Why They're After Your Favorite Tax Break

There may be nothing more American than the home-mortgage deduction, which came into being in 1913--two years before the New York Yankees wore pinstripes. This deduction has helped make the American Dream affordable and has contributed to a run-up in the homeownership rate to 69% from 44% during World War II. In recent years, the mortgage deduction hasn't just helped folks get into a house, it has given them the most valuable tool for managing their finances since the piggy bank: tax-deductible home-equity loans and lines of credit. Just try to find a rate on a credit card or construction loan that, after adjusting for taxes, comes to around 4%, as it does with home-equity borrowing. People have been tapping into this low-cost source of funds for college tuition, vacations and other spending that bailed us out of the last recession.

Now they want to take it away. A presidential panel last week suggested eliminating the interest deduction on all types of home-equity borrowing and replacing it with a 15% tax credit for a principal residence. Is this lunacy? From the homeowner's perspective, it sure seems like it.

Lawmakers have toyed with curbing the mortgage deduction for 30 years, both for utilitarian reasons (to boost tax revenue) and philosophical ones (to make the tax code less favorable to the wealthy). Yet each time the idea has surfaced it has been swatted away amid public outrage and the battle cries of every real estate lobbyist not sunning at his second home on Fiji. This time the outrage may be even more shrill, given the fears of a real estate bubble about to burst. "We are raising the loudest possible alarms," said Tom Stevens, president of the National Association of Realtors, which along with the Mortgage Bankers Association and other industry players concludes that losing the deduction would drive home prices as much as 15% lower, sap consumer confidence and imperil the economy. "You could not pick a worse time to bring this up," says Edward Yingling, president of the American Bankers Association. "The housing market is already testy."

Indeed, mortgage rates rose last week to 6.31% for the average 30-year, fixed-rate deal--the highest level in 16 months. With higher borrowing costs, mortgage applications have been falling and home prices have been leveling off in many markets. Taking away the mortgage deduction would further boost the cost of buying; even proponents of scrapping the deduction concede that home prices would take a hit, though they say the brunt would be taken at the high end of the market--homes at $1 million and up.