Sunday, October 19, 2008

The Pervasive Problem with Housing Advocates

A local politician, Mike Hatch, filed a complaint against Capital One on a deceptive-advertising charge. part of its settlement with Capital One on a deceptive-advertising complaint. Hatch’s office agreed to drop its deceptive-advertising case against Capital One Bank that February in exchange for $749,999 — a dollar short of a statutory threshold for automatic deposit of settlement funds into state coffers. Hatch’s office and the defendant were able to pick other recipients for two-thirds of the proceeds: the Minnesota chapters of the Legal Aid Society and the Association of Community Organizations for Reform Now, ACORN. The state got $250,000 to cover its investigative costs. Two weeks later, ACORN endorsed Mike Hatch in his bid for the Minnesota governorship (he lost, this was in 2006).

In a completely different venue, the New York Times outlines how Henry Cisneros, the Clinton administration’s top housing official in the mid-1990s, loosened mortgage restrictions so first-time buyers could qualify for loans they could never get before. Then, capitalizing on a housing expansion he helped unleash, he joined the boards of a major builder, KB Home, and Countrywide Financial, joining Fannie Mae chairman James Johnson. Cisneros became a developer after the Clinton administration, and joining with KB (American CityVista), he built 428 homes for low-income buyers in what was a neglected, industrial neighborhood. He has financed the construction of more than 7,000 houses.

ACORN, and I'm sure many groups like them representing other special interests, are able to game the system from the top-down using their pretext of helping the little guy. But it's a blatant shake-down of corporations. The politicians they support then perpetuate the system. All that money was not just going to Wall Street. A lot was siphoned off by corporate cronies with ties to government at all levels. It is a good thing this game is over, because the policies they are supporting just do not make any sense.

Minnesota Governor Pawlenty recently vetoed an ACORN-sponsored bill that would have imposed a two-year moratorium on foreclosures in Minnesota, and pretty much guaranteed that no mortgage lenders would do any more business in the state. A foreclosure moratorium would mean that lenders holding mortgages in default would be forced to negotiate with borrowers to modify the loans, and ACORN “counselors” would have been right in the middle of these negotiations. No doubt they would have shaken down every mortgage lender in the country for even more money in return for their cooperation. This raises costs of lending, but that cost is spread around, unseen, while ACORN then builds its patronage system, perpetuating itself.


Anonymous said...

Eric, We are looking for our first home. When trying to help us figure out what the home would "really" cost us, our realtor asked our income to determine our marginal tax rate. This led to this related hypothetical (following).
Please comment on these two extreme scenarios:
a) Family A has Gross Income of $40,000 a year. They buy a $111,000 house and borrow $100,000. They pay $8,000 a year in interest and property taxes. This reduces their tax bill by $1,200 a year (15% marginal rate).
b) Family B has Gross Income of $400,000 a year. They buy a $1,110,000 house and borrow $1,000,000. They pay $80,000 a year in interest and property taxes. Since they are in the 35% bracket, their tax bill is reduced by $28,000 ... 23.333 times as much as Family A.
As an economist/social scientist, can you explain these incentives? Is it designed this way to maximize economic growth? Is this the result of lobbying by the bankers?
It's difficult for those of us who have not studied economics, or the history of this deduction, to understand the policy intuition here.

Anonymous said...

The hilarious thing about Acorn is that they were sued by some ex-employees who were fired when they tried to start a union of activists. Really.

Eric Falkenstein said...

interesting point on the benefits of buying a house. You might add the fact that $500k in capital gains for housing is ignored as well. But I think when you have high marginal tax rates, any tax subsidies directed at activities (investing in homes, buying a Prius, etc.), then necessarily are the mirror image of the marginal tax rate. The only way you could get around this, is to means-test the targeted tax break, but this becomes an administrative nightmare, and also creates sharp disparities in the effective marginal tax rates of individuals. I mean, look at this graph to see the effective marginal tax rates, which bounce all around.

The problem is, everyone wants taxes to be progressive--higher on the rich--but this becomes impossible at each step, because if you have bothe tax rates and subsidies implemented progessively, it just makes taxes progressive^2, and there is a limit to how much you can tax a marginal dollar (60%? 70%?).

When you consider that only the rich can afford professional tax service, this is just another way for the system to simultaneously benefit the current elite, while seeming to tax them. Those at the bottom are unaffected. Those in the middle are screwed, and those at top make sure the little benefits are kept under the pretext of helping the middle class.

So, I think the system tends to favor the rich over time, and becomes insanely ineffective. But like widely diverse pricing on airfares, if you replace with flat pricing, your most price sensitive customers will complain, and they fly a lot.

If I were czar, I would implement a flat tax. But I would never be elected with such a proposal.

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Anonymous said...

Two good related reads. HUD and HUD-Affliate Agencies like ACORN, and most others need to be REGULATED or cut-off from all US Taxpayer money though HUD, and held accountable for their crimes.

The Inside Story of ACORN

ACORN-style pressure tactics against lenders. As Professor Liebowitz said in testimony before Congress this past summer, the government’s entire housing policy was based “on a false claim, or lie” that mortgage lenders were discriminating against minorities.