Gross is right to target the home mortgage-interest deduction (HMID), the largest federal subsidy for housing, totaling somewhere in the region of $76 billion in "tax expenditures" per year. By contrast, the amount allocated for Low Income Housing Tax Credits (LIHTC) is around $1.4 billion.

Some economists estimate the HMID to inflate pre-tax home prices by as much as 20%.

Still, scaling back the deduction limit from $1 million to $200,000 would only further disadvantage taxpayers in high-cost housing states such as New York, New Jersey, and California. To take Los Angeles as an example, the median home price far exceeds the limit proposed by Gross. It is not uncommon for a modest tract home to go for north of $1 million. Homeownership would be even more unaffordable in urban areas, even after the market price corrects itself in a hypothetical post-MID fiscal environment.

The owner of that "modest" million dollar home in NY is not paying a million a year in interest. Did I read the article wrong?

How about this? Mortgage interest can be deducted from income up to the limit where it corresponds to a certain percentage of the fair market value of the home when it was first purchased by the taxpayer.

I don't follow why the price of houses would equilibrate at a higher level if the government stopped subsidizing the financing of their purchase. If anything, removing the HMID would be a one-time shift downwards of prices across the board, as it reduces the ability of everyone to pay for a purchase.

A more important effect would be to remove another plank from under recent buyers, and increase defaults - which is what we're trying to get away from. To avoid this, there could be a five year sliding scale sunset provision.

freditor05 might not be able to read it. snicker.

Arlington,

Let's take three steps back (which would give us two more steps than Gross took before he wrote this article) and look at the whole game of over inflating the money supply and then reconciling high interest mortgage Notes with income tax deductions.... doesn't that just build a model based on inflation? The income tax is used as a tool to balance the interest... not as an income tax (you know, to provide a fair and balanced tax on the personal income for a fair and balanced support of govt by each citizen; ala, the way they sold it to the farmers when they first passed the amendment)

At what point do we finally wake up and smell the interest? Look at you average mortgage payment; what p[ercentage of that is going to "interest"? That's the percentage of housing finance that is inflating the dollar... we are destroying ourselves with our own payments!

It's time to blow the whistle on the construction of the mortgage Note; it is and always has been illegal to charge interest in advance, so let's stop allowing the banks to do that via the "fixed" method of building these Notes. There is over 100% interest rolled up into these Notes in advance of a single day on loan.

Placing a cap on mortgage interest is still a regional inequity; freditor05 might not know what he's saying but he does have a point (if you babble long enough, anything could happen) and yet this whole system of hyper inflation via amortized compound interest is cutting our own throats; the banks do not benefit in the long run because the creation of all this new money is what caused the credit crunch, and the economy is being drained, and homeowners are constantly facing rising prices the same as gasoline and other commodities; all due to the falling dollar which is falling in the first place because of the hyper inflation caused, in no small part, by our compound interest mortgage Notes.

Let's change the system. To hell with these GSE's (privately owned super banks set up by the govt to make Wall Street the master of our mortgages as well as our industry) - our govt set them up and our govt can cut their purse strings. Let's set up fair financing via funding through the FHA. We could simply print money the old fashioned way... directly from the Treasury. That way, not only is there no bond (hence no debt) but the currently worthless Treasury could actually turn back into a place where money resides again. Table the money directly through local Lenders and pay a portion of the simple interest back to the banks as payment for servicing the loan. The dollar stops going to hell, cuz this takes the hyper interest out of 40% of the nation's debt, the local banks start to grow with all the new business; the housing slump turns around with readily available loans for existing home sales, and finally, the economy will pick up gangbusters from all this new activity. What do we lose? The GSE's. And what do they do? for the economy? nothing at all. Giant parasites is all they ever were.

nice to see you in moneybox!

~daysman

Adam,

I think the interest deduction benefits the banks more than the homeowners. It allows them to get away with charging 150 thousand dollars accumulated interest for a 100 thousand dollar home. That said I could not have bought my home without it.

To help fix our economy why not allow a one time deduction or better, a credit equal to the closing costs of a home? Then have the interest be set as a simple rate much like buying a car or boat.

The exorbitant interest monies saved could then be used by consumers to furnish their homes, send their kids to college and to save for retirement. Amortization is basically usury against homeowners anyway.

This changeover could be made relatively easy. Starting in alphabetical order, or some other agreed upon method, each homeowner could refinance his home at the simple rate, deduct the closing costs and then have a home loan with a simple interest rate. The loan would be able to be paid off in one third the normal time. As the process of getting all the homeowners through the system would take more than a year, allow those who had not refinanced to continue to deduct their interest until which time they can get their paperwork done.

I think this action alone would free up so much money to be invested or spent by the American citizen that there would be an economic boom not seen since the end of the second world war.

Money would be freely circulating in the economy and the government would not be subsidising investment bankers through tax deductions. The money saved (76 billion annually by your numbers) could be used to pay down the national debt or shore up social security.

If conventional lenders did not want to lend money this way allow them to continue to offer their financial products in the old way while new lenders stepped in to make money (albeit not as much). Why should a bank be allowed to make 150,000 dollars on a 100,000 dollar loan?

Why should a bank be allowed to make 150,000 dollars on a 100,000 dollar loan?

How is the bank making $150,000 on $100,000 loan?

letme:

His point being no compounding of interest over the life of the mortgage. Go to a simple interest venue.

Make sense?

Adam:

It would seem if we can afford $1 trillion to invade a sovereign country, we can peel off a few additonal $ billion for those who wish better homes and qualify for SCHIP at 250% of poverty.

