I read an article the other day that indicates that the home mortgage interest deduction is potentially in play and on the cutting block again. It appears that during a recent interview HUD Secretary Donavan was asked about the mortgage interest deduction and replied that modifying the deduction would result in increased revenue, deficit reduction and a "rebalance of federal housing policy".
Just what is meant by rebalancing the federal housing policy? Basically, it means a reversal of federal policies and programs encouraging home ownership that have been in place since 1931. In effect, making more people renters than home owners.
Economists from Harvard and Wharton recently claimed that these policies are more to blame for the bursting housing bubble than faulty lending. They recommend eliminating the mortgage interest deduction to correct this.
Others are blaming Presidents Bush's & Clinton's aggressive pursuit of a "home ownership society" for the problems at Fannie & Freddie. Of course there is no mention of CRA and similar programs, unless that is covered under the Clinton umbrella.
And what would this reversal of policy do to the housing market, and the American economy overall? It would devastate the already highly damaged industry so badly that it would take decades to recover, if it could at all. At least if it happenned under current tax policy. And the American economy would remain in the tank for the duration, probably failing even more.
I do agree, certain policies encouraged people who should not have been home owners to buy. CRA, no matter how well intentioned was one of those policies. The blocking of reform of Freddie and Fannie by certain people in congress is another cause. The failure to require proof of ability to pay is certainly a large part of what drove the crash.
While I am generally against subsidies of all forms, I do believe that eliminating this deduction, without a comprehensive change in tax policy, i.e. elimation of the income tax and replacing it with something like the Fair Tax, will be economically destructive. It will effectively prevent much of the lower and middle economic classes from owning homes, no matter how fiscally responsible they are. It would also crush the mortgage industry.
President Obama wanted to eliminate the mortgage interest deduction from the "wealthy", whoever that really is. I am sure that it will come up in the economic task force that will make their recommendations in December. And we have some ecomonists recommending getting rid of it.
Eliminating the home mortgage interest deduction would be the worst economic policy decision since Herbert Hoover, and there have been some pretty bad ones since then. And if that isn't enough to bother you, carefully read the last sentence of the article.
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