As if the federal government doesn't spend enough to promote homeownership, Congress is seriously considering legislation that would depart from precedent and allow homeowners to deduct the cost of mortgage insurance premiums from their income taxes. Lenders typically require borrowers who put less than 20% down to take out, and pay for, private mortgage insurance to cover the lender in case the borrower defaults. Minority housing advocacy groups, consumer and union groups, mortgage insurance firms and mortgage bankers endorse the legislation.
Despite its appeal to politicians in an election year, this is an especially bad idea that does not withstand serious scrutiny from either a practical or policy standpoint. Our country needs a more balanced and comprehensive housing policy that places increased reliance on the important and growing role ofhousing in communities across the country. And Congress must understand that a true national housing policy involves much more than additional and questionable incentives for homeownership.
Arguments Against Legislation
First, current homeownership incentive programs are highly effective and successful. In fact, our nation's homeownership rate recently hit a record high of 68.4%, according to the Census Bureau.
Second, the legislation raises the question of whether there is, or should be, a limit to federal support for the “dream” of homeownership. According to the U.S. Budget, the government will direct more than $110 billion in tax expenditures to encourage and subsidize homeownership in fiscal year 2004. That includes the mortgage interest deduction, state and local property tax deductions and the exclusion of most house sales from capital gains taxes, but does not include other homeownership incentives offered through HUD.
Third, the Internal Revenue Service (IRS) opposes the radical idea that mortgage insurance premiums should be deductible because it's contrary to longstanding tax precedent. Under current law, mortgage interest expense is tax deductible. Most other homeownership-related costs are not deductible, including most settlement costs — such as appraisal and notary fees — and premiums for insurance, including fire, comprehensive, title or private or FHA mortgage insurance.
Of course, state and local property taxes are deductible. The distinction drawn by the IRS is clear: mortgage insurance premiums are a “service” expense related to a loan, similar to an appraisal or credit report, rather than an integral part of the cost of mortgage money, such as interest charges, which are deductible.
To blur this well-understood and established distinction, as proposed, is to invite the potential for enormous abuse of the tax laws and further loss of federal tax revenues through new homeownership deductions. If mortgage insurance, then why not all insurance premiums?
Despite the sponsor's claim to target the benefits to families making less than $100,000, the legislation may not achieve that result. Many lower-income households do not pay enough in mortgage interest to itemize their deductions, opting instead to take the standard deduction.
Opponents Face an Uphill Battle
Congressional sponsors, and the special interest groups supporting them, are eager to grant this new giveaway. In 2003, without debate, they added it as an amendment to another Senate bill only to see the provision dropped after the National Multi Housing Council (NMHC), the National Apartment Association (NAA) and other groups expressed procedural and substantive questions. Sponsors have pledged to continue their efforts this year, an election year, when politicians are especially vulnerable to pressure from mortgageand their allies to push this tax bill.
This legislation illustrates the bias in our national housing policy. Many groups, including the NMHC and the NAA, stress the need for a more balanced national housing policy. Still others, such as the National Low Income Housing Coalition, question the emphasis on homeownership as potentially harmful to many families by raising concerns that a family living paycheck to paycheck faced with a major home repair could be forced into bankruptcy or foreclosure.
Despite the good intentions behind the legislation, further skewing our national housing policy with yet another homeownership incentive is not something our nation needs right now.
Howard Menell is the tax advisor for the Washington, D.C.-based National Multi Housing Council. NMHC and the National Apartment Association operate a Joint Legislative Program.