“I would trade the mortgage interest deduction for a top tax rate of 25 percent,” said David G. Kittle of Investors Mortgage Asset Recovery Co. Kittle raised eyebrows when he spoke up at the ULI Terwilliger Center for Workforce Housing’s Policy Symposium, held September 21, 2011, at the Washington, D.C., office of the Collingwood Group, the sponsor. The panel featured some of the nation’s most distinguished “housers”: Hon. Henry G. Cisneros, Hon. Rick Lazio, Ali Solis, and Hon. Brian Montgomery.

But Kittle’s vision of thoughtful tax reform is an unlikely near-term scenario, according to most of the panelists. What they fear is devastating budget cuts that could occur if Congress fails to act on the “Super Committee’s” recommendations or undertake other debt reduction measures.

The federal government subsidizes housing to the tune of over $200 billion per year, panelists noted, with the mortgage interest deduction alone accounting for nearly half ($91 billion) of that amount. All of this, they agreed, is on the deficit reduction chopping block. “We are concerned about Section 8 renewals to keep the most vulnerable Americans housed, as well as potential cuts to community development programs and new markets tax credits, which leverage private sector funding sources,” said ULI member Solis, senior vice president of Enterprise Community Partners.

“We know programs will be cut,” remarked former U.S. Department of Housing and Urban Development (HUD) Secretary Cisneros. “Since the end of World War II, the ratio of debt to GDP [gross domestic product] has been about 38 percent, but now it is up to 65 percent and heading to 100 and 200 percent. It’s time to ask the big questions and change the paradigm. What is the government’s role in housing?”

Cisneros went on to discuss the importance of housing to society and the economy. “Decent housing is the context for all other goals like quality education and health care,” he noted. Furthermore, he went on, “we will not get the economy back on track without a robust housing sector, which has accounted for up to 15 percent of GDP when the economy is strong.”

One major factor that is holding back the recovery of the housing industry, panelists acknowledged, is the “overhang” of foreclosed homes, which are selling at a discount and impeding recovery of the homebuilding sector. Cisneros, a ULI member, expressed disappointment that for three years, federal economic recovery initiatives have failed to “aggressively” address the foreclosure issue.

Recently, the Federal Housing Administration (FHA) and HUD issued a request for information to solicit ideas for the disposition of foreclosed homes owned by Fannie Mae, Freddie Mac, and the FHA—an inventory of about 250,000 units, which, by some estimates, could eventually reach a million or more. Once purchased, these real estate–owned (REO) homes could be rehabilitated and then either sold or rented as affordable housing. An alternative proposal to allow the agencies to rent out REO properties has been held up, panelists noted, by objections from regulators.

In addition to working with large private companies and nonprofit organizations, Cisneros suggested, HUD should “unleash the capacity of small investors to work with local governments toward neighborhood stabilization.” This approach to reducing agencies’ inventory of foreclosed homes, panelists agreed, must be done correctly. If investors don’t have “skin in the game,” they could walk away from troubled properties, thus devastating neighborhoods all over again.

Panelists agreed on one result of the housing crisis and ensuing recession: reduced public confidence in homeownership as a vehicle for building wealth. But if housing cannot build wealth and equity for the middle class, asked former New York Congressman Lazio, what can? “Many Americans have no net worth; they are one illness or job loss away from being on the street,” Lazio, a ULI member, noted. “A dead decade could lead to Americans’ believing that ‘the American dream’ has evaporated.”