Debate over Mortgage Interest Deduction, Government Role in Housing

There was sharp disagreement among participants in at least one panel at a forum on the future of housing sponsored by the National Association of Home Builders (NAHB) and produced by CQ Roll Call.  Fellow panelists agreed while that the private sector needs to play a greater role in mortgage financing maintaining some level of federal support is essential. 

Peter Wallison of the American Enterprise Institute said lowering the conforming loan limits of government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac over time will allow the private sector to come in and pick up that business.  "If you simply made those changes and authorized the withdrawal of the GSEs, you would find we would gradually move to a completely private system, which is where I think we should be going," he said.

 Michael Calhoun, president of the Center for Responsible Lending retorted that "Private capital by itself will not secure a safe market and most importantly, private capital during a down market is least likely to be there."  Georgetown University Law Professor Adam Levitan concurred, saying private money dries up when the going gets tough.

Michael Stegman, counselor to the Secretary of the Treasury for Housing Finance Policy told the audience "We know how much more serious the [housing and economic] crisis would have been without the FHA stepping up."

Another panel on tax reform drew broad general agreement that the mortgage interest deduction (MID) plays a key role in shaping housing demand, while differing in their evaluation of current policy.  NAHB economist Robert Dietz quoted the Tax Foundation that repealing the MID and lowering marginal tax rates would cause the GDP to decline by $100 billion annually.  It would also cause home values to fall. 

Anthony Randazzo, director of economic research at the Reason Foundation, said he opposes the mortgage interest deduction and believes that tax policy should not be set to achieve social purposes.   "Do we want to support middle class or low-income home owners? Then let's just provide an explicit subsidy to people we want to, and then find a middle ground," he said.

Dr. John Weicher, a director of the Hudson Institute's Center for Housing and Financial Markets, rejected the idea that the mortgage interest deduction is a tax distortion.  "Keep in mind if you are a home owner you have an asset and consumption," he said. "You are a landlord renting to yourself. It is silly to think of this as simply a consumption when it is the biggest investment that nearly anyone is going to make."

The forum was keynoted by two of the ten co-sponsors signed on to S 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013; the Corker-Warner bill.  Co-sponsors Jon Tester (D-MT), Bob Corker (R-TN) were joined by Johnny Isakson (R-GA), a member of the committee studying tax reform

Tester said the senators had worked hard to make sure the 30-year, fixed-rate mortgage remains a viable option.  "This is something consumers want and expect. I don't think we could have a viable 30-year note in a purely private market."

Corker who, along with Mark Warner (D-VA) filed S 1217, said he thought the 10 senators who had weighed in on the bill had made a difference.  "I think we have struck a very good balance. The 10 percent capital piece is a very, very important element. Another component that was very important was having a federal backstop."  As the process moves forward he expects to see improvements to his bill as well as changes to a housing finance proposal pending in the House.

In terms of tax reform, Sen. Isakson said the Senate Finance Committee is prepared to move forward if it gets "the opportunity."   Every provision in the tax code, he said, including the mortgage interest deduction and Low Income Housing Tax Credit, must be justified in terms of "what they produce for the country. If you can't make a case for your tax provision, it should not be in there."

"I can make a great case for the preservation of the mortgage interest deduction and I can make a phenomenal case for low and moderate income housing tax credits in terms of the payback to the country, but those arguments have to be won and lost when you are truly doing a major reform," the former real estate broker said. 

Another speaker at the forum, Eric Belsky, managing director of the Joint Center of Housing Studies at Harvard University said the housing downturn had led to a remarkable slowdown in household growth.  "There is not a strong recovery in household formations, but we are seeing signs of that happening. People don't want to live with their parents into their 30s; they are doing it out of economic necessity."

The future of homeownership looks bright, he said.  "Nineteen out of 20 people say they plan on buying a home somewhere in the future if they are under the age of 45.  You can lock in housing payments with a fixed rate mortgage today or look at higher rents in the future. A lot of people will look at that calculation and say 'I think it is time to buy a home.'"