Will Congress Make The Mistake Of Killing The Mortgage Deduction?

Just when I think Obama and/or Congress couldn't come up with any more ways to delay or destroy economic recovery, he proves me wrong.

First, there was the stimulus. Then Cash for Clunkers, followed by ObamaCare. Cap and Trade still lurks, waiting to make energy cost skyrocket. (Like that will help the economy). Then there was the first time home buyers tax credit, followed by a modified version that covered anyone buying a home. Now, to kill off the housing market entirely, they're looking to do away with the mortgage interest tax deduction, which will add thousands of dollars per year to the taxpayer's tax burden.

Do they really think this will help anything? Estimates predict elimination of the tax deduction will bring in $208 billion over the next ten years, but at what cost? What will the actual revenues be when all factors are taken into consideration?

Frankly, I doubt they'll collect anywhere near what they expect to because a lot of people that might have otherwise bought homes will decide it's no longer financially attractive to do so. What will that do to the housing values and the housing market? Two things that I can see.

First, housing values will drop, making an already shaky housing market even more so as an increasing number of homeowners will see their equity disappear. Some of those will find themselves upside down on their mortgages. This in turn means we'll probably see an increase in foreclosures and 'walk-aways', where people abandon their homes because they can no longer justify paying the mortgages even if they do have the money to pay them. Why should they when they'll end up with far less than they started with when they first bought their home? It will make more sense to let the home go into foreclosure rather than to keep paying for housing guaranteed to depreciate greatly in value. (In effect, it's like having your mortgage rate increase from 5.5% to 20%. Even if you can afford to pay it, you're really getting little in return for tall he money you spend.)

Second, the housing market will shrink even more than it has since the home buyer tax credits ended this past April. The only difference will be that the effect on the market will be semi-permanent. It could take decades for the market to recover and even when it does, there will a large stock of homes looking for buyers that don't exist.

In turn, all of this could affect the financial industry as people won't be taking out mortgages or equity loans. The banks won't be making any money because of the dearth of loans (and likely a large supply of foreclosed homes they can't sell at any price).

Again, Congress is getting ready to shoot itself (and the economy) in the foot by proposing legislation that will have the unintended consequence of killing off yet another part of the economy and ending up with even less revenue than they started with. If they really want to help reduce the deficit, then perhaps they should stop spending money we don't have.

If Congress were really interested in generating a little more revenue, then perhaps they could do away with the interest deduction for second homes. It's been done before and had little overall effect on the housing market as most activity on the market is for primary homes.

But they won't do that because, after all, it makes sense.