Should We Stop Subsidizing 30-Year Mortgages?
Taxpayers subsidize 30-year mortgages. What that means is that your tax dollars are used to keep the rate low on 30-year mortgages, specifically 30-year fixed rate mortgages.
Maybe that's OK with you. Maybe you have a 30-year mortgage and you figure you benefit from the subsidy. Of course, if you don't have a 30-year mortgage, I've got to wonder why you'd think this subsidy is a good idea.
But let's not just take the selfish view here. Let's see if the whole idea of subsidizing 30-year mortgages makes any sense to anyone.
A guy named Peter Wallison wrote an article about this in the Wall Street Journal on February 1st. He lays out the issues clearly and concludes that subsidizing the 30-year mortgage really isn't worth it. But before we get to that, let's talk briefly about how the 30-year mortgage is subsidized by the taxpayer today. It's got to do with Fannie Mae and Freddie Mac.
These two entities - known as GSE's or government-sponsored entities - are both bankrupt. The only reason they exist is that the government keeps them going -with our tax dollars. The reason the government keeps them going is the government's trying to avoid the collapse of the mortgage market in the U.S. The reason the mortgage market in the U.S. would collapse without these GSE's is that no bank would write mortgages unless they could immediately turn around and sell the mortgage to Fannie Mae or Freddie Mac. At least that's the government's logic.
Mr Wallison cleverly points out, however, that there is a currently market for what are known as "jumbo mortgages" and that market is not subsidized by the taxpayer. His proof is that if you go to Google and type in "30-year jumbo fixed rate mortgage, a whole bunch of offers pop up. I tried it and he's right.
But supporters of government-subsidized mortgages will say that even if you can get the Jumbo's, they cost more.
Jumbo mortgages are simply bigger mortgages. They're known as "non-conforming" mortgages because the higher amount doesn't conform to GSE guidelines and therefore GSE's won't buy the mortgage. Because GSE's don't buy the mortgage, banks charge a higher interest rate. They do that because they have to hold the mortgage on their books, rather than sell it to a GSE. Since they have to hold the mortgage on their books, they have to "reserve" money - some percent of the principal value of the mortgage - just in case some of the mortgages on their books go bad, meaning the home-owner doesn't pay their monthly payment. So because they have to put more money in reserves, they don't get to use that money, and there's a cost associated with that, which cost they pass on to the homeowner in the form of a higher interest rate.
So what's the cost? According to Wallison, it's about 0.5%. If you do a search of rates on the internet, you'll probably come up with that number too.
But, hey, 0.5% is still more, right? Right, but now we're back to why I should subsidize your mortgage. So tell me, why should I?
In the end, if the mortgage market can function without the subsidy, then why not let it do so. Even if you buy the idea that GSE's have helped millions of Americans own their own home by making mortgages more affordable (and with all the defaults and foreclosures going on now, it would be a tough argument to make), you still have to explain why someone who doesn't take a mortgage should be subsidizing someone who does.
What the author doesn't talk about, by the way, is the whole idea of getting a tax deduction for your mortgage interest. He does mention that 30-fixed mortgages amortize slowly, which basically means that you pay mostly interest rather than pay down principal in the first years of our mortgage. And he mentions that people like the idea of getting a tax deduction on that interest payment.
But that tax deduction is just another form of subsidy. Your tax bill is reduced when you get the deduction. And doesn't that mean - again - that I'm subsidizing your 30-year mortgage? Right, we found yet another subsidy by the taxpayer - and all by just looking at the 30-year fixed rate mortgage.
Now, imagine what else we might find if we browsed through the 70,000 pages of the IRS's tax code?
Maybe that's OK with you. Maybe you have a 30-year mortgage and you figure you benefit from the subsidy. Of course, if you don't have a 30-year mortgage, I've got to wonder why you'd think this subsidy is a good idea.
But let's not just take the selfish view here. Let's see if the whole idea of subsidizing 30-year mortgages makes any sense to anyone.
A guy named Peter Wallison wrote an article about this in the Wall Street Journal on February 1st. He lays out the issues clearly and concludes that subsidizing the 30-year mortgage really isn't worth it. But before we get to that, let's talk briefly about how the 30-year mortgage is subsidized by the taxpayer today. It's got to do with Fannie Mae and Freddie Mac.
These two entities - known as GSE's or government-sponsored entities - are both bankrupt. The only reason they exist is that the government keeps them going -with our tax dollars. The reason the government keeps them going is the government's trying to avoid the collapse of the mortgage market in the U.S. The reason the mortgage market in the U.S. would collapse without these GSE's is that no bank would write mortgages unless they could immediately turn around and sell the mortgage to Fannie Mae or Freddie Mac. At least that's the government's logic.
Mr Wallison cleverly points out, however, that there is a currently market for what are known as "jumbo mortgages" and that market is not subsidized by the taxpayer. His proof is that if you go to Google and type in "30-year jumbo fixed rate mortgage, a whole bunch of offers pop up. I tried it and he's right.
But supporters of government-subsidized mortgages will say that even if you can get the Jumbo's, they cost more.
Jumbo mortgages are simply bigger mortgages. They're known as "non-conforming" mortgages because the higher amount doesn't conform to GSE guidelines and therefore GSE's won't buy the mortgage. Because GSE's don't buy the mortgage, banks charge a higher interest rate. They do that because they have to hold the mortgage on their books, rather than sell it to a GSE. Since they have to hold the mortgage on their books, they have to "reserve" money - some percent of the principal value of the mortgage - just in case some of the mortgages on their books go bad, meaning the home-owner doesn't pay their monthly payment. So because they have to put more money in reserves, they don't get to use that money, and there's a cost associated with that, which cost they pass on to the homeowner in the form of a higher interest rate.
So what's the cost? According to Wallison, it's about 0.5%. If you do a search of rates on the internet, you'll probably come up with that number too.
But, hey, 0.5% is still more, right? Right, but now we're back to why I should subsidize your mortgage. So tell me, why should I?
In the end, if the mortgage market can function without the subsidy, then why not let it do so. Even if you buy the idea that GSE's have helped millions of Americans own their own home by making mortgages more affordable (and with all the defaults and foreclosures going on now, it would be a tough argument to make), you still have to explain why someone who doesn't take a mortgage should be subsidizing someone who does.
What the author doesn't talk about, by the way, is the whole idea of getting a tax deduction for your mortgage interest. He does mention that 30-fixed mortgages amortize slowly, which basically means that you pay mostly interest rather than pay down principal in the first years of our mortgage. And he mentions that people like the idea of getting a tax deduction on that interest payment.
But that tax deduction is just another form of subsidy. Your tax bill is reduced when you get the deduction. And doesn't that mean - again - that I'm subsidizing your 30-year mortgage? Right, we found yet another subsidy by the taxpayer - and all by just looking at the 30-year fixed rate mortgage.
Now, imagine what else we might find if we browsed through the 70,000 pages of the IRS's tax code?
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