Although the first few days of February brought frigid temperatures to the entire country, it did not keep five HAR Federal Political Coordinators from participating in the 2011 Federal Political Coordinator and Policy Conference in Washington, D.C. For three days, as temperatures outside plummeted, we heated things up in the Capitol building as we met with Congressional staff and impressed upon them the importance of supporting REALTORS® through legislative reform. Of the many issues addressed, the three that were highlighted as vital to Houston-area REALTORS® were: preserving and protecting the Mortgage Interest Deduction, extending and finding a permanent source of funding for flood insurance, and Government-Sponsored Enterprises (GSE) reform. An expanded analysis provided by NAR follows.
Those from the Houston area that braved the ice and snow and attended the Fly-in were: Carlos Garcia – Met with Nathaniel Tipton of Congressman Gene Green’s office; Delora Wilkinson – Met with Luke Murry, Office of Congressman Ted Poe; John Nichols – Met with Kristin Hendee, Office of Congressman John Culberson; Shad Bogany – Met with Susie Saavedra and Thao Nguyen, Office of Congressman Al Green; and Vicki Fullerton – Met with Kimberly Ellis, Office of Congressman Kevin Brady.
Those from the Houston area that were not able to attend because of the inclement weather conditions were:
- Jim Cockrill – Scheduled to meet with Jesse Lashbrook of Congressman Pete Olson’s office;
- Sherri Strickland – Scheduled to meet with Norman Kirk Singleton, Office of Congressman Ron Paul;
- Gerald Womack – Scheduled to meet with Yohannes Tsehai and Shashrina Thomas, Office of Congresswoman Sheila Jackson Lee;
- and Sheri Brummett – Scheduled to meet with Charles Fields, Office of Congressman Michael McCaul.
Although not physically present at the FPC meetings, all members of Congress from the Houston area were briefed.
Reauthorizing the National Flood Insurance Program
For some time now, the Congress has been approving short-term extensions of the National Flood Insurance Program (NFIP) authority to issue flood insurance policies while debate continues over comprehensive fiscal reforms to the program. Between September 2008 and September 2010, there were nine extensions and, twice, authority was allowed to expire, delaying or cancelling tens of thousands of real estate transactions according to recent NAR survey data.
As a result of REALTOR® advocacy efforts, Congress has unanimously extended the NFIP to September 30, 2011. With program authority now extended for a year, attention is expected to turn to proposals to reform and ensure the program’s financial soundness. While the House passed its version of reform legislation last Congress, the Senate failed to consider legislation. While the one-year extension brings a level of certainty to the NFIP, Congress must adopt comprehensive reform measures to place the program on more sound financial footing for at least another 5 years. NAR supports reforms to increase program participation by adding coverage for business coverage and updating coverage limits which have not been adjusted since 1994. NAR also supports fully funding a pilot program for mitigating older properties with insured losses, but any rate increases should be more gradually phased-in so that there is an opportunity to adjust and no one will shoulder the entire increase in a single year.
Without the NFIP, more than 5.5 million home and business owners in 20,000 communities nationwide could not obtain a mortgage or flood insurance to protect their properties against flooding, the most common natural disaster in the U.S., and more specifically, in the Houston-area. The NFIP was created because of the lack of available flood insurance in the private market, which is still true today. Flood insurance also serves as an alternative to expensive taxpayer – funded disaster relief for flood victims.
Facts on the Mortgage Interest and Real Estate Tax Deductions in Texas
Of the approximately 5,430,700 owner-occupied houses in Texas in 2009, 3,428,275 or 63% had a mortgage.
In 2008, 2,197,587 taxpayers in Texas claimed a deduction for mortgage interest. The total amount deducted was $21,877,154,000. This means that the average taxpayer claiming the MID deducted $9,955 from taxable income in 2008. At a marginal rate of 25 percent, this means that the average taxpayer saved $2,489 in taxes as a result of the MID. The total tax savings from the MID in Texas in 2008 was $5,469,288,500.
