Tuesday, March 3, 2015

Housing Tax Policy, A Series: Part 17 - Political Postures and Mortgage Modifications

There is now a common political script that bemoans the influence of moneyed interests on federal policy - talk of Wall St. vs. Main St., bailouts, etc.

One of the favorite complaints from this script is that we chose to bail out the "predatory" bankers instead of bailing out households.  A favorite policy of this script is loan modifications.  If only we had done loan modifications instead of bank bailouts.
I will forgive, for the sake of this post, the broader problem with this complaint, which is the fact that there have been numerous loan modification programs, aimed explicitly at erasing debts owed by households to the banks, while no program intended to help "Wall Street" or the banks was implemented with terms so deserving of the term "bailout" as that.  Part of the complaint might be that those loan modification programs didn't amount to much.  As the Survey of Consumer Finances data shows, they couldn't have amounted to much, at least with regard to being a source of redistribution.

As this first graph shows, mortgages as a percentage of total family assets are highest for the 40%-90% income range.  Low income families do not tend to hold highly leveraged real estate.  That's not to say that they don't own real estate.  Real estate as a proportion of assets peaks for families in the 20%-39% income range.

Share of mortgages with principal balance exceeding estimated home value: 2009:Q4
Share of mortgages with principal balance exceeding estimated home value: 2009:Q4
Source: San Francisco Fed
So, keep this in mind when you read an essay that describes quantitative easing as a bailout for Wall Street and moans that we didn't do enough to restructure mortgages for underwater households.  Mortgage modification would tend to support households in the upper half of the income distribution and higher real estate values would tend to support households in the bottom half of the income distribution.

Here is a map from the San Francisco Fed that demonstrates the significant geographic influence on underwater mortgages.  Even after accounting for the scale of mortgages held, by income groups, we should keep in mind that nationally, defaults have been strongly related to Loan to Value levels, which are much more related to geography than to income.

One might protest that mortgage relief should be means tested.  Here is a graph of the total value of real estate, mortgages, and selected financial assets, by household.  If mortgage restructuring managed to reduce total mortgage levels by 10%, that would amount to a one-time transfer of $82 billion to the bottom 40% of households and $108 billion to the middle income quintile.  Households in the top 40% of incomes would claim $737 billion in the absence of means testing, in this scenario.

As a demand-side stimulus, this would amount to less than 1% of a single year's GDP, even if a full 10% of all mortgages outstanding to households in the bottom 60% of the income distribution were forgiven.  And, remember, low income households are not highly leveraged, so this probably overstates the total.

Also, to the extent that more aggressive loan modifications would damaged bank balance sheets even further, this would pull down aggregate demand.

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