Saturday, December 8, 2012

A Major Injustice and Massive Reverberation Effect: The Number One Reason Homeowners' Interest Deduction Should NOT be Ended

While I have written extensively at http://blog.mortgagehelplosangeles.com on both sides of the question of ending the mortgage interest deduction over the past few weeks, and can see major arguments on both sides, there is one huge, overriding issue that must be addressed if this century-old-benefit is to be done away with.

We are a nation that was founded on the principle of justice.  We are a nation of laws, and we can rightly expect the government to protect our investments, and not do things to destroy them.  The elimination of the home interest deduction would effect homes valued at $500,000 to $1,500,000 as the interest deduction is capped for interest on loan amounts under $1,000,000, and homes of less value are not generally going to take schedule A.

If those homes drop 15% as suggested, a huge number of middle class home owners could see a $75,000 to $200,000 loss of value. That is significant, and would be a gross injustice.  How can we as a people justify such a huge "taking" of property from so many middle class among us.  Is this fair?  Fair is hard to define.  But ask yourself if it is just.

By the way, this change in tax law could be compared to the change in depreciation rules that hit apartment and commercial property owners in the late 80's with a similar massive loss in valuations. Those lost valuations "TOOK" massive amounts of assets from those owners without compensation, destroyed the savings and loan industry, and cost the government and the economy untold billions in unintended consequential losses.

A 15% reduction in the values of homes with values between $500,000 and $1.500,000 would likely also have a huge reverberation effect throughout the economy and further undermine Fannie, Freddie, FHA, and all mortgage lending institutions by putting a another huge swath of homeowners into negative net worth territory.

As usual, most who write on this subject and seemingly our politicians, too, have a hard time seeing the downstream consequences of their actions.  This decision is likely to cost the government more in the short term than it gains through taxation.

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