The 30-Year Mortgage On It's Way Out?

[JohnH]

Here's an interesting article which, if correct, would have a significant impact on the tax preparation industry long-term, not to mention the US economy in general. For the majority of our clients, the home mortgage deduction is the threshhold deduction opening up the benefits of itemizing their other deductions. I also wonder how this policy shift would impact people's flexibility in changing jobs, etc.

A radical change of this type would have a huge negative impact on home prices. On the other hand, a more stable home financing market might bring more order to the entire credit system, once the initial 5-8 year pain is over.

http://www.housingwatch.com/2010/09/08/30-year-fixed-rate-mortgage-an-endangered-species-part-1/?icid=main%7Chp-desktop%7Cdl6%7Csec3_lnk2%7C169195

[dyne]

I believe that within two or three years the standard deduction will be vastly increased
to $30,000 or thereabouts for a joint return and if so most taxpayers will not be able
to itemize and therefore the home mortgage interest will not be deductible by them.

[Nashville]

Endangered Species

I agree with Fred. I believe the Sch A is perhaps a more endangered species than the 30 year mortgage. I'm old enough to remember when the "standard deduction" was first called the "low income allowance" and the tax code has ever since been trying to shove more and more taxpayers OUT of Sch A and INTO taking standard deductions. Just two examples in recent memory are 1)Adding over 65 and blind allowances to the standard deduction 2)Adding property taxes to the standard deduction and even sales tax on new cars in 2009. There are a dozen more examples I won't mention so we can move on.

To begin with, the 30-year mortgage is not really in the best interest of the borrower. I view this as more debt, longer debt, and yet another opportunity for the borrower to stick his head in the sand. A typical discussion might be from wife (or husband) - "Oh look honey!!! By taking 30 years instead of 15, the bank is going to lower our house payment by $12/month!!!" Stop and think how stupid this really is. 15 more years of debt servitude for a lousy $12/month. Like Esau selling his birthright for a bowl of soup.

Nonetheless, what John says is true. If BillyBob and SweetSue can't lower their payment by $12/month they won't qualify under current guidelines, and lending, new home sales, and construction will crash. What will have to heppen would be a relaxing of the current guidelines to allow passage of shorter term loans.

I remember when the standard mortgage used to be 20 years, not 30. They found out by stretching out another 10 years the housing bubble would grow immensely. But as in all such gimmicks, they only buy time and kick the can down the street.

[JohnH]

Note the other ideas under consideration. 30% down payments, less government participation in the lending process, shorter loan terms, no long-term fixed rates, etc. This would vastly increase the risks of home ownership and eliminate some people entirely from the buying pool. Clearly they're embracing the idea that more people should be renters rather than homeowners.

I'm not saying this is necessarily good or bad. After all, someone paying 5% down and carrying a 30-year mortgage really isn't an owner in any real sense of the word until about year 10 or so. Their name is on the deed, but in actuality they're renting from the bank, especially now that they can't count on housing price inflation to convert them into an owner with equity. When you purchase equity you have a stake in the process. But when your equity is primarily a result of price inflation, especially if you then borrow against it, you no longer have a dog in the fight so when prices go south you have little incentive to avoid a default.

So perhaps in the long run a policy like this will bring some stability to the credit markets. But in the short run there will be lots of pain as people adjust to deflation or even collapse in housing prices. A policy like this will have negative consequenses for many years after it's implemented. Of course, in the long run we're all dead, too.

[Burke]

I believe that within two or three years the standard deduction will be vastly increased
to $30,000 or thereabouts for a joint return and if so most taxpayers will not be able
to itemize and therefore the home mortgage interest will not be deductible by them.

I do not see it going up that much, but I do believe the taxpaying public is better served by increasing the standard for all filers and eliminating itemizing altogether. Adding back certain items to the standard deduction defeats the purpose and just makes it more complicated. So many things which have also been created and put elsewhere on the return, such as student loan interest, the 1/2 SE credit (just lower the rate), moving expenses, educator expenses, penalties on early WD (just reduce the amt reported on 1099-INT), should be eliminated to simplify the form itself.
And as for EIC, don't get me started!! There is a tax simplification committee which has been working on this for some time, reducing the 1040 from 75 lines to 30. However, I don't think I will live long enough to see Congress stop using the Tax Code for social policy.

[JohnH]

H-m-m-m. I thought they were using the tax code to fill their campaign coffers and line their pockets.