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Election Implications

The votes have been cast and counted, and this time there is no dispute about the winner. George W. Bush will be sworn in for a second term as president in January with a much stronger mandate than he had last time around. Moreover, the president's electoral victory is just part of the story. Republicans strengthened their control over Congress, adding to their majority in both the House and Senate. They picked up House seats largely as a result of partisan redistricting in Texas. But the Grand Old Party also added three seats in the Senate, capitalizing on the retirement of Democrats in South Carolina, North Carolina, Oklahoma, Louisiana and Florida (while losing open seats in Colorado and Illinois).

What that means is the president has strong allies in his bid to revamp the tax code. President Bush has promised to make the tax code "simpler and flatter," and that could have implications for the mortgage industry. As former Clinton-era HUD official and now industry consultant Howard Glaser recently pointed out, the president has never promised to preserve the mortgage interest deduction exactly as it is.

While the mortgage interest deduction has been sacrosanct for many decades, periodically reformers from both the right and left of the political spectrum have called it into question. Some liberals argue it favors the well-to-do and depletes potential financing for affordable housing. Conservative critics have argued that it represents a special interest loophole that manipulates consumer behavior. They'd like to see a tax code that is more neutral rather than rewarding certain behaviors, such as homebuying.

President Bush is on record supporting homeownership as a policy goal and has set ambitious targets for increasing minority homeownership, so we think it is ultimately unlikely that he will seek to end the mortgage interest deduction completely. But any move to create a "flatter" tax system is likely to include debate about the role of the mortgage interest deduction, and some reformers will likely propose changes. The mortgage industry needs to be ready to defend the deduction when this debate occurs. The elimination of the deduction may impact not only the housing sales market, but also the performance of existing loans.

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