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Home Ownership - Meeting with the President, September 11, 1976
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Home Ownership - Meeting with the President, September 11, 1976
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The original documents are located in Box 17, folder "Home Ownership - Meeting with the
President, September 11, 1976" of the James M. Cannon Files at the Gerald R. Ford
Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 17 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
MEETING WITH THE PRESIDENT ON
HOME OWNERSHIP
Saturday, Sept. 11, 1976
1:30 p.m.
Satur
GERALD R. LIBRARY FORD,
THE WHITE HOUSE
WASHINGTON
MR. CANNON:
ATTACHED ARE 8 COPIES
cd
LIBRARY
FORD
&
HOMEOWNERSHIP OPPORTUNITIES FOR MIDDLE AMERICA (HOMA)
1. Format: This program would provide either a grant or a tax credit to purchasers of first homes.
Both new and existing homes would be eligible. There would be a maximum mortgage
LIBRARY
limit of $38,000 and maximum price limit of $40,000. The amount of the tax credit
would be the lesser of (1) the difference between payments to principal and interest
FORD
at the current market rate (9% assumed in this analysis) and payments to principal
&
and interest at 6% or (2) the difference between principal and interest at 9% and
GERALD
20% of the family's income. The subsidy on the maximum price house would phase out
at about the $18,000 income level.
2. Families Assisted: 1.1 million families in the relevant income range of $14,000 to $18,000 a year
will purchase in any case. An additional 700,000 - 800,000 families could
be made capable of home purchase, of which an estimated 250,000 would purchase
in the first year.
3. Subsidy per Family: The average first year subsidy per family would be $500 and, with normal
income growth, the average subsidy over the life of the loan would be $1325.
Assuming a 5 1/2% growth rate in normal income, the $14,000 family would phase
out in 5 years and higher income families would phase out sooner.
4. Number of Incremental Purchasers per year: 250,000 additional families are likely to
(OMB estimater 50,000)
purchase in the first year.
5. First Year Outlays: About $670 million (assuming 1.35 million purchasers annually, each with a $38,000 mortgage).
6. Total Costs: $1.8 billion over the period of subsidy for each year's assisted families.
7. Cost per Incremental Purchaser: (First Year): $2,700 ($670 million divided by 250,000)
(Total) - $7,200 ($1.8 billion divided by 250,000 incremental
purchasers)
8. Risk to the Government: No default risk since FHA insurance is not required.
9. Ease of Administration: If assistance is provided as a tax credit, administration is
extremely inexpensive but costs uncontrollable. If the assistance
is provided by direct subsidies, administration is complex, but the
number of recipients, hence costs, can be controlled.
- 2 -
10. Inequities: Benefits are focused on moderate income marginal purchasers, but only first time home
purchasers in this class are benefitted and not existing homeowners or second.
time home purchasers with similar income.
11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $38,000 Mortgage:
Downpayment (not including closing costs) of $2,000.
Monthly mortgage payment reduced by $56, from $306 to $250 in first year; reduced ty $42 in
second year to $264, if income increases by 5 1/2% to $15,285, subsidy phases out after 4 years.
12. Pros:
1. The President can fairly represent that this program will bring homeownership within the
grasp of an additional 800,000 young families seeking to purchase a first home.
2. Assures buyer and lender of first-time purchasers continued capacity to support mortgage
regardless of income growth.
3. Accelerates opportunity for homeownership for young moderate income families with growing
incomes.
4. Also allows those who buy anyway to purchase better housing and mitigates the
financial strains facing such families.
5. The subsidy provided will phase out with normal income growth, hence few families
will be subsidy recipients after 3-5 years in the program.
6. If interest rates again reach 7 1/2 percent, the subsidies being provided
will be SO small that the program will have phased itself out of existence.
7. By not differentiating between new construction and existing housing, but
focusing on families who can afford only modest housing, it will encourage
some young families to buy older housing in urban areas which is a bargain
as compared to new construction.
8. Can be combined with any downpayment option.
- 3 -
9. If implemented as a tax credit, could be translated into a monthly subsidy by homeowner
adjusting his withholding.
Cons:
1. Substantial outlays required.
2. Some families may not experience income growth, hence not work off subsidy
as rapidly as anticipated.
3. May be criticized as welfare for the well-to-do ($14,000 - $18,000
incames), although it serves a lower income band than any of the
other alternatives.
4. Incentive to purchase maximum price ($40,000) house, except that purchaser with
normal income growth will have to assume full costs within 2-5 years.
GRADUATED PAYMENT/FIXED RATE MORTGAGE
LIBRARY
FORD
1. Format: Initial mortgage payments would be reduced and later payments increased at a set rate of
&
increase.
9ERALD
2. Number of families assisted:
3. Subsidy per Family: None
4. Number of Incremental Purchasers per year: 40,000 additional families may purchase in the first year;
more in later years as FHA demonstrates the viability of GPs
to PMI's and conventional lenders, rising to up to 100,000
5. First Year Outlays: None
per year.
6. Total Costs: Depends on ultimate foreclosure rate.
7. Cost per Incremental Purchaser: (First Year) - None
(Total) Depends on ultimate foreclosure rate.
8. Risk to the Government: Increases FHA default risk by up to 40%, requiring .5 to .6 premium.
9. Ease of Administration: Requires FHA underwriting, but FHA is already financing same GP mortgages
this year pursuant to Section 245.
