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CBO Report - "We should subsidize more mortgages"

Bruce Krasting's picture




 

The Congressional Budget Office reports are worth looking at as they often give clues on future economic policy and legislation. The CBO is supposed to be non-partisan. I’m not sure I understand what that means. In one way or another everything in D.C. is partisan. It has been my observation that the CBO attempts to steer the direction of policy in their reports. They push their own agenda. What motivates them is not clear to me.

CBO recommends steps that could be taken. It also estimates the consequences of any economic policy action. They forecast (guess at)  both the number of new jobs that would be created and for how long those jobs might last.

The recent CBO report evaluates a range of stimulus options. The following two slides are from the 2/10 and the 11/15 reports. They are similar, but there is one very important new policy option in the most recent analysis:

 

..

 


The new thinking from the CBO:

"Subsidizing the Interest Rate on Certain Mortgages That Are Refinanced."

The CBO is making a very strong suggestion that ON BUDGET mortgage relief should be considered as an economic stimulus. According to the CBO this new form of stimulus would be more effective in creating (lasting) jobs than (1) Infrastructure spending, (2) Increasing aid to individual states, (3) Corporate tax holiday on foreign earnings, (4) Reducing business taxes, (5) Expanding business depreciation (6) Sustaining the Bush tax cuts and (7) Reducing workers FICA taxes.


 

That’s incredible! Subsidizing mortgages with federal money is a better economic stimulus than infrastructure spending? We are charting new waters with this thinking.

The Federal Reserve has done everything feasible to reduce interest rates in an effort to create cheap refi opportunities. As a consequence, mortgage rates are at record lows. But the CBO thinks they have to be lower still and proposes to subsidize the rates consumers are paying.

I don’t agree with the philosophy of this new stimulus approach. It’s a kick the can down the road policy that is directed at a very small percentage of the population. The sand states would be the primary beneficiaries. The banks would also get another shot in the arm. I’m sick of policies that have imbedded subsidies to the financial sector.

That said, mortgage subsidies would be very popular with the politicians (from both sides of the aisle) in the coming election year. It is correct to view the US economy as currently running on only 6 of its 8 cylinders. The two that are misfiring are related to the housing sector. So a "fix" to the broken wheel that also gets votes is a theoretical possibility.

The fact that the CBO has teed up (and therefore legitimized) the idea of direct support for mortgage borrowers means that some of our lawmakers will come up with new legislation. In the current environment Washington can’t pass any legislation. So this has little chance of seeing the light of day.

I'm surprised that the CBO is touting, a package that includes cash subsidies for mortgage borrowers. The notion of oiling what squeaks makes sense at one level. On another level the idea that tax dollars should be used to directly reduce monthly mortgage payments would seem like the ultimate act of desperation. Are we really that desperate?

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Wed, 11/16/2011 - 20:05 | 1885213 Bicycle Repairman
Bicycle Repairman's picture

Fuck the CBO.

Wed, 11/16/2011 - 19:51 | 1885161 kevinearick
kevinearick's picture

They turned on Freddy and Fannie again, but the best stuff is over at USDA...

Wed, 11/16/2011 - 18:10 | 1884772 navy62802
navy62802's picture

Principal write-downs. That's the only real solution here. It's what should have happened in 2007/2008 in order to bring the mortgage market into arrears. And that's basically what would have been accomplished by directly bailing out homeowners instead of giving that money to the middle-man banks. We should have had principle write-downs coupled with renegotiation of mortgage terms (i.e. elimination of those predatory ARMs etc). Such a move would not only have kept many millions of people out of foreclosure (and subsequently saved the banks ... after all the housing crisis is what brought banks to their knees in 2008), it would have also deflated home values which had been inflated by the Fed's easy money policies and by the political push to placate voters. And one last measure that should have been taken is to hold borrowers to strict guidelines. If you can't freaking afford a house, you don't get the mortgage.

Wed, 11/16/2011 - 16:59 | 1884279 WTF_247
WTF_247's picture

The fed could drive interest rates to negative if they want (Banks pay you 1% a year) but a majority of people could not take advantage of it becuse the house they own is underwater and cannot be refinanced or sold.  This is one of the things that is actually keeping unemployment higher - lack of income mobility.  I cannot get a job in city A, but cannot move to city B to take a job that is available without just walking away from my home because I cannot sell the house.

 

The only method that would work is for the govt to purchase ALL the mortgages and then refi/adjust the rate and sell them back to the banks to service.  No applications, no restrictions - just change everything down 2% for example.  If you have a mortgage, the rate is now 2% lower.  Had we done this to begin with I think housing would be better off now.  I am no fan of bailouts, but at least the money would go directly to the citizens that pay taxes rather than to save the asses of idiots who make huge bets that blow up.  To do it now is a bit late I think.

