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Mortgage Deduction…Crossing the Rubicon

By Larry Doyle on February 28, 2009 at 7:36 AM in American Consumers, Barack Obama, Commerce, Congress (House & Senate), Current Affairs, Economy, Employment, Equity Markets, Home Loan, Housing & Housing Crisis, Mortgage Crisis, Wall Street

The mortgage interest deduction has been a cornerstone of American tax and housing policy. In fact, I can’t count the number of times I conversed with my accountant about maintaining mortgage debt based upon the feeling it was the one deduction the government would never touch. Well, never just pulled into the driveway!

For clarification purposes and at the request of a number of readers, allow me to address this deduction. As proposed in President Obama’s budget, for those households currently paying taxes in the 33% and 35% brackets, the mortgage deduction would now be at a 28% rate. The proposal would not take effect until 2011.

This Mortgage Deduction Looks Less Sacred. Its effect can and is hotly debated by economists and housing analysts. In my opinion, though, there are a few points not debatable. This initiative is another method of achieving wealth redistribution. It will make housing more expensive at the margin. It will put pressure on housing in general and in upper income areas specifically. Given that there are no initiatives proposed to support those needing Jumbo mortgages, this tax change will only further negatively impact this sector of the market.

Lastly, is this Obama’s “crossing the Rubicon?” Don’t think for a second that this initiative just developed. How and why did we NEVER hear about this during the campaign? Did he know how negatively it would be received?

In summary, having “crossed the Rubicon,” how far does he penetrate into the territory?

We’ll be watching, but knowing how wildly optimistic his growth projections are in his proposed budget, Obama will need more $$$. The mortgage interest deduction just became fair game.

I need to call my accountant.

LD

  • http://deleted Aaron

    LD you forgot to add that he is giving a tax credit to people who don’t itemize their deductions. I have read it is either $5K or $10k to people who make less than $40K. So someone who has a $60,000 mortgage and makes $40,000 while taking the standard deduction on his or her taxes will get an additional tax credit. This means they might actually get a check back from the government in the amount of the credit or more. He has begun the wealth redistribution in earnest with this policy and his back door means testing of Social Security (This what the Make Work Pay Policy actually is because you get your SS tax money back while avoiding paying into the trust with no effect on your future draw)

  • KB

    I was a member of NAR (National Assoc. of Realtors) for many years. It was a given that reducing or eliminating the mortgage interest deduction would be the end of the real estate market as we know it. A major incentive for homeownership as well as investment property would be gone. I fear this program combined with the increase or total elimination of the capital gains tax will be the final nail in the coffin for the RE market. Change we can believe in.

  • J S Ruby

    The folks who voted BO in wanted change and their getting it.

  • FrenchNail

    I just had a good laugh!!!! There are so many real estate agents in know in Phily who wanted the One because he was going to turn the economy around and the real estate market was going to come back.

    I guess they’ll have to change jobs too.

  • candymarl

    This is not good. How will this help the housing market recover? I don’t understand.

    • obamastolemyboyfriend

      I firmly believe that Obama does not want the market to recover and/or for any economic recovery. Barack Obama hates this country. That has been abundantly clear to me for at least a year. There is something not right with this man who so blatantly misrepresents himself to be something that is not and goes to great lengths to hide the truth about who he really is. I shudder to think what will happen when we find out what he is really up to. Strengthing America? It sure doesn’t seem like that is anywhere in the plan!

      • lark

        How about to mold it into an African social-democratic country as per his father’s dreams?

        • nickoury

          USA – United States of Aframerica

          • obamastolemyboyfriend

            Sadly, I have been calling it the country formerly know as the United States of America. I started doing that last June. I really thought Americans would never , as a majority, fall for this stupidity. Alas, they did.

            BIG HEAVY SIGH

      • HARP

        BINGO…….Now you understand. Its all on purpose, First you destroy something so you can build it the way you envision it. Alinsky at its finest.

      • I’m a Linda too

        That is looking more like the reality every day.

