Debt Deal Endangers Housing Subsidies

Congressional accountants are going to be pressed to find the cuts needed to meet its new budget obligations, and housing subsidies present an easy target. Entitlement programs are …

Congressional accountants are going to be pressed to find the cuts needed to meet its new budget obligations, and housing subsidies present an easy target. Entitlement programs are off limits as is the national defense budget and no one wants to raise taxes. Without budging on these issues it leaves budget balancers looking for any and all options. Housing subsidies like mortgage deductions are attractive to legislators who would like to save money without raising too many red flags, as are increasing fees for federal lenders. Both of these choices would make homeownership more expensive even though economists say it will not support the pressure. For more on this continue reading the following article from The Street.

The fragile housing market may attract the attention of the Congressional committee charged with finding ways to cut the growing U.S. deficit.

The Joint Select Committee on Deficit Reduction won’t be able to put much of a dent in the deficit by going after housing subsidies, but the subsidies are nonetheless thought to be relatively easy pickings.

The bipartisan, bicameral committee of 12 was created by the deficit reduction plan passed by Congress and signed by President Obama this week. It must cut $1.5 trillion in 10 years or a tough series of cuts to areas dear to each party–such as Defense and Medicare will kick in automatically.

The biggest savings from housing would come from cutting tax deductions on mortgage interest. Estimates vary widely, but the numbers–whether $80 billion per year or $200 billion are enormous.

"Killing the mortgage interest deduction would be huge," wrote Robert Litan, vice president for Research and Policy at the Ewing Marion Kauffman Foundation, and a former associate director of the Office of Management and Budget, in an email exchange with TheStreet,though he is convinced it won’t happen as it is too popular with middle class Americans.

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"Instead, the idea in Simpson-Bowles of putting an overall cap on personal deductions – including home mortgage – is an ideal that may have legs," he says.

Another less talked about issue the committee may take up is fees charged by Fannie Mae(FNMA.OB) and Freddie Mac(FMCC.OB).

As part of a white paper published earlier this year, the Treasury Department has already proposed gradually raising fees the mortgage giants charge for guaranteeing mortgage backed securities, known as "g-fees." The idea would be to offset the government sponsored enterprises’ debts to the Treasury, while allowing the government to gradually withdraw from the mortgage market, which it currently backstops almost singlehandedly.

"It’s inevitable that some g-fee increase will be part of deficit reduction," says Rob Zimmer, a former Freddie Mac lobbyist who now represents Community Mortgage Lenders of America. "It’s a relatively easy thing to do versus cutting other social programs for Dems or, in the case of Republicans, cutting defense spending or raising taxes."

Over the long term, such a move would likely benefit big mortgage lenders like Bank of America(BAC), Wells Fargo(WFC) and JPMorgan Chase(JPM) says Ed Mills, policy analyst with FBR Capital Markets.

That’s because they would no longer have to compete with Fannie and Freddie, whose fees are below what the market would dictate. A Wells Fargo spokeswoman declined to comment on whether the bank supports a g-fee increase. Spokespeople for Bank of America and JPMorgan did not respond to questions.

However, raising the g-fee too quickly could further weaken the housing market, Mills says. "In the short term it could be viewed as a tax by some because they have no other options, and the only thing that changes is it is more expensive to make a mortgage."

Litan, however, believes Congress will be reluctant to tinker with Fannie and Freddie without a larger consensus about the future of the housing giants. He also believes small revenue-raising tricks like these are a distraction from the real work that needs to be done.

"Everyone knows where the money is," Litan says. "The money is in the entitlement programs and somehow in closing loopholes and if they end up having to sort of nickel and dime it with a variety of these other things then the whole thing is in trouble."

This article was republished with permission from The Street.


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