Wed, 11/16/2011 - 16:52 | 1884223 steve from virginia
steve from virginia's picture

 

Trial balloon and futile, in the end.

The so-called 'home' builders are waiting for anything that looks like bubble 2.0 to flood the market with more houses. With the problem being supply far in excess of demand the only solution is to nationalize developers then put them out of business.

Or wait until events accomplish the same thing. Another deleveraging leg ("days," sez Willem Buiter) and half of them are well-deserved toast, along with most of the large banks.

Good riddance.

Wed, 11/16/2011 - 16:36 | 1884127 Bobportlandor
Bobportlandor's picture

I have a solution for this LOTTO the houses @1$ per ticket up to morgage remaining.

No capital G tax untill home is sold by winner.

Solved.

Wed, 11/16/2011 - 16:30 | 1884082 oldman
oldman's picture

Bruce,

So long as the banks take a haircut or pay for the subsidy in other ways than funding election candidates, I think this subsidy is a good idea. In fact, why not reduce all mortagages issued since 2005 by an equal amount? In this way, none of us will criticize the poor for not paying what they never had nor the others who had and continue to pay.

Bottom line remains the same: criminal conspiracy of the real estate matrix.

Free market?

What's that and who cares?                                  om

Wed, 11/16/2011 - 16:26 | 1884062 mayhem_korner
mayhem_korner's picture

 

 

Apparently the statists have had too much Fukishima tuna.

Wed, 11/16/2011 - 16:23 | 1884040 oldman
oldman's picture

no comment

 

 

Wed, 11/16/2011 - 16:22 | 1884035 AdahPrice
AdahPrice's picture

Oo!  Oo!  I got it!  Here it is!  Give each returning Iraq or Afghanistan veteran a house, with a $100,000 mortgage.  The vet pays the $100,000 mortgage, on the same terms WW2 vets paid on their VA mortgages.  And whether the house originally cost $100,000 or $1,000,000, sell it to the vet for $100,000.  That takes the overhang of McMansions off the market, and every Congressman who votes for this will be assisting, not a "colossal entitlement giveaway" but a patriotic reward to our brave troops, even as he gives the Fed the signal to print up another, let's see, say 500,000 vets * an average of $150,000 each ($250,000 original price of a McMansion vs. $100,000 cost to veteran) which works out to be, um, $75-billion dollars.  Drop in the bucket, compared with all the other costs of the wars, and especially compared with the Wall Street bailouts.

Wed, 11/16/2011 - 16:36 | 1884120 Cugel
Cugel's picture

Sarcasm?

I don't want the overhang of McMansions taken off the market. I want what's left of the wealth squandered by housing speculators in the bubble returned to the broader economy in the form of cheaper housing prices. Congress doesn't have to do anything for that to happen (only to stop doing some things), and it costs the taxpayers nothing.

Wed, 11/16/2011 - 16:20 | 1884022 MiniCooper
MiniCooper's picture

Banks around the World are increasing the spread between Official Rates and the mortgage and other loan rates they charge their customers. If thw Fed subsidises mortgages it will just allow banks to raise the spread even more. The Fed money will end up with the banks and not help customers.

This happened in Japan a decade ago and in the end Govt had to pass a law to force banks to pass on the low BOJ Rate to customers - many of whom were trapped paying rates of interest they could barely afford.

That said, I hate the idea of mortgage subsidy. There is a tax credit already on mortgage debts payements. Tenanst dont get subsidies so why should someone with a mortgage?

The UK (where I am from) got rid of Mortgages Interest Tax Relief decades ago just before the last housing boom collapsed.

Wed, 11/16/2011 - 16:07 | 1883961 NotApplicable
NotApplicable's picture

How else can they maintain the property tax base, which maintains the local overlords?

That is ALL that this is about (other than the obvious vote-buying game).

Wed, 11/16/2011 - 16:02 | 1883920 PulauHantu29
PulauHantu29's picture

"House prices never fall" ...I was told?!

Why not knock off 50% of everyone's principal...nay, why be cheap with OPM?...... just write off the whole Shebang.

Wed, 11/16/2011 - 15:35 | 1883793 TheSilverJournal
TheSilverJournal's picture

Seeing that half of mortgage holders are already underwater, yes, the controllers of computer generated fiat are getting desperate. And desperation is a stinky cologne.

Wed, 11/16/2011 - 15:30 | 1883771 oddjob
oddjob's picture

I thought you all had mortgage interest deductibility.

Wed, 11/16/2011 - 16:11 | 1883981 NotApplicable
NotApplicable's picture

Doesn't matter for many anymore, as the standard deduction ($10.8k married filed jointly) has risen higher than their yearly interest payments.

