Felix Salmon

Chart of the day: Where does the mortgage-interest deduction go?

Felix Salmon
Jul 12, 2011 20:07 UTC

Check out page 44 of the Joint Committee on Taxation report on the way that household debt is treated for tax purposes. I’ve put the table into chart form, to make it easier to see what’s going on. Apologies for the rather weird y-axis on the chart: it’s serving a double purpose, counting total returns for the left-hand column and dollars for the right hand column. I would have done a dual axis, but I was having difficulty making that work in Excel.


In any event, the big picture here is clear. Households earning more than $200,000 a year account for less than 10% of the returns, but get 30% of all the benefits. And households earning more than $100,000 a year get 69% of all the benefit. The mortgage-interest deduction might be a middle-class tax break, but realistically it’s an upper-middle-class tax break.

The JCT is also very clear on the two separate ways in which it’s fundamentally unfair, benefiting owners at the expense of renters:

The deduction for home mortgage interest reduces the after-tax cost of financing and maintaining a home. Because the Federal income tax allows taxpayers to deduct mortgage interest from their taxable income, but does not allow them to deduct rental payments, there is a financial incentive to buy rather than rent a home. Taxpayers are also allowed to exclude gains from the sale of their principal residences of up to $500,000 from gross income. There is no such exclusion for other types of investments, further reinforcing the financial incentive to buy rather than rent a home.

Homeowners also receive preferential treatment under U.S. tax law because the imputed rental income on owner-occupied housing (that is, the cost of rent which the taxpayer avoids by owning and occupying a home) is not taxed. Consider two taxpayers: one rents a home at a $1,000 monthly rate, and the other owns a home which carries a $1,000 monthly mortgage. All else equal, a renter pays taxes on a measure of income that includes the $1,000 used to pay rent and the homeowner pays taxes on a measure of income that does not include that same $1,000. If imputed rental income were included in income, it would be appropriate to allow a deduction for mortgage interest, property taxes, and depreciation as costs of earning that income. Because tax law allows taxpayers to deduct mortgage interest and property taxes to determine their taxable income but does not tax imputed rental income or allow them to deduct rental payment, it creates the incentive to buy rather than rent a home and to finance the acquisition with debt.

The mortgage-interest deduction should be abolished, of course — it’s a dreadful piece of public policy. Homeownership, especially during times of high unemployment, does more harm than good, and there’s not even any real evidence that the deduction actually increases homeownership, rather than just artificially making houses more expensive to buy.

But if we’re not going to abolish the mortgage-interest deduction, I like the idea that homeowners should be taxed on their imputed rental income. Think about it this way: I can give you a house, or I can give you the money to buy that house, or I can give you an income stream to pay the rent on that house. The tax consequences of the three are very different, and the last one is the worst: you have to pay income tax on the income stream, leaving you with less money for rent. But if you own a house, and get lots of valuable benefit from it every month, you don’t need to pay any tax on that benefit at all.

More realistically, however, we should just look at the $80 billion a year we’re spending on the mortgage-interest deduction and ask ourselves (a) whether we can afford it, and (b) whether it’s really the best possible way in which we could be spending $80 billion a year. The answer to both questions is clearly no. Especially since that money is going overwhelmingly to the richest households in America.


Whoops didn’t get to finish.
Allow only one home deduction and require it to be a house or condo – forget the houseboat, yacht or big sailing vessel interest deduction. If they can afford those they can afford not having the deduction. Some folks buy fishing boats that cost more than some of the boats with a bunk, a kerosene stove and a chemical john and they cannot deduct the interest on them.

Posted by rogersw | Report as abusive

More data on mortgage delinquency and downpayments

Felix Salmon
Jul 12, 2011 18:05 UTC

Last month, in a post headlined “how the mortgage industry lies with statistics,” I bemoaned the fact that I couldn’t find good real data to compare to the massaged data which went into this chart.


What this chart purports to show is that if you’re writing qualified mortgages, the default rate is low whatever the downpayment; it’s the non-qualified mortgages which see enormous default rates above 15%.

But now Glenn Costello of the Kroll Bond Rating Agency has taken the same data from CoreLogic and crunched it for me in exactly the way I requested of Anthony Guarino, the man who put the above chart together. And if you look at the data in a non-massaged way, it looks very different indeed:


The first thing to note is that all of the bars on this chart apply to qualified mortgages: the unqualified ones aren’t even included. And yet the y axis goes much higher than the official mortgage industry’s chart — one of the bars reaches a whopping 40%, about which more in a minute.

The greenish bars, on this chart, are all the mortgages with downpayments of 20% or more, broken down into three groups: downpayments of 20-25%; 25-30%; and more than 30%. (The chart actually shows LTV, or loan-to-value, which is the opposite of a downpayment: to get the downpayment, you subtract the LTV from 100.)

The worst performance for this group happened in 2006, for mortgages with a 20-25% downpayment: they ended up with a delinquency rate of 10.3%. That’s very high, and that single datapoint alone would suffice to show that the 20% downpayment level isn’t a guarantee of safety when it comes to mortgages.

