The U.S. housing finance system is very complex, expensive, and mostly benefits middle- and high-income households, without raising home ownership rates significantly when compared to other countries. This chapter compares the U.S. housing finance system with those in other advanced economies and recommends the gradual abolition of some of its tax expenditures once the housing market stabilizes. It also calls for reforming the Government Sponsored Enterprises’ ambiguous public/private status and streamlining their mandates.
Australia, Ministry for Finance and Administration (1997), “Reform of the Australian Financial System,” Treasurer's Press Release No. 102, Canberra: Treasury.
Congressional Budget Office (CBO) (2001), Federal Subsidies and the Housing GSEs, Washington, DC: U.S. Government Printing Office.
Congressional Budget Office (CBO) (2004), Updated Estimates of the Subsidies to the Housing GSEs, Washington, DC: U.S. Government Printing Office.
Congressional Budget Office (CBO) (2009), Budget Options, Vol. 2, August.
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)| false Congressional Budget Office (CBO)( 2009), Budget Options, Vol. 2, August.
Glaeser, E.L. and J.M. Shapiro (2003), “The Benefits of the Home Mortgage Interest Deduction,” in Tax Policy and the Economy, Vol. 17, pp. 37–82, National Bureau of Economic Research.
Lehnert, A., W. Passmore and S.M. Sherlund (2008), “GSE’s, Mortgage Rates, and Secondary Market Activities, The Journal of Real Estate Finance and Economics, Vol. 36 (3), pp. 343–63.
Yelten, S. (2006), “House Prices In the Netherlands: Determinants, Concerns, and Considerations Related to Phasing Out the Tax Deductibility of Mortgage Interest Payments,” Kingdom of the Netherlands—Netherlands: Selected Issues, IMF Country Report No. 06/284, Washington, DC: International Monetary Fund.
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)| false ( Yelten, S. 2006), “House Prices In the Netherlands: Determinants, Concerns, and Considerations Related to Phasing Out the Tax Deductibility of Mortgage Interest Payments,” Kingdom of the Netherlands—Netherlands: Selected Issues, IMF Country Report No. 06/ 284, Washington, DC: International Monetary Fund.
Van den Noord, P. (2005), “Tax Incentives and House Price Volatility in the Euro Area: Theory and Evidence,” économie Internationale, Vol. 101, pp. 29–45.
Prepared by Evridiki Tsounta.
The Government Sponsored Enterprises (GSEs) supply funds to the mortgage market by purchasing loans from mortgage originators, and packaging them into mortgage-backed securities (MBS), which are subsequently sold to investors. The GSEs guarantee the principal and interest payments on the MBS issues—a guarantee that investors treated as tantamount to a government guarantee even before they were taken over by the government.
Passmore (2005) estimates that the implicit subsidy to GSEs is between $122 billion and $182 billion of which the shareholders retain between $53 billion and $106 billion. This higher estimate can be explained by Passmore (2005) considering the value embedded in all debt outstanding while the CBO only considers recent debt issuances during a given year.
The Australian Housing Loan Insurance Corporation (HLIC) was privatized in 1997, originally established to facilitate the development of an Australian secondary mortgage market. The privatization followed the recommendations of the Wallis Inquiry—a review of financial sector regulation undertaken to ensure that government policy would promote market outcomes (Australia, Ministry for Finance and Administration, 1997). The inquiry recommended that government guarantees be withdrawn from the HLIC to ensure that the mortgage market operated on competitively neutral terms. Following the privatization, homeownership rates were essentially unchanged. Now, the Australian mortgage market is made up of private insurers.
Beginning in 1983, the United Kingdom limited deductible interest on a maximum loan of £30,000—that became binding over time (Yelten, 2006). That limit was never raised, in spite of rising home prices, and the tax rate at which it was deductible was progressively phased down since 1993 from 25 percent to 10 percent before disappearing completely in 2000 (Gibb, Munro and Satsangi, 1999). In contrast, the corresponding ceiling for the United States is much more generous at $1 million plus home equity indebtedness of up to $100,000 with no upper limit on the tax rate.