The past two years dealt a punishing blow to the personal wealth of millions of middle-class homeowners. Amid rising foreclosures and plummeting home values, Americans lost more than $4 trillion in home equity. Ten million American households — or more than 1 in 5 homeowners — are currently “under water,” owing more on their mortgages than what their homes are worth. Millions more have lost the equity they were counting on to send their kids to college, save for retirement or to have as a nest egg for emergencies.
[IMGCAP(1)]While a full recovery will be years in the making, Congress should take some steps now to cushion this loss to the middle class. In particular, Congress should pay more attention to the innocent bystanders of the crisis — those millions of homeowners with traditional, fixed-rate mortgages who are now among the recession’s casualties. True, most of these homeowners are not losing their homes. Nevertheless, they deserve the help.
First, taking steps to restore homeowner wealth will help restore the consumer confidence that our economy badly needs for a sustained recovery. As long as middle-class Americans remain anxious and insecure about their financial footing, the economy will continue to sputter.
Second, helping middle-class Americans rebuild what they’ve lost will help rebuild public trust in government — now sorely lacking. While the bulk of federal aid has gone to borrowers with risky mortgages they can’t afford or to the banks that made bad loans in the first place, homeowners who have had no part in the making of the meltdown have watched their wealth evaporate with no help in sight. It is no wonder that middle-class Americans are disappointed with government or that this disillusionment is helping to fuel the revolt against Washington, D.C.
Fortunately, there are a variety of simple, cost-effective and broadly appealing ways to help middle-class homeowners preserve what they have or restore what they’ve lost. Here are three such ideas:
Capital Loss Deduction for Home Sale Losses
Current law shields homeowners from paying taxes on up to $250,000 of profits from the sale of a house, but there’s no corresponding deduction for those who sell at a loss. Congress should allow a deduction for losses on home sales between 2008 and 2010. Currently, about 27 percent of home sales are at-loss sales, up from 10 percent in late 2007. This idea should have bipartisan appeal — House Republicans made a similar proposal in their 1994 “Contract With America” — and limiting the deduction to a three-year period will keep the price tag low.
Ban on Short Sale Penalties
One way to preserve home values in a neighborhood is to encourage homeowners in trouble to sell their homes (even at a loss in a “short sale”) instead of simply walking away. Unfortunately, some current practices discourage these short sales. In particular, the presence of a short sale on a homeowner’s credit record can ding that person’s credit score by as much as 300 points. In effect, the impact of a short sale on someone’s credit score is little different from that of foreclosure. To encourage more short sales, Congress should temporarily disallow short sales from affecting the credit rating of borrowers who are otherwise in good standing. This proposal costs the government nothing and could prevent some foreclosures that would otherwise diminish property values in a neighborhood still further.
Emergency Mortgage Bridge Loans
A third way to reach out to middle-class homeowners is to provide emergency help to homeowners in trouble because they’ve lost their jobs. The fastest growth in foreclosures is no longer among borrowers with subprime or exotic mortgages, but among traditional borrowers with good credit who have fallen victim to 10 percent unemployment. Moreover, unemployment is expected to be the primary driver of future foreclosures.
These traditional borrowers don’t currently qualify for any of the mortgage modification programs now being offered by the government, nor would a mortgage modification necessarily be what they need. Reps. Barney Frank (D-Mass.) and Elijah Cummings (D-Md.) have each proposed a sensible solution — an emergency mortgage bridge loan program that would offer homeowners a way to make their mortgage payments for several months until they’re back on their feet.
These three ideas, plus others, can serve as a down payment to deserving homeowners who are seeking to recover their fortunes in the aftermath of the housing crisis. By providing a helping hand, Congress can show its ability to hit home with the middle class.
Anne Kim is the economic program director at Third Way, a Washington, D.C.-based think tank, and Ryan McConaghy is deputy director of the economic program at Third Way.