Americans overwhelmingly oppose any action by Congress to tamper with the mortgage interest deduction, but it could be eliminated or scaled back as federal lawmakers and the Administration are looking at tax increases in light of deficit concerns.
The consequences would be devastating for home owners, the housing market and the nation’s economy. Any attempts to tamper with the mortgage interest deduction would raise taxes on millions of home buyers and home owners and further depress home values, leaving more home owners with mortgages larger than the value of their property (“underwater”) and fueling even more foreclosures. It only takes a 6 percent drop in home values to wipe out $1 trillion in household wealth.
This cornerstone of American housing policy has been in place since the inception of the tax code 100 years ago and supports the aspirations of families at all income levels to become home buyers. More than 33 million home owners directly benefit from the mortgage interest deduction and two-thirds of the benefit goes to middle-class home owners who make less than $200,000.
Building 100 single-family homes creates more than 300 full-time jobs and generates $8.9 million in federal, state and local tax revenues. Scaling back the mortgage interest deduction will shrink the tax base of local communities. It will cause already cash-strapped state and local governments to further cut essential services -- including jobs for local school teachers, police and fire departments.
Acting preemptively to protect the deduction, NAHB last year launched a nationwide Protect Homeownership campaign that attracted thousands of policymakers, business owners, community leaders and consumers to learn the facts, sign a petition and attend rallies in politically charged swing states leading up to the November elections. Overall, NAHB was able to reach more than 25 million Americans.
The association’s efforts to elevate housing on the national agenda have sent a powerful message to the media and members of Congress: Americans value homeownership and lawmakers need to support pro-housing policies that will create jobs, help local communities to flourish and make it easier and more cost-effective for buyers to purchase homes and builders to construct homes. Moreover, NAHB is positioned – and prepared – to be highly engaged in the debate if threats to the home mortgage deduction and other housing tax incentives materialize.
On April 25, NAHB economist Robert Dietz testified before the House Ways and Means Committee during a hearing on tax reform and residential real estate. He called on Congress to maintain support for vital housing tax incentives, including the mortgage interest deduction. For more details, view Dietz's testimony or see NAHB's press release.
To educate the public on the importance of preserving the mortgage interest deduction as a cornerstone of American housing policy, as well as to enlist their support to urge policymakers to make sure creditworthy consumers and small businesses can get mortgages and loans, NAHB has created a consumer-oriented website, ProtectHomeownership.com. The website contains frequently asked questions, statistics, polling data and other important information to allow consumers to stay informed.
Large numbers of foreclosures nationwide are driving down home values, destabilizing communities, costing jobs and preventing a full-fledged housing and economic recovery.
The lower home values caused by foreclosed homes are also forcing many home owners "underwater" to a situation where they owe more on their mortgage than their home's current market value. Preventing foreclosures and keeping people in their homes is essential to stabilize home prices, strengthen communities across the land and get the recovery up to full speed.
The large numbers of foreclosures in most areas have inevitably led to numerous problems in the housing market, especially regarding appraisals.
Flawed appraisals are a major problem for home buyers, owners and builders. Too often, appraisers are using distressed properties – many of which have been neglected and are in poor physical condition – as comparables in assessing the value of well-kept existing or brand new homes without accounting for major differences in condition and quality.
Many home owners seeking to refinance and take advantage of today’s record low interest rates are unable to do so because their house appraisals are coming in too low. A move-up buyer is out of luck if the appraisal on their existing home comes in below what they owe on their current mortgage. Likewise, many prospective home buyers have been left out in the cold because their dream house was appraised below the sales contract price. In fact, 60 percentof builders responding to an NAHB member survey in late 2011 reported receiving appraisals on new homes that were lower than the contract sales price, and more than half of the builders reporting that they had encountered this problem said the appraisal amount was less than the cost of construction.
Such appraisal practices are not only unfair and unreasonable, they perpetuate the cycle of declining home values, drive more home owners underwater and act as an obstacle to the recovery of the housing market.
Moreover, the lower property values triggered by foreclosed homes are shrinking the local tax base of many communities. This is putting further pressure on already cash-strapped state and local governments to keep essential services at acceptable levels.
Major reforms in appraisal practices and oversight are needed to ensure that appraisals accurately reflect true market values and don’t contribute to price volatility, impede the economic recovery or harm aspiring home owners and move-up buyers. Based on more than a year of research by a special Appraisal Working Group and extensive input from stakeholder groups, NAHB has published "A Comprehensive Blueprint for Residential Appraisal Reform," which offers specific recommendations for changes to all aspects of the appraisal system.
