Federal Reserve Bank of Minneapolis
president Narayana Kocherlakota:
mortgage interest tax deduction
encourages people to take on large
amounts of debt, instead of saving.
(Mr. Kocherlakota, Barney Frank is holding...)
By: Chris Serres
April 5, 2011
Federal Reserve Bank of Minneapolis president Narayana Kocherlakota criticized government intervention in the housing sector, including federal guarantees of mortgages and the home interest tax deduction, in prepared remarks given at a homeownership workshop today in Minneapolis.
Kocherlakota argued that in the wake of the financial crisis the housing market has become overly dependent on government guarantees. About 90 percent of all mortgages originated over the past two years are guaranteed by government-controlled entities such as Fannie Mae and Freddie Mac, a situation that he referred to as "not a sound long-term strategy."
"Over time, our country needs a mortgage market that returns to greater reliance on private risk-taking and private risk assessment, along with the enhanced regulatory oversight that is already in place," he said.
Kocherlakota, a first-time voting member of the policy-setting Federal Open Market Committee, also questioned the longstanding federal tax deduction of mortgage interest payments. He argued that the deduction encourages people to take on "large amounts of debt," instead of saving.
"If we truly want to encourage home ownership, we should contemplate programs that provide incentives for individuals to save and become equity holders in their homes -- and, by extension, in their communities," Kocherlakota said.
The mortgage interest deduction has become a source of controversy in recent months, as concerns about the federal debt intensify. In December, the co-chairmen of the White House's deficit-reduction commission proposed paring the mortgage-interest deduction as part of a series of proposals to rein in the federal government's swelling debt