From Mr Peter I. Crabbe and Mr Michael Kuczynski.
Sir, Operation Twist aims at reviving the US housing market. As to that, Brazil’s finance minister is right to point to an inefficient imbalance in the US monetary-fiscal mix. (“Brazil blames Fed stance on fiscal inaction”, September 23).
One difficulty with OT is that if long yields are successfully reduced, mortgage-bank margins shrink; their capital growth is also reduced; hence so is their ability to lend.
Another lies in the nature of yield curves: long yields are in effect expected short interest rates; if they fall, it is because a sluggish economy can be expected to continue to depress short rates (indeed the Federal Reserve is already preparing us for that). Further, fixed-rate mortgages, 20 per cent of the total outstanding, are not affected.
Would it not be better to take a different tack: provide tax inducements to persuade mortgage lenders and hard-pressed over-leveraged households to swap the burdensome part of outstanding mortgages into secure leases? This could be done at near-zero fiscal cost by extending tax allowances on mortgage interest payments into tax allowances on the resulting rental payments. Lenders would swap potentially non-performing loans into equity claims on real assets – a modest but positive gain to their capital, hence to their lending potential – and, by cutting outlays on housing services, households’ disposable income would be boosted.
Around a quarter of US homeowners are in negative equity, another quarter are hard-pressed; and mortgage servicing absorbs over 10 per cent of average pre-tax household income. At current savings rates, the debt-for-lease swap we suggest could deliver a fiscally-near-neutral boost to US demand of $350bn-$400bn, commensurate with President Barack Obama’s recently announced fiscal programme.
Decreased personal equity in the housing stock might worsen the quality of its upkeep, but so does foreclosure, and this tack has the advantage of helping those in greater need.
Peter I. Crabbe, Cambridge, UK
Michael Kuczynski, Pembroke College, Cambridge, UK
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