10. Inequities: Benefits primarily those with reasonable cash equity and reasonable expectations of
income growth.
11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $36,000 Mortgage:
Monthly mortgage payment reduced by $37 from $284 to $247 in first year and by $30 to $254 in the
second year; payments would continue to rise by 3% per year over the first ten years of the
mortgage term, then level off. (Assuming both loans at 8 1/2% with .6 premium on GP and
.25 PMI premium on the level payment mortgage).
12. Pros:
1. Accelerates opportunity for homeownership for those with expectations of rising income
by providing lower payments in early years of the mortgage, thus mitigating initial income
constraints on homeownership.
- 2 -
Pros: (cont'd)
2. Involves no direct subsidies.
Cons:
1. Requires higher (at least 7%) downpayment to avoid outstanding balance exceeding
house price, so cannot be combined with a downpayment option.
2. Increased default risk since, during early years of mortgage, amount owed
will exceed original principal amount.
3. Lenders may shy away due to higher risks and reduction in their cash flow.
4. Many consumers will be wary if uncertain about their future income growth.
5. Will probably require FHA insurance, another impediment to lender and
consumer acceptance, as well as an additional workload burden and risk to HUD.
REDUCE FHA DOWNPAYMENT REQUIREMENT
1. Format: Legislative change to reduce downpayment required for FHA insurance
Current
Option
3% for up to $25,000
3% for up to $25,000
10% for $25,000 - $35,000
5% for $25,000 - $40,000
20% for $35,000 - $45,000
10% for $40,000 - $50,000
20% for $50,000 - $60,000
2. Number of Families Assisted: 275,000 - expected FHA volume of 255,000 plus incremental purchases
3. Subsidy per Family: None
4. Number of Incremental Purchasers per year: 20,000 (10,000 - 30,000) - Reduces downpayment
requirement for FHA purchasers only by an
average of 3%, but increases required monthly
payment to amortize resulting larger mortgage
amount.
5. First Year Outlays: None
6. Total Costs: None
7. Cost per Incremental Purchaser: (First Year) - None
(Total) - None
8. Risk to the Government: An increase in foreclosure losses, but even these increased losses should be
covered by the current .5% premium.
9. Ease of Administration: Simple change in FHA processing, but any resulting larger volume of FHA insurance
would increase HUD workload hence staff needs.
- 2 -
10. Inequities: Benefits primarily families with little wealth but relatively high incomes, who
purchase homes over $30,000 in cost.
11. Impact on Typical $15,000 Income Family Buying a $40,000 House.\
Lowers downpayment (not including closing costs) from $2750 to $1500 or by $1250, but increases
monthly payments by $10 from $286 to $296.
12. Pros:
1. FHA may demonstrate value of higher loan to value ratio loans and lead the private
sector into greater acceptance of such loans.
2. Can be combined with an interest reduction program more significantly to increase
homeownership opportunities by providing those who benefit from the subsidy but
have low equity with low downpayment financing.
Cons:
1. Requires legislative change.
2. Can be criticized for benefitting only families with relatively high incomes who can
already afford the increased monthly costs of homeownership.
3. Very small number of families actually will be assisted to achieve homeownership.
4. Could make FHA more competitive with rather than a complement to the private sector's
mortgage insurance industry.
5. 90 - - 95% loans already available in private sector in many instances.
FEDERAL GUARANTEE OF DOWNPAYMENT
1. Format: Federal Government would guarantee an unsecured loan for one half of downpayment.
2. Number of Families Assisted: 1.48 million (if restricted to first time purchasers with
incomes under $20,000).
3. Subsidy per Family: None
4. Number of Incremental Purchasers per year:
75,000 (50 - 100,000)
Lowers downpayment required at purchase but raises total price of home since the
second loan must be amortized simultaneously at the mortgage:rate.
5. First Year Outlays: None
6. Total Costs: Defaults on quarantees for 1.48 million purchasers are estimated at $318
million, primarily during the first five years (based on 12% default rate and
5% guarantee). (In addition, FHA losses could be increased by as much as
$61 million as a result of additional losses resulting from decreased loan
to value ratios on 85,000 eligible FHA loans).
7. Cost per Incremental Purchaser: (First Year) - None
(Total) -$4240 (or $5053 including FHA losses)
8. Risk to the Government: Expected default rate resulting from higher loan to value ratio is 12%.
Expected average loss per guarantee is $216. In addition, decreased
loan to value ratio on 85,000 eligible FHA loans is expected to increase
FHA losses by $61 million.
9. Ease of Administration: Will require some HUD processing at time of guarantee.
10. Inequities:
- 2 -
11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $36,000 Mortgage:
Reduces downpayment (not including closing costs) from $4,000 to $2,000 or by $2,000; but raises
monthly payment by $16 from $290 to $306.
12. Pros:
1. Substantially reduces equity required.
2. Can be combined with interest subsidy to achieve maximum effect.
3. Government need not bear full risk of loss for all assisted purchasers.
4. Does not rely on FHA, SO not staff intensive.
Cons:
1. Requires higher monthly payments SO assisted only families with low wealth
but relatively high incomes.
2. 90 - - 95% loans already available for good risk borrowers.
3. May drive PMIs to increase downpayments required to limit risk from higher loan-to-value
ratios, thereby mitigating effect of program (average PMI per case losses could be
increased by up to $360).
