Congress must reach a decision by March 1 to avoid automatic spending cuts that are part of the budget sequester. An alarming concern is that the mandatory $86 billion in spending cuts could stifle the economic and ongoing housing recovery.
As of now, numerous experts are calling for a few housing-related changes, including adjustments to the mortgage-interest deduction.
Acting Secretary Neal Wolin of the U.S. Department of Treasury spoke before the Chicago Council on Global Affairs Monday, noting the economy has made great progress, especially in sectors such as housing, but going forward this progress will be tested.
"What we cannot do—what would be a grave and unnecessary mistake—is to deliberately throw sand in the gears of our recovery," Wolin said.
He added, "Right now, deep, indiscriminate spending cuts — known in Washington as 'the sequester'— are set to take place on Friday. We're talking about cuts to education, nutrition assistance, and support for small businesses. Loan guarantees for small businesses would be cut by up to $902 million."
In order to make the best decisions possible for the economy, the Brookings Institution created fifteen proposals for the The Hamilton Project’s "15 Ways to Rethink the Federal Budget," covering a wide-ranging set of topics with three proposals dedicated to housing.
The Hamilton Project features leading experts from a variety of backgrounds that developed policy proposals that create options for reducing the deficit while providing economic benefits.
Reforming federal support for risky development, which was proposed by David Conrad and Edward Thomas, proposes to reform federal disaster programs to prioritize hazard mitigation. Additionally, the reform would change incentives to encourage risk reduction in local, public and private sector investments.
The benefit to the economy would reduce budget costs of national disasters and risks to life as well as homeowners' properties living in disaster-prone areas, the experts noted.
The deficit reduction as estimated by authors would be $40 billion over 10 years.
Meanwhile, another proposal is replacing the home mortgage-interest deduction with a 15% refundable credit based on up to $300,000 of mortgage principal, according to Alan Viard, who authored that proposal for the Brookings Institution.
The benefit to the economy is that the deduction would reduce the artificial incentive for the "construction of high-end homes by reducing as well as better targeting the tax breaks for housing."
The reduction as estimated by Viard is $300 billion over 10 years.
Increasing the role of the private sector in housing finance is another proposal on the table by Philip Swagel.
This proposes to increase private participation in mortgage securitization markets as well as privatizing the mortgage finance firms of Fannie Mae and Freddie Mac. Additionally, the proposal would provide secondary government insurance on housing securities.
The proposal would improve incentives for risk taking and investment in the mortgage market as well as market for homes. Additionally, increasing the private sector role reduces taxpayer exposure to risk as well as fostering competition and innovation in housing finance, Swagel said.
The deficit reduction estimated by Swagel is $134 billion over the next 10 years.
In 2010, Erskine Bowles and Alan Simpson co-chaired the National Commission on Fiscal Responsibility and Reform, issuing a report that would have reduced the federal deficit by $5.5 trillion over 10 years.
The Commission’s proposals were supported by 11 out of 18 of the members, however it did not reach the required vote to advance to Congress.
Recently, Bowles and Simpson reissued a proposal, which features two steps of fiscal reforms to put the debt on a downward path.
The co-authors call for an additional $2.4 trillion of deficit reduction over the next 10 years, with one quarter of savings coming from health care reforms and another quarter from tax reform.
The second step calls for a parallel process to make Social Security solvent and make further reforms in health care if necessary to limit cost growth to the rate of the economy.
"The problem is real, the solutions are painful, and there is no easy way out," Bowles and Simpson said.