A new law that will allow some taxpayers to deduct the cost of mortgage insurance seemed silly but relatively harmless when it was enacted late last year. Yet now, in the spotlight of a subprime lending “tsunami,” this law stands as an egregious example of poor public policy: In effect, the short-lived deduction creates an incentive for home buyers to make smaller down payments.
Mortgage insurance, whether purchased in the private market or obtained from the federal government, enables some people to purchase homes they otherwise wouldn’t be able to afford. That’s not all bad. But even with the new tax break, many homeowners still would be better off if they could qualify for a second “piggyback” loan or better yet, made a bigger down payment.
Down payments exist for good reasons: They enable home buyers to obtain a mortgage on more favorable terms and at lower cost. They create equity and cushion new homeowners from the cyclicality of housing markets. And they reduce the lender’s risk if the borrower defaults on the loan.
The wisdom of down payments was aptly noted by one Marvin Carter, an 80-year-old soybean and corn farmer in Carrollton, Ill., who “said he didn’t understand how someone could buy a home without putting any money down,” according to a recent Los Angeles Times story, “Faith in Home Values Persists.”
“When I buy a tractor, they always want 20 percent, and I still have a hard time,” Carter reportedly told the newspaper.
That’s not to say a down payment is a perfect solution for every borrower or that mortgage insurance doesn’t have value in some situations. But surely that doesn’t mean the federal government should create an incentive that promotes smaller down payments.
And if tax-deductible mortgage insurance were such a super idea, why is the new tax break subject to such severe limitations?
Only those taxpayers whose annual household income is less than $110,000 and who itemize their deductions are eligible, and then the deduction is phased out in tiers for those whose household income is more than $100,000, but less than $110,000. Why does an extra $10,000 in income warrant a phase-out that creates confusion and is thus another barrier against those who might be able to take the deduction?
Moreover, the deduction is available only for the 2007 tax year. That means only taxpayers who obtain a mortgage with mortgage insurance this year are eligible and even then the cost is deductible only for this one year. Again, only a small number of people relative to the entire populations of homeowners and taxpayers will be able to receive this benefit.
Proponents argued that a mortgage insurance tax deduction helps low-income and minority households purchase homes. The current tax break, estimated to be approximately $300-$350 for most taxpayers who qualify, is certainly a sweet perk from the federal government. But how many people will clamber into the ranks of home ownership on the strength of an extra $350 and still have the means not only to buy, but also to own that home? And is an individual or family that earns, say, $75,000, $95,000 or $105,000 in annual income truly a “low-income” household?
And even if $350 makes such a difference for a meaningful number of people, why should the federal government help this specific small group at the expense of other taxpayers, especially when homeowners as a group already receive other lucrative tax breaks?
Cynics might look for an answer at OpenSecrets.org, which reports that executives of Mortgage Guaranty Insurance Co., one of the nation’s largest mortgage insurance companies, have been consistent donors to political causes through the industry’s trade group, Mortgage Insurance Cos. of America, which donated $20,000, half in May 2005 and half in September 2006, to the Nevada State Democratic Party. Nevada is the home state of U.S. Senator and Democratic Majority Leader Harry Reid.
The bottom line is that mortgage insurance primarily benefits mortgage insurers, who collect the premiums, and lenders, who can obtain financial protection against the borrower’s default at no cost to themselves since the borrower is forced to pay for the insurance. A tax incentive that encourages smaller down payments to support these industries is not a smart idea and shouldn’t be extended in the future.
Marcie Geffner is a real estate reporter in Los Angeles.
Copyright 2007 Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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