HOMEOWNERSHIP OPPORTUNITIES FOR MIDDLE AMERICA (HOMA)
LIBRARY
1. Format: This program would provide either a grant or a tax credit to purchasers of first homes.
Both new and existing homes would be eligible. There would be a maximum mortgage
FORD
limit of $38,000 and maximum price limit of $40,000. The amount of the tax credit
is
would be the lesser of (1) the difference between payments to principal and interest
GERALD
at the current market rate (9% assumed in this analysis) and payments to principal
and interest at 6% or (2) the difference between principal and interest at 9% and
20% of the family's income. The subsidy on the maximum price house would phase out
at about the $18,000 income level.
2. Families Assisted: 1.1 million families in the relevant income range of $14,000 to $18,000 a year
will purchase in any case. An additional 700,000 - 800,000 families could
be made capable of home purchase, of which an estimated 250,000 would purchase
in the first year.
3. Subsidy per Family: The average first year subsidy per family would be $500 and, with normal
income growth, the average subsidy over the life of the loan would be $1325.
Assuming a 5 1/2% growth rate in normal income, the $14,000 family would phase
out in 5 years and higher income families would phase out sooner.
4. Number of Incremental Purchasers per year: 250,000 additional families are likely to
( OMB 50,000)
purchase in the first year.
5. First Year Outlays: About $670 million (assuming 1.35 million purchasers annually, each with a $38,000 mortgage).
6. Total Costs: $1.8 billion over the period of subsidy for each year's assisted families.
7. Cost per Incremental Purchaser: (First Year): $2,700 ($670 million divided by 250,000)
(Total) - $7,200 ($1.8 billion divided by 250,000 incremental
purchasers)
8. Risk to the Government: No default risk since FHA insurance is not required.
9.
Ease of Administration: If assistance is provided as a tax credit, administration is
extremely inexpensive but costs uncontrollable. If the assistance
is provided by direct subsidies, administration is complex, but the
number of recipients, hence costs, can be controlled.
- 2 -
10. Inequities: Benefits are focused on moderate income marginal purchasers, but only first time home
purchasers in this class are benefitted and not existing homeowners or second.
time home purchasers with similar income.
11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $38,000 Mortgage:
Downpayment (not including closing costs) of $2,000.
Monthly mortgage payment reduced by $56, from $306 to $250 in first year; reduced ty $42 in
second year to $264, if income increases by 5 1/2% to $15,285, subsidy phases out after 4 years.
12. Pros:
1. The President can fairly represent that this program will bring homeownership within the
grasp of an additional 800,000 young families seeking to purchase a first home.
2. Assures buyer and lender of first-time purchasers continued capacity to support mortgage
regardless of income growth.
3. Accelerates opportunity for homeownership for young moderate income families with growing
incomes.
4. Also allows those who buy anyway to purchase better housing and mitigates the
financial strains facing such families.
5. The subsidy provided will phase out with normal income growth, hence few families
will be subsidy recipients after 3-5 years in the program.
6. If interest rates again reach 7 1/2 percent, the subsidies being provided
will be SO small that the program will have phased itself out of existence.
7. By not differentiating between new construction and existing housing, but
focusing on families who can afford only modest housing, it will encourage
some young families to buy older housing in urban areas which is a bargain
as compared to new construction.
8. Can be combined with any downpayment option.
- 3 -
9. If implemented as a tax credit, could be translated into a monthly subsidy by homeowner
adjusting his withholding.
1. Substantial outlays required.
2. Some families may not experience income growth, hence not work off subsidy
as rapidly as anticipated.
3. May be criticized as welfare for the well-to-do ($14,000 - $18,000
incames), although it serves a lower income band than any of the
other alternatives.
4. Incentive to purchase maximum price ($40,000) house, except that purchaser with
normal income growth will have to assume full costs within 2-5 years.
GRADUATED PAYMENT/FIXED RATE MORTGAGE
1. Format: Initial mortgage payments would be reduced and later payments increased at a set rate of
increase.
2. Number of families assisted:
3. Subsidy per Family: None
4. Number of Incremental Purchasers per year: 40,000 additional families may purchase in the first year;
more in later years as FHA demonstrates the viability of GPs
to PMI's and conventional lenders, rising to up to 100,000
5. First Year Outlays: None
per year.
6. Total Costs: Depends on ultimate foreclosure rate.
7. Cost per Incremental Purchaser: (First Year) - None
(Total) Depends on ultimate foreclosure rate.
8. Risk to the Government: Increases FHA default risk by up to 40%, requiring .5 to .6 premium.
9. Ease of Administration: Requires FHA underwriting, but FHA is already financing some GP mortgages
this year pursuant to Section 245.
10. Inequities: Benefits primarily those with reasonable cash equity and reasonable expectations of
income growth.
11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $36,000 Mortgage:
Monthly mortgage payment reduced by $37 from $284 to $247 in first year and by $30 to $254 in the
second year; payments would continue to rise by 3% per year over the first ten years of the
mortgage term, then level off. (Assuming both loans at 8 1/2% with .6 premium on GP and
25 PMI premium on the level payment mortgage).
12. Pros:
1. Accelerates opportunity for homeownership for those with expectations of rising income
by providing lower payments in early years of the mortgage, thus mitigating initial income
constraints on homeownership.
- 2 -
Pros: (cont'd)
2. Involves no direct subsidies.
Cons:
1. Requires higher (at least 7%) downpayment to avoid outstanding balance exceeding
house price, so cannot be combined with a downpayment option.
