Mortgage Interest Deduction Needs to Go.

It may sound crazy for a residential real estate loan officer to suggest the elimination of the mortgage interestdeduction (MID) considering the deplorable state of the nation’s housing market, but however bad the housing market may be, the national debt crisis is worse. The time is now to set aside partisan grandstanding, empty pledges and bombastic speechifying and start looking at the cold hard numbers that make up our national economic reality. In order for this country to rise up out of the ashes of this pitiful, debt driven recession, all cost cutting measures and revenue generating ideas need to be thoughtfully considered including the elimination of the mortgage interest deduction.

I could make the same argument against the MID that you probably have heard numerous times already – how it has no net effect on ownership rates and helps wealthier homebuyers far more than those of more modest means – but I’ll leave that discourse to the politicians and lobbyists. My argument against the MID is more direct; the mortgage interest deduction is, essentially, a government sponsored subsidization of the housing industry that we can no longer afford. Government programs that artificially inflate the housing market create artificial demand. The artificial demand increases home prices which obviate the benefit of the subsidy to the home buyer. We as a nation can no longer afford to subsidize individual industries like housing to help a minority of tax payers at the expense of the many. The housing market needs to wean itself from the government “drug” of financial subsidy and sink or swim in the tide of market forces.

The Simpson Bowles plan outlines two possible paths for the elimination or modification of the MID. The first path abolishes the MID entirely whereas the second path maintains the MID for primary residences under $500,000 while eliminating it for second homes, home equity mortgages, and any mortgages over $500,000. Don’t believe the histrionics of MID proponents who argue that phasing out the MID would be the final body blow to an already anemic housing market. Most mortgages are under $500,000 and therefore would not be affected. Those mortgage holders will continue to enjoy their unfair subsidy. Home equity line holders, on the other hand would no longer be able to write off interest costs if the Simpson Bowles modification goes into effect. Since home equity lines are no longer used as a second mortgage for home purchases, this should have no effect on ability of prospective homeowners to purchase, but may cause homeowners to think twice before raiding their home equity to buy that new car or go on vacation. Isn’t this the sort of personal financial responsibility we want to encourage?

While a phased approach to the elimination of the MID may be prudent considering the current state of the housing market, the full elimination of the MID should be seriously considered as the long term remedy, especially if it is a part of comprehensive tax reform.

In this new “Age of Austerity, our country and its people have to make some hard choices. The elimination of the MID is one example of how we can, as a nation, start living within our means without expensive government subsidies that divorce us from the economic realities.

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