It appears that the sacred cow known as the mortgage interest deduction (MID) is on the table as the White House and Congress grapple on a budget deal to lift the federal debt ceiling.
According to industry officials, capping the MID, and eliminating it entirely for second homes and home equity loans is being discussed, but at press time no further details were available.
According to combined news reports, changing the MID is part of a deal being negotiated between President Obama and House Speaker John Boehner, R-Ohio.
Traditionally, the mortgage industry has been adamant against altering the MID, which is currently capped at mortgage debt of $1 million. The way things stand today, interest paid on second homes and HELOCs can be written off.
Glen Corso, managing director of the Community Mortgage Banking Project, said changing the MID now would damage an already weak housing and loan market. “Home sales are very slow right now,” he said. “Is this really the time to start talking about doing this?”
Corso noted that many lenders qualify applicants based on “what the rules are today.” He said changing those rules could wreak havoc on the business.
Late last year a bipartisan presidential commission proposed cutting the MID, which led to an outcry from lenders, realtors, and the housing industry.
A deficit reduction plan being advanced by the "Gang of Six" senators is vague when it comes to clipping the MID. The plan directs the tax committees to "reform not eliminate" tax expenditures for health, charitable giving, and homeownership.
This leaves the tax writing panels with several options to reduce the MID, including whittling down the $1 million to $500,000.
The President’s bipartisan commission proposed turning the MID into a 12% tax credit and limiting its reach to $500,000 in mortgage debt but only for primary residences.
For homeowners in the 25% tax bracket that pay $6,000 in mortgage interest, the proposed 12% tax credit would give them $720 to reduce their total tax liability.
The current MID would give the homeowner a $1,500 tax deduction.