Wednesday, December 1, 2010

Oh No They Didn't....

The US Debt Commission charged by the president on balancing the US’ budget, remitted their fiscal austerity plan. Within the proposal was a key ingredient which will greatly affect American homeownership, specifically the income-tax deduction for mortgage interest. The 18-member commission has been looking for ways to trim the federal deficit. Among the $3.8 trillion in debt-cutting options being considered by the “National Commission on Fiscal Responsibility and Reform” was initially written to include the eliminating for second homes mortgages of more than $500,000, and home-equity loans. The final release is a bit more aggressive. It includes a 12% non-refundable tax credit available to all tax payers with mortgages now caped at $500,000. NO credit from interest from second homes and home equity loans. As one might expect, the reaction from various housing industry leaders was a strident “Not A Good Idea”. With its release, the Congress and the President “must decide which tax expenditures to include in the tax code” of which mortgage interest for primary residences is specifically mentioned. I’ll highlight a few of the comments I have found around the news wires:

• “For a battered housing industry, which is struggling with a 21 percent unemployment rate among construction workers, this is absolutely the worst time to be considering changes,” said National Association of Home Builders President Bob Jones. Adding that diminishing or ending the deduction would exert further downward pressure on home prices, leaving more homeowners with mortgages larger than the value of their property and fueling even more foreclosures.
• Mortgage Bankers Association Chairman Michael D. Berman said that while his group’s members shared in the growing concern about the federal deficit, limiting the use of the mortgage-interest deduction “will have negative repercussions for consumers and home values up and down the housing chain.” Given “the fragile state” of the housing market, Berman said, “now is not the time to be scaling back incentives for homeownership.”
• Not to be left out, the National Association of REALTORS® has decided to take a wait and see approach.

There are some supports of this action, may of which are in the economics field. “The mortgage-interest deduction is to housing policy what Social Security reform has traditionally been to politics: the third rail,” says Kevin Gillen, vice president at Econsult Corp. in Philadelphia. He shares a consensus among economists is that the deduction is regressive and promotes overconsumption.

Out of pure selfish reasons, it’s no surprise that I oppose anything but a very limited change relating to interest and tax deduction on all types of homeownership. My suggestion would be to eliminate the interest deduction on all mortgages over $1.5 million and all Non-Owner properties as they typically have additional deductions taken with home improvement. This affects the super rich (or over extended) and the “investor”. The fact that it’s mentioned creates a slippery slope down the road should more severe additional cuts are required. The primary-residence tax and interest deduction is the one almost every American homeowner looks forward to as a way to be rewarded for the risks and costs of owning and maintaining a home. With almost half of the recent homebuyers consisting of first-timers, this tax and interest deduction is critical to the on-going recovery. Any changes in my opinion, even my own suggestions should not be implemented until the housing market is operating normally.