Priming the Mortgage Market
LEWIS, ALFRED BAKER
A suggestion for stimulating home building PRIMING THE MORTGAGE MARKET By Alfred Baker Lewis On the theory that high interest rates combat inflation, the Eisenhower Administration has been...
...In practice, however, this is not quite the pattern...
...For example, if only 2 per cent of the interest paid on new Government-guaranteed housing mortgages were made free of these taxes, it would equal a 1-per-cent interest rise for all corporations paying the 52-per-cent corporation profits taxes, and for all individual investors in the 50-percent tax bracket...
...This cannot, however, directly reduce the cost of living...
...Interest is an important item in the cost of many durable goods, particularly automobiles and the more expensive household appliances, which most people buy on installment plans...
...but some do, and to the extent that they do it would help...
...More funds could be made available in the mortgage market by permitting Social Security funds to be invested up to...
...In highly concentrated industries, such as automobile manufacturing, tight money does reduce demand— and causes unemployment—but it has little effect on prices...
...A suggestion for stimulating home building PRIMING THE MORTGAGE MARKET By Alfred Baker Lewis On the theory that high interest rates combat inflation, the Eisenhower Administration has been strongly committed to what is popularly known as the "tight money" policy...
...Thus only the largest companies can expand, either through the use of retained profits or as a result of good connections with the big banks because of interlocking directorates...
...By making the interest on Government-insured mortgages partly free of corporation and individual income taxes, it would be possible to attract funds for such mortgages without raising interest rates...
...Furthermore, small businesses, which depend proportionately more on borrowing, find it harder to keep going as their credit is restricted...
...they rarely reduce prices...
...Some dealers fail...
...has to finance his stock purchases at increased rates, and often the bank warns that it will not renew his loans so generously...
...State and local taxes go up, too, when it costs more to finance long-range improvements...
...In any case, the Government guarantee on these mortgages is effective— even though it amounts to only 60 per cent of VA mortgages...
...This same plan could be used to stimulate other industries when demand and production were declining and unemployment threatened...
...manufacturers will then compete more fiercely to supply the restricted market, and this will reduce prices...
...We should also use the tax laws to make part of tin-interest from socially useful investments similarly tax free...
...Under this system, instead of having to raise the interest on FHA mortgages from 4V'l- to 5 per cent, as was recently done, it would actually have been possible to lower the rate to 4 per cent...
...Private funds can also be drawn into the mortgage market...
...Proponents of tight money conditions see them working this way: The higher cost to consumers of durable goods will reduce demand...
...When sales fall off, the big companies merely cut back production and put the squeeze on their employes...
...At present, interest in Government-insured mortgages is fully taxable, unlike the interest on bonds issued by states or local governmental bodies, which are free of income and profits taxes...
...In fact, the principle of using taxes to stimulate desired forms of investment and production is actually what takes place when the Government grants rapid depreciation allowances to companies expanding their plants for defense reasons...
...The higher interest rate, meanwhile, makes new homes more expensive and has led to a sharp reduction in home construction...
...20 or 25 per cent in FHA and VA mortgages...
...Consequently, he must cut his profit to the bone to move his stock, pay off his high-cost loan and try to survive...
...Where there is a price reduction, it is the dealer who suffers...
...The Federal budget is increased when more interest has to be paid on Government securities that come due and must be renewed...
...This would be safe because the rate of default has been very low...
...Perhaps the one area which best illustrates the pitfalls of tight money is housing...
...In the case of housing at least, several steps might be taken to improve conditions...
...There would still have been the same return after taxes from all corporations paying the 52-per-cent corporate profits taxes as there is now on the 5-per-cent rate...
...He Alfred Baker Lewis is President of the Union Casualty and Life Insurance Company of Mount Vernon, N.Y...
...Interest on Federal Housing Administration-guaranteed mortgages was recently raised...
...Interest is also an important part of the cost of government...
...Washington's present monetary policies, therefore, strengthen the tendency toward concentration of control in industry...
...True, many lending institutions do not pay that sort of tax...
...Indeed, it threatens to cause serious unemployment in the building and building-supply industries...
...Medium-sized businesses are also affected, because they cannot afford expansion...
...But interest on Veterans Administration-guaranteed mortgages was not, and it is next to impossible to secure a VA mortgage...
Vol. 40 • September 1957 • No. 35