In 2008, 2,380,930 taxpayers in Texas claimed a deduction for real estate taxes. The total amount deducted was $12,380,981,000. This means that the average taxpayer claiming the real estate tax deduction subtracted $5,200 from taxable income in 2008.
At a marginal rate of 25 percent, this means that the average taxpayer saved $1,300 in taxes as a result of the real estate tax deduction. The total savings from the real estate tax deduction in Texas in 2008 was $3,095,245,250.
If the MID and real estate tax deductions were eliminated, the loss would not be a one-year event; homeowners lose out on these potential savings each and every year. The present value3 of these lost savings could total $171,290,675,000. The value of all owner-occupied real estate in Texas in 2009 was $911,056,231,900. If the lost tax savings are fully capitalized into the price of houses, the average decline in value in Texas would be 19%. From the individual perspective, the median priced home in Texas in the third quarter 2010 was $151,700. A decline in value as projected would mean a loss in home value of $28,522 for the typical home owner.
- Marginal rates range from 10 to 35 percent.
- Present value calculation assumes 5 percent discount rate and 1000 year time horizon.
Sources for the data above include: Internal Revenue Service 2008, American Community Survey 2009, NATIONAL ASSOCIATION OF REALTORS® 2010; All calculations are by the NATIONAL ASSOCIATION OF REALTORS® Research Division
Government-Sponsored Enterprises (GSE) Key Points based on NAR Principles
An efficient and adequately regulated secondary market is essential to providing affordable mortgages to consumers. The secondary market, where mortgages are securitized and/or combined into bonds, is an important and reliable source of capital for lenders and therefore for consumers. Without a secondary market, mortgage interest rates would be unnecessarily higher and unaffordable for many Americans. In addition, an inadequate secondary market would impede both recovery in housing and the overall economic recovery.
We cannot have a restoration of the old GSEs with private profits and taxpayer loss system. The current GSEs should be replaced with government chartered, non-shareholder owned entities that are subject to sufficient regulations on product, revenue generation and usage, and retained portfolio practices in a way that ensures they can accomplish their mission and protect the taxpayer.
Government-chartered entities have a separate legal identity from the federal government but serve a public purpose (e.g. the Tennessee Valley Administration and the Export-Import Bank). Unlike a federal agency, the entities will have considerable political independence and be self-sustaining given the appropriate structure.
The mission would be to ensure a strong, efficient financing environment for homeownership and rental housing, including access to mortgage financing for segments of the population that have the demonstrated ability to sustain homeownership. Middle class consumers need a steady flow of mortgage funding that only government backing can provide.
The government must clearly, and explicitly, guarantee the issuances of the entities. Taxpayer risk would be mitigated through the use of mortgage insurance on loan products with a loan to value ratio of 80 percent or higher and guarantee or other fees paid to the government. This is essential to ensure borrowers have access to affordable mortgage credit. Without government backing, consumers will pay much higher mortgage rates and mortgages may at times not be readily available at all (as happened in jumbo and commercial real estate loans).
The entities should guarantee or insure a wide range of safe, reliable mortgages products such as 30 & 15 year fixed rate loans, traditional ARMs, and other products that have stood the test of time and for which American homeowners have demonstrated a strong “ability to repay.”
For additional safety, sound and sensible underwriting standards must be established for loans purchased and securitized in MBSs, loans purchased for portfolio, and MBS purchases.
The entities should price loan products or guarantees based on risk. The organization must set standards for the MBS they guarantee that establish transparency and verifiability for loans within the MBSs.
Political independence of the entities is mandatory for successful operation (e.g. the CEOs will have fixed terms so they cannot be fired without cause, they should not be allowed to lobby, and the authorities should be self-funded — no ongoing appropriations).
In order to increase the use of covered bonds, particularly in the commercial real estate arena, the entities should pilot their use in multifamily housing lending and explore their use as an additional way to provide more mortgage capital for residential housing. The entities should be allowed to pave the way for innovative or alternative finance mechanisms that meet safety criteria.
There must be strong oversight of the entities (for example, by the Federal Housing Finance Agency — FHFA or a successor agency), that includes the providing of timely reports to allow for continual evaluation of the entities’ performance.