Give Me A Tax Break

Legislators debate allowing households to deduct mortgage insurance payments

The Mortgage Insurance Fairness Act may enjoy bipartisan support in both the U.S. House of Representatives and Senate, but lawmakers are dragging their feet when it comes to signing the legislation into law. If passed, it will enable households with a combined income of $100,000 or less to fully deduct mortgage insurance payments on federal tax returns.

The Washington Post reported that the bill allows borrowers below that threshold to deduct 100% of their mortgage insurance premiums; borrowers with incomes above $100,000 would lose 10% of the deduction for each $1,000 that their incomes exceed $100,000. Married households filing separately would have a $50,000 income threshold and would lose 10% of the deduction for each $5,000 their income exceeds $50,000.

The Senate passed its own version of the bill in 2004, but the mortgage insurance deduction was later removed during negotiations with the House. Current bills in both chambers are stalled in committee. Rep. William Jefferson (D-La.) says it may be a matter of finding the right vehicle in which to place the stand-alone tax bill.

“The Mortgage Insurance Fairness Act would help open the doors of homeownership for more lower- and middle-income buyers who might otherwise be discouraged by the rising cost of purchasing a home. The IRS allows a deduction for interest paid on a home, and we think it should extend the same benefit to those who cannot afford a large down payment and instead rely on mortgage insurance as the path to homeownership,” Rep. Paul Ryan (R-Wis.) says.

Mortgage insurance is traditionally required for buyers who make a down payment of less than 20% of the home purchase. It protects lenders if a borrower defaults on a mortgage and enables buyers to purchase a home with as little as 3% down.

“Institutions are worried about exposure. This [bill] will lower the monthly payment for homeowners and help people afford their mortgages better. It will be particularly important to low-income, minority, and veteran borrowers,” Jefferson says.

In 2004, 42% of first-time home buyers put no money down and 81% made a down payment of 20% or less, according to the National Association of Realtors. Minority and low- to middle-income first-time homebuyers are the most frequent users of mortgage insurance.

William Spriggs, an Economic Policy Institute fellow who sits on the BLACK ENTERPRISE Board of Economists, and other proponents of the legislation believe that disallowing the insurance deduction is an issue of fairness. The insurance is functionally equivalent to mortgage interest payments, which are deductible on mortgage debt of up to $1.1 million and represent the government’s second-highest tax expenditure.

“Some people fear that it may encourage risky mortgages because it adds an element of affordability,” Spriggs says. “But the issue of fairness is bigger than the issue of whether someone decides to buy a house with mortgage insurance.”

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