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Senators Cite Importance of Maintaining Federal Backstop in Housing Finance Overhaul

WASHINGTON, D.C. – September 18, 2013 – (RealEstateRama) — Sens. Jon Tester (D-Mont.), Bob Corker (R-Tenn.) and Johnny Isakson (R-Ga.) today stressed that ongoing efforts to reform the U.S. tax code and overhaul the housing finance system should take into account the important role that housing plays in the economy.

The senators joined housing industry experts at a forum that examined the future of U.S. housing, “Building a Better Future: America’s Housing at a Crossroads,” at the Newseum in Washington. The symposium was produced by CQ Roll Call and sponsored by the National Association of Home Builders (NAHB).

Sens. Tester and Corker are among 10 bipartisan cosponsors of the Housing Finance Reform and Taxpayer Protection Act (S. 1217), legislation to reform the nation’s housing finance system that includes a federal backstop while limiting taxpayer exposure.

“We worked hard to make sure the 30-year, fixed-rate mortgage remains a viable option,” said Tester. “This is something consumers want and expect. I don’t think we could have a viable 30-year note in a purely private market.”

“We had 10 senators that weighed in and made a difference,” said Corker. “I think we have struck a very good balance. The 10 percent capital piece is a very, very important element. Another component that was very important was having a federal backstop.”

As the legislative process moves forward, Corker added that he expects to see improvements to S. 1217 and that a housing finance proposal pending in the House will also undergo changes.

“My guess is by the time something passes out of the House it might be a little bit different from where it is and move a little more toward where the Senate bill is,” said Corker. “My guess is the House and Senate can pass bills with different characteristics and we can move to conference to get something done for the country.”

In terms of tax reform, Sen. Isakson, who is a member of the Senate Finance Committee, said his panel is prepared to move forward if it gets “the opportunity.”

Isakson said that every provision in the tax code, including the mortgage interest deduction and Low Income Housing Tax Credit, must be justified in terms of “what they produce for the country. If you can’t make a case for your tax provision, it should not be in there.”

“I can make a great case for the preservation of the mortgage interest deduction and I can make a phenomenal case for low and moderate income housing tax credits in terms of the payback to the country, but those arguments have to be won and lost when you are truly doing a major reform,” said Isakson.

Along with the Senate keynote speakers, housing analysts engaged in a series of in-depth discussions on key issues, with a special emphasis on the outlook for housing demand and production, ongoing efforts toward reform of the housing finance system and the potential impacts of tax reform on homeownership and the economy.


The housing downturn led to a “remarkable slowdown in household growth,” said Eric Belsky, managing director, Joint Center for Housing Studies at Harvard University. “There is not a strong recovery in household formations, but we are seeing signs of that happening. People don’t want to live with their parents into their 30s; they are doing it out of economic necessity.”

As the economy continues to mend, pent-up demand for housing should also increase, according to NAHB Chief Economist David Crowe.

“I would say in general the housing market is only half-way back,” he said. “Multifamily production is back to 300,000 units per year, which is nearly back to normal.”

While the single-family side continues to gradually bounce back, Crowe said that several challenges remain.

“Credit for buyers and builders remains difficult, and there is a lack of buildable lots,” he said.

Looking ahead, the outlook looks bright for homeownership.

“Nineteen out of 20 people say they plan on buying a home somewhere in the future if they are under the age of 45,” said Belsky. “You can lock in housing payments with a fixed rate mortgage today or look at higher rents in the future. A lot of people will look at that calculation and say ‘I think it is time to buy a home.’”

Columbia Business School Professor Christopher Mayer also noted that homeownership is not just an American dream but a global dream.

“When you look at developing countries, people try to buy a home,” said Mayer. “It is economic security.”

Housing Finance

Panelists addressing the issue of housing finance were in general agreement that the private sector needs to play a greater role in mortgage financing but that maintaining some level of federal support is essential to ensure stability and liquidity in the mortgage markets.

A dissenting view on this latter point came from Peter Wallison of the American Enterprise Institute, who said that lowering the conforming loan limits of government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac over time will allow the private sector to come in and pick up that business.

“If you simply made those changes and authorized the withdrawal of the GSEs, you would find we would gradually move to a completely private system, which is where I think we should be going,” said Wallison.

This response drew a sharp rebuttal from other panelists.

“Private capital by itself will not secure a safe market and most importantly, private capital during a down market is least likely to be there,” said Michael Calhoun, president of the Center for Responsible Lending.

“Mike is making a real important point that credit will dry up in the housing finance market when times get tough,” added Georgetown University Law Professor Adam Levitan.

“There is a government, taxpayer supported entity that stands up,” said Michael Stegman, counselor to the Secretary of the Treasury for Housing Finance Policy. “We know how much more serious the [housing and economic] crisis would have been without the FHA stepping up.”

Tax Reform

On the topic of tax reform, a third panel of housing experts were in general agreement that the mortgage interest deduction plays a key role in shaping housing demand, while differing in their evaluation of current policy.

“The nonpartisan Tax Foundation found that if we repealed the mortgage interest deduction and lowered marginal tax rates then GDP would decline by $100 billion annually,” said NAHB economist Robert Dietz.

Dietz also said that repealing the deduction would case home values to fall. “Considering it only takes a 6 percent drop in home values to wipe out $1 trillion in household wealth, the economic consequences could be significant.”

Noting the importance of the mortgage interest deduction to younger households, who are paying greater amounts of interest in the early years of a mortgage, Dietz warned that repeal of the deduction would lead the homeownership rate to fall and the average age of a first-time home buyer to rise. This delay could in turn affect family formation, wealth accumulation and other economic and demographic outcomes.

Anthony Randazzo, director of economic research at the Reason Foundation, said he opposes the mortgage interest deduction and believes that tax policy should not be set to achieve social purposes.

“Do we want to support middle class or low-income home owners? Then let’s just provide an explicit subsidy to people we want to, and then find a middle ground,” he said.

Dr. John Weicher, a director of the Hudson Institute’s Center for Housing and Financial Markets, rejected the idea that the mortgage interest deduction is a tax distortion.

“Keep in mind if you are a home owner you have an asset and consumption,” he said. “You are a landlord renting to yourself. It is silly to think of this as simply a consumption when it is the biggest investment that nearly anyone is going to make.”