The President’s plan has the devil in the details
Breathing new life into the FHA sounds like a plan, especially since the private groups that made FHA practically irrelevant are evaporating into thin air. However, it is unclear exactly what it is that the FHA is supposed to do, or who is going to be helped.
The idea that people could pay-were it not for the adjustment- really means that people could carry their mortgage loan as long as there was an artificially low rate or there was negative amortization. These separately or in combination created an artificially low monthly payment for them. A market interest rate or a fully amortizing loan creates an unaffordable situation for many. How the FHA is supposed to provide relief for borrowers such as these would realistically come as a subsidy to both the borrower and the lender who made the original loan. That begs the question of why are we effectively rewarding bad behavior or bad decision-making.
Additionally, there is a provision that would eliminate, on a temporary basis, the income tax burden on forgiven debt. This existing provision in the IRS code has always struck me as odd, especially since the capital loss from a house sale is not considered for tax purposes. (I speculate this arcane portion of the code was there to encourage borrowers not to walk away from their loans.) Arguably, the tax code as it stands is inconsistent at best. Given the tax structure however, this change will accrue much greater benefit to the wealthier. Those in higher tax brackets get the bigger break; they, not coincidentally, also are the ones that could buy the more expensive houses. They are not the group in the greatest financial need.
Determining who is in deserving need of relief from this current situation is all but impossible. Attempting to figure this out will keep bureaucrats humming for quite a while. The idea of reinvigorating the FHA is a good thing in the broader scheme of housing. However, no one who participated complained during the heady upside years of the real estate bubble. Relief for lenders or borrowers whose decisions only now are financially hurting them seems to be a burden the taxpayers should not bear.
The idea that people could pay-were it not for the adjustment- really means that people could carry their mortgage loan as long as there was an artificially low rate or there was negative amortization. These separately or in combination created an artificially low monthly payment for them. A market interest rate or a fully amortizing loan creates an unaffordable situation for many. How the FHA is supposed to provide relief for borrowers such as these would realistically come as a subsidy to both the borrower and the lender who made the original loan. That begs the question of why are we effectively rewarding bad behavior or bad decision-making.
Additionally, there is a provision that would eliminate, on a temporary basis, the income tax burden on forgiven debt. This existing provision in the IRS code has always struck me as odd, especially since the capital loss from a house sale is not considered for tax purposes. (I speculate this arcane portion of the code was there to encourage borrowers not to walk away from their loans.) Arguably, the tax code as it stands is inconsistent at best. Given the tax structure however, this change will accrue much greater benefit to the wealthier. Those in higher tax brackets get the bigger break; they, not coincidentally, also are the ones that could buy the more expensive houses. They are not the group in the greatest financial need.
Determining who is in deserving need of relief from this current situation is all but impossible. Attempting to figure this out will keep bureaucrats humming for quite a while. The idea of reinvigorating the FHA is a good thing in the broader scheme of housing. However, no one who participated complained during the heady upside years of the real estate bubble. Relief for lenders or borrowers whose decisions only now are financially hurting them seems to be a burden the taxpayers should not bear.
David Levin
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