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Subsidizing big mortgages
Should your tax dollars be used to subsidize mortgages of up to $750,000? My guess is that most people would say no to that and the Feds will soon be bringing policy in line with those sentiments. As reported in today’s New York Times, the size of home mortgages that will be guaranteed by the Federal government will soon shrink by about one-third. Those already owning homes in expensive areas and especially those wanting to sell those homes, feel that such a move would unduly penalize them in an already stagnant housing market.
With foreclosures beginning to rise and the housing market still stagnant, now is a bad time to alter government policy in a way that will further depress housing prices. Still, there will never be a good time to do that so the proposed reductions should just be implemented as soon as possible which is probably the first step in getting prices to where they should be – that is, what the market says they should be. Maybe those really expensive areas shouldn’t be so expensive after all. Once this government policy is discontinued, perhaps the home mortgage interest deduction on Federal income taxes will be the next housing market subsidy to be discontinued.
Well, I think you are totally right, there’s just never a good time – maybe it’s time to just bite the bullet and do it. And, while many people would certainly be upset, and I can tell you it’d hurt me a lot, I think you’re right about the mortgage tax deduction.
The mortgage tax deduction would be better handled as a tax credit. As it is now, those with the highest incomes and biggest mortgages get far greater tax benefits than the average homeowner. For example, someone with a $1M mortgage will pay about $50K in interest and at a 35% tax bracket gets $17,500 for his tax break, while someone with a $200K mortgage will pay $10K in interest, while saving only $2,500 in taxes (25% bracket) or $1,500 (15% bracket).
Changing the tax code to provide a tax credit of 25% of the interest paid to a maximum of a $5,000 tax credit would preserve (or enhance) the tax benefit at the low end without overly rewarding the high rollers.
Joe – I would wonder how many people in your theoretical situation end up paying AMT instead. Also, I don’t think you can deduct all of a mortgage over X amount, and X amount is less than $1M.
It’s tough. I’m not going to re-hash my situation again, but I’m badly underwater on a property I no longer really want. Like the proposed changes to allow grocery stores to sell beer and wine, changing the rules of the game while people are playing always hurts somebody…and changing the mortgage rules now definitely falls into that category. Doesn’t mean it isn’t the right thing to do for the country, but for those of us who were incentivized to buy when we shouldn’t by government policy and are already feeling screwed, pulling the rug out from under us without anything in exchange is just wrong.
The public purpose behind backing mortgages without a cap, like the public purpose behind allowing all of the mortgage interest on a $970,000 home to be deducted form income taxes, is not to promote homeownership. That’s the public purpose for backing most home loans, and for allowing the interest to be deducted on most mortgages.
The public purpose behind extending those benefits up to very expensive homes is to give a boost to the real estate and construction industries. Maybe this made sense after World War II, when we really did need to ramp up those industries, and we really did need to increase employment in them. It doesn’t make sense today.
Corey, X = $1M for your own home.