The discourse around proposed changes to the federal tax system, especially between talk show pundits and economists and politicians—each with their own allegiances—is devoid of some simple, transparent facts. A first step toward public understanding of who benefits and who loses from proposed changes to the Mortgage Interest Deduction is to examine current data on home mortgages.
In 1975, Congress passed the Home Mortgage Disclosure Act (HMDA), which requires lending institutions to report on all applications for mortgage credit. The federal government recently released 2016 data (the most current available) on mortgage lending activity across the U.S. While not every mortgage is captured by HMDA, it stands as the best representation of mortgages made by the nation’s lending institutions.
A review of the facts:
Very few mortgages are made for $500,000 or more
There were more than 7 million mortgages made to purchase homes or refinance existing mortgages for owner-occupied, 1 to 4 family, and manufactured housing units. Of those, 93 percent were for an amount under $500,000. This means that the proposed $500,000 limit on Mortgage Interest Deduction that is now part of the tax reform discussion would impact under 7 percent of homebuyers and people who seek to refinance their existing loans. Nationally, approximately 1 percent of loans were for more than $1 million.
While the proposed $500,000 threshold would not impact most of the nation’s homebuyers or people who seek to refinance existing mortgages, there are communities where that limitation would have a large effect. For example, in San Francisco, 64 percent of mortgages were for more than $500,000 in 2016, and 18.5 percent were for more than $1 million. Although not as extreme, in Washington D.C., and Orange County, California, roughly 37 percent of mortgages were larger than $500,000 and 4.5 percent exceeded $1 million. Boston, another high-priced market, had 22 percent of mortgages exceed $500,000 and 3.9 percent were larger than $1 million. Despite these outliers, millions of borrowers in cities across the U.S., like St. Louis, Philadelphia, Dallas, and Milwaukee, would be largely unaffected by the new threshold.
Even fewer mortgages are made for $750,000 or more
If congressional negotiations concluded with an easing of that limit to $750,000, another 4.8 percent of mortgages across the U.S. would continue to receive the Mortgage Interest Deduction. In 2016, fewer than 2.5 percent of borrowers received a mortgage for more than $750,000.
There is precedence for national housing policy with regional variation
The 2017 FHA loan limits in areas not considered “high-cost” are generally below $300,000; conforming loan limits for Fannie Mae and Freddie Mac are approximately $425,000. High-cost loan limits rise to $635,000 (or higher)–above the $500,000 proposed threshold.
5. Borrowers who are getting $500,000 mortgages tend to be well-to-do
Of those who received loans for $500,000 or less, 40 percent had incomes at or below the HUD-established median family income where their home is located. Another 43.5 percent of households had incomes double their area median. For those who received loans greater than $1 million, 55 percent had incomes greater than five times the local median. Among borrowers who received loans for $500,000 or less, 47 percent had incomes below $75,000 and almost 88 percent had incomes below $150,000. Conversely, for those who received loans greater than $1 million, almost 38 percent had incomes between $300,000 and $500,000 per year and another 40 percent had incomes greater than $500,000 per year. Of those whose income is $300,000 per year or less, 95 percent received loans of $500,000 or less.
6. The existing Mortgage Interest Deduction disproportionately benefits the highest-income borrowers
The non-partisan Joint Committee on Taxation reports that in 2017, the home Mortgage Interest Deduction taken by taxpayers resulted in $63.6 billion in foregone taxes; deductions for property taxes was another $33.3 billion. They estimate that more than 20 percent of the beneficiaries and 45 percent of the tax expenditures went to households with incomes over $200,000. Credits and subsidies designed to ease the cost burden of renters, who comprise approximately 37 percent of the nation’s households, amount to a much smaller amount.
7. Renters are still out in the cold
Harvard’s Joint Center for Housing Studies reports that in 2015, 7.6 million owner-occupied households (10.2 percent) were severely cost burdened, meaning that those households spent more than 50 percent of their household income on housing costs (e.g., mortgage, insurance, and taxes). This compares to 11.1 million renter-occupied households (25.6 percent). Cost-burden rates for lower-income households are substantially higher. For example, 41.6 percent of owner-occupied households with incomes under $30,000 per year were severely cost burdened compared to 54.4 percent among renters.
Cost burdens are a serious concern because, particularly when incomes are lower, there remains an insufficient amount of the monthly income to pay for other things people need–food, medical care, transportation, childcare, etc. Certainly, the Mortgage Interest Deduction and federal subsidies in the rental market generally help those owners and renters who avail themselves of the benefits. While the Mortgage Interest Deduction is available to every homeowner with a mortgage (although many lower-income homeowners do not itemize, and thus don’t take advantage of it), rental assistance touches a relatively small percentage of all renters and particularly those in need.
Food for Thought
To paraphrase the late Daniel Patrick Moynihan, we are entitled to our own opinions, but not our own facts.
Objective data on “who benefits” from the mortgage interest deduction shows that the $500,000 limit is one that leaves unaffected the overwhelming majority of homeowners (and homeowners who want to refinance their existing mortgages).
One could reasonably argue for regional indexing of the $500,000 threshold value so that homeowners in high-priced areas are not disadvantaged. This kind of indexing is not alien to the mortgage and real estate markets (e.g., FHA and GSE loan limits vary by region).
Academics, advocates, and elected officials over the years have suggested that tax savings from changes in the rules around the home Mortgage Interest Deduction could be used to realign and rebalance the way the federal government subsidizes ownership and rental housing.
Now is the perfect time to consider whether some part of the savings from the home Mortgage Interest Deduction could be allocated to provide additional financial resources to the nation’s renters, either through enhanced Low Income Housing Tax Credits allocations, additional funding for housing choice vouchers, or any of the other well-established ways the federal government supports the nation’s housing market.
Ira and Michael, one of your “facts” is untrue. Your so-called fact #6 starts with “The existing, uncapped, Mortgage Interest Deduction…” Well, boys, the MID is currently capped at $1 million. While a $1 million cap might as well be uncapped for me and most Americans, it is in fact a cap. Claiming that the MID is currently uncapped undermines your otherwise excellent article.
Hi Jerry, what you read was an editing error and has since been corrected. We regret any confusion it may have caused readers. And thanks for pointing it out.
You’re absolutely right Jerry and it we will get that fixed. Thank you for the comment and the compliment.
With the reduction, the MID limit should be indexed to the maximum “high limit” conforming loan limits established by FHFA each year. This would accomplish two goals: most notably by removing the “hard cap” of $500,000 and allowing the limit to be indexed to measurable housing price inflation. For 2018, this would be $679,650, about a third lower than today’s amount but above the proposed cap.
One additional consideration is that the MID also eliminates the deduction for second homes and for mortgage debt acquired as a draw of home equity.
These need to be reconsidered, as it may be quite easy for a middle-income person to own a primary and vacation or second home where the amount of mortgage debt totals more than $500,000 — but debts on a second home would be disallowed from the equation. A more equitable change would be to allow for total mortgage debt on primary and any secondary residences up the conforming limit (as above) to be deducted, irrespective of whether that debt was incurred via a purchase or a draw of equity.