The popular tax deduction for home mortgage interest has come under fire again as politicians tasked with bridging an enormous budget gap puzzle over how the country can make ends meet. Nearly 40 million Americans take advantage of the deduction, which allows homeowners to write off interest paid on mortgages, lowering their taxable income. Experts say eliminating the deduction could result in about $150 billion of additional revenue for the federal government, which is currently expected to run a deficit of more than $1 trillion. But what politician has the political capital to suggest such a measure? According to a recent New York Times/CBS News poll, few Americans favored getting rid of the tax cut, long prized as a middle-class benefit.
Financial experts have also trained a critical eye on the tax break for homeowners, saying the program contributes to financial instability by encouraging consumers to carry more debt. Because of the incentive, some critics charge that consumers have piled on excessive amounts of debt, a key factor that contributed to 2008's global financial meltdown. "Congress should modify the U.S. tax system to reduce the incentives for destabilizing activities by banks and households," Minneapolis Fed President Narayana Kocherlakota said in a speech in late June at the Tri-State Bankers Summit. "Higher amounts of household and financial institution leverage mean that the financial system is more susceptible to these kinds of shocks."
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These discussions come against a backdrop of increasingly tense negotiations between Democrats and Republicans about raising the debt ceiling, and the economic drag of consistently disappointing jobs and housing market data. But despite the revenue the federal government could recover by discontinuing the program, could axing the mortgage interest deduction further hobble the housing recovery?
U.S. News talked to mortgage expert Keith Gumbinger, president of mortgage-information site HSH.com, to find out how tapping out on the tax break for homeowners could impact the housing market and economy. Excerpts:
This popular deduction has been sacrosanct for a long time, but should it be abolished in light of the country's fiscal difficulties?
Anything that might temper demand and temper demand of vitally important first-time buyers in the marketplace is probably unwelcome, at least right now. The question is, why now? In the middle of one of the worst housing markets arguably ever, why do we have to do this right now? Is it necessary to make this change right now? Right now, there is at least some value in [the mortgage interest deduction]. It helps to foster at least some demand in the market. Thinking about it that way and knowing that rents are rising and home prices are falling, this mortgage interest deduction may become more of an important component of that decision making process.
There are proponents and there are detractors for this thing and there always have been. Most of the strident voices on that side are involved in the industry: your Realtors, your builders, mortgage sales, and what have you, because it helps to sell products more easily. On the other side, you've got folks look at the tax code and say, 'Why are we trying to benefit this one particular class relative to other classes?' And then you can get into questions of fairness, and is this fiscally responsible and are we promoting or distorting certain markets at the expense of others?
Some critics say the home-mortgage interest deduction causes homeowners to borrow excessively. Is that true?
How does somebody get a mortgage? Aside from the recent episode with subprime where you could breathe and get a loan, when you walk into an office you're going to have to qualify for the amount of mortgage you can borrow based upon your income. The fact of the matter is, most first-time buyers leverage themselves up as far as they can anyway, relative to their income so it's not as if they're going to be able to turn around and buy more house, they're not going to have enough money to buy anymore house.