I suspect a lowering of mortgage interest to loans amounting to $200,000 across the country would be counter productive to home ownership and also the home building industry. Why not subsidize the home building industry or do we have to globalize that also? If we are really interested in curtailing the interest deducted, maybe:

• Limited the deduction to the primary house (Gross) the owner lives in, which still can be scammed.
• Set a median deduction for various regions, states, or cities which will make the tax code more complex but not penalize most urbanites.
• Start to phase out the homeowner interest deduction at higher incomes such as > $500,000. Isn't this the real issue?

I may disagree with you and Daniel as to where the middle class income begins and ends these days; but, I do not believe it is around the median household income that is reported by the US Census Bureau each year. It has skewed upwards and away from the median household income and not so much because of the growth in that level of income. The new middle class income has shifted upwards and ends somewhere between $300,000 and $500,000. Much can be said for inflation and globalization.

"Middle class" is a truly subjective term. The Census Bureau reports median household income at about $48k in 2006; the poverty line is about $21k for a family of 4.

So, what are the perceived bottom and top ends of the middle class?

peteq:

Hmmm.

Well, if one accepts what qualifies as being poor as defined by SCHIP/CHP; then, we could put a bottom on that statistic of somewhere near 250% of poverty as taken from different median in other parts of the country. $48,000 is the aggregate median for the US and may not be applicable given a particular area.

I think I already defined an upper limit.

Wow, a range of proposals and attacks from various angles...where to begin...

I like letmebefell's suggestion of a five-year sunset provision, but if you will recall a little housing policy history, Ronald Reagan (and I am no defender of that administrations' record overall) did try to abolish the home-interest mortgage deduction in 1986, but it was retained at the last minute due to overwhelming lobbying pressure from realtors. So if Congress in its tax-reform frenzy could not accomplish it then, I very much doubt the current housing market could withstand another financial blow now.

The HMID is really a massive transfer of wealth to homeowners, and very wealthy ones in some cases at that. But it is the still the federal government's single largest housing subsidy.

I think Arlington's idea is too complicated to implement. Plus, what happens in the current market, where home values are dropping in some regions? These declines would distort the amount allowed for deduction relative to the fair-market value of the home, thereby incentivizing bad investment decisions (ie. logically, it would encourage buyers to get in at the apex of the market, when deductible levels are highest as a percentage of the fair market value of the home).

A version of run75441's proposal to "set a median deduction for various regions, states, or cities" already exists in the Fannie Mae conforming loan limit, which is calculated based on area median income (I think). Maybe.

I do this stuff for a living... well, for an attempt at survival, anyway. Did you read my hastily typed reply to Arlington?

I tell you something, and it seems to get zero press, but we have a little problem in our industry. Most of our national Lenders have gone out of business. (Lenders being the corporations that table the money - Lenders perform the loans and then sell them to the secondary market) That's the catch 22 of this housing slowdown; the Lending market has been decimated.

The federal government can't just ride shotgun anymore, the market is in real trouble. My solution is for the FHA to fund loans through local banks at simple interest. Larry called this idea "crazy talk"! (grin) Maybe it is a little outside the box, but it is well within the Constitution. Also, it would stop the major damage being inflicted upon our residential mortgage market by the secondary market; i.e. it would replace the secondary market... which, currently, would come as a great relief. Most of all, it would provide fair mortgages - and through that - stop the debasement of 40% of the nation's debt. (stopping the current free fall of the dollar) everyone wins except the GSE's who go out of business; even Wall Street wins as they finally unload all those mortgages.

Adam(?):

I always "assumed" you were more of a writer than an econ type of person. :) I am impressed.

To my knowledge, the limit of mortgage interest deduction is still $1 million of the initial mortgage plus $100,000 of additional debt tied to the house. However:

"IRS has made it a priority to investigate cases where they believe homeowners are taking mortgage interest deductions that are for loans greater than their acquisition debts."

The limit is set to high. Also, homeownership is still one of the biggest retirement benefits for most of America that is not into stocks, capital gains etc. heavily. My 401k will be taxed at a higher rate than capital gains when I retrieve it. . . why? Aren't dividends also tax free or at worst 15%? The home morgage interest rate is still a middle class advantage.

Thanks run75411.

Housing policy is an interest of mine. It's interesting that daystar is griping about the GSEs. I never understand these critiques; yes, they benefit from special "charter" privileges that give them a monopolistic edge, but they are about the only piece of the financial system ensuring the liquidity of the residential mortgage market at the moment.

And the sophistication of our secondary market is (arguably) one of the reasons homeownership is so prevalent in the US--we've been a model for other countries to emulate.

1) The GSE's are far better than selling (and reselling and reselling and reselling...) the paper on the open market... at least the loan gets serviced by one bank; which means homeowners can send in their payment and not fight a nightmare of having their mortgage moved on them without notice. After which, they get to fight with all three credit bureaus to remove unfair lates.

2) Our GSE's provided home loans, just getting a mortgage was a step up from other nations; traditionally, home ownership has been much easier in America than most other nations (of course, land was more plentiful).

3) But the construction of home loans is an amortized collection of compound interest; which is way too high. The average 30 year Note will collect 120% interest. Wall Street follows their lead, so the whole system is overly usurious. Corruption was rampant, but the real problem is the construction of home loans. When 95% of the monthly payment is being applied to interest, it not only rips off the homeowner, it compounds the inflation of the dollar... which then drives up the cost of houses, gas, food, you name it.