Saturday, October 15, 2011

The Blame Game

If you buy a residence in the US and live in it, you are in a remarkable situation, especially if you finance the home with a large mortgage. If the value of your home rises, you can sell it tax free (in more than 98 percent of actual home sale situations) and if the value of your home falls, you can, in most states, simply move away and owe nothing. Even better, the government subsidizes the interest expense that you pay on the mortgage by permitting tax deductions for mortgage interest paid.

If you decide to pay off your mortgage early (to take advantage of lower mortgage rates), the government insists that all "conformable" mortgage loans (comformable to GNMA standards, which accounts for more than 90 percent of all US mortgages) provide for no penalty whatsoever to homeowners choosing to refinance their homes (a luxury unheard of in the mortgage market for commercial real estate).

As if that isn't enough, Congress has created two "quasi" government agencies, Federal National Mortgage Association (Fannie Mae) and Federal Mortgage Corporation (Freddie Mac) who currently own or guarantee more than half of the mortgages in the US. The effect of this taxpayer largess to home buyers is to lower the interest rates paid on home mortgages by providing massive amounts of taxpayer dollars for the mortgage market.

Is there a wonder that there was a housing bubble? Does it really require predatory lenders to get this rocket-fueled housing bubble going?

If virtually all capital gains on common stock were tax free, we would see a massive bubble in US stocks, especially if the interest on stock loans were tax deductible and if the government provided taxpayer money to loan money to potential stock holders.

So, why the deal with housing?

The government (both political parties) made the decision to favor home ownership over renting for the average American.

Note that none of the legislation introduced by either President Obama or Republicans does anything to change the current government favoritism of residential housing. So, guess what? We are absolutely assured to repeat the housing bubble and bust in the future. Nothing in Dodd-Frank or the other sledgehammer attacks on capitalism initiated by President Obama and his Democratic Congress do anything to change government's policies that guarantee another housing disaster at some future date.

What about Canada? Canada does not have tax-free sales of residential homes. Canada does not permit tax deductions for interest expense. Canada does not have a Fannie Mae or Freddie Mac? Guess what? Canada had no housing bubble either. Are Canadians that different from Americans? Nope. They just have different government policies regarding housing.

So, why are Wall Streeters blamed for the housing bubble, but government policies get a free ride? Because politicans have no clue as to what happened from 2006 to the present. Today's Obama tirades are simply a knee-jerk, anti-capitalism reflex to a downturn that their very own political allies put in motion generations earlier.

Wall Streeters did not cause the housing bubble or its subsequent collapse. Wall Streeters did not put in place the Obama policies that have stifled any hopes of a vigorous economic recovery.

The real blame for the housing bubble and collapse belongs to current government policies regarding residential housing. Until those policies end, we are doomed to repeat the housing bubbles and busts.

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