2. Increased default risk since, during early years of mortgage, amount owed
will exceed original principal amount.
3. Lenders may shy away due to higher risks and reduction in their cash flow.
4. Many consumers will be wary if uncertain about their future income growth.
5. Will probably require FHA insurance, another impediment to lender and
consumer acceptance, as well as an additional workload burden and risk to HUD.
FEDERAL GUARANTEE OF DOWNPAYMENT
1. Format: Federal Government would guarantee an unsecured loan for one half of downpayment.
2. Number of Families Assisted: 1.48 million (if restricted to first time purchasers with
incomes under $20,000).
3. Subsidy per Family: None
4. Number of Incremental Purchasers per year:
75,000 (50 - 100,000)
Lowers downpayment required at purchase but raises total price of home since the
second loan must be amortized simultaneously at the mortgage:rate.
5. First Year Outlays: None
6. Total Costs: Defaults on quarantees for 1.48 million purchasers are estimated at $318
million, primarily during the first five years (based on 12% default rate and
5% guarantee). (In addition, FHA losses could be increased by as much as
$61 million as a result of additional losses resulting from decreased loan
to value ratios on 85,000 eligible FHA loans).
7. Cost per Incremental Purchaser: (First Year) - None
(Total) -$4240 (or $5053 including FHA losses)
8. Risk to the Government: Expected default rate resulting from higher loan to value ratio is 12%.
Expected average loss per guarantee is $216. In addition, decreased
loan to value ratio on 85,000 eligible FHA loans is expected to increase
FHA losses by $61 million.
9. Ease of Administration: Will require some HUD processing at time of guarantee.
10. Inequities:
- 2 -
11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $36,000 Mortgage:
Reduces downpayment (not including closing costs) from $4,000 to $2,000 or by $2,000; but raises
monthly payment by $16 from $290 to $306.
L2. Pros:
1. Substantially reduces equity required.
2. Can be combined with interest subsidy to achieve maximum effect.
3. Government need not bear full risk of loss for all assisted purchasers.
4. Does not rely on FHA, so not staff intensive.
Cons:
1. Requires higher monthly payments SO assisted only families with low wealth
but relatively high incomes.
2. 90 - 95% loans already available for good risk borrowers.
3. May drive PMIs to increase downpayments required to limit risk from higher loan-to-value
ratios, thereby mitigating effect of program (average PMI per case losses could be
increased by up to $360).
REDUCE FHA DOWNPAYMENT REQUIREMENT
1. Format: Legislative change to reduce downpayment required for FHA insurance
Current
Option
3% for up to $25,000
3% for up to $25,000
10% for $25,000 - $35,000
5% for $25,000 - $40,000
20% for $35,000 - $45,000
10% for $40,000 - $50,000
20% for $50,000 - $60,000
2. Number of Families Assisted: 275,000 - expected FHA volume of 255,000 plus incremental purchases
3. Subsidy per Family: None
4. Number of Incremental Purchasers per year: 20,000 (10,000 - 30,000) - Reduces downpayment
requirement for FHA purchasers only by an
average of 3%, but increases required monthly
payment to amortize resulting larger mortgage
amount.
5. First Year Outlays: None
6. Total Costs: None
7. Cost per Incremental Purchaser: (First Year) - None
(Total) - None
8. Risk to the Government: An increase in foreclosure losses, but even these increased losses should be
covered by the current .5% premium.
9. Ease of Administration: Simple change in FHA processing, but any resulting larger volume of FHA insurance
would increase HUD workload hence staff needs.
- 2 -
10. Inequities: Benefits primarily families with little wealth but relatively high incomes, who
purchase homes over $30,000 in cost.
11. Impact on Typical $15,000 Income Family Buying a $40,000 House.\
Lowers downpayment (not including closing costs) from $2750 to $1500 or by $1250, but increases
monthly payments by $10 from $286 to $296.
12. Pros:
1. FHA may demonstrate value of higher loan to value ratio loans and lead the private
sector into greater acceptance of such loans.
2. Can be cambined with an interest reduction program more significantly to increase
homeownership opportunities by providing those who benefit from the subsidy but
have low equity with low downpayment financing.
Cons:
1. Requires legislative change.
2. Can be criticized for benefitting only families with relatively high incomes who can
already afford the increased monthly costs of homeownership.
3. Very small number of families actually will be assisted to achieve homeownership.
4. Could make FHA more competitive with rather than a complement to the private sector's
mortgage insurance industry.
5. 90 - - 95% loans already available in private sector in many instances.
OF
THE TREASURY THE
THE SECRETARY OF THE TREASURY
WASHINGTON
1789
September 11, 1976
Memorandum to The Honorable James M. Cannon
Director, Domestic Council
Subject: Homeownership Tax Incentives
I have just been informed that a set of proposals to
encourage homeownership will be the subject of memoranda for
the President this weekend. Some of the suggested schemes
include subsidies in the form of tax incentives. I would
like to record my strong opposition to the proposed tax
devices. The proposals in question are titled "Homeowner-
ship Opportunities for Middle America (HOMA) " and "Tax
Exempt Savings" on a spreadsheet which was provided us by
Lynn May of your staff. I have two overriding reasons for
opposing the tax aspects of these proposals:
As I have repeatedly emphasized, the amount of
complexity now cluttering up the tax code threatens se-
riously to undermine the self-assessment tax system. These
proposals would add yet another layer of complex provisions
affecting millions of taxpayers and would allocate tax
advantages in an arbitrary way which would certainly be
perplexing to many taxpayers, especially those who have
already sacrificed to buy a home.
