime mortgage loans. From 2007 to 2008, Freddie Mac executives said the company’s exposure was from $2 billion to $6 billion when it was actually as high as $244 billion, according to one SEC complaint.
From 2006 to 2008, Washington-based Fannie Mae executives said the firm’s exposure to subprime mortgage and reduced- documentation loans was about $4.8 billion when it was almost 10 times greater, according to the regulator.
‘Told the World’
“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” Robert Khuzami, director of the SEC’s enforcement division, said today in a statement. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books.” . . .

The Federal Reserve's massive wealth transfer

The article neglects to mention that many banks were forced to take loans against their will. But it sure was a way to increase bank profits. From Bloomberg:

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue. . . .

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.” . . .

Not much hope for the housing market turning around soon

Foreclosures jump 7% in October from September

Is housing heading down again?

From CNN:

The besieged housing market has even further to fall before home prices really hit rock bottom.
According to Fiserv (FISV), a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices.
Several factors will be working against the housing market in the upcoming months, including an increase in foreclosure activity and sustained high unemployment, explained David Stiff, Fiserv's chief economist.
Should home values meet Fiserv's expectations, it would make it the third (and lowest) trough for home prices since the housing bubble burst. . . .

"Mortgage default warnings surged in August"

Obama and Democrats could only hold up these mortgage foreclosures for so long. From the AP:

Banks have stepped up their actions against homeowners who have fallen behind on their mortgage payments, setting the stage for a fresh wave of foreclosures.

The number of U.S. homes that received an initial default notice -- the first step in the foreclosure process -- jumped 33 percent in August from July, foreclosure listing firm RealtyTrac Inc. said Thursday.

The increase represents a nine-month high and the biggest monthly gain in four years. The spike signals banks are starting to take swifter action against homeowners, nearly a year after processing issues led to a sharp slowdown in foreclosures.

"This is really the first time we've seen a significant increase in the number of new foreclosure actions," said Rick Sharga, a senior vice president at RealtyTrac. "It's still possible this is a blip, but I think it's much more likely we're seeing the beginning of a trend here." . . .

Other factors have also worked to stall the pace of new foreclosures this year. The process has been held up by court delays in states where judges play a role in the foreclosure process, a possible settlement of government probes into the industry's mortgage-lending practices, and lenders' reluctance to take back properties amid slowing home sales. . . .

If the government forces risky loans, can the government then claim that they didn't know the loans were risky?

So what about the government forcing banks to make these risky loans? How can the government claim ignorance that these loans were risky? Can these banks now sue the government?

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation. A foreclosed home in Arizona. The Federal Housing Finance Agency suits are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others. The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter. The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims. The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value. Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers. . . .

Obama's Mortgage Refinance Proposal

Obama is currently floating a mortgage refinance proposal. Here is a simple question: why aren't people refinancing their mortgages right now? Presumably there are cost to doing the refinancing that exceeds the benefits. In this proposal, who is going to eat those costs? The taxpayers? The mortgage lenders? From Fox News:

Sources in the housing and mortgage industry confirm that the refinancing proposal, which would cover government-backed mortgages, is one of several on the table as the administration tries to tackle the housing slump as well as the overall slack in the economy.
"As one would expect, we continue to look for ways to ease the burden on struggling homeowners and to help stabilize the market, whether that's through assessing new proposals or older ones worth re-considering as market conditions change," an administration official told Fox Business Network, while cautioning they have "no plans to announce any major new initiatives at this time."
The refinancing idea would help homeowners by saving them money on interest payments while potentially having a stimulus effect on the economy -- since the money they would have spent on mortgage interest would be available for other things.
Christopher Mayer, a professor of real estate finance and economics at Columbia University who pushed the idea, estimated it could save consumers $75 billion a year in interest. . . .

Here is another article indicating that the plan might be aimed at subsidizing "high risk borrowers."