The Mortgage Deduction: Sacred or Superfluous?

As our country faces possibly the biggest budget crisis ever, the Obama Administration has created a deficit commission charged with discovering the best ways to bring down the national debt. It has come up with a plan to cut our $3 trillion dollars in debt over the next decade. One of the proposals this commission has suggested is to eliminate the time-honored mortgage interest tax deduction. While this idea has garnered some bi-partisan support, it has also created a major uproar among the mortgage industry associations, who claim now is not the time to mess with the tax break. So who is right?

Opponents of this proposal say it is essential to creating affordability in the housing market.

“It would immediately stop in its tracks any stabilization we are seeing in the housing market and would effectively increase the cost of homeownership for millions upon millions of people,” according to Michael Berman, chairman of the Mortgage Bankers Association.

That thought was echoed by Ron Phipps, president of the National Association of Realtors. “Any changes to the deduction, now or in the future, could critically erode home prices and the value of homes by as much as 15%,” adding, “it will effectively close the door on the American dream.”

In fact, the NAR recently surveyed homeowners and found that almost 75 percent of them consider the deduction “extremely” or “very important.” This suggests that perhaps some may not have bought homes without the tax break.

The current mortgage interest deduction allows homeowners to deduct all of the interest paid on their homes each year from their tax returns. Some interest from mortgages on investment property and home equity loans is currently eligible for the tax deduction. Proponents say that mortgage deduction really only profits the wealthy as lower-income buyers are not likely to itemize their taxes and cannot take advantage of the savings. They say it does not truly encourage homeownership, but simply encourages the wealthy to buy bigger homes than they otherwise would. Furthermore, the Treasury has estimated this mortgage deduction, one of the largest deductions in the U.S. tax code, will cost the government $131 billion in revenue in 2012.

The White House commission has proposed that instead of deducting mortgage interest, homeowners would be given a 12 percent non-refundable tax credit on mortgages up to $500,000. This would make the tax advantage available to all buyers, not just those rich enough to itemize their tax returns. There would also be no credit or deduction for second houses or home equity loans.

The issue comes down to answering the question ‘Is the mortgage deduction necessary to the full functioning of the housing market?’ In all honesty, no. People bought homes before the introduction of this tax break and they could certainly do so without it. The follow-up question is ‘can the economy and the housing market survive the immediate elimination of the mortgage deduction?’ That is much harder to answer.

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