December 2, 2010 by 4 Comments

If Congressmen are seriously thinking about cutting the mortgage interest deduction, they had better think again.

If they did vote to eliminate the mortgage interest deduction, they would face uproar. Many middle-class homeowners count on deduction as a way to save or a way to make ends meet, and the powerful real estate industry also depends on the mortgage interest tax .  (You can use a mortgage calculator to compute your tax savings.)

The president’s deficit reduction commission’s draft documentdeficit commission, mortgage interest tax deduction, mortgage interest tax break, deficit commission mortgage interest tax deduction proposal proposes scaling the mortgage interest deduction to $500,000 and limiting it to only primary residences.  The deduction is currently limited to $1 million and can be used on second homes.  The deficit commission also lays out the option of eliminating the mortgage interest deduction.

But even that group of deficit hawks – perhaps hesitant about the idea and other proposals in the document – has delayed a final vote on its proposals.

Every so often some panel proposes eliminating or curtailing the mortgage interest deduction. They usually don’t get very far once the real estate industry groups, like National Association of Realtors and National Association of Home Builders, flexes their muscles.

NAR firmly believes that the mortgage interest deduction (MID) is vital to the stability of the American housing market and economy,” stated NAR President Ron Phipps in a news release. “The MID must not be targeted for change.”

Phipps mentions that NAR is working hard for 75 million home owners and 1.1 million. He doesn’t mention that all those Realtors can vote and write letters to their Congressmen and even make campaign contributions, but we get the hint.

About three-fourths of homeowners and two-thirds of renters said the mortgage interest deduction was extremely or very important to them, according to NAR-commission survey of about 3,000 homeowners and renters this October.

Messing with the deduction would hurt the fragile housing market and decrease home values by as much as 15 percent, including homes of homeowners who own their homes outright with no mortgage, NAR says.

Any downward pressure on home prices will hamper the economic recovery, increase foreclosures and hurt banks’ abilities to lend. It could push the economy into another recession, causing more job losses. “It will effectively close the door on the American dream,” Phipps says.

Other real estate groups are warning against touching the mortgage interest deduction.

“Given the fragile state of the nation’s housing market, now is not the time to be scaling back incentives for homeownership,” Michael D. Berman, CMB, Chairman of the Mortgage Bankers Association, saying it would “have negative repercussions for consumers and home values up and down the housing chain.”

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  •' jeff morris says:

    The National Association of Realtors and National Association of Home Builders are full of baloney. Any industry that cannot survive without preferential government tax treatment deserves to die. And the industries those two groups represent won’t die if their tax subsidy is withdrawn. They will adjust to the removal of this particular distortion in the market.

  •' Jessica says:

    Eliminating the tax deduction at a time when the real estate market is hobbled is absolutely ridiculous. For instance, a mortgage of $500k in NYC does not even purchase a one bedroom apartment. So if there were to ever be an elimination of mortgage interest tax deductions it should not be based on one value but rather a tiered approach based on locality.

  •' Homeowner and Realtor says:

    Jeff: since you probably aren’t aware…real estate accounts for over 60% of the gross national product or all money Americans spend. Think about jobs that pertain to real estate: painters, carpenters, electricians, etc…Think about the things you buy to furnish your piece of real estate: furniture, light fixtures, even dishes! The issue seems to be not only its removal but clearly the lack of understanding by the public on how this will affect them and even more, our economy! The mortgage interest deduction has been in place for 100+ yrs…real estate is one of or THE biggest purchases you will make and maintain. Without the MID, there is no value in real estate other than potential appreciation down the road…I don’t know about you, but I want to receive tax benefits on my biggest asset and protect my investment…

  •' Jeff Morris says:

    Thanks for replying. I understand your point about real estate’s share of the national economy. However, from my perspective what you’re saying about the MID is that it overvalues real estate by building a subsidy into the cost of borrowing money to purchase a home. What I think it actually does is artificially lower the cost of borrowing to buy a home. Maybe in the end it’s the same thing. I guess I’m just philosophically predisposed to the country moving toward a simplified tax code that doesn’t let the government decide what individual choices (e.g., home buying)are more socially desirable than others (e.g., renting)by giving a tax break to those groups of Americans is deems more worthy of receiving them.

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