A tax reform proposal introduced by House Republicans that would make the mortgage-interest deduction basically irrelevant for most Americans has some people in the mortgage industry worried that the change will create a major deterrent for potential buyers in 2017.
Currently, the mortgage-interest deduction allows taxpayers who own their homes to reduce their taxable incomes by the amount of interest paid on the loans, which is secured by their principal residences or, sometimes, second homes.
Although the proposed reforms would not eliminate the write-off, they would make it so that deduction is applicable to only about 5% of all borrowers. That’s because, under the proposed reforms, the standard deduction that taxpayers receive would be doubled, plus certain itemized deductions would be repealed, thereby making it so there would be no need for a borrower to make use of the mortgage interest deduction.
The Better Way To Do Tax Reform proposal, which was introduced this past summer, specifically states, “Far fewer taxpayers will choose to itemize deductions, with the vast majority of taxpayers finding they are better off by taking advantage of the larger, simpler standard deduction instead.”
Previously, when it was presumed that Hillary Clinton would become the next U.S. president, the fate of this GOP-backed proposal was somewhat unclear; however, it is believed to stand a better chance under a Trump administration. Not that an up or down vote would be any less controversial: Some feel the elimination of the mortgage interest deduction could, along with rising rates, help derail the housing recovery.
David G. Kittle, CMB and president of the Mortgage Collaborative and former chairman of the Mortgage Bankers Association (MBA), says the deduction has been “a tremendous motivator for home purchase, so any incursion on it should be coupled with an all-inclusive tax reform package.”
“I would support looking at [a tax reform proposal] if it encourages first-time homeowners and millennials to purchase a residence,” Kittle tells MortgageOrb. “Increase the deduction for the young, and cap it on for the wealthier homeowner who, in many cases, has sufficient deductions before the deduction.”
Regina M. Lowrie, CMB and president and CEO of RML Advisors and also former chairman of the MBA, says eliminating the deduction for about 95% of homeowners “will have a substantial negative impact on the housing and home finance market.”
“The housing market has been a noted laggard during the recent recovery, and to attempt now to eliminate the deduction will only impose a heavy anchor that drags down this vital economic sector,” Lowrie tells Orb.
She adds that the impact from its elimination will only increase as rates rise. In fact, it could ultimately result in increased delinquencies – at least in high-cost states.
“If the mortgage interest is repealed, what then happens to the Alternative Minimum Tax [AMT], which increasingly hits middle-class homeowners?” Lowrie asks.
“Home mortgage interest claimed as an itemized deduction is only deductible for the AMT if the loan was used to buy, build or improve your home,” she explains. “For regular tax purposes, interest on home equity mortgages up to $100,000 is deductible, even if you used the proceeds for personal purposes, such as buying a car or paying off credit card debt. So, unless the home equity loan proceeds were used to improve your home, the interest is added back for AMT purposes.
“The deductibility of mortgage interest has worked well to promote the housing market for decades,” she adds. “Whatever happened to ‘If it’s not broken, then why fix it?'”
Lowrie warns that there could be other unintended consequences, should Congress seek “to focus on removing housing-related deductions.” For example, homeowners might be “more likely to exercise their votes to reduce local taxes and local spending. That likely impacts money spent on police, fire and local services.”
Glenn Stearns, founder and chairman of Stearns Lending, says although he is a “huge believer that lowering tax rates and simplifying the tax code will help to stimulate our economy” and believes that “simplifying our tax code and reducing the deductions need to play a big part in this strategy,” any decision to change or eliminate the mortgage-interest deduction “is a major mistake.”
“Our country has been built on housing,” Stearns says. “Housing has been at the center of all of our recoveries, and we have seen how long this last recovery took when housing didn’t play an immediate role. Not only does this deduction help make housing more affordable for most Americans, it provides an incentive to invest through goods and services. This alone adds millions of jobs and helps to stimulate our economy. Eliminating the interest deduction will cause a reduction in homeownership and play a major role in reducing our GDP. Let’s hope they don’t touch this sacred cow.”