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    "label": "Home Ownership - Meeting with the President, September 11, 1976",
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    "id": "1515850",
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    "title": "Home Ownership - Meeting with the President, September 11, 1976",
    "description": "This file contains materials regarding President Ford's housing proposal.",
    "citationUrl": "https://catalog.archives.gov/id/1515850",
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        "James M. Cannon Files (Ford Administration)",
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    "ocrText": "The original documents are located in Box 17, folder \"Home Ownership - Meeting with the\nPresident, September 11, 1976\" of the James M. Cannon Files at the Gerald R. Ford\nPresidential Library.\nCopyright Notice\nThe copyright law of the United States (Title 17, United States Code) governs the making of\nphotocopies or other reproductions of copyrighted material. Gerald Ford donated to the United\nStates of America his copyrights in all of his unpublished writings in National Archives collections.\nWorks prepared by U.S. Government employees as part of their official duties are in the public\ndomain. The copyrights to materials written by other individuals or organizations are presumed to\nremain with them. If you think any of the information displayed in the PDF is subject to a valid\ncopyright claim, please contact the Gerald R. Ford Presidential Library.\nDigitized from Box 17 of the James M. Cannon Files at the Gerald R. Ford Presidential Library\nMEETING WITH THE PRESIDENT ON\nHOME OWNERSHIP\nSaturday, Sept. 11, 1976\n1:30 p.m.\nSatur\nGERALD R. LIBRARY FORD,\nTHE WHITE HOUSE\nWASHINGTON\nMR. CANNON:\nATTACHED ARE 8 COPIES\ncd\nLIBRARY\nFORD\n&\nHOMEOWNERSHIP OPPORTUNITIES FOR MIDDLE AMERICA (HOMA)\n1. Format: This program would provide either a grant or a tax credit to purchasers of first homes.\nBoth new and existing homes would be eligible. There would be a maximum mortgage\nLIBRARY\nlimit of $38,000 and maximum price limit of $40,000. The amount of the tax credit\nwould be the lesser of (1) the difference between payments to principal and interest\nFORD\nat the current market rate (9% assumed in this analysis) and payments to principal\n&\nand interest at 6% or (2) the difference between principal and interest at 9% and\nGERALD\n20% of the family's income. The subsidy on the maximum price house would phase out\nat about the $18,000 income level.\n2. Families Assisted: 1.1 million families in the relevant income range of $14,000 to $18,000 a year\nwill purchase in any case. An additional 700,000 - 800,000 families could\nbe made capable of home purchase, of which an estimated 250,000 would purchase\nin the first year.\n3. Subsidy per Family: The average first year subsidy per family would be $500 and, with normal\nincome growth, the average subsidy over the life of the loan would be $1325.\nAssuming a 5 1/2% growth rate in normal income, the $14,000 family would phase\nout in 5 years and higher income families would phase out sooner.\n4. Number of Incremental Purchasers per year: 250,000 additional families are likely to\n(OMB estimater 50,000)\npurchase in the first year.\n5. First Year Outlays: About $670 million (assuming 1.35 million purchasers annually, each with a $38,000 mortgage).\n6. Total Costs: $1.8 billion over the period of subsidy for each year's assisted families.\n7. Cost per Incremental Purchaser: (First Year): $2,700 ($670 million divided by 250,000)\n(Total) - $7,200 ($1.8 billion divided by 250,000 incremental\npurchasers)\n8. Risk to the Government: No default risk since FHA insurance is not required.\n9. Ease of Administration: If assistance is provided as a tax credit, administration is\nextremely inexpensive but costs uncontrollable. If the assistance\nis provided by direct subsidies, administration is complex, but the\nnumber of recipients, hence costs, can be controlled.\n- 2 -\n10. Inequities: Benefits are focused on moderate income marginal purchasers, but only first time home\npurchasers in this class are benefitted and not existing homeowners or second.\ntime home purchasers with similar income.\n11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $38,000 Mortgage:\nDownpayment (not including closing costs) of $2,000.\nMonthly mortgage payment reduced by $56, from $306 to $250 in first year; reduced ty $42 in\nsecond year to $264, if income increases by 5 1/2% to $15,285, subsidy phases out after 4 years.\n12. Pros:\n1. The President can fairly represent that this program will bring homeownership within the\ngrasp of an additional 800,000 young families seeking to purchase a first home.\n2. Assures buyer and lender of first-time purchasers continued capacity to support mortgage\nregardless of income growth.\n3. Accelerates opportunity for homeownership for young moderate income families with growing\nincomes.\n4. Also allows those who buy anyway to purchase better housing and mitigates the\nfinancial strains facing such families.\n5. The subsidy provided will phase out with normal income growth, hence few families\nwill be subsidy recipients after 3-5 years in the program.\n6. If interest rates again reach 7 1/2 percent, the subsidies being provided\nwill be SO small that the program will have phased itself out of existence.\n7. By not differentiating between new construction and existing housing, but\nfocusing on families who can afford only modest housing, it will encourage\nsome young families to buy older housing in urban areas which is a bargain\nas compared to new construction.\n8. Can be combined with any downpayment option.\n- 3 -\n9. If implemented as a tax credit, could be translated into a monthly subsidy by homeowner\nadjusting his withholding.\nCons:\n1. Substantial outlays required.\n2. Some families may not experience income growth, hence not work off subsidy\nas rapidly as anticipated.\n3. May be criticized as welfare for the well-to-do ($14,000 - $18,000\nincames), although it serves a lower income band than any of the\nother alternatives.