Facts on mortgage tax deductions

Tax reform has been one of the major issues in the presidential election.  One candidate says he can lower rates by chopping deductions, while another says that this cannot be done without hurting the middle class.  Last week NYT published a short piece laying out some under-reported data on who actually benefits from one of the biggest tax deductions of them all: home mortgages.  Some key facts that everyone, regardless of their political persuasion should know:

1. 70 percent of taxpayers do not itemize.
2. More than two-thirds of the benefits go to upper-income households ($100k plus) because they pay more interest on mortgages and have higher tax rates

The pols from both parties are unwilling to admit that there would be winners and losers if the deduction were to be capped or scrapped.  Those who do not itemize or who have small mortgage balances would come out ahead, whereas those who have just taken out jumbos will be less than pleased.  

Final thought: the subsidy provided by the home mortgage deduction encourages Americans to overinvest in owner-occupied housing.  That's why a recent NPR piece listed the deduction as one of six policies about which virtually all economists support and would drive most pols nuts (the others included ending the tax deduction for health care expenses, scrapping the corporate income tax, and taxing carbon). 

Why have lending standards tightened so much?

Supposedly the US credit crunch is over, but ordinary borrowers still have difficulty getting access to credit.  David Wessel has an interesting WSJ column that shows how higher credit scores are now needed, even among those with steady jobs and a good credit history.  This keeps buyers out of the home market and makes it more difficult for those with homes to refinance. 

While no one wants to see a return to the days when a person could get a home loan for zero percent down, one has to wonder why lending standards have swung so far the other way.  Many of the people Wessel talked to pointed their fingers at our old friends Fannie Mae and Freddie Mac.  Burned by so many bad loans, have they now become too risk averse?

Bye-bye to Fannie and Freddie?

So it seems, according to press accounts in NYT and WSJ.  The Obama administration laid out three scenarios for the future of mortgage finance, none of which included Fannie or Freddie.  One option is for the federal government to get out of the mortgage insurance business altogether (except for a scaled-down FHA).  Another is for the government to stay out of the way most of the time except in periods of financial shocks (question: define a financial shock).  In the last case, the government would guarantee mortgages issued by the private sector, but would charge a fee for the service -- much like what is currently done with the FDIC for bank accounts.  

It remains to be seen which approach can get through a divided Congress.  In any of the three scenarios, mortgages would become more expensive and fewer households would qualify.  But after the turbulence of the last few years, that is not necessarily a bad thing.