  • MBC

    Without that tax deduction, those folks won’t be buying new appliances, new carpet, new landscaping, etc. No more new cars, housekeepers, nannies, or paying the neighbor kid to wash your car. Seriously, when I needed work, I was not too proud to clean other peoples houses. The taxes instead will be used to pay for hog farm odor control, fast speed trains from LA to Las Vegas, and saving the wetland in the SF area (because those poor people cannot afford to do it themselves). BO was right when he said this is the beginning of the end.

    • lark

      What if in addition to all that the main goal is to stop the building trend by developers of developing tracks in predominantly white areas of larger and more expensive homes and to move that trend towards pushing whites in the direction of moving into smaller more modest homes that are not that different from those in black neighborhoods?

      I think Obama’s father had a dream too.

  • JRD

    obamastolemyboyfriend, you are 100% correct!

  • http://noquarterusa No-nonsense-Nancy

    Lark, I think you have something there. They want us to be poor. I have said all along they want black supremacy.(and I am NOT a racist!)

    • heather

      Oh, but you must be – by virtue of not agreeing with the O, you have proven your racism. Case closed, and now I have my fingers in my ears and I am singing “LA-LA-LA”. You. are. a. racist (even when you’re not meaning to be).

  • lizzy

    Aren’t we sooooo happy to discover the change that Obama was planning as he conned all the gullible fools with his rhetoric of change. Reducing the interest rate deduction hurts hard working families. Of course O has that incredible mandate with his election!

  • http://noquarterusa No-nonsense-Nancy

    Do we really know his father was? There is speculation of several men. His mother was very promiscuous.

  • John

    I make $52,000 a year. I live in an area where, no matter how low housing prices go, I will never, EVER be able to afford to buy a house. So I rent. I pay $900 a month for a large one-bedroom apartment.

    Here’s my question: when was the last time the federal government ever gave even the slightest bit of attention to renters? Renters make up 32% of Americans. Mortgage payers make up 33%, and the remaining 65% are people who own their homes outright. Yet the government seems to be obsessed with pouring money into aid for the tiny percentage of Americans within the one-third who are paying off mortgages, the vast majority don’t need help at all.

    How about this idea? A huge tax cut for middle-class renters, which might allow us to, you know, BUY A HOUSE. Then we could enter that Very Important Class of Americans who are actually noticed by policy makers.

    • NoBamaNoWay

      i hear you; the whole housing situation is a disaster. almost all decent housing is nearly unaffordable, or it takes every penny of you income so it’s impossible to save anything.

      the catch-22 is that the areas with “good” jobs also have ridiculously high housing costs. if you lived where i live you could easily buy a house on 52K/year, but good luck finding a job that pays that much here (western SD).

      you won’t find much sympathy on this website, though; it seems to be comprised mainly of people who think “the rich deserve to be rich, the poor deserve to be poor.”

      • MBC

        You’re wrong about this website being comprised of many people who think “the rich deserve to be rich, the poor deserve to be poor”. I think the site is made up of people who think hard-work, tenacity, and integrity deserved to be rewarded.

  • blogforce one

    The mortgage interest tax deduction is one of the primary closing tools for real estate brokers when showing properties. Without it the real estate industry is dead an buried. the entire U.S. economy is built on the foundation of real estate ownership and the ability to borrow against these assets for other investment needs.This is the touchstone that will eliminate the value of ownership. Obama and co. are in a feeding frenzy of wealth and equity stripping from the American people and their progeny whom he has sworn to protect and serve.He will loot pension funds by expropriation in order to ‘save’ them a la Kirchner-Peronista Argentina style within 2 years. also on LIVE LEAK I just read that a memorandum was signed pledging hard U.S. assets to China in the event of default . What has happened is Obama has maxed out the credit cards, opened new credit cards, maxed those out and then pawned all of Americas’s real estate and businesses to the Chinese

  • HARP

    For those unfamiliar with Saul Alinsky, his writings on radicalism and social change will chill the bones of not only conservatives, but more moderate liberals:

    “Any revolutionary CHANGE must be preceded by a passive, affirmative, non-challenging attitude toward CHANGE among the mass of our people. They must feel so frustrated, so defeated, so lost, so futureless in the prevailing system that they are willing to let go of the past and CHANGE the future.”

