TCS Daily


The Katrina House Tax

By Duane D. Freese - October 3, 2005 12:00 AM

Will homeowners in 2112 still be paying fees on their mortgages to cover the clean up costs of Hurricane Katrina as telephone users are still paying the "temporary tax" to pay for the Spanish-American War?

You remember the Spanish-American War? It ended 107 years ago, and telephone users have been paying a tax for it ever since. At the time it was considered a "luxury tax" that only the rich paid, because they were the only ones with phones. Now, it is a tax mostly on the poor, raising $5 billion annually that the federal government doesn't want to give up. It's been a target of many Republicans as a sign of how once a tax is implemented, government becomes addicted to the revenue and it rarely goes away.

Well, while we won't be alive in 2112, we ought to prevent the federal government from doing a similar thing to future homebuyers -- for the sake not only of homebuyers but of honest, straightforward government.

Congress is in a tizzy over how to pay for the clean up costs of Katrina. With Louisiana lawmakers pushing for an additional $250 billion -- about $200 billion too much considering that hurricane relief already totals $62 billion -- the House, Senate and White House don't want to look too cheap. But they are in a bind in how to pay for any extra largesse with the current budget deficit.

So, up pops the Republican Study Committee with a suggestion. As part of its "Operation Offset," its 100-conservative members would require Fannie Mae and Freddie Mac, the government-sponsored enterprises created to ensure liquidity in the mortgage markets and promote home ownership, to pay fees against their investment portfolios and debt securities.

And here's the great kicker in this proposal. According to the RSC, these "fees" won't have any effect on the GSEs' mission of promoting affordable housing and home ownership. In layman's language, it won't affect the costs of mortgages to homebuyers.

Instead, they claim, "This would promote competition in financial markets and recover some of the federal subsidy retained by those enterprises without reducing their capacity to achieve their public mission."

Yippee! A no cost solution! Only you might wonder, then, from where the $1.6 billion they claim this measure will raise in 2006 and $19.9 billion over 10 years will be exacted? Pieces of paper and parchment? Electrons in the air? Yeah, and it's fiber optic lines, the spectrum and electrons in the air that are paying that telephone tax. Right?

People pay taxes -- not electrons and pieces of paper. And it will be consumers -- homebuyers -- that will pay the "fees." The notion that the federal government is only cutting a subsidy is disingenuous. The GSEs receive nothing from federal coffers. There are no outlays for it. The subsidy is the preference given by the private market in buying its packages of mortgages and its debt.

The GSEs are conduits -- like copper or fiber telephone lines. Only in their case, they are providing through their activities the juice -- mortgage market liquidity. Their product -- the long-term, 30-year, fixed-rate mortgage that is prepayable. This mortgage has encouraged affordable homeownership at 68% of households that is unmatched elsewhere in the industrialized world. And it has been made possible only because the GSEs have created not merely a national market but an international market raising trillions in capital for American home mortgages.

Charging a fee on their mortgage securities activities and mortgage portfolios for which they issue debt is placing a fee on homeownership, nothing more, nothing less.

But the RSC confusion, or obfuscation, of this only reflects the confusion and obfuscation of the GSEs critics who have been seeking their reform.

There's no doubt that some reform is needed. Fannie Mae and Freddie Mac have had accounting problems in recent years, with Fannie Mae having overstated earnings by $11 billion in recent years and Freddie Mac reportedly understating them by about $5 billion. Heads have rolled at the top of both GSEs. New leaders are in place, There's room for consolidating regulation now scattered over three agencies under one with adequate staff to provide appropriate oversight.

But the simple reforms have gotten fogged up by the desires of some to totally do away with the GSEs and by the worries by others that the GSEs' continued growth poses some kind of systemic risk to the financial system.

The privatizers and risk worriers, including Federal Reserve Chairman Alan Greenspan, have focused in particular upon the GSEs' portfolios of mortgages and mortgage securities, which now total $1.5 trillion. While that sounds like a lot, it but a sliver of the more than $17 trillion in home values, including $10 trillion in equity that the GSEs have helped homeowners build.

Indeed, Greenspan has testified that the current levels of the portfolios pose no risk, though his proposal to reduce them to $200 billion in total seems to suggest otherwise.

Charging fees on the portfolios might encourage the GSEs to sell them off more quickly than they otherwise would. Of course, it also would have the effect of discouraging them from building them up in times of financial crisis.

That's how the portfolios got as large as they are in the first place -- to the benefit of the whole U.S. economy.

Akash Deep, an economist at Harvard University, and Dietrich Domanski of the Bank of International Settlements noted in a 2002 study in BIS Quarterly Review that a "strong expansion of the GSEs' retained mortgage portfolios seems to have played an important role in absorbing increasing mortgage origination and refinancing." That refinancing, the two economists noted, "appears to have supported household spending. At least in the United States in 2001, this seemingly had a significant countercyclical effect."

In other words, they believe it helped prevent a deeper recession.

While Greenspan has at times diminished the role played by the GSEs in that regard, he nonetheless also wrote Sen. Robert Bennett last month that the GSEs should be allowed to expand their portfolios during times of crisis to promote financial liquidity. He would have them sell off the mortgages quickly after the crisis was over, but charging them fees while performing that vital economic function seems a bit ridiculous. Or does Congress want to get rid of a safety valve against recession?

Before Congress races to any quick fix -- whether to fund the Katrina disaster or to reform the GSEs generally -- it needs to get a better grip on what it is trying to achieve.

Otherwise our descendents will end up paying for Katrina, as they have now for the Spanish-American War, for centuries to come.

To see more of the extensive coverage of the 2005 Hurricane Season from TCS, click here.


 

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