December 2, 2008 Dear Editor, In order to help the housing market recover, to aid financial institutions tattered balance

sheets and generally to put a floor under precipitously declining valuations for financial assets, I propose that the United States Congress pass a Tax Relief Package which would double the mortgage interest deduction for taxpayers (or apply a tax credit to those who do not itemize deductions) for five years for taxpayers with incomes under $200,000 per year starting with income in 2008. The doubled-deduction would be reduced over five years returning to the current level in 2012.
2008 MORTGAGE RELIEF PROGRAM Value of MortgageTax Deduction (as a percent of 2007 level)
200% 150% 100% 50% 0%
20 08 20 09 20 10 20 11 20 12

The effects of the tax deduction would be immediately felt by the consumer, who arguably needs help the most and has been the most ignored by institutions and by government policies. There would be an immediate cash infusion over the next 12 months into taxpayers pockets which is calculable, knowable, and dependable. There would be no waiting for delinquencies before banks or consumers are compelled to act, no waiting for bank workouts or refinancing, no waiting for lower interest rates from the market, and no additional fees to the consumer by the banks for much needed mortgage relief. As consumers have extra cash in their pockets from the increased mortgage deduction, mortgage payments would be more affordable; and therefore, delinquency rates and default rates would decline as payments are made. As a result, existing mortgage-backed securities (MBS) that exist on every financial institutions balance sheet (e.g. banks, insurance companies, money market mutual funds) as well as those that trade in bond markets are likely to see increased cash flow from the payments and are less likely to face default or delinquency. The valuation of these MBS would increase as cash flows rise and default rates drop. Because the existing MBS would increase in value, assets at banks, insurance companies, money market mutual funds, and any SIVs (if there are any that remain), would at a minimum stabilize and stop falling in value and even possibly increase in value. This valuation stabilization would cause fewer writedowns at financial institutions and require less capital for writedowns. Finally, it would stabilize these financial institutions' balance sheets which, over time, would encourage banks to trade with each (as they should during normal course of business) and cause counterparty risk to diminish significantly.

For the housing market, there would be several positive effects, too. Changing the economics of the deduction would change the economics of owning a home instead of renting because the net cost of the mortgage payment would be cheaper than most rents on housing. This changing fundamental cost would cause the demand for housing to increase for both new and existing homes as homeowners would want to buy to take advantage of the deduction. This increase in demand for housing would draw down the oversupply (currently around 11 months of supply) in both new and existing home markets and would make the market become more in balance between demand and supply. Furthermore, the demand may stabilize the decline in prices that the US housing market has seen over the last 24 months. In fact, sufficient demand may actually cause an increase in pricing for housing so fewer houses would be under water with negative equity. As for the cost of the new deduction, it is estimated that the mortgage tax deduction costs the US Treasury approximately $74 billion in 2007 and an estimated $80 billion for 2008. 1 If the change to the deduction is restricted to those tax filers making $200,000 or less in income, the change in policy would affect nearly 31,533,000 tax filers who took the mortgage deduction in 2006 (or nearly 89% of all filers who took the deduction). In addition, the cost would be approximately $45.9 billion because of the restriction on income on the new deduction. 2 But because a total of only 23% of all tax filers across all income brackets take the mortgage interest deduction, the majority of real relief would have to come to those who do not itemize. For those tax filers who own a house, but who do not itemize the mortgage interest deduction (which is nearly 90% of all tax filers making less than $40,000 per year), a tax credit could be applied instead of a tax deduction. In fact, because of the disproportionate number of tax filers making less than $100,000 do NOT itemize the mortgage tax deduction (50% in this bracket alone), these tax filers would see a significant benefit from the proposal. According the US Census data, the median price of a house in October, 2008 is $218,000 3 If one assumes a 20% deposit and 7% interest rate combined with a marginal tax rate of 20%, the tax deduction for the non-itemizers would come out to $2,440and thats before the new tax policy would double it for the first year. For the budget as a whole (and I am not a tax economist), it seems to me that a legitimate, back-of the-envelope calculation is when 23% of tax filers cost $46 billion, then to get 100% of all tax filers would cost an additional $138 billion (i.e. three times the $46 billion). Admittedly, this calculation is rough; but it may overestimate the final cost to the US Treasury considering the lower values of the house (and subsequently mortgages) these lower incomes can afford combined with lower marginal tax rates for these income brackets. This brings the total of $138 billion for non-itemizers who would then get a tax credit. Real dough. When combined with the $46 billion for those who do itemize, the total works out to $175 billion. Now, lets do pie-in-the-sky (and lets be fair to all tax filers): if we double the tax
Overview of the Federal Tax System as in Effect for 2008, prepared by the Staff of the JOINT COMMITTEE ON TAXATION, U.S. Congress, April 14, 2008, page 18. 2 Estimates of Federal Tax Expenditures for Fiscal Years 2007-2011, prepared for the House Committee on Way and Means and the Senate Committee on Finance by the Staff of the Joint Committee on Taxation, U.S. Congress, September 24, 2007, pp 37 and 43. 3 www.census.gov/const/uspricemon.pdf
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credit for the lower 75% of tax filers (i.e. now it costs $276 billion for them) and add it to the already-itemizers $46 billion, the total is now $322 billion much less than the estimated $1.4 trillion spent so far for all the bailout schemes combined (while guaranteeing $8 trillion of assets). 4 And it seems a lot more efficient. The benefit would be nearly $400 per month to 75% of tax filers, which is more than any bank, any lower interest rates, or any workout that the US government could give them. The plan would be felt much more immediately by the consumer than anything else proposed to date. The US government would be directly helping consumers instead of corporations, the CEOs and their extravagant bonuses. And we could stop watching the whack-a-mole performance by the current administration and get on with living our lives.

http://www.nytimes.com/imagepages/2008/11/26/business/20081126_FED_graph1.html