Tax Policy and Housing

Wed, 10 Sep 2008 15:27:49 +0000

One of today's headlines in The Washington Post is "Homeownership Mission Vulnerable After Rescue." The worry is that with Fannie and Freddie in trouble, there will be less government support for affordable housing:

But the overarching question is about the future of the companies' founding purpose and long-standing mission to promote homeownership for lower-income families.

Regulators have made clear that they see Fannie Mae and Freddie Mac as essential to the health of the whole mortgage market, not just the lower end. James B. Lockhart III, director of the Federal Housing Finance Agency, barely mentioned affordable housing Sunday as he described an eight-point plan for the companies. Instead, he chose to underscore a broader mission: "the critical importance each company has in supporting the residential mortgage market in this country."

That has affordable-housing advocates wondering whether affordable housing will be seen as an expendable luxury in a drive to restore the two companies to profitability as soon as possible.

"Our concern is that the rhetoric has been about preserving the global financial system," said Mike Shea, executive director of Acorn Housing. "There has not been a whole lot of rhetoric about preserving homeownership."

It is important to distinguish between the cost of housing for low-income families and homeownership for low-income families. Consider that the major subsidy to housing comes in the form of the tax deduction. The higher the marginal tax rate, the greater the value of the subsidy. High marginal-rate taxpayers can get the largest subsidy through homeownership and itemization of their mortgage interest. Low marginal-rate taxpayers can get the largest subsidy not through direct homeownership but through renting their housing from high marginal-rate taxpayers in a competitive housing market. In such a market, at least some of the landlord's tax benefit gets passed through in the form of lower rent.

If it is homeownership by low-income families, rather than low costs of housing, that matters, then perhaps we should begin reform by removing the tax incentives for them to rent. That could involve tax credits, rather than tax deductions, for housing payments, as proposed by the President's tax advisory commission in 2005. The more we can meet these public policy objectives through tax policy, the less compelling will be the arguments for why the government should sponsor entities like Fannie and Freddie.