TAX NEWS - JUNE 2010

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US Tax: FDIC's Bair questions housing tax breaks

Bair, the chairman of the Federal Deposit Insurance Corp., said in a speech Monday that Congress should consider paring back federal tax deductions for homeowners. She said these subsidies helped inflate house prices, harming the very consumers that many of the programs aimed to help.

Bair took aim at federal tax deductions for mortgage interest, local property taxes, and capital gains on house sales (in certain circumstances). She said these taxpayer subsidies for homeowners, taken together, "are about three times the size of all rental subsidies and tax incentives combined."

Even that probably understates the case. Consider the hundreds of billions of dollars the feds are spending to support Fannie Mae (FNM) and Freddie Mac (FRE) in the name of making mortgages available, and the limited-time-only tax credits that have helped to prop up house prices over the past year.

Whatever the tab, though, Bair said the problem is the same: Government subsidies for property owners push up the price of houses, undermining so-called affordable housing programs run by the likes of Fannie and Freddie.

Bair rejected the notion that laws like the Community Reinvestment Act, the 1977 law that encourages lending in low-income areas, fed the housing crisis.

Risky loans "were made in large volumes because for a time they were highly profitable and because Wall Street would buy them and securitize them," she said. "It's as simple as that."

But she said policymakers have a duty to better educate consumers and to reform securitization, the process that Wall Street uses to turn loans into bonds salable to pension funds and other risk-averse institutional investors.

Along the same lines, she said, the government should reconsider popular tax deductions that helped the U.S. homeownership rate hit an all-time high of 69% during the bubble in 2005. That number stayed in the mid-60s throughout the 1980s and 90s. It was recently 67%, the Census Bureau said.

"Sustainable homeownership is a worthy national goal," Bair said. "But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may NOT be the right answer."
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