An oft-repeated truism is that government grants special treatment to homeowners and favors the housing industry. Discussions of the “housing lobby” inevitably preface with the word “powerful.” But is this truism, well, true? Upon closer inspection, the record is more mixed than many assume.
Several government programs and incentives promote home ownership. The government explicitly guarantees qualifying mortgages through VA and FHA and implicitly though government sponsored enterprises, like Fannie Mae and Freddie Mac. The Federal Home Loan Bank (FHLB) system was created to fund mortgage lending by member banks. Mortgage interest is tax deductible.
Less than Meets the Eye
Both government policies and opposition to those policies emphasize their impact on home ownership. Much of the opposition to the Basel Endgame proposal focused on its supposed adverse impact on first-time home buyers. However, as I pointed out in an earlier post the mortgage issue was largely a red herring. New capital charges for operational risk would likely make a larger and less ambiguous impact. Similarly, the FHLBs have strayed from their original mission. They now serve primarily as a source of liquidity for large commercial banks, many of which devote only a small share of their balance sheet to residential mortgages. Federal Home Loan Bank membership does not extend to nonbank mortgage lenders, even though they account for more mortgage originations than banks or thrifts.
Many see the mortgage interest deduction as symbolic of the “powerful housing lobby.” The Tax Cut and Jobs Act (TCJA) of 2017 preserved the mortgage interest deduction. However, it capped the state and local tax (SALT) deduction at $10,000 and raised the standard deduction. As a result, many few taxpayers itemize making the mortgage interest deduction much less meaningful. Only 13.7% of taxpayers itemize at all and fewer still use the mortgage interest deduction. Higher mortgage rates in recent years may make the mortgage interest deduction more attractive. Critics of the deduction compare it to other consumer debt. However, businesses routinely deduct interest as a business expense. It’s the biggest expense for most banks.
Handling Failure
The failures of SVB, Signature, and First Republic are the second, third, and fourth largest bank failures in American history. Washington Mutual (WaMu), at $300 billion in assets, was the biggest. Or was it? The company’s ex-CEO described troubled larger banks as “too clubby to fail.” Those banks included Wachovia ($782 billion), Citigroup ($1.32 billion), and Bank of America ($1.67 billion), which each received open bank assistance through the systemic risk exception (SRE). Wachovia merged out of existence, but the SRE allowed a deal structure with acquirer Wells Fargo that protected Wachovia’s shareholders and creditors. Citigroup and Bank of America continue to operate.
Regulators closed WaMu and essentially wiped out its shareholders. WaMu was the nation’s largest thrift institution. Then there’s Fannie Mae and Freddie Mac. Fannie and Freddie were practically synonymous with politically favored organizations. Ralph Nader described them as “not only too big to be allowed to fail but perhaps too influential and too politically connected to be regulated or shaped effectively in the public interest.” The Heritage Foundation wrote in 2005 that Fannie and Freddie “operate with valuable federal privileges that give them a significant competitive advantage over other participants in the housing finance market.” As recently as July 15, 2008, NPR declared Fannie and Freddie as political “kings of the hill.” However, only a few months later regulators put Fannie and Freddie into conservatorship. The conservatorship discharged top management and wiped out common and preferred shareholders.[1]
The harsh conditions imposed on Fannie and Freddie contrast with the open bank assistance provided to Bank of America and Citi. Megabanks seem to be the true kings of the hill. Those banks remained open, continue to pay dividends, and management remained in place, at least for a while. To be sure, shareholders of Bank of America and Citi also took a hit. BAC’s market capitalization is 40% below 2007 levels. Citi’s is 90% below.
Real Estate and the Wealth Tax
In 2021, Senator Elizabeth Warren and Rep. Pramilla Jayapal introduced the Ultra-Millionaire Tax Act (UWT), which would impose a 2% annual tax on wealth above $50 million (rising to 3% for wealth above $1 billion. The bill has failed to gain any traction.
Some efforts are underway at the state level to tax wealth. However, we already have a wealth tax at a local level. It’s called the property tax. In some states, property taxes represent a higher percentage of wealth than would the proposed ultra-millionaire tax. For example, the median property tax in New Jersey is $8.797 and the average is $11,577. These tax levies are against a median home value of $355,700 for an effective property tax rate of 2.47%. The 2.47% represents the percentage of the home asset. Since most homeowners also have a mortgage, the tax represents a considerably higher percentage of home equity. Under the UWT, the effective tax rate for someone with a net worth of $2 billion would be 2.45%.
Political discourse, and a lot of press coverage, often focus on the narrative rather than the reality. The narrative assumes that homeowners and their lenders receive an extraordinary array of government benefits. Indeed, government guarantee programs reduce the risk to lenders and likely make home financing more readily available and cheaper. At the same time, however, companies that promote home lending, either directly or through guarantees, receive harsher treatment relative to commercial and investment banks, especially very large ones. And America’s only wealth tax is on real estate.
[1] In 2023, Fannie and Freddie shareholders won a $612 million jury award over the FHFA’s practice of sweeping the companies’ profits to the U.S. Treasury.