One of the housing industry’s leading supporters in the U.S. Senate says that he would be in favor of limiting homeowners’ mortgage interest deduction if the tradeoff were lower corporate tax rates.
In keynote remarks he delivered via Skype from his office in Washington, D.C., Sen. Johnny Isakson (R-Ga.) told builders and suppliers attending Builder’s Housing Leadership Summit in New York City on Wednesday that he was against reducing or eliminating the deduction to preserve other tax breaks.
However, Isakson also believes the MID “has to be considered part of the mix” in any strategy to shrink the federal deficit and debt. He pointed specifically to the proposal by the Simpson-Bowles Commission—to phase out the MID by limiting it to a 12% tax credit on homes up to $500,000 (MID’s cap is currently $1 million) and eliminating the deduction for second homes—as one possible route that Congress might ultimately take.
Isakson’s comments put him at odds with the NAHB, whose chairman Barry Rutenberg referred to the senator as “one of the most respected people on housing in the Senate.” Rutenberg is a staunch advocate for the MID as a pillar of homeownership and savings.
Also challenging the wisdom of phasing out the deduction is Kevin Villani, a former chief economist for Freddie Mac. Writing recently for American Banker’s “Think Bank” opinion blog, Villani states, “There is no convincing evidence that eliminating the mortgage interest deduction now would free up capital for more productive investment.”
He goes on to say that “to the extent it historically induced people to become homeowners and invest more in housing, [MID] likely also increased household saving (that’s why they were called savings and loans) for a down payment—a requirement that should be re-instated—by as much or more as the increase in investment.” Villani and Rutenberg each contends eliminating the MID would cause house prices to deteriorate by another 20%, “the approximate value of their lost mortgage interest deduction, exacerbating bank foreclosure losses,” Villani wrote.
Isakson, who championed the 2009 tax credit for first-time home buyers, believes his colleagues in the Senate are, in the main, supportive of housing and homeownership, even if that support for some is expedient. “We’ll never get below 7.5% unemployment if we don’t get the housing industry back.”
Prior to addressing a rally of 10,000 Realtors in Washington today, Isakson told U.S. News& World Report that the housing market “was the beginning point of the spear going into the recession and it will be the spear leading us out.” In that interview he estimated that housing makes up about 15% of the economic activity in the nation. “It’s that gross domestic product that needs a boost and it’s housing that’s going to take us from where we are to where we want to go.”
The industry’s recovery, he suggested during Builder’s Summit, will depend in part on attracting more private capital to the mortgage market. Last year, he introduced the “Mortgage Finance Act,” which within 18 months of its enactment would place Fannie Mae and Freddic Mac into receivership and phase out these entities over a 10-year period. Their replacement during this transition period would be a Mortgage Finance Agency that would guarantee securitizations of high-quality mortgages (those with at least 5% down payments and between 70% and 90% loan-to-value). “A main function of the Mortgage Finance Agency is to provide a dependable, transparent market for high-quality mortgages,” this bill states.
This legislation, if passed, would also create a self-funding catastrophe fund to protect taxpayers from having to bail out the agency in the event of another housing market collapse during this 10-year transition period. The goal, says Isakson, would be to take the agency private within that decade.
Isakson spoke briefly about the SAVE Act, which he and Sen. Michael Bennett introduced last year. This bill’s language has been altered since that introduction, but in essence it would allow home buyers who choose to purchase an energy-efficient home to apply projected long-term savings in their energy costs to their income statements to qualify for a mortgage. The Institute for Market Transformation, quoting government estimates, reports that the average U.S. household currently spends more on energy costs than property taxes each year.
While he doesn’t think the SAVE (for Sensible Accounting to Value Energy) Act has a chance of passing during this session of Congress, he’s hopeful that some form of this legislation will eventually see the light of day.
He’s also hopeful that something can be done about the appraisal process which Isakson, a third-generation Realtor, calls “an abject disaster.” He blames the Obama Administration for being “overly regulatory” on the banking system. While including short sales and foreclosures is unavoidable in appraising new homes in most markets these days, Isakson prefers a calculation that also factors in “cost to replace” and market value analyses.
John Caulfield is senior editor for Builder magazine.