Back Matter

References

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1

The author is grateful to Marja Hoek-Smit and Todd Sinai for guidance at the initial stage of the research, and to Charles Kramer, Marcello Estevão, David LeDrew, Bill Lindquist, Andrea Maechler and the IMF’s European Department for helpful comments and suggestions. Special thanks to Thomas Dowling for excellent research assistance and to Hildi Wicker-Deady for production assistance. All errors are mine.

2

In contrast, Oswald (1997, 1998) argues that homeownership leads to higher unemployment, as it hinders labor mobility.

3

Discussing the recently released Treasury proposals for reforming the U.S. housing finance system is beyond the scope of this paper; for a detailed discussion please refer to IMF (2011).

4

This historical survey draws heavily from U.S. Department of Housing and Urban Development (2006) and Committee on the Budget (2008). The reader is referred to those sources for a more detailed and comprehensive historical perspective. Green and Wachter (2005) also provide a comprehensive description of the history of the U.S. mortgage market.

5

Our analysis does not focus on the temporary policies enacted in response to the recent housing meltdown.

6

Analysts typically view the 25 to 40 years age-group as the “first-time home-buying cohort,” as many households purchase their first home within those ages. Thus, the 1970s was a period when many of the baby-boomers became first-time homebuyers. Moreover, real long-term ex-post mortgage interest rates averaged only 150 basis points over the entire decade of the 1970s, and were negative for three years in that period.

7

Despite the impressive increase, large variations persisted in homeownership rates between White (72 percent in 2008), Hispanic (49 percent) and Black households (47 percent) as noted in Glaeser and Gyourko (2008).

8

Doms and Krainer (2006) find that demographic factors (the emergence of the baby boomers) account for around a third of the change in the homeownership rate during the 1990s while the rest is accounted by greater propensity to be homeowners; the latter, they assert, could be related to higher education attainment.

9

In contrast, Gabriel and Rosenthal (2005) using disaggregated data by metropolitan areas, minority status, and income class for the 1990s found that household characteristics (income, age, and marital status) explain most of the increases in homeownership rates, while credit barriers explain only a very small share. Based on this evidence, they concluded that mortgage market interventions, are unlikely to have large effects on homeownership.

10

For a discussion of the current state of the U.S. housing market, please refer to Tsounta (2011).

11

For more details on the history of Home Owner’s Loan Corporation, please refer to Green and Wachter (2005).

12

Nowadays, the FHA operates one of the largest housing programs, the Mutual Mortgage Insurance (MMI) program, which aims to extend homeownership to buyers who lack the savings, credit history, or income to qualify for conventional mortgages. The program insures mortgages on single- and multifamily homes issued by private lenders, in exchange for a fee. If a borrower fails to make a payment or defaults on an insured mortgage, the FHA pays the issuer or holder of the mortgage the amount due.

13

FHA-insurance was funded by a fixed premium charged on unpaid mortgage loan balances. Subsequently this was changed to a fixed premium at closing and ultimately to a sliding scale based upon the initial loan-to-value ratio (a proxy for the riskiness of loans). The mortgage insurance fund overseen by the FHA was required to be “actuarially sound.”

14

Between 1957 and 1973, every state passed an enabling statute for private mortgage insurance, ending FHA’s monopoly in mortgage insurance. Demand for private insurance was driven by the limitations of the loan size insured by FHA and its down-payment requirements. Private insurers also provide the credit enhancements required by Freddie Mac and Fannie Mae for purchasing (or guaranteeing) mortgages with loan-to-value ratio above 80 percent.

15

The privatization was initiated by changes to public accounting procedures adopted by the federal government in 1968. Under the new regime, any net additions to the Fannie Mae’s portfolio would have been considered necessarily as federal government expenditures (see Quigley, 2006, for a discussion.) To avoid apparent increases in federal expenditures, its functions were divided; any subsidized portfolio activities were transferred to the Government National Mortgage Association (Ginnie Mae), instituted contemporaneously, and the bulk of the secondary market operations were spun off to a corporation owned by private shareholders (Glaeser and Gyourko, 2008).

16

Unlike the European mortgage market, a covered bond market has not developed in the United States.

17

For more details, the reader is referred to the Committee on the Budget (2008) that has been the main source for the analysis included in this section.

18

In 2008, the additional standard deduction for property taxes of $500 for joint filers was enacted for the 2008 tax year, to spur up housing activity for those individuals that did not itemize, as part of the Housing and Economic Recovery Act of 2008.