The Administration is strongly committed to a bal-
anced budget in Fiscal 1979. We can ill afford to commit
the Administration to tax expenditure programs of the
magnitude being proposed here without the fullest consid-
eration of the overall budget, including previously advanced
tax initiatives. The "HOMA" proposal, for example, appears
to have an estimated FY '79 cost of $1.2 billion.
Furthermore, I see a number of specific problems with
these proposals. Since the "HOMA" proposal is apparently
under the most serious consideration, I shall confine my
further comments to it. This proposal suffers from the
following defects:
FORD
LIBRARY
- 2 -
The amount of subsidy which would be distributed to
people who would purchase homes without the program is
extremely large. Accepting the quantitative estimates
provided on the spreadsheet, approximately 83 percent of the
total government expenditure or $4.5 billion over the life
of the program would be paid out to households who would
have purchased homes in any case.
No consideration appears to have been given to the
short run effect of this proposal on the prices of existing
homes. Can we not expect a substantial part of its effect
to be "dissipated" in higher market prices for existing
houses?
Since construction of single family dwellings most
suited to owner occupancy is more predominant outside
central cities, the locational effect of this incentive
would be in the direction of movement to the suburbs. This
will aggravate problems of central cities.
An effect of the proposal will be to shift demand
away from rental housing. This will further depress the
portion of the building industry which is engaged in build-
ing multi-unit structures.
There will be many problems developing clear and fair
rules for administering the HOMA proposal. For example, how
are we to identify "purchasers of first homes"? How do we
deal with situations where one spouse of a married couple
has previously been a joint owner of a home? Is the housing
unit defined to include such tenure forms as co-ops and
condominiums?
Finally, I am disturbed by the procedures under which
these tax initiatives have been advanced within the Adminis-
tration. Treasury has primary responsibility for tax
policy. Significant tax proposals which are to be forwarded
for Presidential consideration, should be given full anal-
ysis and review by the Office of Tax Policy. In this case
only the most informal, indirect, and last-minute commu-
nication brought these measures to my attention.
Baf William E. Simon
OF
THE TREASURY THE
THE SECRETARY OF THE TREASURY
WASHINGTON
1789
September 11, 1976
Memorandum to The Honorable James M. Cannon
Director, Domestic Council
Subject: Homeownership Tax Incentives
I have just been informed that a set of proposals to
encourage homeownership will be the subject of memoranda for
the President this weekend. Some of the suggested schemes
include subsidies in the form of tax incentives. I would
like to record my strong opposition to the proposed tax
devices. The proposals in question are titled "Homeowner-
ship Opportunities for Middle America (HOMA) " and "Tax
Exempt Savings" on a spreadsheet which was provided us by
Lynn May of your staff. I have two overriding reasons for
opposing the tax aspects of these proposals:
As I have repeatedly emphasized, the amount of
complexity now cluttering up the tax code threatens se-
riously to undermine the self-assessment tax system. These
proposals would add yet another layer of complex provisions
affecting millions of taxpayers and would allocate tax
advantages in an arbitrary way which would certainly be
perplexing to many taxpayers, especially those who have
already sacrificed to buy a home.
The Administration is strongly committed to a bal-
anced budget in Fiscal 1979. We can ill afford to commit
the Administration to tax expenditure programs of the
magnitude being proposed here without the fullest consid-
eration of the overall budget, including previously advanced
tax initiatives. The "HOMA" proposal, for example, appears
to have an estimated FY '79 cost of $1.2 billion.
Furthermore, I see a number of specific problems with
these proposals. Since the "HOMA" proposal is apparently
under the most serious consideration, I shall confine my
further comments to it. This proposal suffers from the
following defects:
- 2 -
The amount of subsidy which would be distributed to
people who would purchase homes without the program is
extremely large. Accepting the quantitative estimates
provided on the spreadsheet, approximately 83 percent of the
total government expenditure or $4.5 billion over the life
of the program would be paid out to households who would
have purchased homes in any case.
No consideration appears to have been given to the
short run effect of this proposal on the prices of existing
homes. Can we not expect a substantial part of its effect
to be "dissipated" in higher market prices for existing
houses?
Since construction of single family dwellings most
suited to owner occupancy is more predominant outside
central cities, the locational effect of this incentive
would be in the direction of movement to the suburbs. This
will aggravate problems of central cities.
An effect of the proposal will be to shift demand
away from rental housing. This will further depress the
portion of the building industry which is engaged in build-
ing multi-unit structures.
There will be many problems developing clear and fair
rules for administering the HOMA proposal. For example, how
are we to identify "purchasers of first homes"? How do we
deal with situations where one spouse of a married couple
has previously been a joint owner of a home? Is the housing
unit defined to include such tenure forms as co-ops and
condominiums?
Finally, I am disturbed by the procedures under which
these tax initiatives have been advanced within the Adminis-
tration. Treasury has primary responsibility for tax
policy. Significant tax proposals which are to be forwarded
for Presidential consideration, should be given full anal-
ysis and review by the Office of Tax Policy. In this case
only the most informal, indirect, and last-minute commu-
nication brought these measures to my attention.
