The chair of the Federal Deposit Insurance Corp. warned that if left unchecked, government debt could rise to 185% of the country’s gross domestic product by 2035.
And Shelia Bair added that popular tax benefits for mortgage borrowers are partially to blame.
“This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit,” Bair wrote in an editorial, “Will the Next Fiscal Crisis Start in Washington?” recently published in The Washington Post.
“Overly generous tax subsidies for housing and health care have contributed to rising costs and misallocation of resources,” Bair continued.
Total federal debt has doubled to almost $14 trillion in the past seven years—or more than $100,000 for every American household. Bair wrote that while work continues to repair the country’s financial infrastructure and improve economic growth, she fears a new financial crisis could be brewing in Washington.
But Bair wrote that all the blame can’t rest on the feet of the tax code that’s “riddled with special-interest provisions that have little to do with our broader economic prosperity,” including the mortgage interest tax credit. The combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45% of primary federal spending in 2010, up from 27% in 1975. Bair cited Congressional Budget Office projections that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today's dollars. She added defense spending is “similarly unsustainable.”
Bair said observers need to look no further than the ongoing crises in Greece and Ireland, where “yields on long-term government securities have risen from rough parity with U.S. Treasury obligations in early 2007 to levels that are hundreds of basis points higher.
“If investors were to similarly lose confidence in U.S. public debt, we could expect high and volatile interest rates to impose losses on financial institutions that hold Treasury instruments,” she wrote. “All of us would pay more for consumer and business credit, and our economy would suffer.”
Bair said recent proposals to reduce the federal debt are “credible first steps toward recognizing and addressing the nation's fiscal problem.” Both the National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center recently proposed a series of provisions to reduce the federal deficit, including an overhaul of the tax code that would limit, and in some cases eliminate, the mortgage interest tax credit.
Reducing the mortgage interest tax credit is one of the most controversial of the proposals, drawing the ire on both sides of the aisle. But the fact that it’s even being discussed is a signal of a culture shift in Washington, Lisa Marquis Jackson, vice president of John Burns Real Estate Consulting, told National Mortgage News.
“The tax credit is one example of something that was sacred one or two years ago, but isn’t so sacred anymore,” she said. “Some of that is likely political posturing, as well as an interest in helping reduce the deficit.”
Those proposals, along with comments from the likes of Bair and others, are just the opening salvos of what will likely be a drawn out, politicized debate in Washington over the best way to reduce the deficit, a debate Jackson believes will have a tremendous impact on the housing industry. From dealing with reform of Fannie Mae and Freddie Mac and disposing of millions of real estate owned properties, to uncertainty over the future of mortgage rates and the renewed focus on tighter underwriting, the attitude toward housing in Washington has changed, Jackson said.
“Now that the tone is not about pushing the homeownership rate up and the focus is more about lending to responsible borrowers, the trend will swing to more of a rental society and a push will be made to promote affordable, nice places for people to live,” she told NMN.
Jackson recently wrote that it seemed unlikely Congress would reduce the mortgage interest credit, except maybe to drop the cap below $1 million. But now it appears the cap could be lowered significantly and she warned a drastic decline would impact homebuilders that target the move-up buyer and the country’s most expensive states dramatically.
In her editorial, Bair acknowledged that “most of the needed changes will be unpopular, and they are likely to affect every interest group in some way,” and while necessary, she added any changes would need to be phased into effect.
“Establishing a comprehensive plan now would demonstrate a firm commitment to the type of long-term budget discipline that will be needed to preserve our nation's credibility in the global financial markets and a stable banking sector at home.”
