Are things back to normal yet? Despite the recent improvement, probably not. With 4.5 million homes lost to foreclosure over the last five years, that works out to 900,000 foreclosures per year, on average. In a typical month before 2007, the number was closer to 250,000.
But while the mortgage deduction would save a lot of money, the consequences of eliminating it entirely will be dire. According to the National Association of Home Builders, home purchases and the ancillary economic activity generated from home purchases account for nearly 20 percent of GDP. That's not insignificant.
An alternative for policy-makers to consider, however, is to adjust, rather than eliminate, the mortgage deduction. Capping the tax break will allow it to do what it is intended to do: stimulate home buying. A cap would continue to motivate individuals to purchase a home without giving them a benefit that lasts well beyond its usefulness to the economy.
Last summer, Federal Housing Finance Agency chief Edward DeMarco made a fatal mistake: He flatly refused to consider principal reduction on underwater mortgage loans backed by Fannie Mae and Freddie Mac. Perhaps DeMarco thought an Obama reelection wasn't in the cards, or maybe he really was concerned about the use of public funds toward such an endeavor. At any rate, rumors of his ouster were prescient, as President Obama has just nominated a replacement, Representative Mel Watt, a Democrat from Charlotte, North Carolina.
Let me tell you how that came about. Neil contacted me and asked if he could use an example from my Portrait of HAMP Failure series to illustrate the real-world consequences of the program, which all too often turned the loan modification process into a nightmare for homeowners. I gave him a number of suggestions, and he selected the story of Jeremy Fletcher, a Southern California swimming pool installer who bought a new home at the height of the bubble, right before the housing market crashed – and the market for installing pools along with it. Fletcher’s HAMP odyssey included a yearlong fight with Citi Mortgage, and just when he maneuvered to the point of getting a permanent modification, his loan was sold off to Saxon Mortgage, who then refused to honor any of his previous agreements. “It seemed like we had cornered Citi, got them to the point where they had to modify, and they just up and sold the loan,” Fletcher told me at the time.
One of the big questions about the sustainability of the housing recovery is whether it’s being driven by owner-occupants — the people who live in the houses they buy — or speculators.
In the last year or so, after all, some of the big institutional investors have bought up a lot of distressed properties because they perceived the market to be undervalued, and saw some major opportunities in the rental market. Blackstone, for example, is now the biggest owner of single-family homes, having purchased about 20,000 homes across the country, most of them foreclosures.