Baf William E. Simon
GERALD R. LIBRARY FORD
1. FORMAT:
HOMEOWNERSHIP OPPORTUNITIES FOR MIDDLE AMERICA (HOMA)
BROCK-ASHLEY
GRADUATED PAYMENT/F:
This program would provide a tax credit to purchasers of first homes.
GNMA would pay 2% interest on the mortgage initially, and any
Initial mortgage pay
Both new and existing homes would be eligible. There would be a maximum
additional interest due to the variable rate provisions. This
increased at a set I
mortgage limit of $38,000. The amount of the tax credit would be the
would accumulate with interest in the borrower's GNMA loan
payments should bett
lesser of (1) the difference between payments to principal and interest
account which is to be repaid when the house is sold or by
initial income const
at the current market rate (9% assumed in this analysis) and payments to
arrangement with GNMA.
principal and interest at 6% or (2) the difference between principal and
interest at 9% and 20% of the family's income. This program would phase
out at about the $18,000 income level.
2.
Number of
1.33 million
1.7 million
1.5 million
Families
Assisted:
3.
Subsidy per
The average subsidy per family in the first year of about $500 and of
There is no direct subsidy involved in the program. There
NONE
Family:
about $650 over the life of the loan.
are, however, indirect costs involved in all direct loan
programs.
4.
Number of
230,000
The GNMA loan would reduce monthly payments enough such that
80,000 (under constra
Incremental
250,000 to 300,000 additional families would be able to afford
exceed 100%)
Purchaser
a $35,000 house without spending more than 25% of their income
per Year:
on housing. The GNMA loan would reduce current costs but
increase total costs because the GNMA loan must be repaid
with accumulated interest. Thus, there may be market resistance
to this program, since it substantially reduces or eliminates
a homeownership equity accumulation, one of the primary perceived
benefits of homeownership.
5.
First Year
About $665 million
The average GNMA loan would be about $500 after one year. If
NONE
Outlays:
1.7 million loans were issued, total lending under the program
would reach $850 million.
6.
Total Costs:
$1.7 billion over the period of subsidy for each year's assisted families.
Total lending for the first year participants will reach about
NONE
Assuming a 7% growth rate in normal income, the $14,000 family would
$5 billion after 5 years. Lending to participants entering
phase out in 5 years and higher income families would phase out sooner.
in years 2-5 will be about $10 billion. As currently conceived,
total lending under the program will increast at an exponential
rate. In theory, however, all of these outlays would be
recovered as recipients ultimately repaid their GNMA loans.
7.
Cost per
(First Year) - $2,900 ($665 million divided by 230,000)
(First Year)
-
There are no direct costs to the government,
(First Year) - NONE
Incremental
but in terms of \budget impact, total lending
Purchaser:
(Total)
- $7,391 ($1.7 billion divided by 230,000 incremental purchasers)
(Total)
-
would be about $2,800 per incremental purchaser
(Total)
- NONE
in the first year. After 25 years, GNMA would
have lent about $250,000 per incremental first
year purchaser.
8.
Risk to the
Essentially no default risk since FHA insurance is not required.
There is a particularly high risk of default associated with
Increased FHA default
Government:
second mortgages such as the GNMA loans which may be higher
than the original principal of the first mortgage, by the
time it becomes due.
UATED PAYMENT/FIXED RATE MORTGAGE
TAX EXEMPT SAVINGS
DOWNPAYMENT VOUCHER/GRANT
mortgage payments would be reduced and later payments
Contribution made to, and interest earned on, a savings account
$1,000 cash payment to buyer
eased at a set rate of increase. Increasing mortgage
would be deductible from taxable income if the savings in that
should better match rising incomes. This mitigates
account are used for a downpayment by first time home purchasers.
income constraints on homeownership.
Limits would be $20,000 income, $10,000 total savings, $2,500
per year in addition to savings.
1.5 million families
1.46 million
$2,500
$1,000
(under constraint than loan to value ration cannot
75 - 100,000
60,000
100%)
Raises loan-to-value from .86 to .89 based on in-house
research, this would increase housing demand by 60,000
units per year.
$938 million
$1.4 billion
Year 1:
$938M a year
All costs are borne in the first year a family is a
Year 2:
$1.88B a year
subsidy recipient.
Year 3:
$2.86B a year
Years 4-8:
$3.75B
Year)
-
NONE
(First Year) - $37,500 to 50,000
(First Year) - $23,000
NONE
(Total)
- $37,500 to 50,000
(Total)
- $23,000
FHA default risk
NONE
NONE
FEDERAL GUARANTEE OF DOWNPAYMENT
REDUCE FHA DOWNPAYMENT REQUIREMENT
Federal guarantee of loan for one half of downpayment. This
Legislative change to reduce downpayment required for FHA insurance
second loan would be secured by a second lien.
Current
Option
3% for up to $25,000
3% for up to $25,000
10% for $25,000 - $35,000
5% for $25,000 - $40,000
20% for $35,000 - $45,000
10% for $40,000 - $50,000
20% for $50,000 - $60,000
1.55 million
275,000 (expected FHA volume plus incremental purchases)
NONE
NONE
90,000 - 140,000
20,000
Lowers downpayment required at purchase but raises total price of
Reduces downpayment requirement for FHA only by an average of 3%.
home if the second lien is amortized at mortgage rate which will
be in excess of rate of inflation.
