America’s homeownership system needs changes — such as limiting or ending the income tax deduction for mortgage interest — if it is to become a stable, healthy part of the nation’s economy, the region’s top banking regulator said Friday.
“I am not suggesting we do away with all support for housing,” said Thomas Hoenig, chairman of the Federal Reserve Bank of Kansas City, Mo. “I am saying it is time for change. ...
“In brief, housing policy is badly flawed, and today’s budget environment requires reform. ... It is apparent that unsustainable trends in housing prices and home financing have been a major contributor to financial crises.”
Others have suggested reducing or ending the tax deduction on mortgage interest, but it has become such a vital part of homeowners’ financial picture that most experts view such a change as politically difficult, if not impossible.
Hoenig has been the lone dissenter among Federal Reserve policymakers on steps to help the economy recover. This week he opposed a move by the Fed to inject more money into the economy by buying government bonds. For several months he has favored taking gradual steps toward increasing interest rates, saying today’s low rates will trigger inflation and future economic crises.
In the text of a speech at the National Association of Realtors Conference in New Orleans Friday, Hoenig said the U.S. housing finance system’s “critical flaws” led to the market’s downturn and will cause future disruptions unless policymakers act.
Misguided incentives, poor lending standards and other bad practices burdened people with debt they can’t repay, encouraged unwise lending and created a secondary mortgage market supported more by political influence than sensible financial practices, Hoenig said.
“During the crisis, politicians, regulators and market participants were singled out for blame,” he said. “In reality, it was a group effort.”
Because of the home financing market’s poor conduct, Hoenig said, the Federal Reserve adopted a rule in 2008 prohibiting lenders from making loans without considering whether borrowers could repay them from income or other assets. “Who would have thought it necessary to write rules that are otherwise nothing but common sense?”
Government shouldn’t try to revive the housing market by enacting new tax credits, bailing out Freddie Mac and Fannie Mae, paying for mortgage restructuring or keeping interest rates unusually low, he said.
Instead, he said, “I support a policy path that returns the housing industry toward greater market discipline and greater long-run stability.” He said that includes reducing or removing subsidies — such as tax deductions for mortgage interest — that encourage too much borrowing for homeownership and can lead to boom-and-bust cycles in housing.
Hoenig said the government should reform Fannie Mae and Freddie Mac, two government-backed private businesses that originate billions in mortgage-backed securities. He says new rules should require Fannie and Freddie to follow strong lending and conduct guidelines or other private businesses should be allowed to originate mortgage-backed securities, also following strict standards.
Hoenig said government and federal banking regulators should examine rules on mortgage lending, the use of credit ratings for mortgage-backed securities, tax laws and other policies that influence mortgage debt.
Limiting the amount of mortgage interest homeowners can deduct would allow most people to continue buying homes they can afford but would not encourage people to borrow more money than they can repay, he said.
He cited a 2005 report by a presidential panel that said the deduction is an incentive for Americans to take on more debt, encourages “over-investment in housing” and benefits higher-income people disproportionately.
Some of the changes would have to be phased in gradually after the current housing market recovers, Hoenig said.
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