Fears about mortgage interest deduction on federal tax returns flare

Nov. 1--Organizations representing Realtors and mortgage bankers say they will strongly oppose recommendations anticipated today from President Bush's tax advisory panel to limit deductions of interest paid on home mortgages.

Based on preliminary information about the recommendations, the National Association of Realtors contends the action would drive down home values nationwide by 15 percent, devastate the housing market and harm the economy. Representatives for the housing and mortgage industries said they were uncertain exactly what the advisory panel would recommend, but added that they were confident Congress will not enact it into law because of the harm it would do to middle America and consumer confidence.

"I think the country has made a promise to a lot of people when they bought their homes that they would be able to deduct their mortgage interest," said Jim Hamilton, president of the California Association of Realtors.

Hamilton said he was concerned that even discussing a proposal that threatens home mortgage tax write-offs could dampen the housing market and undermine consumer confidence, which he said could jeopardize the larger economy. Homeowners currently can deduct the interest they pay on mortgages up to $1.1 million from their state and federal income taxes. They can take the deduction on both primary and second homes. The value of the deduction increases for home owners in higher tax brackets.

Dustin Hobbs, a spokesman for the California Mortgage Bankers Association, said it is that organization's understanding that the president's advisory panel on tax reform wants to replace the home mortgage interest deduction with a 15 percent tax credit that would be limited to primary homes and loans of up to about $313,000.

Max Sawicky, economist for the Economic Policy Institute, an independent research organization based in Washington, D.C., said limiting the size of a loan on which interest is tax deductible would have a disproportionately severe impact on parts of the country such as California and the Northeast with higher-than-average median home prices.

Sawicky said he understood that the panel might recommend a $400,000 limit on the amount of the loan on which interest is tax deductible or replacing the deduction with a capped tax credit.

Either way, he said, in Southern California it could "pop" the speculation that has been driving housing prices. In the higher-price ranges, he added, "it could have the effect of shoving down home values significantly and leaving people upside down on their mortgages."

Sawicky said he does not personally oppose reducing the mortgage interest deduction, which he called "excessive."

"I think it is generally a good idea to reduce the value of deductions and the government needs revenue," he said.

Also Sawicky said under the current system, "We are subsidizing real estate at the high end and I don't see why we should do that."

He said in the future he would not be surprised if limiting the mortgage interest deduction is one way the federal government will seek to close a huge gap between projected spending and revenues.

Still, Sawicky said he does not believe congressional Democrats or Republicans this year want to undertake an assault on the popular mortgage interest deduction.

"The legislative session is nearly over and they have other things to worry about," he said. "and next year is an election year."

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