The Debate Over the Mortgage Interest Tax Deduction

As newly elected officials settle into their offices in the capitol, there has been a wealth of speculation about what will be first on their agenda. Recently, there has been a lot of discussion about policies relevant to the mortgage industry.

One topic of interest on everyone’s mind has been the mortgage interest tax deduction. Both political parties are looking for ways to cut spending and in that process, tax deductions are brought to the table for discussion.

J.D. Crowe, Senior Vice President of Southeast Mortgage

The concept of being able to deduct interest from income dates back to 1894, when the first income tax was created. All forms of interest were deductible. The Supreme Court quickly ruled that the tax was unconstitutional and it wasn’t until 1913 that a new income tax was enacted.

Although all interest was again considered deductible, the benefit to a homeowner wasn’t really a consideration. Back then, most people paid cash for their homes. They didn’t have mortgages.

Today, the deduction allows homeowners to deduct interest on the mortgage debt of first and second homes up to $1 million.

Proponents of the tax deduction argue that the deduction makes home ownership attractive in a time the market desperately needs people to buy homes.

“[Getting rid of it] would throw the housing sector into turmoil … and chill the market just as it is trying to recover,” said Jerry Howard, CEO of the National Association of Home Builders in an interview with CNN Money.

David Stevens, CEO of the Mortgage Bankers Association, said the economy “could actually move backwards” if the deduction is taken away because it has a significant impact on middle class Americans’ cash flow.

Opponents of the tax deduction say that it only benefits the wealthy and cite the change in today’s financial market in comparison to what the deduction was designed for as reasons to revise the policy.

“It’s time to take a closer look,” said John Taylor, the president of the National Community Reinvestment Coalition, in a recent interview with the Huffington Post. “This is far and away the government’s largest housing subsidy, and it primarily benefits people who are financially comfortable and some people who are extremely financially comfortable.”

In an interview with MarketWatch.com, Chuck Marr, director of federal tax policy at the Center on Budget and Policy Properties provided insight into the most likely of scenarios — leaving tax cuts the same short term, changing them long term.

“That’s something that could easily be done,” Marr said. “Many of [the deductions] are very poorly designed and could be improved, but proposals to eliminate them are unrealistic.”

Whether or not the mortgage tax deduction should, or will continue as it is, remains uncertain. However, the tax break’s presence since 1913 leans toward an unlikely possibility for Congress to remove the deduction in the short term, as other pressing issues loom to avoid a fiscal cliff. The tax deduction may be moved further down on the new leaders’ agenda and into 2013.

- J.D. Crowe, Senior Vice President of Southeast Mortgage