77% of mortgage interest tax deduction benefits go to households earning over $100,000 (Source: Smart Growth America)
Smart Growth America, a national research and advocacy organization for better development practices, recently released a report recommending a slate of reforms to federal government involvement in the real estate market. Together, the reforms would purportedly save approximately $33 billion while aiming to better align federal programs with policy priorities.
Among the report’s criticisms of current federal programs are that they favor single-family homes over other housing types, penalize individuals who cannot or choose not to buy a home, and that they benefit a relatively small proportion of households. For example, over 75% of mortgage interest tax deduction benefits go to households with incomes of over $100,000/year; arguably, these benefits are not promoting broad homeownership as much as subsidizing more expensive home purchases by higher income buyers.
To address those concerns and others, Smart Growth America (SGA) proposes several policy changes, many aimed at removing subsidies which lack a strong link to housing policy objectives. One such change would be to reduce the mortgage interest deduction value cap from $1 million to $500,000 and to limit the deduction for households earning over $100,000 so as target the benefit to individuals with greater economic need.
Another suggestion is to lower the limit for FHA-insured loans from its current historically high level of $729,000. Congress raised the FHA limit during the recent economic downturn, during which period FHA’s share of insured mortgage originations grew from 5% to 25%. SGA suggests lowering the limit for FHA loans back down to more traditional levels to refocus on the program’s original intent of helping first-time home buyers obtain financing they couldn’t otherwise obtain in the private mortgage market.
One of the report’s most innovative ideas is the establishment of mortgage savings accounts. Americans may already take advantage of tax-free savings accounts for health care and college expenses. Smart Growth America suggests that Congress should authorize a similar option to allow individuals to save for a home purchase. Modeled after an existing program in Montana, it would be limited to first-time home buyers, who would be able to make pretax contributions for up to 10 years; funds put towards the purchase of a home would not be taxed.
Among the report’s other suggested reforms are to eliminate some rate subsidies from the National Flood Insurance Program, increase the Low Income Housing Tax Credit, and to improve the Rehabilitation Tax Credit. The full report can be viewed here.