19

The exclusion is limited to one sale every two years. Special rules apply in the case of sales necessitated by changes in employment, health, and other circumstances.

20

In FHA-insured mortgages, the borrower pays an upfront mortgage insurance premium (today 1.5 percent) and in addition, pays an annual insurance premium that declines over the life of the loan (today, it starts at around 0.5 percent of the loan balance) until the loan-to-value ratio falls below 75 percent.

21

In addition to the FHA and VA mortgage insurance and guarantee programs, Rural Development, an agency of the United States Department of Agriculture, guarantees loans for rural residents with minimal closing costs and no down payment. Those programs operate on a much smaller scale than FHA’s programs and are not discussed in this paper.

22

The groups that are really on the homeownership margin (the poor and the young) rarely use the deduction, even when they are owners. As such, the deduction is unlikely to influence homeownership rates.

23

Capozza et al. (1996) argue that all owner-occupied U.S. housing subsidies are fully capitalized into urban land prices. In the international context, Berger et al. (2000) provide evidence that the Swedish interest rate subsidies were fully capitalized into house prices.

24

Their estimates are based on two approaches. In the first approach, they lower household’s mortgage debt by the amount of household liquid assets. The result is a nearly 40 percent decline in mortgage debt; the decline is mostly skewed towards higher income households. Second, they compare loan equations for Australia (which never had an interest mortgage deduction) with those in the United States and again find that U.S. loan to value ratios are approximately 40 percent higher than in Australia.

25

The American Housing Survey illustrates that 95 percent of the top 70 percent highest income U.S. residents live in homes with more than 228 square feet per capita; much higher than the median square footage per capita in London, Paris or Rome (Glaeser and Shapiro, 2003).

26

Larger and better housing might have positive externalities to the neighbors in terms of aesthetics and could benefit children and fertility rates.

27

According to the U.S. Census Bureau (2007), property taxes comprised 45.2 percent of all local government general own source revenue in FY 2006 and 1.2 percent of State government general own source revenues.

28

Specifically, they are exempt from state and local income taxation and from Securities and Exchange Commission’s fees; and they may use the Federal Reserve as their fiscal agent. GSE debt is provided as collateral for public deposits, for unlimited investment by federally chartered banks and for open market Fed purchases.

29

A reduction of 25 basis points on debt servicing charges is rather small to have a major impact on housing affordability. For example, a 30-year fully amortizing mortgage of $200,000 with a fixed rate of 6.4 percent would imply monthly savings on debt servicing chargers of $33 (Gyourko and Sinai, 2003).

30

Since the onset of the crisis, the U.S. private-label market for mortgage-backed securities remains almost completely shut down.

31

Tax expenditures do not necessarily mean that tax revenues would increase by that amount if the tax provision is eliminated since if a tax provision was repealed or significantly scaled back investment decisions would also be amended.

32

Dietz (2008) reports that tax expenditures are overstated since the tax expenditure for rent-imputed income should not be added to those for mortgage interest and property tax deduction, as this would result in double counting. However, such overestimation is not very large and the models used by the OMB and the Joint Committee on Taxation (known as Individual Tax Models (ITM)) allow for the choice to use standard deduction or itemized one, thus effectively capturing the changes in household’s behavior if there are changes in the mortgage interest deduction. Thus, papers routinely sum tax expenditures; recent examples include Carraso et al. (2005) and U.S. Government Accountability Office (2005).

33

Our analysis is based on tax expenditure estimates and projections from OMB. These estimates are somewhat different from the ones provided by the Joint Committee on Taxation and NBER’s TAXSIM model. For example, the Committee on the Budget (2008) reports that the mortgage interest deduction totaled $79.9 billion in FY 2008 versus $88.5 billion by the OMB and over $100 billion by Altshuler and Dietz (2008).

34

The Treasury Department has only recently begun estimating tax expenditures on net imputed rental income; estimations are highly volatile ranging from $60 billion to zero. This measure has also been criticized on similar grounds as the mortgage interest deduction.

35

To date, the FHA has never requested an appropriation for the program.

36

As indicated by Green and Wachter (2005) any comparison of the mortgages market in the United States in an international context is typically limited to developed countries, due to lack of mortgage funding in developing countries (Renaud, 2009). For example, the ratio of mortgage debt outstanding to GDP was 58 percent in the United States in 2002, compared to no more than 14 percent in any Latin American country, up to 11 percent in any Middle Eastern country (other than Israel) and less than 22 percent in any South or East Asian countries (other than Japan, Hong Kong, Singapore and Taiwan, POC).

