WASHINGTON — A stimulus package being drafted to boost the sluggish economy does not need to target the beleaguered housing sector to be effective, Congressional Budget Office director Peter R. Orszag yesterday told members of the Senate Finance Committee.
“To be effective, fiscal stimulus need not target the source of economic weakness,” Orszag said. “The housing market clearly is one of the major forces leading to this period of economic weakness, but that does not then mean that effective fiscal stimulus has to target that sector.”
His comments raise questions about whether housing-related bond proposals will be included in the economic stimulus legislative proposals being negotiated by House and Senate leaders and Treasury Secretary Henry Paulson that are to be enacted quickly to boost the nation’s faltering economy.
Several housing sector-targeted proposals have been floated, including one to change the tax law to raise the volume cap for private-activity bonds and temporarily allow state and local governments to issue tax-exempt mortgage revenue bonds to refinance existing subprime loans. However, Orszag said that housing-focused ideas do not have the same level of stimulus that other proposals would, such as direct cash rebates.
“In general, those [housing-targeted] proposals usually do not rise to the macro-economic level by themselves,” he said. “They may have important effects on a dynamic that could ensue involving increased foreclosures leading to reduced economic activity leading to increased foreclosures, but their direct impact tends not to be big enough on a macro scale to rank close to the other types of proposals we are discussing.”
Osrzag’s remarks come as some housing group officials last week voiced concerns that housing proposals may not be included in the stimulus package.
“It’s make a lot of sense to include it in this package,” Barbara Thompson, executive director of the National Council of State Housing Agencies, said of the mortgage revenue bond proposal. “We are disappointed obviously that the administration seems to be suggesting that, while that’s still important, they feel like it needs to wait for another opportunity.”
Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, said yesterday that “the stimulus package that Congress will shortly consider needs to include a component that will address the problems in the housing and credit markets.”
Currently, MRBs can only be used to aid first-time home buyers. Administration officials have called on Congress to pass separate, pending legislation to expand the MRB programs to subprime borrowers.
In his written testimony, Orszag warned that enacting “such a tax-subsidized effort would hurt first-time home buyers, for whom this legislation was originally intended, by propping up home prices.”
He added: “There are also concerns about whether the proposed legislation would bring sufficient benefits to homeowners to justify the impact that the increase in tax-exempt issuance would have on federal revenues.”
Other pending housing-focused stimulus proposals, from the Securities Industry and Financial Markets Association, include temporarily exempting housing bonds from the alternative minimum tax, which would make the bonds more attractive to investors and reduce the cost of MRB-financed mortgages by as much as half of a percentage point. Another proposal calls for repealing the so-called 10-year rule. The rule forces housing agencies to use mortgage prepayments that come in more than 10 years after mortgage revenue bonds are issued to retire the debt — a requirement that effectively prevents the payments from being recycled into new mortgages.
Orszag seemed to be open to possibly including one transportation infrastructure proposal in the stimulus package. Sen. Ron Wyden, D-Ore., argued that road resurfacing projects would have a quick benefit and should be funded as part of the stimulus. Orszag agreed that resurfacing projects may have immediate benefit, but was skeptical that other infrastructure would have a short-term simulative affect.
“In our internal discussions, road resurfacing has held up as perhaps the one example of infrastructure spending that would spend out relatively rapidly,” Orszag said. “The challenge is, in a broad-based infrastructure package, targeting those things that would spend out quickly because in general these projects do spend out very slowly and that substantially attenuates their stimulative impact in the short term.”
