MBA Strongly Opposes Proposal to Limit Mortgage Interest Deduction

The National Commission on Fiscal Responsibility and Reform published its final report and suggests rolling back the mortgage interest deduction as a way to lower the deficit.

The commission recommends scaling back the current rule which caps the mortgage deduction at $1 million for principal and second residences, plus an additional $100,000 for home equity.  The new proposal would make a 12% non-refundable tax credit available to all taxpayers and cap it at $500,000.  No credit for interest from a borrowers second residence or home equity line of credit would be allowed.

As expected, the two of the largest trade associations representing the mortgage and real estate industry oppose the proposal.

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“A rollback of the mortgage interest deduction as proposed by the commission would have a devastating impact on both present and future homeowners in this country,” said Michael D. Berman, CMB, Chairman of the Mortgage Bankers Association. “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.”

The National Association of Relators said it would remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest.

“NAR firmly believes that the mortgage interest deduction (MID) is vital to the stability of the American housing market and economy,” said Ron Phipps, President of the National Association of Realtors.  “The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years.”

According to NAR, a survey conducted in October by Harris Interactive found that of nearly 3,000 homeowners and renters, nearly three-fourths of homeowners and two-thirds of renters said the mortgage interest deduction was extremely or very important to them.

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  • One very important issue, that was not mentioned in the great summary Admin did of the proposal, was that no interest on any mortgage other than those secured by the principal residence is deductible. In 1986, I had a client who was financing three homes. The loss of tax benefits under the 1986 Tax Reform Act forced him to sell one of the three because he could no longer afford the payments. Under current law a taxpayer can deduct the interest on the principal residence plus one other personal residence.
    While it is clear that the credit is nonrefundable, can any unused amount be carried back to past tax returns and/or forward to future years until fully utilized? And if so, for how many years in each direction? Right now many seniors cannot take advantage of their itemized deductions because of the standard deduction is larger. The proposed mortgage interest credit would be helpful for many of them but only if the unused credit can be carried back and carried forward.
    Would the definition of interest include MIP as it does right now through 12/31/2010? If the bill narrows the definition of interest, that could mean further trimming of the deduction without venting that aspect in public.
    The tax proposal is so radical, I have no words to adequately describe my personal opposition. I do not know what former Senator Simpson or former Chief of Staff Bowles are smoking these days but the proposal must have been so painful for them that they failed to present how 150 items impacting just individuals will change.
    I am a conservative not a liberal. In this context, conservative means one favoring slow change while liberal means one favoring radical change. Even though I favor tax law changes, I find this supply side, semi-flat tax rate proposal so radical and irresponsible, it is disgusting. Who would have imagined BHO to be a flat tax guy in disguise? His proposal is far more radical than anything President Reagan had in mind. Beyond the impact to individual taxpayers, the harm to the housing industry and charities would be immense.

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