A new proposal to revamp the mortgage interest deduction created more confusion for the mortgage industry this past week.
Policymakers on both sides have been toying with the idea of enacting changes to the mortgage interest deduction as a means to cut the nation's growing federal deficit.
But Rep. Keith Ellison, D-Minn., threw another log into the fire this week by sponsoring a bill that would limit the popular deduction to the first $500,000 of mortgage debt and then convert it to a 15% non-refundable tax credit. The change would hit homeowners with higher-priced mortgages the hardest.
Ellison's bill suggests the shift would create $200 billion in savings over ten years. He believes the money saved from this should then be invested in the National Housing Trust Fund to provide affordable housing to communities.
Mortgage Bankers Association CEO and President David Stevens questioned the proposed bill for essentially ignoring the pivotal issues that are impacting homeowners, while ignoring the budget deficit by using the deduction to pay for other government expenditures.
"In any final proposal dealing with the government’s role on housing finance, we have to deal with making sure there is money available for affordable housing–wherever that line gets drawn," said Stevens. "But in isolation to support one isolated bill that is solely focused on mortgage interest deduction purely for funding affordable housing is ill-timed given the construct of the broader debate that has to happen."
If any change is made, it would be a complete game changer not to consider the budget deficit first, Stevens suggested.
"We have $17 trillion dollars in debt almost, and the current budget is spending a trillion more than what we take in from tax revenues," the MBA leader said. "That’s really where the focus has to be, and that's why I assume that mortgage interest deduction as a significant tax benefit to Americans will likely be on the table just like social programs and other tax structures."
Meanwhile, the National Low Income Housing Coalition supprorts the bill and calls it a solution for the housing economy.
"I think that we will basically spark the economy by making for low and moderate-income people to keep more of the money they have and spend less of it on housing," said Ellison. He added that America is already seeing a drop in the deficit and this act will only help in lowering it.
Overall, the mortgage tax deduction is on the table, but in what form it will survive — if it survives at all — is unknown.
The MBA sees tampering with it a dangerous, and perhaps unnecessary, proposition.
"Other people want to go after it for other reasons and that is fine, but when I look at it from a pure tax revenue standpoint, you don’t get a lot of lift out of the mortgage interest deduction," said Stevens.
"If you go too deeply, you really start hitting middle class homeowners and could ultimately strike the core of the housing recovery."