Mom, apple pie and Chevys are all near and dear in the hearts of Americans—along with the mortgage interest deduction. But thanks to the government’s worsening debt picture it appears that at least one of these cherished icons is in danger of being thrown overboard.
Hint: It’s not mom, the pie or the car.
Early last week when Congress and the White House reached a debt ceiling deal, lenders, builders and Realtors breathed a collective sigh of relief that no new taxes were enacted—or cuts to existing deductions, including the MID.
But the legislation that was signed into law increases the debt ceiling in two steps. The first step, which trims $1 trillion over 10 years, is automatic. The next step isn’t and involves cutting an additional $1.5 trillion, which is where the MID comes into play.
A congressional committee split evenly between Democrats and Republicans is tasked with finding those cuts or bringing in new revenue by eliminating tax deductions. The deadline: Nov. 23.
Housing and mortgage lobbyists I spoke with about the issue believe that indeed a strong attempt will be made to cut the interest deduction on any and all mortgage debt north of $500,000. Currently, the cutoff is $1 million. Efforts also will be made to eliminate the MID for seconds and HELOCs.
“Will it succeed?” one lobbyist asked. “I think they have a strong shot at it and I think the magic number is $500,000,” he said.
How much does the deduction cost the U.S. Treasury each year? It all depends on who you ask. One figure I’ve heard is $70 billion but a former Hill staffer told me that the joint tax writing committees of Congress typically work off a much higher number: $100 billion to $110 billion a year.
At this time it’s inconceivable that Congress will eliminate the entire deduction. “Just think of what this would do to housing,” said Glen Corso, managing director of The Community Mortgage Banking Project.
Like many in the industry, Corso doesn’t want the MID touched at all. Others are more pragmatic. One veteran lobbyist, requesting his not be published, said what many might think, but won’t admit: “It’s not going to kill the housing market. If you cut it down to $500K a vast majority would not feel it.” He added, “I know what I’m saying is hearsay.”
In other words, middle-class folks who carry less than $500,000 in mortgage debt would still get the break but “rich folks” would not. Will this stop wealthier Americans from buying homes in Malibu and on Central Park West? It’s doubtful.
But a key detail involving the deduction would be the “grandfather” date. If Congress clips the MID will it be retroactive affecting all or going forward? I would guess that it would be immediate, because of the growing need for revenue. Even Democrats, who are traditionally “pro-housing,” might support it—along with many Republicans who historically believe that Uncle Sam gives away too many tax breaks tied to home buying.
