Doing Away with the Mortgage Interest Deduction

This week President Obama gave a speech at George Washington University. Among many items mentioned, the President said that he was in favor of eliminating the home mortgage interest deduction.

The AJC ran an interview article in which Senator Mark Warner of VA had this reaction to the proposal to eliminate the home mortgage interest deduction, stating, “The whole sense here that you can do this without everybody having skin in the game just isn’t the case.

Well, sure. We all have to tighten our belts to get out of the debt crisis that is looming in this country. That much I agree with.

But eliminating the deduction for home mortgage interest is not asking folks to cut back, it is raising taxes. And while raising taxes may be necessary to get out of our mess; it is not the place to begin. The beginning is to cut government programs and wasteful spending.  Adding a new tax – which is the effect of eliminating the mortgage interest deduction – will harm housing as we are trying to catch the falling knife that housing has become around Metro Atalanta and throughout a large part of the country.

Not only will it hurt any housing recovery, it will also have those “unintended consequences” that so many of the governments recent actions have produced.

If we eliminate the home mortgage deduction, we would cause at least the following Unintended Consequences:

  • Foreclosures would rise further: 27.9% of all homes with a mortgage are underwater, according to Corelogic. Many of those homeowners are making their payments because they can afford to, even knowing they owe more than the home is currently worth. However, take away the mortgage interest deduction, and their payments just rose in step with their income tax bracket, say 25% or so for most. A good number of those folks will no longer be able to afford their mortgages, and will need to walk away from their homes.
  • The Government would take over Private Property: Currently, the GSE’s, or Fannie Mae, Freddie Mac and Ginnie Mae own or guarantee 95% of all new mortgage originations.  If the elimination of mortgage interest deduction causes massive default, that property will be repossessed by those same government entities. That would not only cause economic turmoil, it would also be the largest infringement on private property rights by the government, ever.
  • Rents would increase:  Landlords very often have mortgages on the properties that they are managing and renting.  Part of the calculation regarding the minimum price that they can rent the property for is calculating the mortgage interest deduction as part of the actual cost to that landlord to own the property. If that goes away, and an average landlord is in the 25% income tax bracket, then they necessarily will have to increase rents by that same amount in order to be able to afford the property. That will get passed along to the tenant.
  • Communities would become unstable: Homeownership is key to creating communities that are stable.  And that stability breeds better citizens, better places to bring up healthy, balanced children. Doing away with the mortgage interest deduction would create less stable communities.
  • Greater Economic Disparity: Homeownership through having and paying down a mortgage is also a sort of ‘forced savings plan’. The homeowner pays down the mortgage over time, and thus has and eventually pays off an asset – often the single largest asset that many Americans end up owning.  The mortgage interest deduction encourages that at least, and at most makes it possible for many homeowners.
So, eliminating the home mortgage interest deduction not only skirts the real issue, that of cutting spending, but that action would cause grave economic turmoil and would be an infringement to our Constitutional rights. It would be the wrong move.

2 Responses to Doing Away with the Mortgage Interest Deduction

  1. Susan says:

    This is the same as saying “Put the working peoples neck on the block and ‘CHOP OF THEIR HEADS’!!!” How much more working middle class blood does this Government want????? STOP WELFARE ABUSE AND FOOD SUBSIDY ABUSE AND CUT THE FEDERAL PAY ROLL AND STOP WITH ALL THE FEDERAL JOBS THAT ARE PAID FOR BY THE WORKING MIDDLE CLASS!!!!!!!!!!!!!!!!!!!!

  2. Jim Duffy says:

    Susan: Certainly the added regulations of the last few years, while intentions may have been good in wanting to defend the consumer, have in fact added costs to the mortgage transaction. That now oft-repeated phrase born as a result of these added regulations, of ‘Unintended Consequences’ for the consumer.

    Good news though? These have also resulted in further depressing the housing market beyond what would have happened with no government intervention – which means home buyers are getting literally the deal of a lifetime, for those in a position to buy.