housing_bubbleAs if they haven’t done enough harm already, Congress and the bureaucrats in Washington D.C. are now considering the elimination of the Mortgage Interest Deduction. Why can’t they understand that they do not need more taxes from us, or “income” as they are now calling it (as if that will fool us)? They need to STOP SPENDING!

Congress Started the Housing Collapse

The Mortgage Bubble, also known as the Subprime Loan Crisis, was caused by Congress. They made laws and policies that forced banks to give loans to undeserving borrowers. The Community Reinvestment Act (CRA), for example, compelled banks to relax their underwriting practices in favor of more “flexible” criteria. This allowed would-be buyers and borrowers to get a bigger loan than they could every pay back, especially, when many of the buyers shouldn’t have received a loan at all.

Although Congress may have had good intentions, they never seem to think through the ramifications of their actions. But, then, Congress isn’t well known for “thinking” after all. They preached from their mountain on high, that the CRA would allow low income buyers to afford their first home which would open home ownership to millions of more Americans. What really happened was a race to the bottom.

Banks and mortgage lenders lowered their mortgage rates and gave riskier loans than the lender across the street, or across town, to attract customers in order to meet their Congress-mandated quotas. When the lender across the street realized they were no longer competitive and were not meeting their Congress-mandated quotas, they were forced to do something or else be forced out of business by the government. So, they lowered their rates and gave out even more risky loans. Back and forth it went until rates were being offered below the prime rate (the rate at which banks borrow from other banks or the Federal Reserve); thus, they were offering “subprime loans”

Every Action has an Equal and Opposite…

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Like a bad horror movie, it was easy to ‘see’ the scary monster coming. Since loans had been given to those who could not afford them who had a previously terrible credit history (meaning: they don’t pay their debts), the next domino to fall was obvious… they didn’t pay their debts. The house of cards began to inevitably fall as more and more new homeowners found themselves ‘underwater’ and either stopped trying to make good on their obligations or just simply couldn’t pay. Foreclosure was the next step as the lenders began to take back the property which secured their now-unpaid loan. As this course of action became more and more frequent, the foreclosure market grew.

Lenders are not in the landlord, property management, or real estate business. They are in the lending business. They do not want to own property! Therefore, they unloaded it at the best possible price as fast as possible to salvage whatever cash they possibly could out of the deal-gone-bad; so, they could use the cash for what they did best – lending to borrowers. Thus, lenders sold property fast and cheap. With more foreclosures came more cheap sales.

Foreclosures are present in every market, in good times and in bad. A few here or there do not make a difference; but, thousands upon thousands of them do. Housing prices began to fall as regular homeowners who wanted to sell in the normal course of their lives had to lower their prices to be competitive with all of the foreclosures around town. The downward spiral of price depression began and built steam quickly.

The Next Crisis

Next, all of the borrowers who had Home Equity Lines of Credit (HELOCs), interest only loans, or 5-year loans with balloon payments began to fall. As interest rates began to creep up, as did their monthly payments, or their balloon payment became due, they were in hot water. They did not have a pile of money to pay off the loans. It was all spent.

These borrowers had been counting on low interest rates and getting another loan when the maturing one came due. They would use a new loan to pay off the old loan and keep prodding along. But, as it came time to refinance their loans, the property would not appraise and interest rates were too high. The house was now worth less than they owed. A whole new group of homeowners, who had made terrible decisions which were forced upon the bankers by the policies and laws of Congress, began to falter. A myriad of additional foreclosures followed.

Congress Completed the Housing Collapse

Not to be outdone by their own previous harmful decisions, Congress rushed to action with a one-two-three combination of punches followed by a knock-out to the economy. One. They forced government-sponsored enterprises, such as Fannie Mae and Freddie Mac, to purchase CRA loans as part of their “affordable housing goals”. Thus, these pseudo-government agencies were now buying bad loans. Two. Congress then mandated that subprime and near-prime loans also be purchased. Thus, the agencies were now buying the worst-of-the-worst loans. Three. Congress poured money into the agencies to afford it all, raised taxes, and increased the national debt four-fold. Thus, the economy as a whole was now adversely affected.

The Knock-Out Punch. While all this was going on in government, there was still a large private market for these loans which would be bundled together in packages of many, many loans and sold as “derivatives” on the derivative market. As you might expect, some of these bundles began to fail as, eventually, did the companies with large holdings in derivatives. Congress could not have that! Such companies were their biggest campaign donors and offered them jobs and speaking engagements after they left Congress… making these such companies TOO BIG TO FAIL.

As Congress dumped taxpayers’ hard-earned cash in with the sewage of bad markets filled with bad companies who had bought bad loans taken out by bad borrowers who were allowed to borrow due to bad decisions of Congress, the housing collapse was complete and the economy was in the toilet.

So, Now What?

Congress is once again tinkering. They will tell you that they will fix it. Government is the answer. YOU do not NEED the money. GOVERNMENT does. They will raise your taxes to produce more ‘income’ for them to spend. This time, instead of raising the tax rate, they will lower the deductions. It is all just the sleight-of-hand of a bad magician. They think we do not see them. They think we are stupid. In the end, their tinkering always means less for us and more for them.

As they consider eliminating or decreasing the mortgage interest deduction, they will try to convince us it is the ONLY course of action left to reduce the federal deficit. This poppycock will spew from their mouths with supposed passion and heartfelt emotion. They will pull on our heartstrings – aren’t we Patriotic Americans? Don’t we want the deficit to be paid down? All along they will have no intention of paying down anything. They will spend more, give more to their cronies, and pay off their campaign donors. Most of it will be legal, because they make the laws, you see. They decide what is legal and what is not. We will all suffer, especially, the younger, middle-class families who would see their longer term financial prospects significantly and negatively affected.

Tinkering with the mortgage interest deduction would depress home prices further, causing more home owners to be underwater, spur more foreclosures, and act as a further drag on the housing and economic recovery. Sound familiar? Millions of existing home owners who are struggling to make ends meet; but, still manage to stay current with their mortgage payments, would face a big tax increase they cannot afford.

It Affects YOU!

Claims that the mortgage interest deduction benefits only wealthy taxpayers and that only a small number of home owners utilize the deduction are blatantly false! If you have a home mortgage, you now get the deduction. Meaning, you pay less taxes. In reality, 70 percent of home ownership tax benefits go to middle-class home owners who earn less than $200,000. And, out of 75 million home owners, 35 million claimed the mortgage interest deduction in 2009. This doesn’t even take into account the millions of taxpayers who are renters and one day aspire to own a home of their own. Or, the roughly 25 million who now own their homes free and clear; but, have used the deduction in the past.

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Congress has an unusual talent of destroying markets, ruining companies, and making life harder. It is often said that the only thing governments do well are “kill people and break things”, that has certainly been the case with all of their recent tinkering in housing and the economy. Congress… stay out of our homes, out of housing, and away from mortgages. Haven’t you done enough bad already? We, can fix it. We’ll fix it all. Just stop tinkering and let us.

ABOUT THE AUTHOR

Christian D. Malesic, MBA, IOM is the Executive Officer of the Home Builders Association of Berks County (HBA). He provides insight on personal finance, business operations, marketing, construction issues, and occasionally, on political philosophy/history. To receive notice of the newest articles written by Christian, follow him on Twitter @CDMalesic

© Copyright – Christian D. Malesic, MBA, IOM. All Rights Reserved Worldwide.