\n4. Incentive to purchase maximum price ($40,000) house, except that purchaser with\nnormal income growth will have to assume full costs within 2-5 years.\nGRADUATED PAYMENT/FIXED RATE MORTGAGE\nLIBRARY\nFORD\n1. Format: Initial mortgage payments would be reduced and later payments increased at a set rate of\n&\nincrease.\n9ERALD\n2. Number of families assisted:\n3. Subsidy per Family: None\n4. Number of Incremental Purchasers per year: 40,000 additional families may purchase in the first year;\nmore in later years as FHA demonstrates the viability of GPs\nto PMI's and conventional lenders, rising to up to 100,000\n5. First Year Outlays: None\nper year.\n6. Total Costs: Depends on ultimate foreclosure rate.\n7. Cost per Incremental Purchaser: (First Year) - None\n(Total) Depends on ultimate foreclosure rate.\n8. Risk to the Government: Increases FHA default risk by up to 40%, requiring .5 to .6 premium.\n9. Ease of Administration: Requires FHA underwriting, but FHA is already financing same GP mortgages\nthis year pursuant to Section 245.\n10. Inequities: Benefits primarily those with reasonable cash equity and reasonable expectations of\nincome growth.\n11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $36,000 Mortgage:\nMonthly mortgage payment reduced by $37 from $284 to $247 in first year and by $30 to $254 in the\nsecond year; payments would continue to rise by 3% per year over the first ten years of the\nmortgage term, then level off. (Assuming both loans at 8 1/2% with .6 premium on GP and\n.25 PMI premium on the level payment mortgage).\n12. Pros:\n1. Accelerates opportunity for homeownership for those with expectations of rising income\nby providing lower payments in early years of the mortgage, thus mitigating initial income\nconstraints on homeownership.\n- 2 -\nPros: (cont'd)\n2. Involves no direct subsidies.\nCons:\n1. Requires higher (at least 7%) downpayment to avoid outstanding balance exceeding\nhouse price, so cannot be combined with a downpayment option.\n2. Increased default risk since, during early years of mortgage, amount owed\nwill exceed original principal amount.\n3. Lenders may shy away due to higher risks and reduction in their cash flow.\n4. Many consumers will be wary if uncertain about their future income growth.\n5. Will probably require FHA insurance, another impediment to lender and\nconsumer acceptance, as well as an additional workload burden and risk to HUD.\nREDUCE FHA DOWNPAYMENT REQUIREMENT\n1. Format: Legislative change to reduce downpayment required for FHA insurance\nCurrent\nOption\n3% for up to $25,000\n3% for up to $25,000\n10% for $25,000 - $35,000\n5% for $25,000 - $40,000\n20% for $35,000 - $45,000\n10% for $40,000 - $50,000\n20% for $50,000 - $60,000\n2. Number of Families Assisted: 275,000 - expected FHA volume of 255,000 plus incremental purchases\n3. Subsidy per Family: None\n4. Number of Incremental Purchasers per year: 20,000 (10,000 - 30,000) - Reduces downpayment\nrequirement for FHA purchasers only by an\naverage of 3%, but increases required monthly\npayment to amortize resulting larger mortgage\namount.\n5. First Year Outlays: None\n6. Total Costs: None\n7. Cost per Incremental Purchaser: (First Year) - None\n(Total) - None\n8. Risk to the Government: An increase in foreclosure losses, but even these increased losses should be\ncovered by the current .5% premium.\n9. Ease of Administration: Simple change in FHA processing, but any resulting larger volume of FHA insurance\nwould increase HUD workload hence staff needs.\n- 2 -\n10. Inequities: Benefits primarily families with little wealth but relatively high incomes, who\npurchase homes over $30,000 in cost.\n11. Impact on Typical $15,000 Income Family Buying a $40,000 House.\\\nLowers downpayment (not including closing costs) from $2750 to $1500 or by $1250, but increases\nmonthly payments by $10 from $286 to $296.\n12. Pros:\n1. FHA may demonstrate value of higher loan to value ratio loans and lead the private\nsector into greater acceptance of such loans.\n2. Can be combined with an interest reduction program more significantly to increase\nhomeownership opportunities by providing those who benefit from the subsidy but\nhave low equity with low downpayment financing.\nCons:\n1. Requires legislative change.\n2. Can be criticized for benefitting only families with relatively high incomes who can\nalready afford the increased monthly costs of homeownership.\n3. Very small number of families actually will be assisted to achieve homeownership.\n4. Could make FHA more competitive with rather than a complement to the private sector's\nmortgage insurance industry.\n5. 90 - - 95% loans already available in private sector in many instances.\nFEDERAL GUARANTEE OF DOWNPAYMENT\n1. Format: Federal Government would guarantee an unsecured loan for one half of downpayment.\n2. Number of Families Assisted: 1.48 million (if restricted to first time purchasers with\nincomes under $20,000).\n3. Subsidy per Family: None\n4. Number of Incremental Purchasers per year:\n75,000 (50 - 100,000)\nLowers downpayment required at purchase but raises total price of home since the\nsecond loan must be amortized simultaneously at the mortgage:rate.\n5. First Year Outlays: None\n6. Total Costs: Defaults on quarantees for 1.48 million purchasers are estimated at $318\nmillion, primarily during the first five years (based on 12% default rate and\n5% guarantee). (In addition, FHA losses could be increased by as much as\n$61 million as a result of additional losses resulting from decreased loan\nto value ratios on 85,000 eligible FHA loans).\n7. Cost per Incremental Purchaser: (First Year) - None\n(Total) -$4240 (or $5053 including FHA losses)\n8. Risk to the Government: Expected default rate resulting from higher loan to value ratio is 12%.\nExpected average loss per guarantee is $216. In addition, decreased\nloan to value ratio on 85,000 eligible FHA loans is expected to increase\nFHA losses by $61 million.\n9. Ease of Administration: Will require some HUD processing at time of guarantee.