NONE
NONE
NONE
NONE
(First Year) - NONE
(First Year ) - NONE
(Total)
NONE
(Total)
- NONE
A significant increase in foreclosure rates. For example, by
An increase in foreclosure rate. Losses should be covered by the
increasing loan-value ratio by 8 percent (.86 to .93) foreclosure
.5% premium.
rate would be increased by 11 percent. (elasticity of 1.4).
Number or
230,000
The GNMA loan would reduce monthly payments enough such that
80,000 (under constrai
Incremental
250,000 to 300,000 additional families would be able to afford
exceed 100%)
Purchaser
a $35,000 house ithout spending more than 25% of their income
per Year:
on housing. The GNMA loan would reduce current costs but
increase total costs because the GNMA loan must be repaid
with accumulated interest. Thus, there may be market resistance
to this program, since it substantially reduces or eliminates
a homeownership equity accumulation, one of the primary perceived
benefits of homeownership.
5.
First Year
About $665 million
The average GNMA loan would be about $500 after one year. If
NONE
Outlays:
1.7 million loans were issued, total lending under the program
would reach $850 million.
6.
Total Costs:
$1.7 billion over the period of subsidy for each year's assisted families.
Total lending for the first year participants will reach about
NONE
Assuming a 7% growth rate in normal income, the $14,000 family would
$5 billion after 5 years. Lending to participants entering
phase out in 5 years and higher income families would phase out sooner.
in years 2-5 will be about $10 billion. As currently conceived,
total lending under the program will increast at an exponential
rate. In theory, however, all of these outlays would be
recovered as recipients ultimately repaid their GNMA loans.
7.
Cost per
(First Year) - $2,900 ($665 million divided by 230,000)
(First Year) - There are no direct costs to the government,
(First Year) - NONE
Incremental
but in terms of budget impact, total lending
Purchaser:
(Total)
- $7,391 ($1.7 billion divided by 230,000 incremental purchasers)
(Total)
-
would be about $2,800 per incremental purchaser
(Total)
- NONE
in the first year. After 25 years, GNMA would
have lent about $250,000 per incremental first
year purchaser.
8.
Risk to the
Essentially no default risk since FHA insurance is not required.
There is a particularly high risk of default associated with
Increased FHA default ris
Government:
second mortgages such as the GNMA loans which may be higher
than the original principal of the first mortgage, by the
time it becomes due.
9.
Ease of
If assistance is provided as a tax credit, administration is extremely
GNMA would have to become a mortgage originator, and servicer
FHA underwriting. FHA wi
Administration:
inexpensive but costs uncontrollable. If the assistance is provided by
or would have to pay mortgage bankers to provide this service.
direct subsidies, administration is complex, but the number of recipients,
hence costs, can be controlled.
10. Other
The homeowner's real equity in the home is substantially reduced
Lender resistance due to
Problems:
by the GNMA second lien. His mobility also is reduced because
reduced cash flow.
he must repay the loan if he sells his home. Given the potential
exponential growth rate of total lending under the program, the
indirect cost of additional interest on all Treasury borrowing
is likely to be substantial. Finally, GNMA could become a large
holder of single family homes if default rates are as high as may
be reasonably expected.
IMPACT on Typical
Monthly mortgage payment reduced by $36, from $286 to $250, in first year;
Monthly mortgage payment reduced by $44, from $286 to $242, in
Monthly mortgage payment
1
$15,000 Income
reduced by $15 in second year. No impact after second year.
each year. Total mortgage debt increases continually, by over
first year; payment rises
Family Buying a
$5,500 per year.
term.
$37,000 House with
$35,000 Mortgage:
(under constraint than loan to value ration cannot
75 - 100,000
60,000
100%)
Raises loan-to-value from .86 to .89 based on in-house
research, this would increase housing demand by 60,000
units per year.
$938 million
$1.4 billion
Year 1:
$938M a year
All costs are borne in the first year a family is a
Year 2:
$1.88B a year
subsidy recipient.
Year 3:
$2.86B a year
Years 4-8:
$3.75B
Year) NONE
(First Year) - $37,500 to 50,000
(First Year) $23,000
)
NONE
(Total)
- $37,500 to 50,000
(Total)
$23,000
sed FHA default risk
NONE
NONE
derwriting. FHA will finance same this year (Section 245)
Run through tax system; SO minimal administrative cost
Would impose significant operational capacity to administer
the program (e.g., would have to certify incomes of participants
($20,000 income limit, and if constraints such as requiring
purchase of decent safe and sanitary housing were imposed,
would have to verify that constraints were met.)
resistance due to increased default risk and
Creation of a new tax loophole with a large constituency.
Equal subsidy would be paid to families of different wealth.
1
cash flow.
Slow implementation, most recipients will take several years
to accumulate enough in their downpayment account to make
May have slight inflationary impact on price of housing since
a purchase. Also, deduction amount need not correlate with
subsidy reduces purchase price.
housing expenditures.
mortgage payment reduced by $75, from $286 to $211, in
Downpayment effectively reduced by $1,000, from $4,000 to
Lowers downpayment by $1,000 from $4,000 to $3,000.
ear; payment rises by 3 percent per year over the mortgage
$3,000, through tax saving.
90,000 - 140,000
20,000
Lowers downpayment required at purchase but raises total price of
Reduces downpayment requirement for FHA only by an average of 3%.
home if the second lien is amortized at mortgage rate which will
be in excess of rate of inflation.