Wed, 11/16/2011 - 15:21 | 1883725 Mark123
Mark123's picture

Aren't we already subsidizing mortgages by a huge amount?  FHA, Freddie, ZIRP, etc etc....and they want to do more??????????????????????????

God, am I fed up with these crooks.

Wed, 11/16/2011 - 14:42 | 1883533 kaiserhoff
kaiserhoff's picture

What motivates them?  There are thousands of lobbyists on K Street, and only 535 Congress Critters.  (Assist to Ms. Creant)

The information (cough, bribe) money has been sloshing around to the think tanks and underlings for years.  Why not further corrupt a few overpaid file clerks, who crunch some powerful numbers?

Wed, 11/16/2011 - 14:39 | 1883524 catch edge ghost
catch edge ghost's picture

Kick the can keeps the hosts alive during the journey to zero growth.  Some will not survive the trip, their number is not known.  Infrastructure investment requires a better forecast of the infrastructure demand.

The real can being kicked, the can of whoop-ass that has enslaved humanity for centuries, is being kicked upstairs.  We're trading the monkey on our back for a gorilla on our roof.

Wed, 11/16/2011 - 14:32 | 1883480 Dr. Gonzo
Dr. Gonzo's picture

I thought just last year the CBO wanted Congress to stop Americans from being able to write off mortgage interest on their income taxes to help lower the deficit. WTF? 

Wed, 11/16/2011 - 15:07 | 1883663 chdwlch1
chdwlch1's picture

Makes sense to me. Offer subsidies to re-write the current fraudulent mortgages (MERS mess, illegal transfers of title, etc.) and make them legitimate contracts.  Gets the TBTF banks out of the coming mortgage-related litigation firestorm that they were unsuccessful in settling with 48 AGs for $21 Billion.  Saves the Govt. from having to bailout TBTFs in the future (at least for their mortgage related crimes).  It also keeps people chained to their mortgages and curtails the ongoing home-ownership exodus.  Once everything is nice and clean, THEN they can do away with the mortgage interest deduction.....

Wed, 11/16/2011 - 14:14 | 1883409 devo
devo's picture

Legislation? Doesn't King Obama just use executive power to create laws?

Wed, 11/16/2011 - 14:58 | 1883627 donsluck
donsluck's picture

A path paved by Bush and enabled by Pelosi.

Wed, 11/16/2011 - 16:20 | 1884023 NotApplicable
NotApplicable's picture

LOL, Keep going!

There were 12,667 orders (they started counting with King Lincoln) issued before Clinton ever assumed office.

 

Wed, 11/16/2011 - 14:10 | 1883398 El Viejo
El Viejo's picture

Does that mean I get to deduct a certain portion of my taxes as a charitable contribution?

Wed, 11/16/2011 - 15:23 | 1883739 Mark123
Mark123's picture

Classic!

Wed, 11/16/2011 - 14:03 | 1883377 csmith
csmith's picture

Obama is waking up to the idea he needs a "Hail Mary" play to be reelected. CBO provides the economic rationale (such as it is) for goosing the housing market just long enough to employ maybe a million people ahead of the election. It won't work.

Wed, 11/16/2011 - 14:01 | 1883366 scratch_en_sniff
scratch_en_sniff's picture

"What motivates them is not clear to me." Keeping they're jobs man, that’s about the height of it. Here is an off the record(ish) interview with Holtz-Eaton, it's an insight into what kind of politicking they get up to; they adapt and hence fit right in with the type of jiggery-pokery Washington is becoming famous for.

http://digitalassets.lib.berkeley.edu/roho/ucb/text/holtz-eakin_douglas.pdf

Wed, 11/16/2011 - 13:59 | 1883358 Hedgetard55
Hedgetard55's picture

What drives the CBO? The same thing that drives all government bureaucracies, more and bigger government, more and bigger budgets for CBO, more influence, etc.

Wed, 11/16/2011 - 14:06 | 1883337 Mercury
Mercury's picture

In the current environment Washington can’t pass any legislation. So this has little chance of seeing the light of day.

Figure out how to keep this 'can't pass' environment intact and I'll show you a whopper of a stimulus.

It's hard to believe that mortgage subsidies can revitalize a housing market that bubbled and burst as the result of...mortgage subsidies.

Wed, 11/16/2011 - 14:36 | 1883504 Mariposa de Oro
Mariposa de Oro's picture

Can't our new Super Duper Congress get it passed?  I wonder if they've set their sights on the 401ks and IRAs yet?

Wed, 11/16/2011 - 13:54 | 1883335 FeralSerf
FeralSerf's picture

Bankers and Wall Streeters like this sort of thing much better than spending money on infrastructure, because it ends up being a transfer of wealth from the taxpayers and savers to the bankers.

