Congressional efforts to reduce the U.S. deficit revived tax breaks for mortgage insurance and extended interest deductions for homeowners that will cost the government $600 billion over five years.
“This is a meaningful win for the housing lobby generally and more specifically the mortgage insurance industry,” said Isaac Boltansky, an analyst for Compass Point Research & Trading LLC in Washington. “The mortgage finance establishment fared relatively well.”
Congress raced to pass the fiscal bill on Jan. 1 to avoid sweeping spending cuts and tax increases that jeopardized the economic recovery. Legislators also left in place a 2007 tax break for homeowners whose debt is forgiven by lenders and preserved exemptions for profits on home sales, while maintaining mortgage-interest deductions that Compass Point estimates will cost $600 billion over the next five years.
The moves could help a housing market that last year started to reverse a five-year slump that pushed the U.S. economy into the longest recession since the 1930s.
Homeowners will save about $100 billion this year from mortgage interest deductions, according to Compass Point, helping to make buying more affordable relative to renting. Congress, meanwhile, allowed payroll tax cuts to lapse, which will pull more than $100 billion from the economy, the primary reason why 77.1% of U.S. households face higher taxes in 2013, according to the nonpartisan Tax Policy Center.
“What it seems to have come down to is trying to do as little damage to the nation’s housing market as they possibly could,” said Keith Gumbinger, vice president of HSH.com, a mortgage-data firm in Riverdale, N.J.
Borrowers with mortgage insurance, from private guarantors or the U.S. government, will be able to deduct their premiums. That perquisite had expired at the end of 2011.
The change will apply retroactively to 2012 for homeowners making less than $110,000 a year and will remain in force this year, according to a summary of legislative changes from the National Association of Realtors.
“The industry’s ability to close on this priority demonstrates its clout on Capitol Hill, which will be needed in 2013,” Boltansky wrote yesterday in a report.
Almost 3.6 million taxpayers claimed the deduction for mortgage insurance in 2009, the most recent year for which Internal Revenue Service data is available. They deducted almost $5.5 billion in premiums, for a total tax benefit of more than $700 million, according to the National Association of Homebuilders in Washington.
Banks often require buyers who make a downpayment of less than 20% to get mortgage insurance, which pays lenders when homeowners default or foreclosures fail to recoup costs.
A surge in claims during the housing crash led companies including PMI Group Inc. and Triad Guaranty Inc. to cease writing new coverage and limit payouts. Some of those that remain in business have suffered years of losses and had to get waivers from regulators after they breached mandatory capital thresholds.
The weakened industry will need help from Washington this year as regulators consider lessening its role with changes to bank capital rules and new mandates for lenders to retain some of the debt they package into bonds. Policy makers have considered treating loans with insurance the same as those without, which would reduce its value.
“What happens with housing reform is a huge issue for us,” said Teresa Bryce Bazemore, president of Philadelphia-based Radian’s mortgage insurance unit as well as the Mortgage Insurance Cos. of America, a trade group. As reforms are weighed, “it’s important to make sure there’s a role for” the private mortgage insurance industry.
The bill also extended the ability for homeowners to avoid taxes when their debt is written off by lenders in so-called short sales, in which properties are sold for less than loan amounts, and in loan modifications meant to keep borrowers in houses. The forgiven amounts were treated as income before 2007 until the Mortgage Debt Relief Act was passed. That had been set to expire this week before the extension.
Keeping the provision helps housing by limiting foreclosures, according to Jaret Seiberg, senior policy analyst at Washington Research Group, a unit of Guggenheim Securities.
Repossessions since March have slowed to fewer than 60,000 a month, according to
“It’s only another year, and I think there needs to be a more permanent and comprehensive solution, but for now short sales can proceed as well as principal reductions,” said Julia Gordon, director of housing finance and policy at the Center for American Progress in Washington.
Consumer advocates still want a provision that excludes loans in which borrowers tapped their home equity while refinancing to be dropped because it creates a large paperwork burden for everyone who claims an exemption, Gordon said.
This week’s bill will also limit some mortgage-related deductions by reviving so-called Pease limitations for itemized filers including individuals earning more than $250,000 and couples with more than $300,000 in income. Taxpayers will gradually lose the value of deductions up to a total of a 20% reduction, according to the NAR summary.
Limiting itemized deductions will have “far less impact” on the use of the interest deductions relative to other potential changes that could have been introduced, the Realtors group said. Congress otherwise left unchanged interest breaks and exclusions for capital gains on sales of owner-occupied homes of as much as $250,000 for individuals or $500,000 for couples.
Lawmakers will eventually have to touch the “third rail” of mortgage-interest deductions, because the benefits are viewed as disproportionately helping wealthier people, HSH’s Gumbinger said. Borrowers with loans larger than limits for government-backed programs are more likely to face changes than those with second homes, he said.
While Congress has resolved the so-called fiscal cliff that could have triggered more than $600 billion in spending cuts and tax increases, it’s left unfinished business, according to Seiberg. This includes the need to increase the $16.4 trillion U.S. debt ceiling and expected wrangling over it, which leaves a “threat to banks and housing,” he wrote in a note yesterday. The “biggest threat” is that a U.S. default “could cause interest rates to spike.”
Mortgage rates may already be headed higher after bond prices declined yesterday on the budget deal, easing concern that the economy will weaken. A Bloomberg index of yields on Fannie Mae securities used by lenders to package loans rose 0.04 percentage point, to 2.26%, up from as low as 2.14% last month.
