News Cut: April 11, 2011 Archive

An end to the mortgage deduction?

Posted at 2:45 PM on April 11, 2011 by Bob Collins (23 Comments)
Filed under: Economy

Is it time to get rid of the home mortgage interest deduction?

LiveScience.com reports today on a study from Kansas State University that says because most of the tax break goes to people making more than $100,000 a year, it doesn't adequately help the more dense urban cities.

Turner's study, based on household data collected from 1984 to 2007 by the Panel Study of Income Dynamics, showed that in denser, urban cities with limited available housing, the deduction has a negative impact because it both reduces homeownership and inflates housing prices.

"It's just driving up prices, which makes it harder to come up with the down payment," she said.

Believing in the theory that homeowners have more of a stake in the success of their community, Turner noted it's those urban areas where homeownership is needed the most to improve the community as a whole.

The mortgage deduction has been termed "America's favorite deduction," but as tax day approaches, it seems harder to find its friends.

ING Direct boss Arkadi Kuhlman, writing in the Wall St. Journal today, theorizes that it allows borrowers to spread their home payments out over too many years. He favors a deduction based, instead, on principal payments, rather than interest.

Must the U.S. government remove itself entirely from the mortgage market--or take away every family's favorite tax deduction--to fix it? Not necessarily. Congress could as easily create an incentive for consumers to pay down their mortgages by letting them deduct payments on principal, rather than on interest.

A successful model exists to our north. In Canada, the interest on mortgages is not tax deductible, which gives homeowners good reason to pay down their principal as quickly as possible. Canadian banks also hold about 75% of their loans on their books, which encourages more prudent lending. Thanks to such policies, just 1% of Canadian mortgages are currently in foreclosure or delinquent, compared to about 14% of American mortgages. The Canadian real estate market has already rebounded above pre-recession levels.