Feeding The Beast: Why Trump and Congress Should Leave The Mortgage Interest Deduction Alone

President Trump and Congress are once again tinkering with the US tax code (rather than just trashing the entire thing and creating something simple like a flat-tax system). There will always be winners and losers when the tax code is altered. This time the target is middle-class homeowners.

Begin the simple premise that the Federal government wants more of your tax dollars to spend. The Federal government is already spending at almost a rate of 2x over current tax receipts.


And with “mandatory” expenditures expected to keep rising (and discretionary spending expected to decline), the will be increased pressure to find tax revenue from somewhere (or someone) to feed the Federal goverment’s ravenous spending.


What is in their sights? The mortgage interest deduction (MID) for qualified secured debt. There have been calls by a number of people to get rid of the MID, such as Vice President Pence’s Chief Economist Mark Calabria (formerly of the Cato Institute).

Possilities include Calabria’s call for scrapping the MID, lowering the eligibility from $1 million to $500,000 (allegedly impacting fewer than 6 percent of mortgage holders nationally—and converting the deduction into a credit, allowing an additional 15 million low and moderate income homeowners to get a “much-needed tax break”).

Low and moderate income households are often better-off renting given the standard deduction. And low and moderate income households may not fully benefit from the MID if their joint income is less than $77,714. Households earning less than $77,714 but more that $38,173 pay only 10.47% of total personal taxes paid (in 2014, according to the National Taxpayers Union Foundation). And less than $38,173 pay only 2.75% of total personal taxes paid.


It’s the most productive members of the middle class that are forced to pay for subsidies in Obamacare and Social Security already. Removing or limiting the MID amounts to a new middle class tax on those who can’t afford to pay off their mortgage, unlike the political elite in both parties who can continue to get the full tax benefit of home ownership by eliminating mortgage debt.

And what about households that purchased a home that are part of the 6% of the population that have a mortgage balance in excess of $500,000? It will produce a major hit of their after-tax income and likely lead to reduction in home prices, particularly in the suburbs of major US cities. Congress could always grandfather in current homeowners, but the number of households trying to purchase those homes would decline.

Homeownership rates are already at early 1960s levels, back to the days of President Lyndon B. Johnson’s “Great Society” social programs. Now the Trump Administration wants to redistribute the advantages of homeownership AGAIN.


And remember that Canada does not allow MID for homeowners, yet has had explosive home price growth, so thinking that removing the MID will slow the growth of home prices across the board is wishful thinking.

As Kevin Villani wrote in American Banker, “But the “tax loophole” is not the mortgage interest deduction, it’s the failure to tax “imputed rent” from homeownership, i.e., the value of rental services the homeowner receives — done only in Belgium, the Netherlands and Switzerland. This has never been seriously considered in the U.S. because the political, conceptual and methodological problems of taxing farmers for consuming their home grown food — as the U.S. has done — are much greater for homeowner imputed rent.”

And since owners of rental properties get to deduct mortgage interest (as well as depreciation for tax purposes), taking away the MID for households is flat out unfair.

But as I mentioned earlier, Washington DC has to feed “the beast” and its ever-growing expenditures. The simple solution would be to cut Federal spending.





Puerto Rico’s Housing Debt Likely To Be Paid In Full (Opposed to PR’s General Obligation and Agency Debt)

Puerto Rico is seeking to reduce $74 billion of debt,  but Federal housing bonds may be paid in full. Thanks to the US Department of Housing and Urban Development (HUD).
(Bloomberg) — While Puerto Rico and its agencies seek to reduce $74 billion of debt in a record bankruptcy, commonwealth bonds repaid with federal housing money and tobacco settlement funds may dodge a restructuring, according to Moody’s Investors Service.

After Puerto Rico first began defaulting on its obligations two years ago, a federal oversight board on May 3 sought for the commonwealth a form of bankruptcy called Title III. There are six entities remaining that have yet to miss payments to investors. Of those, debt sold by Puerto Rico’s Housing Finance Authority and the Children’s Trust Fund may avoid asking bondholders to accept losses on their securities, Ted Hampton, a Moody’s analyst, wrote in an Aug. 9 report.

“We do not expect either of these securities to be involved in the commonwealth’s debt restructuring, and the federal oversight board has not initiated a proceeding under Title III of Promesa for either of them,” Hampton wrote.

The value of the bonds reflect the strong repayment pledges. Odd-lot trades of fixed-rate Children’s Trust bonds maturing 2039 averaged 97.8 cents on the dollar Wednesday, while Housing Finance debt maturing 2027 traded at an average 104.6 cents, data compiled by Bloomberg show. By comparison, general obligations with an 8 percent coupon and maturing 2035, one of the island’s most actively-traded bonds, changed hands Thursday at about 58.8 cents.


The island’s Housing Finance debt is repaid with yearly allocations from the U.S. Department of Housing and Urban Development, revenue that the commonwealth cannot use, according to Hampton.

“Because of HUD’s role in the program, pledged revenues are not available to the central government of Puerto Rico,” Hampton wrote in the report. “HUD sends the first dollars of amounts allocated to the authority into a line of credit control system for payment of debt service.”

The island’s tobacco bonds, sold by the Children’s Trust Fund, are secured by annual payments from cigarette manufactures under a 1998 Master Settlement Agreement between state attorneys general and the cigarette makers.

Puerto Rico and its agencies have missed about $4.45 billion in debt-service payments to investors, according to Moody’s. The four remaining entities that haven’t defaulted but may undergo a restructuring are Puerto Rico’s Aqueduct and Sewer Authority, the University of Puerto Rico, the Municipal Finance Agency and Highways & Transportation Authority bonds sold for the Teodoro Moscoso bridge.

So why Puerto Rico attempts to restructure its debt, housing debt is protected. Puerto Rico has already defaulted on it debt.


Puerto Rican debt is now selling at $51.25 with a yield of 11.82%.


I suppose Puerto Rico can always expand the export of rum.


And rum ham!