    “This acceptance is the reformation essential to any revolution. To bring on this reformation requires that the organizer work inside the system, among not only the middle class but the 40 per cent of American families –- more than seventy million people -– whose income range from $5,000 to $10,000 a year [in 1971].”

    And what word comes out of Obama’s mouth the most — why, CHANGE!

    http://www.theobamafile.com/ObamaWorks.htm

    • JozefAL

      Actually, if someone bothered to check the Census reports of that era, one might note that $5000 to $9999 annually WAS pretty much “middle class”. In 1971, 28.7% of US households reported income levels in that range (compared to only 23.4% reporting an income range of $10000 to $14999, and 21% reporting an income exceeding $15000). The median income level in 1971 was $9027. You might also note that the Census figures pointedly REFUTE the 40% figure quoted by Alinsky. (Incidentally, someone might like to know, to paraphrase Paul Harvey, the rest of the quote: “They cannot be dismissed by labeling them blue collar or hard hat. They will not continue to be relatively passive and slightly challenging. If we fail to communicate with them, if we don’t encourage them to form alliances with us, they will move to the right. Maybe they will anyway, but let’s not let it happen by default.” It does put Alinsky’s real concern into a genuine perspective, that he feared the very minimizing of blue-collar workers–that Obama did during the primaries–and their turning to right-wingers, as they did during the Reagan era, even though the blue-collar was most adversely affected by the Reagan economic programs.)
      By comparison, in 1970, the figures were 30.3% (for $5000 to $9999), 23.2% (for $10000 to $14999) and 19.1% (for $15000 and over), with a median income of $8730. The Census records don’t give the number of people in these figures, reporting only the number of HOUSEHOLDS (in 1970, there were 64,374,000 households; in 1971, there were 66,676,000 households).

  • Tuppence411

    Larry, I have moved passed the urge to call an accountant. At this stage, call in a shrink or the clergy. Everything I have been taught about personal responsibility and finances has been thrown out the window in just a few months. Principals and values that have serve my family well for generations ever since my great grandfather crossed the Atlantic as a teenager with $20 hidden in his shoe: work hard, save, own your home, educate your children, provide for their health, pay your taxes, give to charity, support your community.

    Barky is orchestrating disincentives for a propersperous Middle America. While at the same time doing NOTHING to stop corporate greed and Wall Street abuses AND creating a nanny state. Lord help us.

    • LD

      Tuppence…Please do not give up those values. They are time tested and will continue to serve you and your future generations well. I agree it is getting more and more challenging but at times like this we need to dig that much deeper into our core principles and fight through it.

      Our kids are counting on us!!

      • heather

        Larry,
        I know what you’re saying was true for the way America used to be, but I think that we are entering a whole new paradigm. You incent the behavior that you want to see. So far, the incentive seems to be to undereducate, underwork, overspend, and take all that you can get because you know you won’t have to pay for it later.

        What I would like people to understand is that while many of these folks are well educated and intelligent, many of them have no education or experience in the areas in which they are affecting change.

        I am making a large assumption, since I’ve never seen a transcript describing exactly WHAT Obama’s education consisted of, but I’m going to go out on a limb and say that he has no clue as to what the effect of his proposals may have on the economy. He doesn’t seem to understand human behavior, economics, banking, or finance. He has a lot of ideas that center around social justice and touchy feely propositions, but I see very little insight as to what happens…..NEXT. I keep playing the scene in my head where he was questioned as to why he would raise the capital gains tax, as it has been shown that revenues actually FALL when the cap gains tax increases, and his answer was FAIRNESS. This is just social engineering — and I don’t think this is the role that goverment should play in our country. It’s not the way we were founded, it’s not what our Constitution says is the role of our government, so why is it okay?