37

For example, in the United States, the imputed income from owner-occupied housing is untaxed, while interest payments are tax deductible, in contrast to interest income from savings, which is taxable. These features make owning a house more attractive than renting. Similarly, Japan has a tax-related advantage to owning housing as opposed to renting since rental income is taxed (even though interest payments are not tax deductible and most of personal interest income is practically tax exempt).

38

For a more detailed discussion of the Canadian mortgage market please refer to Kiff (2009) and Kiff, Mennill and Paulin (2010).

39

There is also a full exemption from the Goods and Services Tax (GST) on the purchase of existing homes; this treatment is part of the benchmark tax system and is not considered tax expenditure. In addition, a partial GST rebate is available for new homebuyers so that the replacement of the former Federal Sales Tax with the GST does not pose a barrier to the affordability of purchasing a new home in Canada. There is also a GST exemption for long-term residential rent amounting to less than 0.1 percent of GDP.

40

Under the RRSP scheme, each year an individual may set aside a certain amount for retirement; the amount saved is deducted from income for tax purposes. At retirement age, any contributions withdrawn from a RRSP are taxed at the contributor’s current marginal rate. The money withdrawn for house purchase remains tax exempt if it is repaid within 15 years after the repayment period starts, which is the second year following the year withdrawals were made (Scanlon and Whitehead, 2004).

41

The government offers a 90 percent guarantee to allow private insurances to remain competitive following the 1988 Canada’s implementation of the Basel Accord which required chartered banks to hold capital only on non-CMHC insured mortgages. In return for the guarantee, a fee and the requirement to build up a contingency fund against default were requested (these rules do not apply to CMHC).

42

The NHG is administered by a private non-profit organization called the De Stichting Waarborgfonds Eigen-woningbezit (Home-ownership Insurance Fund). This organization receives no state subsidy, but central and local governments will provide an interest-free loan if it gets into financial problems.Representatives of central and local government meet each year to set conditions for what mortgages they will cover. The borrower pays 0.3 percent of the mortgage amount for the NHG guarantee. This money goes into a fund to meet potential losses (Scanlon and Whitehead, 2004).

43

The corresponding ceiling for the United States is much more generous at $1 million plus home equity indebtedness of up to $100,000.

44

The IMF (2004) also supported a gradual phasing of the deduction (to avoid disruptive effects). Among the reasons given by the Financial System Stability Assessment were that: (i) mortgage interest deduction introduces a distortion in housing markets—making holding mortgage debt attractive and reducing the incentive to pay back the principal; (ii) it favors wealthy households, as the tax advantage increases with higher tax brackets and is larger the larger the real estate assets of a household; (iii) removing tax deductibility would provide fiscal space given population aging; and (iv) the revenue received could be better targeted at affordable housing for low-income households.

45

In the Netherlands, the mortgage interest deduction is reduced by a fictitious income based on the market value of the house (so called “Eigen Woning Forfait); the “market value” of the house is not the real market value, but a fictitious value for tax purposes, determined by the municipality. For example, if the value of the home is €300,000 and the rate is typically 0.55 percent, then the fictitious income is €300,000 * 0.55% = €1,650. The effect of this is that this part of the annual interest payment is not tax deductible. If we assume that the mortgage interest rate is 5 percent on the €300,000 mortgage then the deduction would be €15,000 - €1,650= €13,350.

46

Information is based on Finfacts (2011).

47

The deduction available for mortgage interest relief against rental income from residential properties was also reduced from 100 percent to 75 percent with effect from midnight on April 7 2009 (Finfacts, 2011).

48

Information is based on Kyero, com.

49

The Australian mortgage insurance market features single premium payment products with full (100 percent) coverage of original loan balance – similar to the Canadian market. The market is also restricted to mono-line insurers and capital markets demand AA ratings. The Australian market contains both flow primary and pool/structured finance mortgage insurance, and is predominately comprised of prime segments (PMI, 2008).

50

Australia had its own subprime debacle in the 1980s when a state-government securitization agency created a program to fund mortgages for low-income borrowers. The program was a disaster and resulted in taxpayer losses of close to half a billion Australian dollars (Mohindra, 2010).

Home Sweet Home: Government's Role in Reaching the American Dream
Author: Ms. Evridiki Tsounta