\n10. Inequities:\n- 2 -\n11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $36,000 Mortgage:\nReduces downpayment (not including closing costs) from $4,000 to $2,000 or by $2,000; but raises\nmonthly payment by $16 from $290 to $306.\n12. Pros:\n1. Substantially reduces equity required.\n2. Can be combined with interest subsidy to achieve maximum effect.\n3. Government need not bear full risk of loss for all assisted purchasers.\n4. Does not rely on FHA, SO not staff intensive.\nCons:\n1. Requires higher monthly payments SO assisted only families with low wealth\nbut relatively high incomes.\n2. 90 - - 95% loans already available for good risk borrowers.\n3. May drive PMIs to increase downpayments required to limit risk from higher loan-to-value\nratios, thereby mitigating effect of program (average PMI per case losses could be\nincreased by up to $360).\nHOMEOWNERSHIP OPPORTUNITIES FOR MIDDLE AMERICA (HOMA)\nLIBRARY\n1. Format: This program would provide either a grant or a tax credit to purchasers of first homes.\nBoth new and existing homes would be eligible. There would be a maximum mortgage\nFORD\nlimit of $38,000 and maximum price limit of $40,000. The amount of the tax credit\nis\nwould be the lesser of (1) the difference between payments to principal and interest\nGERALD\nat the current market rate (9% assumed in this analysis) and payments to principal\nand interest at 6% or (2) the difference between principal and interest at 9% and\n20% of the family's income. The subsidy on the maximum price house would phase out\nat about the $18,000 income level.\n2. Families Assisted: 1.1 million families in the relevant income range of $14,000 to $18,000 a year\nwill purchase in any case. An additional 700,000 - 800,000 families could\nbe made capable of home purchase, of which an estimated 250,000 would purchase\nin the first year.\n3. Subsidy per Family: The average first year subsidy per family would be $500 and, with normal\nincome growth, the average subsidy over the life of the loan would be $1325.\nAssuming a 5 1/2% growth rate in normal income, the $14,000 family would phase\nout in 5 years and higher income families would phase out sooner.\n4. Number of Incremental Purchasers per year: 250,000 additional families are likely to\n( OMB 50,000)\npurchase in the first year.\n5. First Year Outlays: About $670 million (assuming 1.35 million purchasers annually, each with a $38,000 mortgage).\n6. Total Costs: $1.8 billion over the period of subsidy for each year's assisted families.\n7. Cost per Incremental Purchaser: (First Year): $2,700 ($670 million divided by 250,000)\n(Total) - $7,200 ($1.8 billion divided by 250,000 incremental\npurchasers)\n8. Risk to the Government: No default risk since FHA insurance is not required.\n9.\nEase of Administration: If assistance is provided as a tax credit, administration is\nextremely inexpensive but costs uncontrollable. If the assistance\nis provided by direct subsidies, administration is complex, but the\nnumber of recipients, hence costs, can be controlled.\n- 2 -\n10. Inequities: Benefits are focused on moderate income marginal purchasers, but only first time home\npurchasers in this class are benefitted and not existing homeowners or second.\ntime home purchasers with similar income.\n11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $38,000 Mortgage:\nDownpayment (not including closing costs) of $2,000.\nMonthly mortgage payment reduced by $56, from $306 to $250 in first year; reduced ty $42 in\nsecond year to $264, if income increases by 5 1/2% to $15,285, subsidy phases out after 4 years.\n12. Pros:\n1. The President can fairly represent that this program will bring homeownership within the\ngrasp of an additional 800,000 young families seeking to purchase a first home.\n2. Assures buyer and lender of first-time purchasers continued capacity to support mortgage\nregardless of income growth.\n3. Accelerates opportunity for homeownership for young moderate income families with growing\nincomes.\n4. Also allows those who buy anyway to purchase better housing and mitigates the\nfinancial strains facing such families.\n5. The subsidy provided will phase out with normal income growth, hence few families\nwill be subsidy recipients after 3-5 years in the program.\n6. If interest rates again reach 7 1/2 percent, the subsidies being provided\nwill be SO small that the program will have phased itself out of existence.\n7. By not differentiating between new construction and existing housing, but\nfocusing on families who can afford only modest housing, it will encourage\nsome young families to buy older housing in urban areas which is a bargain\nas compared to new construction.\n8. Can be combined with any downpayment option.\n- 3 -\n9. If implemented as a tax credit, could be translated into a monthly subsidy by homeowner\nadjusting his withholding.\n1. Substantial outlays required.\n2. Some families may not experience income growth, hence not work off subsidy\nas rapidly as anticipated.\n3. May be criticized as welfare for the well-to-do ($14,000 - $18,000\nincames), although it serves a lower income band than any of the\nother alternatives.\n4. Incentive to purchase maximum price ($40,000) house, except that purchaser with\nnormal income growth will have to assume full costs within 2-5 years.\nGRADUATED PAYMENT/FIXED RATE MORTGAGE\n1. Format: Initial mortgage payments would be reduced and later payments increased at a set rate of\nincrease.\n2. Number of families assisted:\n3. Subsidy per Family: None\n4. Number of Incremental Purchasers per year: 40,000 additional families may purchase in the first year;\nmore in later years as FHA demonstrates the viability of GPs\nto PMI's and conventional lenders, rising to up to 100,000\n5. First Year Outlays: None\nper year.\n6. Total Costs: Depends on ultimate foreclosure rate.\n7. Cost per Incremental Purchaser: (First Year) - None\n(Total) Depends on ultimate foreclosure rate.\n8. Risk to the Government: Increases FHA default risk by up to 40%, requiring .5 to .6 premium.\n9. Ease of Administration: Requires FHA underwriting, but FHA is already financing some GP mortgages\nthis year pursuant to Section 245.