Wed, 11/16/2011 - 13:52 | 1883328 Sequitur
Sequitur's picture

What a stupid fucking idea. Note to CBO: home prices in America are too high, fueled by debt-induced vomiting a la Greenspan and Bernake. Americans cannot afford home prices at 5x, 6x, even 10x earnings. The only solution is to allow foreclosures, clear the debts, and let young households purchase homes at 2.5x their annual income, freeing up disposable income to be spent in the economy.

Wed, 11/16/2011 - 19:53 | 1885169 kevinearick
kevinearick's picture

++

Wed, 11/16/2011 - 13:47 | 1883308 WineSorbet
WineSorbet's picture

I'm fucking tired of our central planners deciding what's best for the economy. Are we living in a communist country?

Wed, 11/16/2011 - 14:32 | 1883478 Mariposa de Oro
Mariposa de Oro's picture

Yes, but don't tell the proles.  They think they're 'free'.

Wed, 11/16/2011 - 13:58 | 1883356 FeralSerf
FeralSerf's picture

Yes.

Wed, 11/16/2011 - 13:44 | 1883296 ghostfaceinvestah
ghostfaceinvestah's picture

Bruce I bet that item was added because that is what HARP 2 is going to do.  Those 125+ mortgages can't be put into securities, so Fannie/Freddie are going to have to hold them on balance sheet.

If you know how the mortgage market works, primary mortgages are priced off the MBS market.  But those primary rates aren't valid for 125+ mortgages, because they can't be sold into the MBS market.

So Fannie/Freddie will be subsidizing a lot of the those HARP 2 rates implicitly.  And of course that means the taxpayer will be subsidizing those rates.

Wed, 11/16/2011 - 14:25 | 1883453 eatthebanksters
eatthebanksters's picture

Another back door bailout from the 4 horsemen of the appocolypse (Obummer, Temmeh, The Bernank, and Holder) for their masters at the TBTF banks...Let's refi the shit paper and take the banks off the hook and pass the burden to the taxpayer, meanwhile cleaning up chain of title issues so that the unknowing borrower waves his rights for past transgressions by any lender when he/she signs the refi papers.  Not to mention we're guaranteeing a huge new pool of subprime loans with taxpayer money.  Jeeze, these fuckers are desparate for votes aren't they? 

Wed, 11/16/2011 - 13:39 | 1883283 ghostfaceinvestah
ghostfaceinvestah's picture

Mortgage rates are subsidized, if borrowers are smart enough to take the subsidy: stop paying your mortgage, live rent-free form 2-3 years, either fannie/freddie/fha or a TBTF bank picks up the tab via taxpayer subsidies.

Wed, 11/16/2011 - 13:36 | 1883274 Clark Bent
Clark Bent's picture

Sadly too beleiveable. Where are we farming these assholes, has anyone in government ever actually worked in the private sector? Here's an easy one, stop creating a corrupt fascist government that destroys the creators of goods and services and turns their assets over to mindless bloated criminals who bonus themselves off of taxpayer money borrowed from taxpayers three generations hence. And eliminate the EPA. 

Wed, 11/16/2011 - 16:21 | 1884029 NotApplicable
NotApplicable's picture

"corrupt fascist government"

That's redundant. Twice!

Wed, 11/16/2011 - 13:22 | 1883218 Cpl Hicks
Cpl Hicks's picture

There it is, at the top of the chart again. The only arrow in the CBO/ Democrat quiver to boost employment- "Increase aid to the Unemployed".

Effing unbelievable!

Wed, 11/16/2011 - 13:43 | 1883293 SRVDisciple
SRVDisciple's picture

Does the CBO not calculate how much money must be taken out of the economy (rob Peter) to "Increase aid to the unemployed" (pay Paul)? For every 58¢ they tax me, they borrow another 42¢ and then pay out how much? I think it's time for some "Riviera Paradise" to lower my blood pressure.

Wed, 11/16/2011 - 14:22 | 1883446 Commander Cody
Commander Cody's picture

Have a "cold shot" instead.

Wed, 11/16/2011 - 14:50 | 1883586 SRVDisciple
SRVDisciple's picture

Dude. It's not even noon here in the Valley of the Sun.

But if you insist ....

Wed, 11/16/2011 - 13:41 | 1883289 ghostfaceinvestah
ghostfaceinvestah's picture

The second one gets me too - more tax credits for those who pay little or no taxes.

Wed, 11/16/2011 - 14:29 | 1883466 andrew123
andrew123's picture

Ghost, you have made your thoughts on MTG and RDN pretty clear.  Do you have any thoughts on GNW benefiting as the last man standing, or are they toast too?

Wed, 11/16/2011 - 13:51 | 1883321 Capitalist10
Capitalist10's picture

or number three - bankrupt Social Security faster.

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