Don't Fear Mortgage Interest Deduction Talk

 | Mar 06, 2014 | 4:45 PM EST  | Comments
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gnw

In yesterday's column I wrote about the political maneuvering underway concerning how to pay for Presidents Obama's infrastructure spending plans. One of the issues being considered is a reduction in the interest paid on mortgages that may be deducted on individual income tax filings.

The modification or elimination of the mortgage interest tax deduction (MID) is considered one of the third rails of U.S. politics, in between social security reform and gun control. But that status is waning, with more politicians beginning to consider it as fewer mortgagors take the deduction, which requires itemizing expenses on tax returns. 

I think the MID will be modified and ultimately eliminated and that it is a net positive for the U.S. economy, real estate, investors, consumers and society. I've written about this before and will not simply reiterate the points made in my earlier columns. But I advise reading them to get a better grip on the issue. 

I wrote about the MID with respect to the creation of the Simpson Bowles Commission, the defeat of that proposal by Congress and what the reelection of President Obama would mean for the MID here, here and here

I also wrote about the issue in a column that is no longer in the archives from back in 2011. If you want a copy of that column send me a note at rogerbarnold@gmail.com.

More information can also be found at the Tax Foundation.

One of the issues concerning the potential for the MID to be reduced or eliminated that many get wrong is that they think the more often it is defeated legislatively the less likely it is to pass in a future attempt. The reality is the exact opposite. The fact that it is increasingly considered as a potential revenue source for the government is because the political will to confront the MID is increasing and it will eventually be altered.

It will probably be reduced from interest paid on $1 million of mortgages on primary and secondary residences to $500,000 and then eliminated altogether. I don't know if the current Republican proposal to reduce the MID as part of the 2015 federal budget and infrastructure spending plans will pass Congress, but the potential is increasing.

Both speculators and investors should be mindful of the potential impact on the stocks of companies in the real-estate sector as the 2015 federal budget negotiations increase this summer.

The MID is treated by the financial media and the various factions in support of maintaining it in a very emotional and even irrational way. Articles and media commentary on the subject will increasingly appear presenting an almost-unanimous position that a reduction in the MID will be detrimental to the housing industry and economy overall, even though there is little historical precedence and much evidence to the contrary. 

It is true that there will be a nominal and short-lived impact on home values, especially at the higher end, if the MID is reduced. But because of how emotionally charged the issue is, there is a potential for speculators to try to game each other and the stocks of homebuilders, building suppliers, appliance manufacturers, mortgage lenders and mortgage insurers in a negative direction with the potential for the move to cause these stocks to become oversold and present wonderful buying opportunities.

There are obviously way too many stocks to enumerate here, but I will list the ones most susceptible to a sell off if the MID is reduced. 

Toll Brothers (TOL) has a concentration of its building in higher-end residential properties, where a reduction in the MID will have more impact.

American Woodmark (AMWD) builds kitchen cabinets for homebuilders and renovators. Most kitchen renovations are paid for with equity lines. The MID currently allows for interest on up $100,000 of principal on an equity line to be deducted. If that is done away with, this stock will get hit.

Whirlpool (WHR) is the largest home-appliance manufacturer.

Wells Fargo (WFC) is the largest residential mortgage lender.

Genworth (GNW) is the largest mortgage insurance provider.

Lastly, and most importantly, the MID is the linchpin holding the entire federal income tax code together. The electorate has consistently expressed a willingness to accept almost any other tax code changes as long as the MID is maintained, even though they increasingly don't use it.

If the MID is reduced, the political potential for substantive change to the federal income tax code after that will increase dramatically. If it looks like the MID is going to be altered as part of the 2015 budget, I'll address this issue in more detail later this year.

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