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Debt Crisis, Home Loan Rates and the Value of the Mortgage Interest Deduction

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There has been a lot of talk about how the recent debt crisis would impact our economy and specifically home mortgage rates. I kept hearing Senators say that if we didn’t raise the debt limit that mortgage rates would increase and we would spin into a recession. The politicians on both sides of the aisle concurred that if the debt ceiling wasn’t lifted that the stock market, home loan rates and credit ratings would be impacted significantly. On August 2, President Obama signed the bill debt ceiling that passed Congress and the Senate and the U.S. stock market fell almost 300 points. It was the largest drop of the year on a day that politicians had heralded as the day the markets would rebound. Just two days later, the Dow Jones fell 515 points on fears of a global debt crisis and all of the other indicators pointing to another recession in the United States. Am I the only one that thinks that we never got out of the recession? The Obama administration talked a lot about an economic recovery last summer, but with high unemployment, rising debt and virtually flat growth there is no data to support Obama’s claims.

With the unemployment rate at 9.2%, the Federal Reserve has been able to key home loan rates at record lows, but with inflation creeping in, you can see higher interest rates on the horizon. According to Bank Rate, fixed 30-year mortgage rates fell 20 basis points this week, to 4.54%. This is the lowest fixed 30-year rates have been in over eight months. The Mortgage Bankers Association reported that fixed 15-year mortgage rates dropped 15 basis points, to 3.68%. The popular 5/1 ARM decreased 11 basis points, to 3.23%.

Several of the credit agencies came out and said that the American credit ratings were still in jeopardy because the market did not believe that the US government had passed a bill that would eliminate the spending problem that drove us to this “self-created” debt crisis. I think it is funny that the debt bill was passed that forecasted a 2 trillion dollar reduction on a 10 trillion dollar deficit. There were no specific spending cuts in the bill and the super-committee that will come together in a few months will likely target tax increases and defense cuts.

Rumor has it the mortgage interest tax deduction is one of the “loop-holes” they are considering eliminating in an effort to increase tax revenues. Most economists living in the“real world” would agree that this would be another devastating move by our government to hinder and already sluggish housing market. It’s no secret that Obama favors eliminating the mortgage interest deduction for the wealthiest Americans. His administration has thrown out getting rid of the mortgage tax deductions for people with loan mortgage balances that exceed $500,000, as well as the write-off for interest on vacation homes and investment properties. This would really under-cut the housing market recovery efforts in high cost regions in states like California, Colorado, Connecticut, Hawaii, New York, New Jersey, Virginia, Maryland and Washington DC. For example where I live in Southern California, a $500,000 is very common and not really much above the median average. This is a typical class-warfare tactic that Democrats like to use, but unacceptable in the middle of a major housing crisis.

Eliminating the mortgage interest deduction at any level will have a negative impact on property values that will ultimately affect the entire country. As nearly a third of American homeowners find themselves stuck with an underwater mortgage, now is the time to extend incentives for a home purchase loan on owner and non-owner occupied properties. I recommend that contact your local congressman and let him or her know how important that tax deductions for interest on home equity credit lines, refinance and purchase mortgages regardless of the mortgage balance.

John Crudele of the New York Post had an interesting take on the mortgage deduction, “Are They Nuts!? One more time, This Is The Craziest Thing I’ve Ever Heard!” Crudele reiterated that suddenly changing the rules on home loan interest deductions would make homeownership less enticing and he also concurs that it would lower the value of everyone’s home even more than has already occurred. Crudele continued, “Clearly this would cause an increase in home forecloses that will build up on the books of banks and government agencies and would certainly set back any economic recovery by years.”

Last week a forum, Rethinking the Mortgage Interest Deduction, National Association of Realtors’ Chief Economist Lawrence Yun joined a panel of experts to debate the future of the mortgage interest deduction. Yun said, “As the leading advocate for housing and homeownership, NAR firmly believes that the mortgage loan deduction is critical to the stability of the American housing market and economy.” The NAR President continued, “The mortgage interest deduction facilitates homeownership by lowering the carrying costs of owning a house, and it makes a real difference to middle-class families.” Yun maintains that now would be worst possible time to modify the tax laws, which would further hinder the housing sector’s fragile recovery. Reducing or eliminating the interest deduction on home loans  is a de facto tax increase on homeowners, who already pay 80 to 90% of U.S. federal income tax. Yun said, “Doing away with the mortgage interest deduction should not be thought of as removing a tax break for homeowners, but rather increasing taxes on the middle class,” he said. “Furthermore, home equity has been a major source of financing for small businesses and start-ups and any change to the mortgage interest deductibility will significantly hinder their ability to create jobs.”

Yun also asserted that it’s a misconception that only the wealthy benefit from the mortgage interest deduction, when in reality it benefits primarily middle and lower income families. Almost two-thirds of those who take advantage of home loan tax deduction are middle income earners and 91% of people who claim the deduction earn less than $200,000 per year.

There is absolutely no justification for penalizing homeowners that have higher loan amounts. One thing for sure, when you consider how irrational the discussion is with people trying to justify wiping out the tax advantages of a mortgage you realize that these politicians are desperate and they will lie and steal freedom if it gets in the way of their agenda.

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