1st draft
Contents:
Who is responsible for personal mortgage obligations?
Who should help? Template funds?
The Obama mortgage plan - trojan horse aspects
The mortgage interest deductions and limitations
Some questions
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There are two issues here, with both based around who we should help and/or encourage.
The first issue is the current mortgage crisis and the second is the limit of the interest deduction for mortgages.
WHO IS RESPONSIBLE FOR PERSONAL MORTGAGE OBLIGATIONS
Of course, if an individual takes out a mortgage, he is responsible for his own debt. If he anticipates that there could be a problem of unemployment or something outside of his control that would cause him to not make his payments, then he should contribute to a fund to cover himself for that possibility.
But should the government (i.e. citizens who can afford to pay) pay for it?
Should the government help? See
WHO SHOULD HELP? TEMPLATE FUNDS?
One answer that seems obvious would be "those who want to" if this is not a forced decision.
I would recommend a "template" fund be allowed for communities, states, and nationally. A "template" fund is one where a particular set of rules must be followed to assure proper controls against fraud and/or misuse of funds. Each fund would have a percentage that went to the government to cover the cost of audits and regulation. If the fund is deemed to be a "public interest" fund rather than one to help individuals directly, then the contributions should be tax deductible - of course, this means that we have made the decision that the fund saves sufficient money for the taxpayers to more than pay for the taxes paid back to the contributors. t
Other than proper regulation, the government should not be involved in these since politics has been proven to be so dysfunctional that we cannot allow it to get its mits on these funds.
THE OBAMA MORTGAGE PLAN
The new rules, announced this morning by the Federal Housing Finance Agency, include removing caps for “underwater” borrowers and cutting the costs of refinancing. “If you meet certain requirements, you will have the chance to refinance at lower rates, which could save you hundreds of dollars a month, and thousands of dollars a year in mortgage payments,” Obama said.
While this appears it will help a few people, it is not without cost, as there is a Trojan Horse element to it. Basically, the "hit" would be taken by Fannie Mae or Freddie Mac, so the money required from the government (and thus the taxpayers) for the bailout of these two entities will be increased by the loss these two entities take in cashing out the old mortgages to be replaced by the lower interest mortgages.
This means this will cost taxpayers more money, thus piling on to our debt problem or taking away from public and private pension plans.
It is already estimated the bailout could cost between $1 trillion to $2.5 trillion, which is not currently reflected in the US debt total, as is the unfunded liabilities for social security and medicare programs, which is north of $50 trillion.
“The subsidized-refinancing scheme will cost taxpayers at least $600 million according to the administration’s own estimates, and will almost certainly cost much more than that if any significant number of borrowers actually sign up for the program.” But this is just the tip of the iceberg. Losses to investors from similar refinancing proposals have been estimated to be $13 billion to $15 billion. This could eat away any stimulus from the extra money borrowers have due to lower interest payments, the stimulus that Obama and supporters of his plan are banking on.
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“be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value ratios above 80%. Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan.”
"The Home Affordable Modification program will “help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. Working with the banking and credit union regulators, the FHA, the VA, the USDA and the Federal Housing Finance Agency, the Treasury Department today announced program guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications. This program will work in tandem with an expanded and improved Hope for Homeowners program.”
The Federal Housing Finance Agency (FHFA), which governs Fannie and Freddie, announced today that it would waive refinancing fees, requirements of new appraisals and, most consequentially, the rule that the ratio of a loan’s value to that of a home could not be more than 125 percent. This will allow potentially hundreds of thousands of underwater mortgages to be refinanced.
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THE MORTGAGE INTEREST DEDUCTION
If we give tax money back to those who buy a home and mortgage it, then there is more tax burden for others - they are essentially partially paying for other people's mortgages.
National policy has been to promote and enable home ownership. The implementation of that by the goverment has permitted the real estate bubble that peaked in the mid 2000's - which was the underlying cause of the Big Recession. (See The Sub-Prime Mortgages Collapse.)
It would be, I think, ruinous to pull away the mortgage interest deductions, but it is also ludicrous to allow the deductions on "luxury" mortgages - remember, we taxpayers have to pay part of the costs - if one person pays less taxes, we make up the difference.
I would, for now, recommend that the maximum size mortgage for interest deductions be $500,000 and that there not be a deduction allowed for 2nd homes. Surely, there is no public benefit for people owning larger homes and/or 2nd homes.
The people we probably want to help are those who could otherwise not afford to have a basic home. (The $500,000 limit is a starting point for discussion, but I'd recommend implementing it once we have a reasonable foundation for economic growth. The implementation is, of course, a bit unfair to the more wealthy, who relied on it, but then they will have the choice of not continuing to own such big houses and/or 2nd homes. To "smooth the market transition" (i.e. prices), the 2nd home deductions should be phased out at, say, 20% a year.)
Since we do not need to help very high income people be able to afford a basic home, there should be no deductions allowed for those with taxable incomes over $1 millions for the year - and consideration should be given to lowering the deductions for those between $500,000 and that figure (I'd do it proportionally from 0% at $500,000 to 100% at $1,000,000).
ADDITIONAL QUESTIONS
Can we take away the pain of all people or is it best to let that be and go the normal course? Or something in between? Only Solomon or God can decide what is best. Meanwhile we must do our best to not be too far out of balance - and not get into righteousness, believing our point of view is the moral one and then forcing it on others!
Is there a right to property? Should we take property from another because he/she/they have more and give it to those who have less? And what happens if we do that? Is it true that if this is done to a high enough degree that the overall pie shrinks to the extent that people are in fact worse off? (Yes. See the discussion on Understanding Capitalism And Socialism and make the decision yourself.)
