Mortgage Interest Tax Deductibility Back in Debate as Congress Looks to Cut Deficit

The co-chairs of the National Commission of Fiscal Responsibility and Reform issued a draft proposal Wednesday containing....wait for it....a suggestion regarding reform of the mortgage interest tax deduction.  Within minutes the Mortgage Bankers Association (MBA) was out with a statement opposing any discussion of the change.

The debt reduction draft report, which one television pundit referred to as "a grenade rolled into the center of the room" has ignited a firestorm in Washington, mainly centered on proposed changes to Social Security.  The suggested change in the mortgage interest deduction is modest, that it be scales back to eliminate interest on home equity loans, second homes, and first mortgages over $500,000. 

MBA's statement, issued by Michael D. Perman its chairman, said:  

"Given the fragile state of the nation's housing market, now is not the time to be scaling back incentives for homeownership.  The mortgage interest deduction is one of the pillars of our national housing policy, and limiting its use will have negative repercussions for consumers and home values up and down the housing chain.

Perman also expressed the organization's concern over proposals to tax dividends and capital gains at ordinary tax rates which, he said, could seriously impact investment in commercial real estate.  The association, did however state its concern over the growing national debt and its willingness to help identify reasonable solutions, but, "we cannot support proposals that would chip away at the foundations of the real estate market. 

Earlier this week, Rob Chrisman had this to say about mortgage interest tax deductibility...

Any time there is a change in power, and we're running a deficit, talk comes up about changing the deductibility of mortgage interest. The United States certainly pushes folks toward borrowing. If you don't believe it, look at the mortgage deduction that homeowners have. (Interest on credit cards stopped being deductible in 1986.) Companies can write off almost all the interest that they pay on corporate debt (but not dividends, so debt is cheaper than equity). In our business, of course, this helps promote home ownership, since people have to come with less of a down payment. An interesting question to ask a borrower is whether or not they'd buy a home if the tax deduction went away. In countries that don't offer the tax break, like England, home ownership is about the same as the US, but house prices are much lower. And the argument can always be made that economies are better off when people are making decisions based on economic principals rather than tax considerations, and in fact the current crisis is due in part to increased borrower debt magnifying risk. Many economists feel that any system meant to encourage people to take on more debt is not a great thing.