Eliminate MID?

MORTGAGE INTEREST DEDUCTION AND THE GOVERNMENT

The standoff for lawmakers to reach a deal preventing the US from default has been reached. What does this mean to us? That has yet to be seen, but Moody’s came out to say regardless of congress decisions and plans to cut the deficit they will still lead to a negative outlook on the AAA rating. This will mean borrowing costs will increase (home loans, auto loans, credit cards) as the biggest holders of debt lose faith in the US government and sell Treasuries. The US is 14.3 trillion in debt, much higher if you factor in the unfunded liabilities such as Medicare, Social Security, etc. Looks like the MID (mortgage interest deduction) might be affected here as part of the larger plan. This may be the worst possible time to discuss changing tax laws and affecting an already fragile economy and real estate market in the US. Read on for Lawrence Yun, NAR chief economist stance on the future of MID.

It's not like the housing market needs any more headwinds, so here's the government potentially giving us another: The mortgage interest deduction is back in big play in the budget deal. It never exactly came off the table, but the bigger the budget deal, the more likely the mortgage deduction will take a bigger hit. Right now, home loan borrowers can deduct the amount of interest they pay on their mortgages from their taxable income. This goes for principal residences and second homes. The interest deduction is capped at the first million dollars of debt on the home. For
home equity loans it's capped at $100,000 in debt. The deduction costs the US Treasury about an estimated $100 billion a year. There are proposals now to either reduce the cap to $500,000 and/or to eliminate the deduction on second homes. Eliminating the deduction on second homes would save about $15 billion, and reducing the cap to $500,000 would save another $15 billion,
according to economist William Wheaton at MIT. 10.5% of existing home sales in June were of homes over $500,000 according to the Mortgage Bankers Association.

Then there's the idea from the President's bipartisan commission of turning the interest deduction into a 12 percent credit, limited to $500,000 in mortgage debt, only on primary residences.
That could save the Treasury $65 billion. Obviously all this hits the middle class, urban borrowers the hardest because they're the ones with homes in the $500,000 to $1 million range.
Realtors, home builders, investors, vacation home owners, even politicians hate these proposals, because they take money out of their pockets and because they provide a strong disincentive to
buy a home right now. Then again, others argue that it just fosters over-borrowing, as potential homeowners see the deduction as making the loan less than it really is, which it doesn't.
Interesting, in Canada, they don't have a mortgage interest deduction on personal residences, but they do on investment properties; this makes a lot more sense to me, as it is a business expense. It also fosters investment in housing, which is precisely what the US could use more of right now. Of course if the US government defaults on its debt, the housing/mortgage markets will have a lot bigger issues to deal with than the potential loss of a tax deduction; like, say, mortgage rates
going through the roof.

Homeownership Tax Benefits must be preserved. Any changes to the mortgage interest deduction now or in the future could threaten recent progress toward stabilizing the housing market, critically erode home prices and values, destroy middle-class wealth accumulation and hurt economic growth. That was the message delivered by National Association of Realtors® NAR Chief Economist Lawrence Yun during today’s Rethinking the Mortgage Interest Deduction forum, where he joined a panel of experts to debate the future of the MID. The event was hosted by the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institute, and the Reason Foundation.

“As the leading advocate for housing and homeownership, NAR firmly believes that the mortgage interest deduction is vital to the stability of the American housing market and economy,” said Yun. “The MID facilitates home ownership by reducing the carrying costs of owning a home, and it makes a real difference to hard-working middle-class families.”

Yun argued that now is the worst possible time to discuss changing the tax laws, which could further impair the housing market’s fragile recovery and a broader job market recovery.

“One thing that is indisputable is that eliminating the MID will lower the homeownership rate in the U.S.,” he said. “While we must ensure that the conditions that led to the artificially inflated home ownership rate of the bubble years do not resurface, we also need to create the conditions for sustainable home ownership, which has been shown to provide myriad social benefits for families and communities.”

During the debate, Yun challenged recent proposals calling for changes to the tax code, stating that it’s a misplaced argument to say the MID was a cause of the housing market bubble and is suddenly part of the deficit problem, when it’s been part of the federal tax code for more than 100 years.

Reducing or eliminating the MID is a de facto tax increase on homeowners, who already pay 80 to 90 percent of U.S. federal income tax. Yun said the share could rise to 95 percent if the MID is eliminated.

“Doing away with the MID shouldn’t be thought of as removing a tax break for homeowners, but rather increasing taxes on the middle class,” he said. “Furthermore, housing equity has been a major source of funds for small businesses, and any change to the MID will greatly hamper their ability to create jobs.”

Yun also asserted that it’s a misconception that only the wealthy benefit from the MID, when in reality it benefits primarily middle- and lower income families. Almost two-thirds of those who claim the MID are middle-income earners and 91 percent of people who claim the MID earn less than $200,000 per year.

Thank you,

Alan Adamo
Westline Real Estate
(714) 726-5429
www.westlinerealestate.com