The financial crisis that drove the economy into a disastrous recession also appears to be challenging conventional wisdom about the primacy of homeownership and the sanctity of policies supporting it.
As evidence of that shift, the Presidential panel charged with recommending measures to slash the federal deficit has reportedly placed the mortgage interest tax deduction – traditionally viewed, along with Social Security benefits, as politically untouchable -- squarely on the negotiating table. Similar proposals, even hinted at in the past, have quickly crashed and burned under withering attacks from housing industry trade groups, among others, who have argued that homeownership rates would plummet if the tax deduction is removed – along with votes for legislators supporting that action.
But a recent study by the Brookings-Urban Tax Policy challenged at least half of that theory – the half insisting that the mortgage interest deduction both bolsters and broadens home ownership. The study found that the deduction, which costs the government more than $100 billion annually, primarily benefits more affluent buyers while doing little to encourage middle class and lower-income families to purchase homes. In an interview with The Hill, Eric Toder, the study’s lead author, acknowledged the traditionally untouchable status of the deduction. But he also noted, “The kinds of things people are discussing in public are way beyond what they were talking about a couple of years ago.”
Sheila Bair, chairman of the Federal Deposit Insurance Corporation (FDIC), has questioned not just the mortgage interest deduction, but the government policy emphasis on homeownership that it represents. Speaking at a meeting of the Housing Association of Non-Profit Developers, Bair suggested that government officials should rethink 25 years of policies that, she said, have established unrealistic expectations and have proven to be both costly and risky.
These policies helped boost home ownership rates to 69 percent, she agreed, but those levels have proven to be “unsustainable and may not be reached [again] for many years, if ever.”
The emphasis on home ownership also skewed housing policies, to the detriment of rental housing, Bair suggested. Echoing an argument affordable housing advocates have been making for nearly two decades, she noted that the combined cost of the mortgage interest deduction, property tax deductions and the exclusions for gains on the sale of homes “are about three times the size of all subsidies and tax incentives for rental housing combined. In fact,” Bair continued, “you can argue that this huge subsidy for homeowners has helped push up housing prices over time, making affordability that much more of a problem for the very groups you are trying to serve.”
While not calling explicitly for more rental housing subsidies, Bair said, “I think we need a better balance. Sustainable homeownership is a worthy national goal,” she added. “But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may NOT be the right answer.”
Moving to put Social Security and other federal benefits beyond the reach of creditors, the Treasury Department has proposed new rules that would require banks and credit unions to exclude from garnishment orders direct deposits of federal benefits recorded within the 60 days preceding the garnishment notice. The rules would establish a minimum amount that must be protected, but would allow states to set higher protection ceilings.
Existing federal law prohibits creditors from taking Social Security benefits to cover a debt, but it doesn’t specify how financial institutions are to handle direct deposits. Treasury officials say the new rules are needed because financial institutions typically freeze accounts when they receive garnishment orders, and then tap any funds in the account – including Social Security and other federal benefits payments – to cover the bounced check fees and other charges resulting from the freeze.
“The rules address the increasing problem of account freezes and the hardships benefit recipients face when they cannot access life-line funds,” a Treasury official told the Wall Street Journal. The Treasury proposal “provides financial institutions with clear, uniform [rules] to follow when a garnishment order is received, and provides them with protection from liability.”
The rules, which could take effect later this year, would specifically protect Social Security benefits, Supplemental Security Income benefits, Veterans Administration benefits, Federal Railroad retirement benefits, Federal railroad unemployment and sickness benefits, Civil Service Retirement System benefits, and Federal Employees Retirement System benefits.
Homebuyers who missed the deadline for the homebuyer tax credits Congress authorized to bolster the housing market may have another shot at this home purchase incentive program. The Senate has approved a measure that would give buyers until Sept. 30 to complete purchases eligible for up to $8,000 in tax credits.
Under the program’s existing rules, buyers had to have a signed contract by April 30 and complete their transactions by June 30. But housing industry executives, led by the National Association of Realtors, urged legislators to extend the deadline, noting that many of the buyers looking to claim the tax credits were purchasing foreclosed properties or involved in ‘short sales,’ which require more time than standard purchase transactions.
Responding to those concerns, the Senate approved the three-month deadline extension (with which the House is expected to concur) on a 60-37 vote. But only buyers who have a completed purchase contract will be able to take advantage of the reprieve. According to some estimates, 180,000 buyers would benefit from the deadline extension.
NOT SO GOOD
Although default rates on most consumer loans have been declining for more than a year, credit cards have not benefited from that positive trend. The default rate on credit card loans, as measured by a Standard & Poor’s- Experian index, reached 9.14 percent for the three-month period ending in April, the highest level since this index was created in 2004. Defaults on car loans, by contrast, fell to 1.94 percent-- the lowest level since December 20007-- and defaults on first mortgages fell to 3.71 percent from an April 2009 peak of 5.67 percent.
David Blitzer, a managing director of S&P, thinks the credit card default trend raises questions about the pace and strength of the economic recovery. “With attention focused on consumer spending and little hope for a fast rebound in housing, the bank card series may raise concerns for many consumer-related businesses as well as for consumer-oriented lending institutions,” he told New York Times columnist Floyd Norris.
While lenders are tallying continuing losses from credit card defaults, they are also facing declining income from late payments in this sector. The Federal Reserve has given final approval to new rules that will set a $25 cap on late fees and prohibit issuers from charging a penalty fee that exceeds the amount the consumer owes. Issuers can levy a higher penalty fee, but they must demonstrate that it is “reasonable and proportional” to the cost of the violation. The new rules, which take effect August 22, also ban inactivity fees, restrict the ability of issuers to increase card rates, require them to review rate increases imposed after January 2009 and reduce those rates if the circumstances triggering the increase have changed.
Current credit card default trends notwithstanding (see related item), some studies suggest that consumers are adjusting their attitudes toward credit and saving, shunning the former and embracing the latter. The personal savings rate increased in March, reversing two months of declines, credit card delinquencies (if not defaults) have been declining, and American Express reports that more of its customers are exceeding monthly minimum payment requirement and repaying their debts more quickly.
Some analysts think the improvements are related directly to the default rates – issuers are writing off bad debts (and financially troubled debtors), leaving in place stronger borrowers. But other analysts think the statistics reflect more fundamental and positive changes in consumer behavior. Battered and frightened by the stock market decline and falling home prices, many consumers are concentrating on repairing and strengthening their balance sheets. Card issuers, similarly, are adopting more reasonable underwriting standards and reviewing risk models that produced billions of dollars in losses, these analysts say.
“It’s like cholesterol,” John Ulzheimer, president of consumer education for Credit.com, told the Washington Post. “We don’t pay so much attention to [cholesterol levels] until we get the test back from the doctor.” With the results from the financial “test” now in and its lessons clear, Ulzheimer said, “we have a responsibility to do it better than we did three years ago.”
That, at least, is the theory. But past experience and human nature suggest that the reality may prove less encouraging. “I wish I could be more optimistic,” Ulzheimer told the Post. “But consumers generally have pretty short memories. And so do lenders.”