McIlwain: 3 steps to help the housing market

With the housing market in a lethargic recovery, John K. McIlwain of the Urban Land Institute offers three ways to help revive the market in an article in The Atlantic, reprinted from ULI’s Urban Land publication.

1. Renting out federally held real-estate owned (REO) property

With the number of foreclosed homes exceeding 250,000 nationwide, McIlwain supports the federal government’s plan to convert some of that REO property into rental units. As noted in the Federal Reserve’s Jan. 4 white paper, however, this approach would have its own set of difficulties, including:

• Grouping homes geographically enough to permit economical management
• Setting an attractive price for bulk buyers without setting the bar too low; and
• Establishing a financing source for such bulk sales

McIlwain also observes two issues he claims the Fed did not address: possible creation of slums and the length of time renters would be required to hold onto the property.

2. Creating a mortgage interest credit

McIlwain advances the idea of a mortgage interest credit as the largest step the federal government could take to help improve the sagging housing market. Such a move, he says, would provide a strong incentive for younger generations to become homeowners. He proposes a measure similar to one put forth by the Advisory Panel on Federal Tax Reform under President George W. Bush in 2005. Provisions of the panel’s recommendations included:

• “Replace the deduction for mortgage interest with a Home Credit available to all taxpayers equal to 15 percent of interest paid on a principal residence.”
• “Establish the amount of mortgage interest eligible for the Home Credit based on average regional housing costs.”
• Lengthen the time a taxpayer must own and use a principal residence before gains from the sale of the home can be exempt from tax.”

3. Divide mortgages for underwater homeowners to a paying first and a delayed second

McIlwain’s final proposal is aimed at helping underwater homeowners avoid defaulting on their current mortgage. The first, currently paying segment would be no more than 80-90 percent of the value of the home; homeowners would be able to refinance this portion once, but only to reduce their interest rate. The second mortgage would be payable only when the property is sold. Additionally, under McIlwain’s plan, the second mortgage would be payable only from a percentage of the net sales proceeds beyond the first mortgage.

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