NONE
NONE
NONE
NONE
(First Year) - NONE
(First Year ) - NONE
(Total)
- NONE
(Total)
- NONE
A significant increase in foreclosure rates. For example, by
An increase in foreclosure rate. Losses should be covered by the
increasing loan-value ratio by 8 percent (.86 to .93) foreclosure
.5% premium.
rate would be increased by 11 percent. (elasticity of 1.4).
Requires HUD processing at time of guarantee and management in
Simple change in FHA processing. Larger volume of FHA insurance
the event of foreclosure.
would increase work load.
Amortizing second life of mortgage will require a higher income
Requires legislative change. Has greatest effect on homes in excess
to support loan (e.g., a higher monthly payment because of the
of $30,000. Could result in FHA becoming more competitive with
higher mortgage amount).
private mortgage insurance.
Reduces downpayment by $2,000, from $4,000 to $2,000; raises
Could lower downpayment by up to $2,500, from $4,000 to $1,500.
monthly payment by $20, from $282 to $302.
MYGwk will have clean
version for the Pres.
1. POIMAT:
OPPORTUNITIES FOR MILDLE AMERICA (IKMA)
GRADUATED PAYMENT/FIXED RATE: MORTGAGE
PRESAL CUARANTEE OF DOWNPAYMENT
both This program would provide a tax credit to purchasers of first
REDUCE FIA DOWNPAYMENT REQUIREMENT
new and existing homes would be eligible. There would be humes.
Initial mortgage payments would be reduced and later payments
Federal guarantee of loan for one half of downpayment. This
Legislative change to reduce downpayment required for FHA insura
mortgage lesser of limit of $38,000. The amount of the tax credit would be a maximum
increased at a set rate of incroase. Increasing matgage
at the (1) the difference between payments to principal and the
second loan would be secured by a second lien.
payments should better match riving incrmes. This mitigatos
Current
Option
principal current and market rate (91 assumed in this analysis) and interest
initial income constraints on hameowership.
interest at 9% interest at 68 or (2) the difference between principal payments and to
3% for up to $25,000
38 for up to $25,000
out at about the and $18,000 200 of income the family's level. income. This program would phase
10% for $25,000 $35,000
5% for $25,000 $40,000
20% for $35,000 $45,000
10% for $40,000 $50,000
201 for $50,000 $60,000
2. Number of
1.33 million
Families
Assistal:
1.5 million
1.55 million
275,000 (expected FHA volume plus incremental purchases)
3. Subsidy par
Family:
The about average subsidy per family in the first year of about $500 and of
$650 over the life of the loan.
NONE
NONE
NONE
4. Number of
230,000
Incremental
Purchaser
80,000 (under constraint than loan to value ratio cannot
90,000 140,000
20,000
per Year:
exceed 100%)
Lowers downpayment required at purchase but raises total price of
Reduces downpayment requirement for FHA only by an average of 31
home if the second lien is amortized at mortgage rate which will
be in excess of rate of inflation.
5. First Year
Outlays:
About $665 million
NONE
NONE
NONE
6. Total Costs:
phase out a in 7% growth rate in normal income, the $14,000 family
Assuming $1.7 billion over the period of subsidy for each year's assisted families.
NONE
NONE
NONE
5 years and higher income families would phase out would sooner.
7. Cost per
Incremental
(First Year) - $2,900 ($665 million divided by 230,000)
Purchaser:
(First Year) NONE
(Total)
(First Year) NONE
(First Year NONE
$7,391 ($1.7 billion divided by 230,000 incremental purchasers)
(Total)
NONE
(Total)
NONE
(Total)
NONE
8. Risk to the
Government:
Essentially no default risk since FHA insurance is not required.
Increased FHA default risk
A significant increase in foreclosure rates. For example, by
An increase in foreclosure rate. Losses should be covered by th
increasing loan-value ratio by 8 percent (.86 to .93) foreclosure
,5% premium.
rate would be increased by 11 percent. (elasticity of 1.4).
9. Ease of
Administration
direct costs uncontrollable. If the assistance is extremely
inexpensive If assistance but is provided as a tax credit, administration is
FHA underwriting. FHA will finance some this year (Section 245)
hence subsidies, administration is complex, but the number of provided recipients, by
Requires HUD processing at time of guarantee and management in
Simple change in PHA processing. Larger volume of FHA insurance
costa, can be controlled.
the event of foreclosure.
would increase work load.
10. Other
Problems:
Lender resistance due to increased default risk and
reduced cash flow,
Amortizing second lien will require a higher income
Requires legislative change. Has greatest effect on homes in ex
to support loan (e.g., a higher monthly payment because of the
of $30,000. Could result in THA becoming more competitive with
higher mortgage amount).
private mortgage insurance.
IMPACT on Typical
$15,000 Income
Monthly reduced mortgage by $15 payment reduced by $36, from $286 to $250, in first year,
Family Buying a
in second year. No impact after second year.
Monthly mortgage payment reduced by $75, from $286 to $211, in
Reduces downpayment by $2,000, from $4,000 to $2,000; raises
Could lower downpayment by up to $2,500, from $4,000 to $1,500.
$39,000 House with
term. first year, payment rises by 3 percent per year over the mortgage
monthly payment by $20, from $286 to $306.
$35,000 Mortgage: