With proposed tax changes from President George W. Bush's advisory Tax Reform Panel considered detrimental to the housing market, MBS market participants are now up in arms and hindering the implementation of the suggested changes.

Specifically, the panel recommended limiting the mortgage interest deduction by lowering the mortgage interest cap - the loan amount that homeowners could receive a tax break for interest paid - from $1 million to the local Federal Housing Administration loan limit. The deduction would be replaced by a credit equal to 15% of interest paid on mortgages up to the interest cap. The panel also suggested changes viewed as making second lien and second homes less attractive.

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