CommentaryMarket December 19, 2012

In Defense of the Mortgage Interest Deduction

The chatter on the Interwebs lately is that a law that has been sacrosanct for generations, the right of a homeowner to deduct their mortgage interest on their income taxes, is now in jeopardy due to the fiscal cliff we collectively face in the wake of the Recession. 

What a shame.

It is a shame for many reasons, not the least of which is that politicians, in their passion to get reelected, will fix anything that isn’t broken to say they did something. It is a shame because many of my own colleagues, a measure of whom are in low cost markets where they would personally be unaffected, are ambivalent about a change in the law.

The mortgage interest deduction (MID) has been in place since 1913. It has enabled generations of Americans to secure their futures. It is a promise in place that has been the incentive for millions of current homeowners to buy. I’ll restate that: The mortgage interest deduction is a presupposition that millions of people counted on to make the 6 and 7 figure decision to buy their current home. It factored onto choosing to own, what price to pay, and what community to choose. Taking it away breaks a significant promise.

What most people do not realize is that when they buy a house with a 30 year mortgage, they pay twice the amount of their loan over that period is just interest. Forget the current rates; they are a blip. If you bought a house 5 years ago at a 5.5% rate and borrowed $300,000, you’d pay back $613,000 back not including your property taxes. That is $313,000 in interest. When rates inevitably raise again from the current anomaly, people could pay back triple, not double, their principal due to interest.

In the above example, a borrower in a 25% tax bracket would pay roughly $16,000 in interest their first year and be able to save $4,000 in taxes (for clarity, speak to a CPA. I don’t advise on taxes. To say the numbers are perfunctory is an understatement). Some politicians see that and salivate. Some holier than thous scream an unfair subsidy. They are mistaken. That deduction is a 100 year old promise, and that homeowner puts that money right back into the economy- they buy lawnmowers, put on new roofs, update the bathroom, and thousands of other things that have made strong home ownership the cornerstone of a stable economy.

That is not my hot air. It is a fact. Don’t take my word for it, take Franklin D Roosevelt’s. One of FDR’s enduring legacies is the Federal Housing Administration, because even the liberal FDR knew that the get out of the Great Depression, housing had to be strengthened. FDR wouldn’t support removing the MID, not did Truman, Eisenhower, JFK, LBJ, or anyone else that followed. And for good reason. It was never part of the problem. The MID didn’t cause the crash, and indeed enabled more people to stay in their homes when times got tough.

Removing the MID not only breaks our word as a society, it destabilizes housing, which is the reason the whole Great Recession started in the first place. Removing the mortgage interest deduction puts millions of people counting on that money thousands of dollars behind, creating more distressed borrowers and cutting off commerce from other sectors because the money that would otherwise circulate is no longer there. And the distress caused for current home owners doesn’t even speak to the repercussions on those who might otherwise buy. Affordability would be lowered. Tax advantages would be undermined. The buyer pool would shrink. Values would decrease. Foreclosures would increase. Sound familiar?

If there is anything we should have learned from the past 5 years it is that a stable housing market is necessary for a stable economy. Disrupt housing and you get a hot mess. Those who are old enough to recall the 3 headed monster of the late 80’s and early 90’s will see a parallel: The Savings and Loan crisis, a Wall Street crash, and then a housing bust lead to a recession from which all too few lessons were learned. The MID was not on the table then; The FDIC absorbed the FSLIC, freely assumable FHA mortgages were converted to requiring approval, and the economy improved incrementally. Ability to buy and keep was never touched. No recovery ever touched it. We should not change that.

We should learn from history, not tempt fate. If anything, housing should be strengthened and bolstered to ensure stability going forward, and not viewed as a kettle from which money can be dumped into the great vacuum of government. Preserving the mortgage interest deduction will keep housing, and a sustainable recovery, stable.