Additional information about foreclosures and appraisals:
3. Maintain Federal Support for Housing Finance System
A sound housing finance system that provides a stable and affordable supply of credit for home buyers and rental housing is essential to ensure a healthy housing market, spur job creation and maintain a strong and resilient economy.
In the wake of the financial crisis, the private market is clearly not working. The Federal Housing Administration, Fannie Mae and Freddie Mac currently guarantee or insure more than 90 percent of all home mortgage activity and private lending institutions have shown little inclination to step up to the plate. Even with the current high level of federal support, fewer mortgage products are available now than in the past, and these loans are being underwritten on much more stringent terms.
Policymakers are now looking at several proposals to wind down Fannie Mae and Freddie Mac and are weighing several options to encourage increased participation from private financial institutions. Any transition must be done in a careful and deliberate manner to avoid further disruptions to an already fragile housing finance system. The question is what will replace Fannie Mae and Freddie Mac and fill the void of their departure?
Complicating the situation, the federal government is looking to trim back the Federal Housing Administration’s participation in the market, which would further limit the availability of low downpayment mortgages.
As the private market assumes a greater role in the mortgage marketplace, maintaining an appropriate level of government support is essential to preserve financial stability, promote investor confidence and ensure liquidity and stability for homeownership and rental housing.
NAHB has presented lawmakers with a detailed proposal on restructuring the housing finance system to provide a consistent supply of mortgage liquidity and retain a federal backstop while limiting taxpayer exposure. Actively involved in this issue, the association continues to encourage all congressional efforts that seek an appropriate federal role to ensure a reliable and adequate flow of affordable housing credit.
Six federal agencies are proposing a national Qualified Residential Mortgage (QRM) standard that would require a minimum 20 percent downpayment, which would keep homeownership out of reach of most first-time home buyers and middle-class households.
In addition, the QRM plan includes several other bad ideas that would seriously impact the average family’s ability to affordably obtain a home of their own. It would mandate restrictive debt-to-income ratios to qualify for a home loan and prevent 25 million current home owners from refinancing to lower mortgage rates because they lack the required 20 percent equity in their homes.
High downpayment and equity rules along with excessive underwriting requirements will not have a meaningful impact on default rates, but it will tighten lending rules to the point where millions of creditworthy home buyers won’t be able to qualify for a mortgage. Responsible consumers who maintain good credit and seek safe loan products will be forced into more expensive mortgages under the terms of the proposed rule simply because they do not have 20 percent or more in downpayment or equity. In other words, the proposal unfortunately penalizes qualified, low-risk borrowers.
A 2012 study by the UNC Center for Community Capital and the Center for Responsible Lending found that the proposed rule could push as many as 60 percent of creditworthy borrowers into high-cost loans or entirely out of the market. The study also found that the provisions of the Dodd-Frank financial reform legislation that ban loans with the highest risk, such as those with prepayment penalties or no requirement to document the buyer's income, would adequately address the bad underwriting at the root of the housing crisis.
NAHB estimates that it would take 12 years for a typical family to save enough money for a 20 percent downpayment on a median-priced single-family home and other research has found it would take even longer. Borrowers unable to make a 20 percent downpayment or to obtain FHA financing would be expected to pay a premium of up to two percentage points for a loan in the private market to offset the increased risk to lenders, according to NAHB economists. This would annually disqualify about five million potential home buyers, resulting in 250,000 fewer home purchases each year.
If buyers are denied access to affordable housing credit, a housing recovery will not take hold and economic growth will stall.
Low-downpayment home loans have been originated safely for decades and did not cause the housing lending crisis. Subprime, no-documentation loans and other alternative mortgage products crashed the economy. The Administration and regulators must acknowledge this fact and offer a new plan that ensures a safe and healthy mortgage market and keeps homeownership affordable for working American families.
Proposed "Qualified Mortgage" Requirements Will Define the Market
Another provision of the Dodd-Frank legislation could also have a profound effect on mortgage requirements.
The Consumer Financial Protection Bureau (CFPB) on Jan. 10, 2013 issued its rules on a qualified mortgage (QM) standard. The qualified mortgage rule stipulates that borrowers must be able to repay home loans issued to them and will set the parameters for all mortgage financing going forward. So it is essential that it strikes the proper balance that encourages lenders to provide creditworthy borrowers access to affordable home loans, and also gives assurances to financial institutions that they will be protected from lawsuits if they meet the criteria set forth in the rules.
NAHB believes that the final rule generally achieves this balanced approach and is workable for both industry stakeholders and consumer groups. NAHB is encouraged that the CFPB heeded concerns from the housing industry to craft a broad standard that includes many of today's sound mortgage products, including fixed-rate and adjustable-rate mortgages, under the QM standard.
The rule will take effect next January. To spur the revival of the home lending market, it is essential that regulators act prudently and thoughtfully in the coming year to implement this rule in a sensible manner to avoid disruptions to the housing finance system and ensure qualified borrowers can obtain affordable credit.
What's the Difference Between a "Qualified Mortgage" and a "Qualified Residential Mortgage"?
Although the terms sound similar, they refer to different aspects of a mortgage and the financial system.
The term “qualified mortgage,” or QM, refers to all mortgages that will be available to consumers. It sets a specific standard for consumer loans; mortgages not meeting that standard could be considered predatory.
A “qualified residential mortgage,” or QRM, is one that can be sold by the lender on the secondary mortgage market. Lenders are not required to sell mortgages on the secondary market. However, many lenders prefer to sell mortgages quickly in order to replenish their funds so they can continue to make loans in their community, and the vast majority of mortgages are sold on the secondary market. For this reason, the QRM could quickly become the market standard.
Information and resources related to the proposed QRM requirements:
5. Fight Onerous Regulations that Hurt Home Builders, Remodelers and Consumers
NAHB is in the forefront in preventing expensive, pointless regulations from impeding home building and remodeling and adding unnecessary costs to consumers. From overly broad stormwater permit requirements that would literally regulate puddles under the Clean Water Act, to far-reaching Endangered Species Act requirements, and lead paint rules that cost remodelers jobs and money, NAHB is leading the fight to rein-in unnecessary and burdensome regulations that harm the industry and consumers. Just reinstating the lead paint rule opt-out provision for homes not occupied by children or pregnant women would save $336 million annually in compliance costs. NAHB-supported legislation introduced in the Senate on March 7 by Sen. James Inhofe (R-Okla.) addresses many of the concerns from NAHB Remodelers and affiliated trade groups about the EPA’s Lead: Renovation, Repair, and Painting Rule.
For additional information about lead paint rule enforcement and compliance, visit nahb.org/leadpaint. Learn more about NAHB resources on stormwater permits and programs here. View the latest Endangered Species Act developments at nahb.org/esa.
6. Ensure an Adequate Supply of Reasonably Priced Credit for New Home Production
It is absolutely vital to get credit flowing to the housing sector again. In the current regulatory climate, lenders have drastically cut back on acquisition, development and construction (AD&C) loans that are necessary to allow builders to construct new homes. Credit is the lifeblood of housing. Home builders cannot keep their doors open and create jobs in their communities if they cannot get credit to build even pre-sold homes. And when lenders call in performing loans, everyone suffers. Workers get laid off, sound projects go uncompleted and banks take possession of unfinished property.
Federal bank regulators maintain that they are not encouraging institutions to stop making loans or to indiscriminately liquidate outstanding loans. However, NAHB members who are dealing with banks all across the country suggest that bank examiners in the field are adopting a significantly more aggressive stance on AD&C loans out of fear of the regulators coming into the banks and targeting them.
With inventories of new homes nearly depleted in many markets, builders should be gearing up to meet demand, create new jobs and keep the economic expansion moving forward. The only thing holding builders back in these locations are traditional lenders, who still aren’t providing the credit needed to renew the production process.
NAHB worked with Reps. Gary Miller (R-Calif.) and Carolyn McCarthy (D-N.Y.) to introduce legislation to address the credit issue for home builders. On March 19, the House lawmakers unveiled H.R. 1255, the Home Construction Lending Regulatory Improvement Act of 2013. The measure represents a substantial step forward in the effort to restore the flow of credit to the housing industry and is identical to legislation championed by Miller in the last Congress. See NAHB's press release for more details.
7. Recognize Housing’s Important Role to the Economy
As policymakers begin debate on housing finance and budget issues that will impact job creation and future growth, they must understand the important role that housing plays in the U.S. economy. Considering the enormity of the total number of jobs attached to housing, a sector that normally accounts for more than 17 percent of the nation’s Gross Domestic Product, now is hardly the time to step back from the nation’s long-standing commitment to homeownership.
Building 100 average single-family homes generates more than 300 jobs and nearly $9 million in taxes and revenue for state, local and federal governments that supports local schools and communities across the land. Perhaps more than any other consumer product, housing is “Made in America.” New homes and apartments don’t arrive in this country on container ships from Europe or Asia, and most of the products used in home construction and remodeling are manufactured here in the United States.
More than 1.3 million residential construction jobs have been lost since April 2006. The pace of recovery is debatable, but based purely on population growth and demographics, the U.S. will need to build 17 million additional homes over the next decade.
The gap between current production and potential housing production is about 800,000 homes. That represents more than 2.4 million untapped American jobs. This gap is a result of multiple factors, including deferred household formations, a lack of construction financing and flawed appraisal practices under which new homes get compared to distressed and foreclosed properties, thereby distorting true market values.
There can be no economic recovery without a housing recovery. The path forward is perfectly clear: Congress needs to take actions to restore the health of the housing industry to put America back to work.
This is a sentiment shared by American voters as well. An NAHB survey of 2012 voters conducted last year by Public Opinion Strategies and Lake Research Partners found that despite the ups and downs of the housing market, home owners and non-owners alike consider owning a home essential to the American Dream and support politicians who embrace pro-housing policies and the mortgage interest deduction.
An overwhelming 74 percent of the respondents said that owning a home is worth the risk of the fluctuations in the market and 68 percent of those who do not own a home say it is a goal of theirs to eventually buy one. Equally telling, more than seven out of 10 of all Democrats, Republicans and Independents agree that tax incentives to promote homeownership are reasonable and two-thirds of the survey respondents believe the federal government should play a role to ensure that 30-year home loans remain readily available and affordable.
The NAHB poll is consistent with a New York Times/CBS News survey that reveals more than nine out of 10 Americans oppose eliminating the mortgage interest deduction; a recent Harris Interactive survey that shows more than four out of five renters desire to be home owners; and a poll released last May by the Woodrow Wilson International Center for Scholars, which found that voters also placed a very high importance on homeownership.
For more information on this topic, click on the following links:
As Congress looks at tax expenditures and all programs come under review, it is important to protect the Low Income Housing Tax Credit (LIHTC), the most successful affordable rental housing production program in U.S. history. Eliminating the LIHTC would bring production and rehabilitation of affordable rental housing to a standstill.
Since its inception, the program has made possible the production of more than two million affordable apartments. It creates approximately 95,000 new full-time jobs, adds $7.1 billion in income to the economy and generates approximately $2.8 billion in federal, state and local taxes each year. In recent years, the LIHTC has produced about 75,000 new apartment homes annually.
The demand for affordable housing is acute and far exceeds the ability of LIHTC projects to keep pace. The program is essential to address the shortage of affordable housing options in our cities and towns.
On April 25, NAHB economist Robert Dietz testified before the House Ways and Means Committee during a hearing on tax reform and residential real estate. He called on Congress to maintain support for vital housing tax incentives, including the Low Income Housing Tax Credit. For more details, view Dietz's testimony or see NAHB's press release.
The home building industry, with the contribution of a substantial immigrant workforce, plays a critical role in sustaining the national economy and meeting the nation's housing needs. It is estimated that more than 20 percent of the building industry's workforce is foreign-born, making the immigrant population key to meeting housing demand and sustaining growth in the industry.
As Congress turns to a broader conversation on immigration reform, NAHB is urging lawmakers to take steps to make a system that is workable. Specifically, NAHB strongly urges Congress to focus on the direct employer-employee relationship so that U.S. employers remain accountable only for the identity and work authorization status of their direct employees, and not for the employees of other businesses.
NAHB also urges Congress to create an efficient, temporary guest worker program that allows employers to recruit legal immigrant workers when there is a shortage of domestic workers and allows these immigrants to be put on the path to temporary or permanent legal residency or citizenship. Finally, NAHB supports congressional efforts to address the concerns created by the growing undocumented immigrant population and create a system whereby they can achieve legal status.
10. Use All Legal Means Necessary to Protect Property Rights
NAHB’s proactive litigation efforts have forced governmental bodies and agencies at the state and federal levels to scale back or entirely eliminate efforts to limit or stop development on countless parcels nationwide. Fighting on behalf of property owners, NAHB on Nov. 28 filed an amicus (friend of the court) brief with the U.S. Supreme Court in Koontz v. St. Johns River Water Management District, a landmark case that will have major implications for land developers across the country. The U.S. Supreme Court will decide the extent to which government can tell a home builder or developer to pay money or make improvements to off-site land miles away from their own property before they can develop their own land. The Supreme Court is expected to rule on the case by June 30, 2013. View more details here.