        I read an interesting account of an interaction that Davey Crockett had with a constituent. It made a lot of sense to me….
        http://afticker.blogspot.com/

    • NoBamaNoWay

      “Barky is orchestrating disincentives for a propersperous Middle America. While at the same time doing NOTHING to stop corporate greed and Wall Street abuses AND creating a nanny state. Lord help us.”

      word; the rich will get richer, the nanny state will grow, and those in the middle who work hard and play by the rules will fall further and further behind. i’m afraid however that many here have accepted “trickle-down” reaganomics as the solution, which will never work.

      if we give corporations their way, they will move all their factories to mexico and bangladesh and pay a fraction of american wages, while selling their products here in america at full-scale american prices. that’s not good for america.

  • boonies

    Larry …people keep talking about “getting the economy moving again”. But I ask…to WHAT? are we expecting to get back to 10-15% appreciation in RE every year? 401K’s that double every 5-7 years ? The DJIA @ 25,000 and so on?
    If we are expecting to reinflate the bubble we are mistaken.
    Whatt, Larry, should we consider the new “Normal” as we look for a way otu in the next few years?
    Are we going to get a Lost Decade?
    Thanks!

    • LD

      Boonies,

      I honestly think this economic downturn will take at least two years if not slightly longer to turn around.

      From there what is the new “normal”? Well without access to easy capital and a “sahdow banking system” that easily securitizes and distributes loans, I would believe we will have slower growth along with higher rates. Growth may be in the 2-4% range with unemployment in the high single digits and rates higher than current.

      Again, purely my guesstimate but it would bring us back to rate levels of the early 90s.

      Higher rates will inhibit growth.

      Are we going to get a lost decade…? I don’t think so but the chances of that occurring are certainly a lot higher now than a few years ago.

  • boonies

    um, I MEANT a ‘way OUT’…but you knew that! ;-)

  • Ellen D

    From a larger viewpoint, Canada has no mortgage deduction, and has only 5 year terms on their mortgages (although the amortization is over 30 years).
    Their banks are in great shape (with 18% credit card rates) and the Federal Government has balanced the budget for many years.
    And, of course, the government health care.
    So, there’s the realistic look at moving to Canada. You win some and you lose some.

    • LD

      I think it is called collectively living within one’s means.

    • Tuppence411

      I wish people would actually look at the quality of care in places like Canada and England. Canada’s waiting list for treatments, surgeries, even access simple diagnostic equipment is scary. England has a two track system- a decent one for the wealthy who can “buy out” and a crappy one for everyone else.

      This country will never accept the rationing of health care that comes with a single payer universal system. We bitch and moan now when HMO’s deny coverage or we are forced into lower cost, less effective treatments. We turn our heads now in shame when confronted with the disparities between rich and poor, race, gender, and education. How would we respond when the rationing is all upfront and in your face? When a goverment bureaucrat decides that Jane can get the quality breast cancer treatment but Mary can’t because she old and has other health issues.

      But hell what do I know. Maybe we will accept it because Barky will scare us all into thinking that is the only solution, his form of social engineering is the only answer. He is turning everything else on its head. Maybe Americans will accept weeding out the oldest and the sickest among us…….

      • Ellen D

        I and my family have had surgeries in Canada. No problem. I had the best obstetrician in the country because all doctors are covered.
        Are there some hospitals better than others? Yep. Just like here.
        As for waiting – the minute my father was diagnosed with cancer he was hustled in for treatment. In crucial situations they triage just like they do here in ERs.
        And I’ve spent longer times in doctors waiting rooms here than I have in Canada.

        • Ellen D

          Oh yes, I forgot to mention my father was 75 when he was treated. He lived 3 more years.

          • allimom99

            The waits we hear about are real, BUT they are for elective surgeries. I have no problem with that. It’s undoubtedly a cost-containment strategy. Of course if you can afford private pay, you can come to the US. OK. If their system provides medically necessary and preventive care for all, fine by me to wait for a tummy tuck.

