Business

Let private investors fix mess

This past week’s housing num bers from S&P/Case-Shiller and the Federal Housing Finance Agency once again highlighted the depths to which the housing market has fallen.

The Case-Shiller Index reported a further 3.9 percent fall in US home prices for the fourth quarter of 2010. It fell to its lowest annual growth rate, actually a contraction, since the fourth quarter of 2009.

The FHFA Housing Price Index, also reported this week, was similarly abysmal, with a contraction as well.

The Obama administration, through the Treasury Department, set forth three options to deal with Fannie Mae and Freddie Mac, the two financial behemoths run out of Washington that are currently in conservatorship yet still continue to consume mortgages in the marketplace at a staggering pace.

Of the proposed fixes by the administration, some are quite responsible — like the gradual winding down of Fannie and Freddie. While that proposal is a good starting point, much more needs to be done.

The key is it does not need to be overly complicated if we take a free-market approach, sans politics. Incentivize mortgage buyers to come back into the marketplace. Make it appealing and compelling for them to buy and hold mortgage paper.

Altering tax rules so that the holder of a mortgage bond no longer pays federal income tax on the earned interest income for the period the bond is owned — capital-gains taxes would still apply — would give a very strong option to many buyers who are on the sidelines, unwilling to lock in very low yields in Treasuries and fearful of inflation.

This tack addresses several key issues: It will draw fixed-income investors back into the market, as the tax advantages will permit investors to keep more of their money, instead of sending it to Washington.

Furthermore, this structure will keep mortgage rates naturally low, as there will be no federal income taxes on the interest income. As a result of the increased net return for the mortgage bond investor, rates being paid by homeowners would be lower.

This would afford homeowners the same market-based advantages that municipalities and our federal government already enjoy.