\n10. Inequities: Benefits primarily those with reasonable cash equity and reasonable expectations of\nincome growth.\n11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $36,000 Mortgage:\nMonthly mortgage payment reduced by $37 from $284 to $247 in first year and by $30 to $254 in the\nsecond year; payments would continue to rise by 3% per year over the first ten years of the\nmortgage term, then level off. (Assuming both loans at 8 1/2% with .6 premium on GP and\n25 PMI premium on the level payment mortgage).\n12. Pros:\n1. Accelerates opportunity for homeownership for those with expectations of rising income\nby providing lower payments in early years of the mortgage, thus mitigating initial income\nconstraints on homeownership.\n- 2 -\nPros: (cont'd)\n2. Involves no direct subsidies.\nCons:\n1. Requires higher (at least 7%) downpayment to avoid outstanding balance exceeding\nhouse price, so cannot be combined with a downpayment option.\n2. Increased default risk since, during early years of mortgage, amount owed\nwill exceed original principal amount.\n3. Lenders may shy away due to higher risks and reduction in their cash flow.\n4. Many consumers will be wary if uncertain about their future income growth.\n5. Will probably require FHA insurance, another impediment to lender and\nconsumer acceptance, as well as an additional workload burden and risk to HUD.\nFEDERAL GUARANTEE OF DOWNPAYMENT\n1. Format: Federal Government would guarantee an unsecured loan for one half of downpayment.\n2. Number of Families Assisted: 1.48 million (if restricted to first time purchasers with\nincomes under $20,000).\n3. Subsidy per Family: None\n4. Number of Incremental Purchasers per year:\n75,000 (50 - 100,000)\nLowers downpayment required at purchase but raises total price of home since the\nsecond loan must be amortized simultaneously at the mortgage:rate.\n5. First Year Outlays: None\n6. Total Costs: Defaults on quarantees for 1.48 million purchasers are estimated at $318\nmillion, primarily during the first five years (based on 12% default rate and\n5% guarantee). (In addition, FHA losses could be increased by as much as\n$61 million as a result of additional losses resulting from decreased loan\nto value ratios on 85,000 eligible FHA loans).\n7. Cost per Incremental Purchaser: (First Year) - None\n(Total) -$4240 (or $5053 including FHA losses)\n8. Risk to the Government: Expected default rate resulting from higher loan to value ratio is 12%.\nExpected average loss per guarantee is $216. In addition, decreased\nloan to value ratio on 85,000 eligible FHA loans is expected to increase\nFHA losses by $61 million.\n9. Ease of Administration: Will require some HUD processing at time of guarantee.\n10. Inequities:\n- 2 -\n11. Impact on Typical $15,000 Income Family Buying a $40,000 House with a $36,000 Mortgage:\nReduces downpayment (not including closing costs) from $4,000 to $2,000 or by $2,000; but raises\nmonthly payment by $16 from $290 to $306.\nL2. Pros:\n1. Substantially reduces equity required.\n2. Can be combined with interest subsidy to achieve maximum effect.\n3. Government need not bear full risk of loss for all assisted purchasers.\n4. Does not rely on FHA, so not staff intensive.\nCons:\n1. Requires higher monthly payments SO assisted only families with low wealth\nbut relatively high incomes.\n2. 90 - 95% loans already available for good risk borrowers.\n3. May drive PMIs to increase downpayments required to limit risk from higher loan-to-value\nratios, thereby mitigating effect of program (average PMI per case losses could be\nincreased by up to $360).\nREDUCE FHA DOWNPAYMENT REQUIREMENT\n1. Format: Legislative change to reduce downpayment required for FHA insurance\nCurrent\nOption\n3% for up to $25,000\n3% for up to $25,000\n10% for $25,000 - $35,000\n5% for $25,000 - $40,000\n20% for $35,000 - $45,000\n10% for $40,000 - $50,000\n20% for $50,000 - $60,000\n2. Number of Families Assisted: 275,000 - expected FHA volume of 255,000 plus incremental purchases\n3. Subsidy per Family: None\n4. Number of Incremental Purchasers per year: 20,000 (10,000 - 30,000) - Reduces downpayment\nrequirement for FHA purchasers only by an\naverage of 3%, but increases required monthly\npayment to amortize resulting larger mortgage\namount.\n5. First Year Outlays: None\n6. Total Costs: None\n7. Cost per Incremental Purchaser: (First Year) - None\n(Total) - None\n8. Risk to the Government: An increase in foreclosure losses, but even these increased losses should be\ncovered by the current .5% premium.\n9. Ease of Administration: Simple change in FHA processing, but any resulting larger volume of FHA insurance\nwould increase HUD workload hence staff needs.\n- 2 -\n10. Inequities: Benefits primarily families with little wealth but relatively high incomes, who\npurchase homes over $30,000 in cost.\n11. Impact on Typical $15,000 Income Family Buying a $40,000 House.\\\nLowers downpayment (not including closing costs) from $2750 to $1500 or by $1250, but increases\nmonthly payments by $10 from $286 to $296.\n12. Pros:\n1. FHA may demonstrate value of higher loan to value ratio loans and lead the private\nsector into greater acceptance of such loans.\n2. Can be cambined with an interest reduction program more significantly to increase\nhomeownership opportunities by providing those who benefit from the subsidy but\nhave low equity with low downpayment financing.\nCons:\n1. Requires legislative change.\n2. Can be criticized for benefitting only families with relatively high incomes who can\nalready afford the increased monthly costs of homeownership.\n3. Very small number of families actually will be assisted to achieve homeownership.\n4. Could make FHA more competitive with rather than a complement to the private sector's\nmortgage insurance industry.\n5. 90 - - 95% loans already available in private sector in many instances.