Mortgage interest tax deduction back in the cross-hairs as deficit soars

a nice middle class homeHistorically, buying a home has been advantageous for both owners and the country at large. Long considered the engine that drives the American economy, home ownership brings huge rewards to banks, mortgage companies and builders, and the building industry provides tons of jobs.

Home ownership also has benefited the regular guy since 1913, when owners first were allowed to deduct the interest on their mortgages from their income taxes.

As the country seeks new ways to wrangle the escalating national deficit, however, the mortgage-interest tax deduction has come into the target sights of economists, some of whom see it as a huge drain on the federal Treasury. As it has in times past, the notion of ending that tax break has whipped up a frenzy among the parties most invested in such a proposal.

Thomas Hoenig, president of the Federal Reserve of Kansas City, floated the idea -- often referred to as a "third rail" topic among homeowners, real estate agents and politicians -- at the annual National Assn. of Realtors confab in New Orleans on Friday. The man was lucky to have escaped with his head on.

"We're going to have to make some hard decisions with this thing," Hoenig said. "I'm not saying remove it ... but if we [keep it] without making some shared sacrifices, we're going to pay in another form."

The NAR reaction was swift and negative. Describing the end of the deduction as an "ugly scenario," Lawrence Yun, the Realtors association's chief economist, predicted that the removal of the deduction could create a home-price decline of 15%. He added that the loss of the deduction would deepen the economic recession.

No one expects the mortgage-interest deduction to disappear completely, Yun added, but even he acknowledged that the federal government might chip away at it to help ease the country's deficit.

The battle over these deductions is not new. Those in favor of killing them claim that MIDs, as they're called, are nothing more than a subsidy for the real estate industry and wealthier homeowners (only those who itemize deductions get the deductions). They also are thought to have played a role in the housing crisis by promoting over-investment in home ownership. By some estimates, MIDs will cost the Treasury $131 billion in 2010.

NAR fires back that two-thirds of those who claim MIDs are middle-income owners, so they also benefit, and the deductions historically have brought stability to the housing market. Yun says that home ownership brings social benefits to communities, including lower juvenile delinquency rates and higher student achievement among children of homeowners.

Gayle Williams, a Studio City, Calif., homeowner and single mother of two teenage children, says she bought her home 10 years ago to help offset taxes on her six-figure salary from her job as a television producer. "I love the tax deductions; they cover a lot of my mortgage payments."

Economists pretty much agree that the deductions should either go, or be reined in. Try selling that to the Gail Williamses of the country and their Congress members.

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