But just look what happens when you compare the mortgages with a 20-25% downpayment to the mortgages with a 15-20% downpayment. Now we’re looking at the bluish bars — they range from 15-20% downpayments all the way to 3-5% downpayments. But for the time being, just look at the lightest blue bar and compare it to the darkest green bar. That’s where the 20% downpayment dividing line happens, and the difference is stark.

In 2002, 6.6% of mortgages with a 15-20% downpayment ended up in delinquency, compared to just 1.5% of mortgages with a 20-25% downpayment. That’s an increase of 340%. In 2003, the numbers are 5.7% and 1.8%; in 2004 they’re 8.0% and 3.5%; in 2005 they’re 13.3% and 8.3%; in 2006 they’re 21.2% and 10.3%; and in 2007 they’re 15.7% and 6.4%. In every case, the gap is huge; in 2006, it’s in double digits.

Remember, we’re talking about qualified mortgages here — the ones the mortgage industry claims are so safe that banks should be allowed to sell all of them off without keeping any skin in the game. All of these mortgages came with mortgage insurance, for instance. And now check out that tall bar from 2007: if you took out a qualified mortgage, that year, with a downpayment of between 3% and 5%, then you had a 40% chance of ending up in delinquency. There was clearly nothing safe about those mortgages at all; even the mortgages with no money down at all did better. (The final maroon bar shows mortgages with 0-3% down.)

The contrast with the official chart could hardly be starker. Let’s look at 2007. According to the mortgage industry, the worst performance seen in the qualified-mortgage universe was a delinquency rate of 6.3%, for loans with 5% or more in downpayment. The truth is that loans with 5-10% down in 2007 saw a delinquency rate of 25%. And you have to get up to a downpayment of 25-30% before you see a delinquency rate of less than 6.3%.

So let’s all remember this chart, the next time anybody claims that you can have a safe mortgage with a low downpayment. Because the fact is that you can’t.


This is a rather illegitimate view of the data as lending can never be safe once unsafe lending has inflated asset prices beyond all value. Allow unqualified lending and even qualified lending is a rather meaningless term. The real question is, if only qualified lending were allowed, how overvalued might housing have gotten and the answer is not much, but allowing unqualified lending can always raise prices above any margin of safety, even 20%.

Posted by MyLord | Report as abusive

What will the AGs get in return for giving banks immunity?

Felix Salmon
Jul 11, 2011 21:32 UTC

Shahien Nasiripour has an update on the talks between the big banks and the state attorneys general, with some rather worrying news: under the proposed settlement, the AGs are going to give the banks broad immunity from prosecution, despite the fact that they don’t really have a clue what the banks might have done wrong.

Some officials with experience sitting across the negotiating table with major banks say the government is making a critical miscalculation that jeopardizes the public interest by seeking a deal before amassing a credible threat of successful prosecution: In essence, they say, the government would give servicers a blanket pass for widespread alleged acts of fraud while extracting too little in return and operating from a relative position of weakness.

“I would never want to go into a negotiation without solid evidence of actual misconduct to hold as leverage over my counterpart,” said Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program, which was crafted to bail out teetering banks. “It would also be very dangerous from a public policy perspective to waive all future claims as part of such a settlement if you do not have a good sense of the size, scope and severity of the underlying misconduct.”

According to sources familiar with the ongoing state and federal probes, state and federal officials have wasted months not digging into the details of the foreclosure crisis, yielding little of value in court and undercutting the lenders’ incentive to strike a settlement of greater benefit to homeowners and taxpayers.

The investigators have yet to gather many documents, conduct depositions or assemble tallies of aggrieved homeowners. They don’t yet have a good handle on the number of wrongful foreclosures, the amount of fraudulent documents filed in local courts or the volume of legal instruments processed by so-called “robo-signers,” the agents that lenders employed to process foreclosure filings en masse without examining the underlying paperwork.

“The evidence a prosecutor would use is not in the possession of the prosecution,” said one person familiar with the ongoing settlement talks.

This doesn’t really surprise me. A coalition of 50 AGs, not to mention a large number of disparate federal agencies, is never going to be particularly good at taking a focused look at wrongdoing in the banking industry during the financial crisis. The best they can hope for is to get a flavor of what the likely crimes were, and then try and extract as much as they can from the banks.

But the dangers here are obvious, especially to those of us who remember the story of Steve Rattner. Andrew Cuomo, if you recall, granted Rattner immunity from criminal prosecution in return for his testimony — and then regretted that deal later, when he found out much more about Rattner’s actions. It’s clearly in the banks’ interest to do a deal now, before a lot of detail comes out about what they did wrong; after all, this is a world where a single bad mistake can result in fine of hundreds of millions of dollars. Multiply that by thousands of mistakes and it’s easy to see why the banks would much rather pay a few billion dollars up front and put all that prosecution risk behind them.

If a deal isn’t done, aggressive AGs in New York and maybe a couple of other states could decide to start prosecuting cases individually — but the AGs don’t really have the resources to do that in all cases and against all banks, and most AGs don’t have the resources or even the inclination to do it at all. Which is why it’s important that they have all the information they can lay their hands on now, in the run-up to a global settlement. I’m already pessimistic that the settlement will actually achieve much of anything. And if it results in hugely valuable immunity for the banks, it might well be Wall Street which ends up the ultimate winner. Again.


Nothing, you just can’t trust them.

I need to tell my story and try to inspire some courage from average Americans who are getting more and more frightened of their bully government that passes laws makes policies for the special interests: drug companies, banks, etc. and doesn’t do anything for the people that voted them in. The banks and the politicians are just concerned about 2 things, staying in power and money. Everything else is not relevant to them at all.

Hon. Democratic Attorney Generals,

I use Honorable in general to all of you. I am sure most of you are, but I have doubts on others, who are exercizing their power to only help special interests, collect campaign monies and ignore the very people that elected them in their state.

I’ve been having problems getting a modification from Bank of America and since January of this year, I’ve been put through the mill, the HAMP program, which is absolutely useless, then Bank of America said let’s try an in-house, that fell through in just 2 hours.

Then I contacted the Attorney General in my state of Connecticut who I’ve been trying to contact for months now and never got a reply from one of his staff lawyers. Then I just recently contacted them again and spoke to Atty. Joseph Chambers and he said he would send a letter to Bank of America, which he did just last week and he told us to make sure we co-operate. Well, I have been and I co-operated this time as well.

To make a long story short, I was refused again as there hasn’t been any changes since May, now we are on the fast track for foreclosure. HAMP inflates my husbands net after taxes Social Security amount of $926.00 per month to $1245.00 due to HAMP formula using a 1.25 per cent multiplier, which is absolutely ridiculous, I know a regular paycheck gets 4 extra but he gets a flat $926.00 net per month. This is what put us over the top and the difference, after cutting things from our budget is what we are short. Insanity for sure, but President Obama didn’t design it to help, just to give people the impression that he cares and is doing something. Smoke and mirrors, just as the banks use to give people the feeling that they are there to help you. Yes, they are, help you right out into the street.

I sent an email to Attorney Chambers and expressed my displeasure of the proposed immunity for the crooks and the dismissal of Attorney General Schneierman, who’s office did care and asked us to send in our paperwork including fraudulent, robo-signed Releases of Mortgage. Paperwork in Connecticut foreclosure mediation sessions will mean nothing as they will even accept Mickey Mouse signing the foreclosure documents as being certified and correct and will not allow us to speak. It’s a Kangaroo court process designed to favor banks and not homeowners. I work hard everyday, I am 61 and my husband is 62 and will be 63 at the end of the year. All of our other bills are covered, we pay them faithfully every month, we don’t eat as well as we should as we were hoping to get a few hundred dollars off per month to be able to make payments again and meet all of are bills.

My husband and I are responsible, we didn’t even buy the house until we were in our early fifties and we’ve been living here since October of 2000 and we don’t want to lose our home. If we do, that will not deter our nationwide drive to bring Bank of America down and whoever else gets in the way. I’m not mad, I’m as angry as hell and will not stop until my last breath as my husband and I try to help others, even though we couldn’t help ourself, we’ve managed to help others reach solutions with mortgage companies and we don’t charge them. We are not driven by money or greed and wouldn’t take money from people as we’ve been in the same situation and we understand.

Well, I’ve gotten off track, Mr. Chambers answered in a very rude way. A one sentence which was: George — I am not interested in these emails. Please stop sending.
First of all, I would like to point out that when the email was written on my husband’s email account, I signed it, Ronni Mandell and he wrote back George. Perhaps, he’s illiterate or just too impressed with himself and was overwhelmed. I also wrote Attorney General Martha Coakley and her constitutent office wrote and thanked me for my input and feedback, unlike Attorney Chambers.

I am issuing a complaint against the Connecticut Attorney General’s Office as I can’t write the Hon. George Jepsen directly as he doesn’t have an email, like the former Attorney General Richard Blumenthal had. All his mail is screened by the wolves in his office.
With me sending this letter to you, I don’t expect miracles as I am a realist and quite aware that people don’t care about Main Steet, just the banks, so if no reply is made to me, one way of the other, it will not surprise me, but will disappoint.

Attorney General Eric Schneiderman deserves to be put back onto the committee with Connecticut, Iowa and Illinois as he is looking for justice not to appease the banks and applaud their acts of crime. Fraud is fraud and not something to take lightly, the government prosecutes brokers, real estate agents, tellers, why not banks, they are not Gods-heaven help us if they were. Washington, however, treats them as such due to glare of green coming off of the cash-they are what you call dollar struck.


Ronni D. Mandell
West Haven, Ct. 06516

Posted by ronni723 | Report as abusive

When banks voluntarily do principal reductions

Felix Salmon
Jul 11, 2011 14:10 UTC

The holy grail of mortgage modification is principal reduction — the only thing which gets homeowners out of negative equity hell. And one of the big questions is why it’s not more common: it seems to make sense for all concerned, given that a sensibly modified mortgage is likely to be much more profitable for a bank than forcing a homeowner into a short sale or foreclosure and trying to sell off the home in the current market.

Last week the NYT, in a front-page story, found that Chase is actually doing principal reductions — quietly, on some of the most toxic mortgages written during the subprime bubble. But the mechanism was very mysterious — for one thing, the principal reductions were being done on many mortgages which were actually current and in good standing, rather than on mortgages which were careening towards foreclosure.

Philip van Doorn followed up, and my reading of his article — he doesn’t make this explicit — is that there’s actually method to the madness here. In order for banks to offer principal reductions, two criteria need to have been met: (a) they came into the mortgages via acquisition, rather than writing them themselves; and (b) they bought the mortgages at a discount.

Wells Fargo said that even though most of the Pick-a-Pay modifications had resulted “in material payment reduction to the customer,” Wells Fargo had not been forced to make larger provisions for loan loss reserves — which would have hurt earnings results — because of the aggressive write-downs taken when the loans were acquired…

JPMorgan had $24.8 billion in option-ARMS as of March 31 within in its $70.8 billion purchased credit impaired portfolio, acquired as part of the company’s purchase of the failed Washington Mutual from the Federal Deposit Insurance Corp.in September 2008. The PCI loans were written-down to fair value when they were acquired, and as of March 31, JPMorgan said that although it had set aside $4.9 billion in loan loss reserves for all of its PCI loans, “to date, no charge-offs have been recorded on PCI loans.”

It seems that Wells and JP Morgan are happy to do principal reductions only on the mortgages they bought at a discount from Wells Fargo and WaMu respectively; Bank of America, meanwhile, which inherited a bunch of these loans when it acquired Countrywide, is not doing principal reductions, and I don’t think it’s a coincidence that the Countrywide loans were bought at very close to par.

The behavioral psychology here is very easy to understand. No bank wants to admit that it wrote idiotic loans, and write down its own assets from par. Meanwhile, it’s much easier to write up an acquired asset, if the amount you reduce the loan is less than the discount you bought the loan for in the first place.

Economically speaking, however, what the banks are doing here does not make sense. Either writing down option-ARM loans makes sense, from a P&L perspective, or it doesn’t. If it does, then the banks should do so on all their toxic loans, not just the ones they bought at a discount. And if it doesn’t, then they shouldn’t be doing so at all.

The truth is, of course, that banks should be doing principal reductions, and they should be doing them on lots of their loans, rather than just the ones they bought cheap. And the fact that they’re already doing this, entirely voluntarily, on some of their loans is the best possible indication that it makes perfect economic sense to do so on all of their loans. Even if doing so might involve admitting that the subprime crisis still isn’t fully over.


What is the most comical about this ideology is that Bank of America even has pages posted on their website about doing “principal reductions” if your loan was originally from Countrywide. If you are in a negative ARM loan and if you have more than 20% negative equity. It makes NO SENSE at all why bank would not consider this at the largest level! I am in real estate and do a lot of short sales and the hundreds of thousands of dollars the banks lose on short sales and foreclosures is far more than what they would lose by writing down the mortgage. It is complete stupidity!

Posted by truthteller13 | Report as abusive

How the mortgage industry lies with statistics

Felix Salmon
Jun 23, 2011 22:51 UTC

Yesterday something calling itself the Coalition for Sensible Housing policy put out a dense 13-page white paper entitled “Proposed Qualified Residential Mortgage Definition Harms Creditworthy Borrowers While Frustrating Housing Recovery”.

It’s all part of the lobbying campaign surrounding Dodd-Frank, and the eminently sensible idea that if a bank wants to securitize a bunch of mortgages, it has to keep at least 5% of those mortgages for itself. Somehow, in the course of putting Dodd-Frank together, an exception was carved out to that rule, called the Qualified Residential Mortgage, or QRM. For the small group of the most copper-bottomed mortgages, banks could sell off the whole lot, without having to retain 5%.

This gave the mortgage lobby an opening, and they’re attacking it aggressively. They want to open the QRM loophole as wide as possible, and are now kicking up a very loud fuss, complaining that consumers will be damaged if they can’t get access to a QRM loan. The main part of the QRM qualification that they’re upset about is the requirement for a significant downpayment, and so a central part of the lobby’s argument is that if you’re underwriting loans properly, increasing the downpayment doesn’t have much of an impact on delinquency rates. There’s other bits to the argument, too, such as the idea that non-QRM mortgages are going to be much more expensive, but for this post I’m just going to concentrate on the downpayment question.

The white paper explains — in bold type, on page 5 — that “boosting down payments in 5 percent increments has only a negligible impact on default rates”. It continues:

As shown in Table 3 (and in Attachment 2), moving from a 5 percent to a 10 percent down payment requirement on loans that already meet the defined QRM standard reduces the overall default experience by an average of only two- or three-tenths of one percent for each cohort year.

Of course, there are charts and tables. The table comes first:


This is so misleading and confusing that I’ve spent a large chunk of the past 24 hours trying to work out what on earth it’s actually saying, and where the data comes from. The raw data here is indeed being sourced from CoreLogic, and a company called Vertical Capital Solutions did analyze that data, in February 2010. The Vertical Capital report did not, however, have any of the information in this table. Indeed (and inconveniently, from the mortgage lobby’s point of view), it had a whole page which talks about how qualified loans have “substantially higher Delinquencies and Defaults on Qualified Loans with a LTV >80″. (Loan-to-value, or LTV, is the converse of the downpayment: the downpayment and the loan combined are 100% of the loan, since qualified mortgages by definition exclude piggyback loans were second mortgages are involved.)

What the Vertical Capital report does have is a chart of delinquency rates on qualified loans where the LTV is less than 80%, on page 7, and another chart where the LTV is more than 80%, on page 8. Put the two together, and you get something like this:


The difference in delinquency rates between the low-downpayment loans and the high-downpayment loans, here, ranges from 2.94 percentage points for the 2008 vintage, to 7.15 percentage points in 2006. Clearly much bigger differences than are implied in the white paper’s table. And if you look at the percentage increase in delinquency, it’s enormous: all of the delinquency rates more than double, with the lowest increase being 101% in 2006 and the highest being an amazing 502% in 2002.

The mortgage lobby’s own chart, of course, looks very different indeed. Here it is, from page 12 of the white paper:


What this chart purports to show is that non-qualified loans — the red bars — have very high delinquency rates, while qualified loans — the purple, green, and blue bars — have much lower and pretty similar delinquency rates, regardless of the downpayments they use.

But look more carefully. The non-qualified delinquency rates include all delinquencies for all non-qualified loans. But the qualified delinquency rates are not directly comparable, because all of them specifically exclude qualified mortgages with a downpayment of less than 5%.

I spent some time today talking to the man who put this chart together. (It’s sourced to Vertical Capital, but in fact these numbers came from Genworth’s own analysis of CoreLogic’s data, and Vertical Capital did none of this work.) His name is Anthony Guarino, and he’s the vice president of public policy at Genworth mortgage insurance — the company which initially commissioned the Vertical Capital report. I asked him, if he was showing the delinquency rates for all non-qualified loans, why wouldn’t he show the delinquency rates for all qualified loans? Well, he said, “the consortium didn’t want to even talk about zero downpayment mortgages. Why would we even show that? We’d lose credibility if we showed a qualified loan with no downpayment.”

Guarino was perfectly happy to tell me that by excluding all the loans with downpayments of less than 5%, “you’re throwing out the loans with the higher default rates. No one’s saying that downpayment doesn’t matter.” But compare that with the official tone of the white paper:

Based on data from CoreLogic Inc., nearly 25 million current homeowners would be denied access to a lower rate QRM to refinance their home because they do not currently have 25 percent equity in their homes… Even with a 5 percent minimum equity standard, almost 14 million existing homeowners – many undoubtedly with solid credit records – will be unable to obtain a QRM. In short, the proposed rule moves creditworthy, responsible homeowners into the higher cost non-QRM market.

This sounds very much as though even a 5% minimum downpayment is desperately unfair to millions of American homeowners; there’s no indication whatsoever, in the paper, that including a minimum downpayment of 5% in the definition of what constitutes a qualified mortgage might actually be a good idea. Yet when the consortium wants to publish a chart showing the delinquency rates of qualified mortgages, it’s very careful to first strip out any mortgages with a downpayment of less than 5%.

On top of that, the bars in the official chart all look very similar largely because they are very similar: the industry is essentially comparing a set of loans with itself, and declaring that there’s not a lot of difference. The purple bar is all the loans with a downpayment of more than 5%; the green bar is all the loans with a downpayment of more than 10%; and the blue bar is all the loans with a downpayment of more than 20%. The blue bar is a subset of the green bar, which in turn is a subset of the purple bar. The chart is designed, in other words, to look at similarities rather then differences.

I asked Guarino if he could send me the data sliced more naturally: how do loans with a downpayment of less than 5%, for instance, compare to loans with a downpayment of between 5% and 10%? To his credit, he did come back to me with some new data, even if it wasn’t exactly what I asked for: he refused to slice the loan tranches by year, as he did in this graph. Instead, he would only give me aggregate figures, for 2002-2008 and for 2002-2004. Here’s what they look like, charted:


When the mortgage industry starts complaining about the 14 million people who would be denied the chance to buy a qualified mortgage if they don’t have a 5% downpayment, it’s worth remembering that qualified mortgages for people who don’t have a 5% downpayment have a delinquency rate of 16% over the course of the whole housing cycle. (You can be sure the numbers were much higher still in 2006 and 2007, which is why Guarino didn’t give them to me.)

And you can see too why the 20% downpayment limit was put in place: it’s the point at which delinquencies fall to less than 5%. If you take one group of loans with a 20-25% downpayment, and a second group of loans with a 15-20% downpayment, then the second group, on these numbers will have a delinquency rate 56% higher than the first.

The big picture here is that QRM is a distraction, which really shouldn’t exist in the first place. But given that it does exist, the downpayment requirements embedded within it are perfectly sensible. The lower the downpayment, the more likely a loan is to become delinquent. By far. That’s a simple fact which the mortgage lobby will go to astonishing lengths to hide.

Update: Guarino responds in the comments.


Choosing the right mortgage should be based on your capacity to pay on time and you to choose a good mortgage is very important since this is a long term commitment. Make sure you find a mortgage service with small interest rates. If you want to find a simple service that will find the lower rates for you I recommend
Reverse Mortgage Lenders Direct. Com

Posted by Andy124 | Report as abusive

When Uncle Sam forecloses

Felix Salmon
Jun 20, 2011 16:23 UTC

You probably won’t be surprised to hear that Wells Fargo is sparring with the government on the subject of foreclosures. But you might be surprised to see who’s on which side:

Wells Fargo & Co. decided to exit reverse mortgages after federal officials insisted it foreclose on elderly customers who were behind on property tax and insurance payments, a Wells executive wrote in an email to business contacts Friday…

Reverse mortgage market participants generally agreed that the industry is enduring hard times…

One problem is that lenders are not allowed to set aside payments for property taxes and other such recurring costs, leading to trouble if the borrower cannot pay them. Contributing to the issue is a prohibition on underwriting loans based on borrowers’ credit rather than the equity they have in their home.

A third problem arises in the course of disposing of the property. If the borrower dies and the equity in the home does not cover the mortgage, the FHA is responsible for making up the difference. But it is often the lender’s duty to dispose of the house, a process that sometimes forces it to eat some of the costs. An FHA requirement that the lender not sell the house for less than 95% of its appraised value can make that process difficult, Lewis says. “Imagine 5% as your margin on this kind of housing market — it’s insane. If someone has a 375 bid for a 400 house, we can’t sell it.”

All of this is, of course, a direct consequence of the fact that the government is now more lender than regulator when it comes to mortgage finance. Rather than standing up for beleaguered borrowers, it now has a huge financial interest in extracting as much money from them as it can, as quickly as possible.

It’s also completely insane that lenders can’t underwrite reverse mortgages: if we learned anything during the housing crisis, it’s that writing mortgages based on nothing but home value is a recipe for disaster. Tanta, of course, explained this better than anyone:

Three things have been the core of mortgage underwriting since roughly the dawn of time: the three Cs, or Credit, Capacity, and Collateral. Does the borrower’s history establish creditworthiness, or the willingness to repay debt? Does the borrower’s current income and expense situation (and likely future prospects) establish the capacity or ability to repay the debt? Does the house itself, the collateral for the loan, have sufficient value and marketability to protect the lender in the event that the debt is not repaid? …

“Traditional” subprime lending was about loans to people who had capacity but not creditworthiness or who had creditworthiness and capacity but not great collateral…

Given assumptions about the collateral—like, its value always goes up and its value always goes up—you could more or less forget about problems with the other two Cs. When the RE markets were hot enough, in fact, there weren’t “problems” with the other two Cs.

This was spectacularly boneheaded even during the height of the real-estate boom. But it’s even more boneheaded in an environment where homes are falling in value. You can’t underwrite a mortgage, reverse or otherwise, based only on collateral and not at all on creditworthiness. You just can’t. We’ve learned this a million times. And yet HUD is forcing lenders to do just that — and then forcing them to foreclose when the loans go sour, even if the only delinquency is on property tax and insurance payments.

The big problem here, of course, is that no regulator is going to tell HUD to shape up and get its act together. The private sector turned out to be very bad at writing mortgages, during the boom. But it looks increasingly as though the public sector will turn out to be just as bad, during the bust.


“Lower disbursement rates as (taxes and insurance) increase?”


“What if borrowers have already committed to spend that money?”

Borrowers are already committed to spending amounts on taxes and insurance, this just changes the cash flow from (lender–>borrower–>tax clerk/insurance) to (lender–>tax clerk/insurance). Borrowers get lower disbursements from the reverse mortgage, but since they would not then be paying taxes/insurance out of pocket, their cashflow would be unaffected.

Posted by SteveHamlin | Report as abusive

Casey Mulligan’s weird defense of the mortgage-interest deduction

Felix Salmon
Jun 15, 2011 13:09 UTC

It’s not easy to find an economist who thinks the mortgage interest tax deduction is a good idea, but the NYT has managed it, with this column from Casey Mulligan. Unfortunately, it makes no sense. Here, for instance, is the first paragraph, in full:

The home-mortgage interest deduction does not by itself significantly distort housing markets. Too much owner-occupied housing has been built because housing is excluded from sales and other taxes owed by businesses.

That’s the last we hear about sales tax: the argument isn’t fleshed out anywhere else. But apparently if you’re an economics professor at the University of Chicago, then this is all the argument that’s needed: houses aren’t subject to sales tax, therefore the mortgage-interest tax deduction doesn’t distort housing markets. It’s a non sequitur, and the bit about sales taxes isn’t even true. In New York City, for instance, real property transfer taxes, plus the “mansion tax” on properties over $1 million, plus the mortgage tax, can amount to 4.75% of the purchase price between them.

But never mind that, because soon we’re getting to the meat of Mulligan’s argument:

One person’s mortgage interest payment produces interest income for another person or a business. The lender may well owe taxes on the interest income.

More home-mortgage borrowing means more home-mortgage lending, and the latter means more interest income that can be taxed. In theory, home-mortgage borrowing could even add revenue to the Treasury if the lender is in a higher tax bracket than the borrower (or if the borrower is not itemizing her tax deductions).

This is quite possibly the silliest thing I’ve seen the Economix blog ever print. Confidential to Professor Mulligan: mortgages are made by banks, and the margins on mortgage lending are razor-thin: it’s simply impossible for the taxes on the profit a bank makes from a mortgage to exceed the amount of the tax deduction on that mortgage. Oh, and right now, most mortgage lending is done by the government, in one form or another. How much tax are Fannie and Freddie paying on the mortgages they write?

Mulligan’s not finished, though:

Landlords can also take out mortgages on their properties and deduct the interest payments from their taxable income (that benefit may, in turn, affect the rent they set). In that sense, the possibility of deducting mortgage-interest payments from income taxes does not by itself discourage renting rather owning.

It’s that “does not by itself” construction again! Which doesn’t make any more sense the second time it’s used. Of course the mortgage interest tax deduction discourages renting rather than owning, because it’s available only to owners rather than renters. And as any Chicago economist knows, rent is set by the market: landlords will look to maximize the amount of rental income they get on their properties, regardless of what their taxable income might be. Does Mulligan have any evidence that the deduction decreases rents? Of course not, because there is no such evidence.

Naturally, Mulligan completely ignores the host of excellent reasons why the deduction should be abolished, from the fact that it’s distributed incredibly unevenly, mainly going to rich people on the coasts, to the more salient fact, in these fiscally-conscious times, that it costs a whopping $100 billion a year. I can think of a lot of better uses for that kind of money — including simple deficit reduction — and few worse ones. Which is true no matter how many times someone comes up with a facile argument about how one man’s loan payment is another man’s income.


the mortgage write encourages home ownership but is also a safety valve for those who have not or are unable to provided for retirement. The safety net is the downsizing or sale of home that will likely release saved equity. If you think its wise to abolish the deduction consider that there will be no safefty net, that there are no pensions except for goverment workers. Then the tax payer will be picking up the tab-
bottom line its worth preserving this incentive

Posted by thoma | Report as abusive

The anti-risk-retention lobby’s bizarre logic

Felix Salmon
Jun 2, 2011 02:29 UTC

John Carney doesn’t go far enough in his attack on what he calls the Home Ownership Mob. Whenever you see the Mortgage Bankers Association getting into bed with the Center for Responsible Lending, you know something funny is amiss, and in this case it’s their joint opposition to the bit of Dodd-Frank which says that if banks securitize mortgages, they have to keep a modest 5% slice on their own balance sheet.

So far so sensible, right? What can there possibly be to object to there? Well, it turns out that there’s an exemption to that rule. If the mortgages being securitized count as QRMs — that is, “qualified residential mortgages” — then the banks don’t need to keep 5% for themselves, and can go ahead and securitize the whole thing.

The Home Ownership Mob has taken QRM as a rallying cry, and has decided that far from being the exception to the rule, QRM is the new benchmark which all Americans should aspire to. They have a brochure, and a detailed presentation, showing that most mortgages will fail to qualify for the QRM exemption — which of course is exactly the point. But then they go much further: MBA president David Stevens says that failing to throw many more mortgages into the QRM bucket will “withhold credit from tens of thousands of qualified borrowers”.

But the fact is that Stevens hasn’t the foggiest notion whether or not that’s true. The rhetoric of the Home Ownership Mob is entirely based on the unexamined premise that if banks can sell off 100% of their loans, rather than just 95%, then the loan rates will be cheaper.

But there’s no good reason to believe that to be the case. Will banks be able to sell that last 5% of the loan for more than they can book it for on their own balance sheet? I can’t see why they would — and if they can’t, then QRM loans wouldn’t be any cheaper than any other loans. More to the point, investors, burned during the financial crisis by the originate-to-distribute business model, are going to require a risk premium on any securitized paper where the underwriting bank doesn’t retain at least 5%. For that reason, too, it seems reasonable to believe that QRM loans would if anything be more expensive than other loans, rather than cheaper.

And most importantly, we’re talking about 5% of the loan here. Let’s say that the Home Ownership Mob is right, and that banks will require a premium of say 15bp to hold loans on their own balance sheet rather than selling them off in the market. If the market rate is 4.9%, the bank is going to require 5.05% to keep its own bit of the loan in-house.

Now say you’re buying a typical $250,000 home, with 10% down, and you’re getting a standard 30-year fixed-rate mortgage. If the whole thing was sold off into the market, then the monthly payments on a $225,000 mortgage at 4.9% are $1,194.14. On the other hand, suppose that just 95% of the mortgage was sold off into the market at 4.9%, and the other 5% was retained in-house at 5.05%. In that case, you end up paying a whopping 4.9075% instead, overall. And your monthly mortgage payments soar to $1,195.16 — a whole dollar more! That’s more than twelve dollars a year!

That buck a month, of course, is money well spent: it reduces the amount of fraud and tail risk in the system, and forces banks to be honest about their underwriting. Meanwhile, the Home Ownership Mob is trying to return us all to the bad old days when banks felt no need to actually own any part of the mortgages they were underwriting.

It’s becoming very obvious that the QRM, far from being an attempt to push banks to improve their underwriting standards, is in fact going to act as a way for the banking lobby — helped by its friends at the Center for Responsible Lending — to try to get around the rules requiring them to hold on to one dollar of every twenty that they lend out. Let’s hope they fail.


What jomiku said. Felix’s unexamined premise is that if the 5% retention rule goes into effect, unchanged, over the bankster’s objections, that they’ll necessarily be “forced to be honest about their underwriting”. I’m not nearly as sanguine.

The way to force better underwriting is to do so directly. Regulate that area of activity with clear rules and standards, backed up by random, intrusive audits. If greedy banksters with their eye on this quarters bonus check are found to have violated the standards, then file civil lawsuits and/or criminal actions against them as individuals.

Posted by Strych09 | Report as abusive

The stocks-housing disconnect

Felix Salmon
May 31, 2011 17:21 UTC

The double dip in the housing market — with house prices nationally now back to their 2002 levels — stands in stark contrast to what’s going on in the stock market, and a lot of people, myself, included, are puzzling over why that might be.

A few charts would seem to be in order here. First of all, the Case-Shiller house-price index, the blue line on this chart:


It’s pretty clear from this chart that house prices are going down rather than up, and have been doing so for a good five years at this point.

Next there’s houses priced in stocks:


This is particularly interesting because it dates the big decline in housing as a worthwhile asset class all the way back to the early 1980s. You can see the housing bubble and bust in the spike at the end of the chart, but you can also see that this is a very volatile series, and that houses can and probably will become much cheaper still, relative to stocks.

Cullen Roche, looking at these charts, concludes:

Despite all the attempts to manipulate the real estate market, the government has largely failed in attempting to stabilize prices. In other words, it’s undergone a much more natural price discovery process. The equity market, of course, has been intervened in at every step of the way and the government has undoubtedly succeeded in propping up this market.

I don’t agree here at all. The government has done much more to intervene in the housing market than it has in the equity market, to the point at which the government at this point guarantees the overwhelming majority of mortgages. There’s nothing natural about the housing market price discovery process, and there won’t be anything natural about it for the foreseeable future, unless and until banks start taking mortgage risk again. And the large number of houses which have been sitting on the market for well over a year now is proof that this market isn’t clearing and that a lot of homeowners are still pretty delusional when it comes to what they think their home is worth.

But still the question refuses to go away: why is there such a difference between the housing market and the stock market? It’s something to do with investability, I think, because if you look at ways to invest in the housing market, they turn out to behave pretty much like stocks, rather than like houses. Here’s the Vanguard REIT ETF, overlaid with the S&P 500:


The point here is that houses are largely insulated from the kind of capital flows which drive everything from the stock market to the price of gold. There was a brief speculative bubble in housing from about 2000 to 2006, but even then the capital being deployed was largely borrowed rather than invested. Real estate is and always will be a game of debt: it’s almost unheard-of for people to buy up investment properties for cash.

The other weird thing about the housing-stocks disconnect is that it seems to be peculiarly American. There have been gruesome property-market crashes in other countries too, of course — look at commercial property in Ireland, or speculative beach resorts in Spain. But in general, countries with much larger property bubbles than we saw in the U.S. have seen property prices fall much less during the bust. And indeed there are brand-new property bubbles popping up all over the Pacific Rim: what is it that’s causing huge demand in Sydney and Hong Kong and Shanghai and Vancouver which doesn’t seem to have any effect on San Francisco?

I don’t have any good answers here, except to say that if housing is getting cheaper, in many ways that’s a good thing. Sure, it’s bad for banks, and it’s unpleasant for anybody who bought a house as an investment. But in general, the less money we Americans spend on housing every month, the more money we have to spend on more productive sectors of the economy, and the higher our disposable incomes. Falling house prices don’t make people richer. But they can make you feel richer than if you were spending hundreds of dollars more per month on a mortgage.


This may be primarily due to demographics. As baby boomers are selling their house to fund their retirement, house prices continue to slide. Besides baby boomers are more investing in annuities and other safe haven and moving away from real estate. Some nice facts and stats from bankers life and casualty company here.

Posted by RICKCHARLES | Report as abusive