\nOF\nTHE TREASURY THE\nTHE SECRETARY OF THE TREASURY\nWASHINGTON\n1789\nSeptember 11, 1976\nMemorandum to The Honorable James M. Cannon\nDirector, Domestic Council\nSubject: Homeownership Tax Incentives\nI have just been informed that a set of proposals to\nencourage homeownership will be the subject of memoranda for\nthe President this weekend. Some of the suggested schemes\ninclude subsidies in the form of tax incentives. I would\nlike to record my strong opposition to the proposed tax\ndevices. The proposals in question are titled \"Homeowner-\nship Opportunities for Middle America (HOMA) \" and \"Tax\nExempt Savings\" on a spreadsheet which was provided us by\nLynn May of your staff. I have two overriding reasons for\nopposing the tax aspects of these proposals:\nAs I have repeatedly emphasized, the amount of\ncomplexity now cluttering up the tax code threatens se-\nriously to undermine the self-assessment tax system. These\nproposals would add yet another layer of complex provisions\naffecting millions of taxpayers and would allocate tax\nadvantages in an arbitrary way which would certainly be\nperplexing to many taxpayers, especially those who have\nalready sacrificed to buy a home.\nThe Administration is strongly committed to a bal-\nanced budget in Fiscal 1979. We can ill afford to commit\nthe Administration to tax expenditure programs of the\nmagnitude being proposed here without the fullest consid-\neration of the overall budget, including previously advanced\ntax initiatives. The \"HOMA\" proposal, for example, appears\nto have an estimated FY '79 cost of $1.2 billion.\nFurthermore, I see a number of specific problems with\nthese proposals. Since the \"HOMA\" proposal is apparently\nunder the most serious consideration, I shall confine my\nfurther comments to it. This proposal suffers from the\nfollowing defects:\nFORD\nLIBRARY\n- 2 -\nThe amount of subsidy which would be distributed to\npeople who would purchase homes without the program is\nextremely large. Accepting the quantitative estimates\nprovided on the spreadsheet, approximately 83 percent of the\ntotal government expenditure or $4.5 billion over the life\nof the program would be paid out to households who would\nhave purchased homes in any case.\nNo consideration appears to have been given to the\nshort run effect of this proposal on the prices of existing\nhomes. Can we not expect a substantial part of its effect\nto be \"dissipated\" in higher market prices for existing\nhouses?\nSince construction of single family dwellings most\nsuited to owner occupancy is more predominant outside\ncentral cities, the locational effect of this incentive\nwould be in the direction of movement to the suburbs. This\nwill aggravate problems of central cities.\nAn effect of the proposal will be to shift demand\naway from rental housing. This will further depress the\nportion of the building industry which is engaged in build-\ning multi-unit structures.\nThere will be many problems developing clear and fair\nrules for administering the HOMA proposal. For example, how\nare we to identify \"purchasers of first homes\"? How do we\ndeal with situations where one spouse of a married couple\nhas previously been a joint owner of a home? Is the housing\nunit defined to include such tenure forms as co-ops and\ncondominiums?\nFinally, I am disturbed by the procedures under which\nthese tax initiatives have been advanced within the Adminis-\ntration. Treasury has primary responsibility for tax\npolicy. Significant tax proposals which are to be forwarded\nfor Presidential consideration, should be given full anal-\nysis and review by the Office of Tax Policy. In this case\nonly the most informal, indirect, and last-minute commu-\nnication brought these measures to my attention.\nBaf William E. Simon\nOF\nTHE TREASURY THE\nTHE SECRETARY OF THE TREASURY\nWASHINGTON\n1789\nSeptember 11, 1976\nMemorandum to The Honorable James M. Cannon\nDirector, Domestic Council\nSubject: Homeownership Tax Incentives\nI have just been informed that a set of proposals to\nencourage homeownership will be the subject of memoranda for\nthe President this weekend. Some of the suggested schemes\ninclude subsidies in the form of tax incentives. I would\nlike to record my strong opposition to the proposed tax\ndevices. The proposals in question are titled \"Homeowner-\nship Opportunities for Middle America (HOMA) \" and \"Tax\nExempt Savings\" on a spreadsheet which was provided us by\nLynn May of your staff. I have two overriding reasons for\nopposing the tax aspects of these proposals:\nAs I have repeatedly emphasized, the amount of\ncomplexity now cluttering up the tax code threatens se-\nriously to undermine the self-assessment tax system. These\nproposals would add yet another layer of complex provisions\naffecting millions of taxpayers and would allocate tax\nadvantages in an arbitrary way which would certainly be\nperplexing to many taxpayers, especially those who have\nalready sacrificed to buy a home.\nThe Administration is strongly committed to a bal-\nanced budget in Fiscal 1979. We can ill afford to commit\nthe Administration to tax expenditure programs of the\nmagnitude being proposed here without the fullest consid-\neration of the overall budget, including previously advanced\ntax initiatives. The \"HOMA\" proposal, for example, appears\nto have an estimated FY '79 cost of $1.2 billion.\nFurthermore, I see a number of specific problems with\nthese proposals. Since the \"HOMA\" proposal is apparently\nunder the most serious consideration, I shall confine my\nfurther comments to it. This proposal suffers from the\nfollowing defects:\n- 2 -\nThe amount of subsidy which would be distributed to\npeople who would purchase homes without the program is\nextremely large. Accepting the quantitative estimates\nprovided on the spreadsheet, approximately 83 percent of the\ntotal government expenditure or $4.5 billion over the life\nof the program would be paid out to households who would\nhave purchased homes in any case.\nNo consideration appears to have been given to the\nshort run effect of this proposal on the prices of existing\nhomes. Can we not expect a substantial part of its effect\nto be \"dissipated\" in higher market prices for existing\nhouses?\nSince construction of single family dwellings most\nsuited to owner occupancy is more predominant outside\ncentral cities, the locational effect of this incentive\nwould be in the direction of movement to the suburbs. This\nwill aggravate problems of central cities.\nAn effect of the proposal will be to shift demand\naway from rental housing. This will further depress the\nportion of the building industry which is engaged in build-\ning multi-unit structures.\nThere will be many problems developing clear and fair\nrules for administering the HOMA proposal. For example, how\nare we to identify \"purchasers of first homes\"? How do we\ndeal with situations where one spouse of a married couple\nhas previously been a joint owner of a home? Is the housing\nunit defined to include such tenure forms as co-ops and\ncondominiums?\nFinally, I am disturbed by the procedures under which\nthese tax initiatives have been advanced within the Adminis-\ntration. Treasury has primary responsibility for tax\npolicy. Significant tax proposals which are to be forwarded\nfor Presidential consideration, should be given full anal-\nysis and review by the Office of Tax Policy. In this case\nonly the most informal, indirect, and last-minute commu-\nnication brought these measures to my attention.\nBaf William E. Simon\nGERALD R. LIBRARY FORD\n1. FORMAT:\nHOMEOWNERSHIP OPPORTUNITIES FOR MIDDLE AMERICA (HOMA)\nBROCK-ASHLEY\nGRADUATED PAYMENT/F:\nThis program would provide a tax credit to purchasers of first homes.\nGNMA would pay 2% interest on the mortgage initially, and any\nInitial mortgage pay\nBoth new and existing homes would be eligible. There would be a maximum\nadditional interest due to the variable rate provisions. This\nincreased at a set I\nmortgage limit of $38,000. The amount of the tax credit would be the\nwould accumulate with interest in the borrower's GNMA loan\npayments should bett\nlesser of (1) the difference between payments to principal and interest\naccount which is to be repaid when the house is sold or by\ninitial income const\nat the current market rate (9% assumed in this analysis) and payments to\narrangement with GNMA.\nprincipal and interest at 6% or (2) the difference between principal and\ninterest at 9% and 20% of the family's income. This program would phase\nout at about the $18,000 income level.\n2.\nNumber of\n1.33 million\n1.7 million\n1.5 million\nFamilies\nAssisted:\n3.\nSubsidy per\nThe average subsidy per family in the first year of about $500 and of\nThere is no direct subsidy involved in the program. There\nNONE\nFamily:\nabout $650 over the life of the loan.\nare, however, indirect costs involved in all direct loan\nprograms.\n4.\nNumber of\n230,000\nThe GNMA loan would reduce monthly payments enough such that\n80,000 (under constra\nIncremental\n250,000 to 300,000 additional families would be able to afford\nexceed 100%)\nPurchaser\na $35,000 house without spending more than 25% of their income\nper Year:\non housing. The GNMA loan would reduce current costs but\nincrease total costs because the GNMA loan must be repaid\nwith accumulated interest. Thus, there may be market resistance\nto this program, since it substantially reduces or eliminates\na homeownership equity accumulation, one of the primary perceived\nbenefits of homeownership.\n5.\nFirst Year\nAbout $665 million\nThe average GNMA loan would be about $500 after one year. If\nNONE\nOutlays:\n1.7 million loans were issued, total lending under the program\nwould reach $850 million.\n6.\nTotal Costs:\n$1.7 billion over the period of subsidy for each year's assisted families.\nTotal lending for the first year participants will reach about\nNONE\nAssuming a 7% growth rate in normal income, the $14,000 family would\n$5 billion after 5 years. Lending to participants entering\nphase out in 5 years and higher income families would phase out sooner.\nin years 2-5 will be about $10 billion. As currently conceived,\ntotal lending under the program will increast at an exponential\nrate. In theory, however, all of these outlays would be\nrecovered as recipients ultimately repaid their GNMA loans.\n7.\nCost per\n(First Year) - $2,900 ($665 million divided by 230,000)\n(First Year)\n-\nThere are no direct costs to the government,\n(First Year) - NONE\nIncremental\nbut in terms of \\budget impact, total lending\nPurchaser:\n(Total)\n- $7,391 ($1.7 billion divided by 230,000 incremental purchasers)\n(Total)\n-\nwould be about $2,800 per incremental purchaser\n(Total)\n- NONE\nin the first year. After 25 years, GNMA would\nhave lent about $250,000 per incremental first\nyear purchaser.\n8.\nRisk to the\nEssentially no default risk since FHA insurance is not required.\nThere is a particularly high risk of default associated with\nIncreased FHA default\nGovernment:\nsecond mortgages such as the GNMA loans which may be higher\nthan the original principal of the first mortgage, by the\ntime it becomes due.\nUATED PAYMENT/FIXED RATE MORTGAGE\nTAX EXEMPT SAVINGS\nDOWNPAYMENT VOUCHER/GRANT\nmortgage payments would be reduced and later payments\nContribution made to, and interest earned on, a savings account\n$1,000 cash payment to buyer\neased at a set rate of increase. Increasing mortgage\nwould be deductible from taxable income if the savings in that\nshould better match rising incomes. This mitigates\naccount are used for a downpayment by first time home purchasers.\nincome constraints on homeownership.\nLimits would be $20,000 income, $10,000 total savings, $2,500\nper year in addition to savings.\n1.5 million families\n1.46 million\n$2,500\n$1,000\n(under constraint than loan to value ration cannot\n75 - 100,000\n60,000\n100%)\nRaises loan-to-value from .86 to .89 based on in-house\nresearch, this would increase housing demand by 60,000\nunits per year.\n$938 million\n$1.4 billion\nYear 1:\n$938M a year\nAll costs are borne in the first year a family is a\nYear 2:\n$1.88B a year\nsubsidy recipient.\nYear 3:\n$2.86B a year\nYears 4-8:\n$3.75B\nYear)\n-\nNONE\n(First Year) - $37,500 to 50,000\n(First Year) - $23,000\nNONE\n(Total)\n- $37,500 to 50,000\n(Total)\n- $23,000\nFHA default risk\nNONE\nNONE\nFEDERAL GUARANTEE OF DOWNPAYMENT\nREDUCE FHA DOWNPAYMENT REQUIREMENT\nFederal guarantee of loan for one half of downpayment. This\nLegislative change to reduce downpayment required for FHA insurance\nsecond loan would be secured by a second lien.\nCurrent\nOption\n3% for up to $25,000\n3% for up to $25,000\n10% for $25,000 - $35,000\n5% for $25,000 - $40,000\n20% for $35,000 - $45,000\n10% for $40,000 - $50,000\n20% for $50,000 - $60,000\n1.55 million\n275,000 (expected FHA volume plus incremental purchases)\nNONE\nNONE\n90,000 - 140,000\n20,000\nLowers downpayment required at purchase but raises total price of\nReduces downpayment requirement for FHA only by an average of 3%.\nhome if the second lien is amortized at mortgage rate which will\nbe in excess of rate of inflation.\nNONE\nNONE\nNONE\nNONE\n(First Year) - NONE\n(First Year ) - NONE\n(Total)\nNONE\n(Total)\n- NONE\nA significant increase in foreclosure rates. For example, by\nAn increase in foreclosure rate. Losses should be covered by the\nincreasing loan-value ratio by 8 percent (.86 to .93) foreclosure\n.5% premium.\nrate would be increased by 11 percent. (elasticity of 1.4).\nNumber or\n230,000\nThe GNMA loan would reduce monthly payments enough such that\n80,000 (under constrai\nIncremental\n250,000 to 300,000 additional families would be able to afford\nexceed 100%)\nPurchaser\na $35,000 house ithout spending more than 25% of their income\nper Year:\non housing. The GNMA loan would reduce current costs but\nincrease total costs because the GNMA loan must be repaid\nwith accumulated interest. Thus, there may be market resistance\nto this program, since it substantially reduces or eliminates\na homeownership equity accumulation, one of the primary perceived\nbenefits of homeownership.\n5.\nFirst Year\nAbout $665 million\nThe average GNMA loan would be about $500 after one year. If\nNONE\nOutlays:\n1.7 million loans were issued, total lending under the program\nwould reach $850 million.\n6.\nTotal Costs:\n$1.7 billion over the period of subsidy for each year's assisted families.\nTotal lending for the first year participants will reach about\nNONE\nAssuming a 7% growth rate in normal income, the $14,000 family would\n$5 billion after 5 years. Lending to participants entering\nphase out in 5 years and higher income families would phase out sooner.\nin years 2-5 will be about $10 billion. As currently conceived,\ntotal lending under the program will increast at an exponential\nrate. In theory, however, all of these outlays would be\nrecovered as recipients ultimately repaid their GNMA loans.\n7.\nCost per\n(First Year) - $2,900 ($665 million divided by 230,000)\n(First Year) - There are no direct costs to the government,\n(First Year) - NONE\nIncremental\nbut in terms of budget impact, total lending\nPurchaser:\n(Total)\n- $7,391 ($1.7 billion divided by 230,000 incremental purchasers)\n(Total)\n-\nwould be about $2,800 per incremental purchaser\n(Total)\n- NONE\nin the first year. After 25 years, GNMA would\nhave lent about $250,000 per incremental first\nyear purchaser.\n8.\nRisk to the\nEssentially no default risk since FHA insurance is not required.\nThere is a particularly high risk of default associated with\nIncreased FHA default ris\nGovernment:\nsecond mortgages such as the GNMA loans which may be higher\nthan the original principal of the first mortgage, by the\ntime it becomes due.\n9.\nEase of\nIf assistance is provided as a tax credit, administration is extremely\nGNMA would have to become a mortgage originator, and servicer\nFHA underwriting. FHA wi\nAdministration:\ninexpensive but costs uncontrollable. If the assistance is provided by\nor would have to pay mortgage bankers to provide this service.\ndirect subsidies, administration is complex, but the number of recipients,\nhence costs, can be controlled.\n10. Other\nThe homeowner's real equity in the home is substantially reduced\nLender resistance due to\nProblems:\nby the GNMA second lien. His mobility also is reduced because\nreduced cash flow.\nhe must repay the loan if he sells his home. Given the potential\nexponential growth rate of total lending under the program, the\nindirect cost of additional interest on all Treasury borrowing\nis likely to be substantial. Finally, GNMA could become a large\nholder of single family homes if default rates are as high as may\nbe reasonably expected.\nIMPACT on Typical\nMonthly mortgage payment reduced by $36, from $286 to $250, in first year;\nMonthly mortgage payment reduced by $44, from $286 to $242, in\nMonthly mortgage payment\n1\n$15,000 Income\nreduced by $15 in second year. No impact after second year.\neach year. Total mortgage debt increases continually, by over\nfirst year; payment rises\nFamily Buying a\n$5,500 per year.\nterm.\n$37,000 House with\n$35,000 Mortgage:\n(under constraint than loan to value ration cannot\n75 - 100,000\n60,000\n100%)\nRaises loan-to-value from .86 to .89 based on in-house\nresearch, this would increase housing demand by 60,000\nunits per year.\n$938 million\n$1.4 billion\nYear 1:\n$938M a year\nAll costs are borne in the first year a family is a\nYear 2:\n$1.88B a year\nsubsidy recipient.\nYear 3:\n$2.86B a year\nYears 4-8:\n$3.75B\nYear) NONE\n(First Year) - $37,500 to 50,000\n(First Year) $23,000\n)\nNONE\n(Total)\n- $37,500 to 50,000\n(Total)\n$23,000\nsed FHA default risk\nNONE\nNONE\nderwriting. FHA will finance same this year (Section 245)\nRun through tax system; SO minimal administrative cost\nWould impose significant operational capacity to administer\nthe program (e.g., would have to certify incomes of participants\n($20,000 income limit, and if constraints such as requiring\npurchase of decent safe and sanitary housing were imposed,\nwould have to verify that constraints were met.)\nresistance due to increased default risk and\nCreation of a new tax loophole with a large constituency.\nEqual subsidy would be paid to families of different wealth.\n1\ncash flow.\nSlow implementation, most recipients will take several years\nto accumulate enough in their downpayment account to make\nMay have slight inflationary impact on price of housing since\na purchase. Also, deduction amount need not correlate with\nsubsidy reduces purchase price.\nhousing expenditures.\nmortgage payment reduced by $75, from $286 to $211, in\nDownpayment effectively reduced by $1,000, from $4,000 to\nLowers downpayment by $1,000 from $4,000 to $3,000.\near; payment rises by 3 percent per year over the mortgage\n$3,000, through tax saving.\n90,000 - 140,000\n20,000\nLowers downpayment required at purchase but raises total price of\nReduces downpayment requirement for FHA only by an average of 3%.\nhome if the second lien is amortized at mortgage rate which will\nbe in excess of rate of inflation.\nNONE\nNONE\nNONE\nNONE\n(First Year) - NONE\n(First Year ) - NONE\n(Total)\n- NONE\n(Total)\n- NONE\nA significant increase in foreclosure rates. For example, by\nAn increase in foreclosure rate. Losses should be covered by the\nincreasing loan-value ratio by 8 percent (.86 to .93) foreclosure\n.5% premium.\nrate would be increased by 11 percent. (elasticity of 1.4).\nRequires HUD processing at time of guarantee and management in\nSimple change in FHA processing. Larger volume of FHA insurance\nthe event of foreclosure.\nwould increase work load.\nAmortizing second life of mortgage will require a higher income\nRequires legislative change. Has greatest effect on homes in excess\nto support loan (e.g., a higher monthly payment because of the\nof $30,000. Could result in FHA becoming more competitive with\nhigher mortgage amount).\nprivate mortgage insurance.\nReduces downpayment by $2,000, from $4,000 to $2,000; raises\nCould lower downpayment by up to $2,500, from $4,000 to $1,500.\nmonthly payment by $20, from $282 to $302.\nMYGwk will have clean\nversion for the Pres.\n1. POIMAT:\nOPPORTUNITIES FOR MILDLE AMERICA (IKMA)\nGRADUATED PAYMENT/FIXED RATE: MORTGAGE\nPRESAL CUARANTEE OF DOWNPAYMENT\nboth This program would provide a tax credit to purchasers of first\nREDUCE FIA DOWNPAYMENT REQUIREMENT\nnew and existing homes would be eligible. There would be humes.\nInitial mortgage payments would be reduced and later payments\nFederal guarantee of loan for one half of downpayment. This\nLegislative change to reduce downpayment required for FHA insura\nmortgage lesser of limit of $38,000. The amount of the tax credit would be a maximum\nincreased at a set rate of incroase. Increasing matgage\nat the (1) the difference between payments to principal and the\nsecond loan would be secured by a second lien.\npayments should better match riving incrmes. This mitigatos\nCurrent\nOption\nprincipal current and market rate (91 assumed in this analysis) and interest\ninitial income constraints on hameowership.\ninterest at 9% interest at 68 or (2) the difference between principal payments and to\n3% for up to $25,000\n38 for up to $25,000\nout at about the and $18,000 200 of income the family's level. income. This program would phase\n10% for $25,000 $35,000\n5% for $25,000 $40,000\n20% for $35,000 $45,000\n10% for $40,000 $50,000\n201 for $50,000 $60,000\n2. Number of\n1.33 million\nFamilies\nAssistal:\n1.5 million\n1.55 million\n275,000 (expected FHA volume plus incremental purchases)\n3. Subsidy par\nFamily:\nThe about average subsidy per family in the first year of about $500 and of\n$650 over the life of the loan.\nNONE\nNONE\nNONE\n4. Number of\n230,000\nIncremental\nPurchaser\n80,000 (under constraint than loan to value ratio cannot\n90,000 140,000\n20,000\nper Year:\nexceed 100%)\nLowers downpayment required at purchase but raises total price of\nReduces downpayment requirement for FHA only by an average of 31\nhome if the second lien is amortized at mortgage rate which will\nbe in excess of rate of inflation.\n5. First Year\nOutlays:\nAbout $665 million\nNONE\nNONE\nNONE\n6. Total Costs:\nphase out a in 7% growth rate in normal income, the $14,000 family\nAssuming $1.7 billion over the period of subsidy for each year's assisted families.\nNONE\nNONE\nNONE\n5 years and higher income families would phase out would sooner.\n7. Cost per\nIncremental\n(First Year) - $2,900 ($665 million divided by 230,000)\nPurchaser:\n(First Year) NONE\n(Total)\n(First Year) NONE\n(First Year NONE\n$7,391 ($1.7 billion divided by 230,000 incremental purchasers)\n(Total)\nNONE\n(Total)\nNONE\n(Total)\nNONE\n8. Risk to the\nGovernment:\nEssentially no default risk since FHA insurance is not required.\nIncreased FHA default risk\nA significant increase in foreclosure rates. For example, by\nAn increase in foreclosure rate. Losses should be covered by th\nincreasing loan-value ratio by 8 percent (.86 to .93) foreclosure\n,5% premium.\nrate would be increased by 11 percent. (elasticity of 1.4).\n9. Ease of\nAdministration\ndirect costs uncontrollable. If the assistance is extremely\ninexpensive If assistance but is provided as a tax credit, administration is\nFHA underwriting. FHA will finance some this year (Section 245)\nhence subsidies, administration is complex, but the number of provided recipients, by\nRequires HUD processing at time of guarantee and management in\nSimple change in PHA processing. Larger volume of FHA insurance\ncosta, can be controlled.\nthe event of foreclosure.\nwould increase work load.\n10. Other\nProblems:\nLender resistance due to increased default risk and\nreduced cash flow,\nAmortizing second lien will require a higher income\nRequires legislative change. Has greatest effect on homes in ex\nto support loan (e.g., a higher monthly payment because of the\nof $30,000. Could result in THA becoming more competitive with\nhigher mortgage amount).\nprivate mortgage insurance.\nIMPACT on Typical\n$15,000 Income\nMonthly reduced mortgage by $15 payment reduced by $36, from $286 to $250, in first year,\nFamily Buying a\nin second year. No impact after second year.\nMonthly mortgage payment reduced by $75, from $286 to $211, in\nReduces downpayment by $2,000, from $4,000 to $2,000; raises\nCould lower downpayment by up to $2,500, from $4,000 to $1,500.\n$39,000 House with\nterm. first year, payment rises by 3 percent per year over the mortgage\nmonthly payment by $20, from $286 to $306.\n$35,000 Mortgage:"
}