CBO Sees Proposed Cuts to Mortgage Funding, Interest Tax Deductions

[Update 2: Clarifies that the Congressional Budget Office’s role is as the primary congressional agency charged with reviewing congressional budgets and other legislative initiatives with budgetary implications. The CBO does not propose budgets or weigh options.] In a recent report, the Congressional Budget Office says proposed cuts range from the elimination of fighter jet programs, reduction of the strategic petroleum reserve to eliminating the National Youth Anti-Drug media campaign. But one proposal that’s got the mortgage world abuzz is a plan to reduce the mortgage interest tax deduction in two ways. The first would be to reduce the maximum mortgage eligible for the interest deduction from $1.1m in 2012 to $500,000 in 2018 in annual decrements of $100,000 each. That plan the CBO is reviewing would only bring in a relatively small revenue boost of $400m in 2013, but over 10 years, could boost tax revenue by $41bn. The second proposal would replace the deduction with a 15% tax credit for interest on mortgages below the declining limits in the first alternative. This proposal would reduce taxes for some homeowners and raise them for others, and would result in a net increase of tax revenue of $13bn in 2013, and $388bn between 2013 and 2019. Since the plan wouldn’t go into effect until 2013, the CBO said, it shouldn’t affect current strategies to improve the housing sector. The report said supporters of curtailing the mortgage interest deduction believe it will improve the efficiency of the economy because the current policy encourages people to invest in owner-occupied housing more than other investment options. If the benefit of owning a home were reduced, people would potentially look toward other investment options. It could also curtail homeowners borrowing against their homes. The report acknowledges, however, the proposal could have a negative impact on homeownership, a contributing factor to social and political stability that bolsters people’s stake in their communities and government. But it’s not a guarantee, the report said, as the homeownership rate in the US is the same as it is in Canada, the UK and Australia, none of which have mortgage interest tax credits. There are other housing-related cuts in the report. One would tax the Federal Home Loan Banks (FHLB) under the corporate income tax. The FHLB system is a network of 12 banks that provide advances to thrifts to increase mortgage lending. The FHLB network can raise money for the loans by borrowing at below-market interest rates in the capital markets because of the implied backing by the government. While the other better-known government-sponsored enterprises (GSEs) Fannie Mae (FNM) and Freddie Mac (FRE) are subject to federal income taxes, the FHLB isn’t. Taxing the FHLBs could increase the cost of mortgages for borrowers, the report said, and could make the system — already on shaky ground because of the housing crisis — more unstable. A third proposal would eliminate the Community Development Financial Institutions (CDFI) fund, which provides funds to community banks and credit unions, among others, who in turn provide mortgages to first-time homebuyers and small businesses. Eliminating the CDFI would save $435m by 2014. Write to Austin Kilgore.

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