As you may have heard during a quick snippet on NPR or from your favorite partisan talking head, the Commission on Fiscal Responsibility and Reform recently published its final report, including a proposal to limit the mortgage interest deduction. Obviously the MBA and NAR Lobby are in full-fledged damage control mode, which of course amounts to precisely the type of "partisan" rhetoric you would expect from such groups, but I thought I'd offer some information with a bit more cogency and concrete reasons as to why this is a particularly awful idea. Here goes:
1) Banks
There is very little liquidity in mortgage markets, and this is mainly due to the faucets of lending being turned off in favor of saving capital for a rainy day. The alarming drop in mortgage applications as of late means buyers are already lacking confidence in proceeding with their transactions. Limit one of the main reasons why home ownership is beneficial (the MID), and you will limit transactions in the part of the market (over $500K) that still has the farthest to fall. This is also the part of the market where lenders make the most money. So if the goal is to get lenders on their feet and lending again, capping the MID @ $500K is a bit like cutting their legs out from under them, and then saying they can only lend with one ARM (hopefully the negatively amortizing one) tied behind their back.
2) CPA's & Financial Planner's
While most W-2 borrowers file a fairly simple return, the business owners of the world have long been known to play with their tax returns until they are advantageous as possible. This is, of course, best done with the help of a professional. Salaried employees usually make the transition into utilizing a professional (if they haven't already) after they've purchased a home, because far more things need to now be taken into account. One of those things is properly accounting and planning for the MID. If that is eliminated, it's one less reason to use a professional, which in turn hurts small business, and makes me want to think of a pun almost as poor as the one used in the previous paragraph. Again, hurtful, and not helpful to our overall economy.
3) China
Currently, due to the fact that Chinese RE is over-priced and ours, by at least some metrics and forecasts from major universities is considered under-priced, foreigners are picking up as much US RE as possible. These are usually investors or at the very least non-citizens who would not be able to utilize the MID anyway, so they would not see its limitation as an aggravating factor in their decision to purchase RE. 75% of domestic buyers on the other hand, according to a recent Harris poll, find the MID to be "extremely or very important". If China owns our long term debt and our real estate... let's just say that's not good and leave the rest of it to our individual interpretations and/or expletives.
4) Home Prices
Well sure, this is the most obvious one that of course the MBA and NAR lobby have already beat to a pulp, but it's worth mentioning here. Beyond the obvious supply/demand issue, there is another issue that is perhaps more subtle but equally important. If a current homeowner loses their mortgage interest deduction over the $500K limit and is maxed out at their current limit $1.1M (for an owner occupied property), there is a $600K delta which they used to be able to deduct which they now cannot. What this may lead to, in our world of over-leveraged homeowners and rampant consumer debt, is even more foreclousres, as the lack of a tax credit could make the difference for some homeowners between surviving and sending their lender "jingle mail". The last thing our economy needs now is more foreclosures, but capping the MID would certainly be another contributing factor.
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