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NAR Opposes Mortgage Interest Tax Deduction Provisions
Written by Ryan Zook, Cook and Zook Team   
Monday, 13 September 2010 15:11
Lawrence Yun, the National Association of Realtors chief economist, wrote an article this month addressing President Obama's proposal to eliminate or amend the mortgage interest tax deductions (MID) for certain tax brackets, a policy which has been around for 17 presidencies.  As noted on the NAR website, here is the fundamental issue... "Individuals are permitted to deduct mortgage interest paid on mortgage debt of up to $1 million. The deduction is available for interest on mortgages for a principal residence and one additional residence. The $1 million limitation represents the combined allowable debt on two residences. Mortgage interest on up to $100,000 of debt on home equity loans or lines of credit also qualifies for the deduction.  The Administration has proposed limiting the value of the MID for upper income taxpayers by, in effect, converting the deduction to a 28% tax credit for those individuals who are currently in the 33% or 35% tax brackets.

Currently, taxpayers in the 33% and 35% income brackets are able to reduce their taxes through deductions for mortgage interest payments, charitable contributions, local taxes and other expenses by 33 and 35 cents, respectively, on the dollar. Under the Administration’s proposal, these individuals would only be able to reduce their tax bill by only 28 cents on the dollar. The Administration estimates that the change would raise $318 billion over the next 10 years.  While NAR has supported and applauds the efforts of the Obama Administration in taking aggressive measures to stabilize both the housing market and the nation’s economy, NAR has aggressively expressed its opposition to the Administration MID proposal. NAR believes the proposal is ill-timed and ill-advised. It would have adverse impact on housing values and the pace of economic recovery."

Here is Lawrence Yun's latest post: "We’ve heard increased chatter among opinion makers about the need to eliminate or trim the mortgage interest deduction. The argument goes something like this: Not only would ending the MID create a deep source of money for reducing the U.S. budget deficit, but in the aftermath of the mortgage crisis, the country needs to rethink its favored tax treatment of homeownership.

However, this argument downplays two critical facts. First, home owners already pay 80 to 90 percent of the income tax in our country, and among those who claim the MID, almost two-thirds are middle-income earners. So, when we talk about the beneficiaries of this tax benefit, we’re talking about households who are the pillars of federal income tax revenue. We would now be asking them to shoulder an additional tax burden, and also to brace for a 15 percent drop in home values—that’s how much we can expect values to fall as buyers discount the value of the deduction in their purchase offers.

Second, critics who link the mortgage meltdown to our country’s support for homeownership are ignoring the origins of the crisis: unprecedented laxity in underwriting and faulty ratings by credit rating agencies of the securities backed by those mortgages. Through the terms of 17 presidencies, the MID has brought remarkable stability to the housing market.

Yet, critics fail to recognize why our country has been so supportive of homeownership. Academic studies have demonstrated positive social benefits, including lower juvenile delinquency rates and higher student achievement among children of home owners.  Whatever deficit reduction might be realized by taking a carving knife to the MID would come at an intolerably steep price: trillions of dollars in wealth destruction and a new uncertainty in what has long been recognized as a bedrock of our economy."

Lawrence Yun and the NAR are continuing to lobby against the proposal.  Here are a few articles which discuss the decisions ahead:
Obama's interest in changing homeowner tax deductions worries some -- http://www.tampabay.com/features/homeandgarden/article981488.ece
Ax may fall on tax break for mortgages -- http://thehill.com/homenews/administration/101883-axe-may-fall-on-tax-break-for-mortgages

Lastly, I read an interesting article in the Washington Post (click here) over the weekend discussing the effects of inflation/deflation and the uncertainty of the mortgage interest tax deductions for homeowners.  The article goes into cap rates and more, but I thought I'd share this with you because it breaks down the big decisions our government has to make in the coming months regarding the bush tax cuts as well as discusses Obama's proposal to eliminate or reduce a homeowner's mortgage interest deductions.
http://www.washingtonpost.com/wp-dyn/content/article/2010/09/10/AR2010091000511.html?sid=ST2010091002301