  • bayareavoter

    Larry Doyle–please address these ideas:

    I just don’t see how you can do this to already-existing mortgages. The deduction is figured into affordability of those who own and still owe money on their mortgage.

    Will this trigger a huge sell-off before the new rule kicks in?

    Look, I’m not unhappy that the Rs are no longer in control–they screwed things up in a big way but the Ds look like they are off their rockers in wanting to re-engineer society during this scary economic depression!

  • Arabella Trefoil

    Obama’s people marketed the Obama brand, O Logo included. Even though we are close to the end of the “aughties” (2000 – Dec 2009) perhaps the “00′s” belong to the big O.

    The Great Depression of the Aughties, otherwise known as the Obama Depression.

  • bayareavoter

    my previous post disappeared….

    Larry can you explain what will happen if everyone who has a mortgage tries to sell their houses at the same time before the deduction expires?

    I am glad the Rs are gone. With help from the Ds during the last 2 yrs they destroyed this economy and so much more.

    But the Ds seem like they are trying social engineering at exactly the wrong time with the precarious economy. I am really scared.

    And their whole approach isn’t realistic toward those of us who live on both coasts where the cost of living is so high. In my neighborhood in Marin County, CA many of the houses were bought by professional couples probably earning about $250,000 together but here they really are upper middle class and will lose their homes if they have no mortgage deduction and if their taxes go up.

    I “hope” all these upper middle class liberals who have 2 BO bumper stickers on their cars are happy now.

    • LD

      Voter….It is interesting that you write. A good friend of mine who lives in your area was telling me that a number of his friends are attempting to “sell short” their homes. What does that mean? It means that they are trying to sell it below the balance of their mortgage and that the bank will eat the loss. I do not believe that that phenomena is widely broadcast by those within the real estate industry but it is happening. The banks are probably happy to take the loss rather than be stuck with the home.

      With any increase in supply not met by an equal increase in demand those prices are going down.

      While the change in this deduction does not go into effect until 2011, the market will price it in almost immediately.

      You are right, the areas with higher home prices, primarily the coasts will be more impacted by this change.

      • allimom99

        Those folks should be aware that their banks won’t necessarily go along with the short sale – they may well find they are still on the hook for the remainder of their original mortgage. The result they want is not neceesarily what they will get.

  • Julie

    The interest rate mortgage deduction was always kind of bullshit. It favors people who own homes. What about the 1/3 of Americans who rent? The renters subsidize the home owners. Complete BS.

  • Ana

    There is no such thing as “homeowner.” The bank owns your house and you are paying rent to the bank.

    The bank takes the compound interest first so, if you lose your house (as a friend of mine to whom the bank sold a bill of goods – adjustable interest – which increased her monthly payment from $1500 to $2500 in five years….)you lose the house and everything you paid into it )my friend lost $158,000.If you are lucky and you pay for that house three times its worth (add bank rent payments, real estate taxes, insurance – so the bank does not lose any money if it burns down…..) and you will get what that house really cost you. Then, if you fall on hard times and you cannot pay real restate taxes, the government takes it. Does that sound like a “homeowner”? The whole “home ownership” stinks. For the so-called right to be a “homeowner”, you pay through your teeth to the bank, real estate taxes to the government and insure the property against all risks so that those that really own the property are safe.

  • IndianaDem

    Should the government–that is, the taxpayers–essentially be subsidizing the purchase of homes costing so much that a jumbo mortgage is required to buy them?

  • BigB

    It is a ridiculous idea to squeeze homeowners when this country should be doing all it can to encourage people to keep paying their mortgages and buying homes.

    The Republicans have got to get their $h*t together! That’s all there is to it.

  • bebe

    That is a ridiculous idea to squeeze homeowners when this country should be doing all it can to encourage people to keep paying their mortgages and buying homes.

    The Republicans have got to get their $h*t together! That’s all there is to it.

  • BluePenCreek

    I hope that doesn’t happen. The country will be in a worse jam than it is now.