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April 2nd, 2011

What if the mortgage interest deduction was eliminated?

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What would your reaction be if lawmakers decided to do away with the mortgage interest deduction? For certain homeowners, tax season, along with all the usual stress it brings, means the opportunity to deduct some of the interest they paid on their mortgages all year long. However, there have been some discussions, both on Capitol Hill and beyond, of doing away with the famed mortgage interest deduction as a way to correct this country’s ever-growing deficit.

As you might anticipate, many homeowners and professionals are up in arms over the idea, while others think eliminating the deduction could be a reasonable solution.

To get a sense of the differing opinions that are out there, we reached out to four experts in the field and asked them to offer their thoughts on the future of the mortgage interest deduction. Here’s just some of what they had to say:

Alan Viard -- ResizedAlan Viard is an economist at the American Enterprise Institute for Public Policy Research:

A cold-turkey end to the mortgage interest deduction would send housing prices downward.

Ultimately, there are two factors to consider: the value of existing houses and the quantity of resources devoted to housing. If the deduction was eliminated, you’d see fewer resources going into housing and more into housing investments. It would be more efficient.

Government should encourage homeownership, but mortgage interest deductions aren’t an effective way.

Danielle Hale is a research economist at the National Association of Realtors

Danielle Hale -- ResizedHomeowners would see their home values decline 15 percent on average if the deduction was cut. Higher-value areas would feel the most effect. Many homeowners have significant parts of their net worth tied up in their homes. So, that’s a problem.

The 75 percent of homeowners who have mortgages use the deduction. It’s vital to the mortgage industry and the economy. All sorts of research ties homeownership to additional benefits too. For example, homeowners vote more often and engage in civic groups.

Polina Vlasenko is a research fellow at the American Institute for Economic Research

Polina Vlasenko -- ResizedIf the deduction goes away, the housing market will be hurt. There will be lower demand and lower home prices. It won’t have a big effect, though, since nobody buys a home just for a tax deduction.

But removing it is difficult, and there might be an initial shock effect. People will pay more taxes and have less income left over for spending. And the economy isn’t recovering that much. There may be a better time to do this.

Ilyce Glink is the publisher at Thinkglink.com

ilyce_glink_rsIf it’s eliminated, it would be tough at the beginning. Once we work through the cycle of foreclosures, which will take five or six years, people won’t even remember they had the deduction. You could phase it out gradually. But eliminating it sounds worse than it really is.

Realtors will cry and say it will ruin the market. Real estate is Washington’s most powerful lobby.

Be sure to check out our slideshow, “Four experts weight the end of the mortgage interest deduction,” to read the rest of what these experts had to say.

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One Response to “What if the mortgage interest deduction was eliminated?”

  1. Robert Palmer Says: August 1st, 2011 at 9:43 pm

    The elimination of the mortgage deductions is the craziest idea forthcoming by our lawmakers.This would decimate an already weak housing market.Washington would just waste the extra money and continue to spend.My suggestion is that we institute a value added tax on goods and service along with elimination of the capital gains tax and lowering the corporate tax rate to 15%.We need to bring the 53% of people not paying any taxes into the fold .The value added tax would spread out the pain and everybody would contribute.Also i am told that for every 1% tax would generate 1 trillion dollars in revenue for the federal government.Maybe with the value added tax we would be able to restructure the entire tax code in the U.S.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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