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Why The Mortgage Deduction Is Wrong

From the opinion page of the Wall Street Journal:

The New American Dream: Renting

AUGUST 15, 2009

It’s time to accept that home ownership is not a realistic goal for many people and to curtail the enormous government programs fueling this ambition.

By Thomas J. Sugrue

‘A man is not a whole and complete man," wrote Walt Whitman, "unless he owns a house and the ground it stands on." America’s lesser bards sang of "my old Kentucky Home" and "Home Sweet Home," leading no less than that great critic Herbert Hoover to declaim that their ballads "were not written about tenements or apartments…they never sing about a pile of rent receipts." To own a home is to be American. To rent is to be something less.

Every generation has offered its own version of the claim that owner-occupied homes are the nation’s saving grace. During the Cold War, home ownership was moral armor, protecting America from dangerous outside influences. "No man who owns his own house and lot can be a Communist," proclaimed builder William Levitt. With no more reds hiding under the beds, Bill Clinton launched National Homeownership Day in 1995, offering a new rationale about personal responsibility. "You want to reinforce family values in America, encourage two-parent households, get people to stay home?" he said. George W. Bush similarly pledged his commitment to "an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, ‘welcome to my house, welcome to my piece of property.’"

Surveys show that Americans buy into our gauzy platitudes about the character-building qualities of home ownership—at least those who still own them. A February Pew survey reported that nine out of 10 homeowners viewed their homes as a "comfort" in their lives. But for millions of Americans at risk of foreclosure, the home has become something else altogether: the source of panic and despair. Those emotions were on full display last week, when an estimated 53,000 people packed the Save the Dream fair at Atlanta’s World Congress Center. Its planners, with the support of the Department of Housing and Urban Development, brought together struggling homeowners, housing counselors, and lenders, including industry giants Bank of America and Citigroup, to renegotiate at-risk mortgages. Georgia’s housing market has been devastated by the current economic crisis—338,411 homes in the Peachtree state went into foreclosure in May and June alone.

Atlanta represents the current housing crisis in microcosm. Since the second quarter of 2006, housing values across the United States have fallen by one third. Over a million homes were lost to foreclosure nationwide in 2008, as homeowners struggled to meet payments. The number of foreclosures reached an all-time record last month—when owners of one in every 355 houses in the country received default or auction notices or were seized by creditors. The collapse in confidence in securitized, high-risk mortgages has also devastated some of the nation’s largest banks and lenders. The home financing giant Fannie Mae alone held an estimated $230 billion in toxic assets. Even if there are signs of hope on the horizon (home prices ticked upward by 0.5% in May and new housing starts rose in June), analysts like Yale’s Robert Shiller expect that housing prices will remain level for the next five years. Many economists, like the Wharton School’s Joseph Gyourko, are beginning to make the case that public policies should encourage renting, or at least put it on a level playing field with home ownership. A June 2009 survey commissioned by the National Foundation for Credit Counseling, found a deep-seated pessimism about home ownership, suggesting that even if renting doesn’t yet have cachet, it’s the only choice left for those who have been burned by the housing market. One third of respondents don’t believe that they will ever be able to own a home. And 42% of those who once purchased a home, but don’t own one now, believe that they’ll never own one again.

Some countries—such as Spain and Italy—have higher rates of home ownership than the U.S., but there, homes are often purchased with the support of extended families and are places to settle for the long term, not to flip to eager buyers or trade up for a McMansion. In France, Germany, and Switzerland, renting is more common than purchasing. There, most people invest their earnings in the stock market or squirrel it away in savings accounts. In those countries, whether you are a renter or an owner, houses have use value, not exchange value.

For most Americans, until the recent past, home ownership was a dream and the pile of rent receipts was the reality. From 1900, when the census first started gathering data on home ownership, through 1940, fewer than half of all Americans owned their own homes. Home ownership rates actually fell in three of the first four decades of the 20th century. But from that point on forward (with the exception of the 1980s, when interest rates were staggeringly high), the percentage of Americans living in owner-occupied homes marched steadily upward. Today more than two-thirds of Americans own their own homes. Among whites, more than 75% are homeowners today.

Yet the story of how the dream became a reality is not one of independence, self-sufficiency, and entrepreneurial pluck. It’s not the story of the inexorable march of the free market. It’s a different kind of American story, of government, financial regulation, and taxation.

We are a nation of homeowners and home-speculators because of Uncle Sam.

It wasn’t until government stepped into the housing market, during that extraordinary moment of the Great Depression, that tenancy began its long downward spiral. Before the Crash, government played a minuscule role in housing Americans, other than building barracks and constructing temporary housing during wartime and, in a little noticed provision in the 1913 federal tax code, allowing for the deduction of home mortgage interest payments.

Until the early 20th century, holding a mortgage came with a stigma. You were a debtor, and chronic indebtedness was a problem to be avoided like too much drinking or gambling. The four words "keep out of debt" or "pay as you go" appeared in countless advice books. As the YMCA told its young charges, "If you can’t pay, don’t buy. Go without. Keep on going without." Because of that, many middle-class Americans—even those with a taste for single-family houses—rented. Home Sweet Home didn’t lose its sweetness because someone else held the title.

In any case, mortgages were hard to come by. Lenders typically required 50% or more of the purchase price as a down payment. Interest rates were high and terms were short, usually just three to five years. In 1920, John Taylor Boyd Jr., an expert on real-estate finance, lamented that "increasing numbers of our people are finding home ownership too burdensome to attempt." As a result, there were two kinds of homeowners in the United States: working-class folks who built their own houses because they couldn’t afford mortgages and the wealthy, who usually paid for their places outright. Even many of the richest rented—because they had better places to invest than in the volatile housing market.

The Depression turned everything on its head. Between 1928, the last year of the boom, and 1933, new housing starts fell by 95%. Half of all mortgages were in default. To shore up the market, Herbert Hoover signed the Federal Home Loan Bank Act in 1932, laying the groundwork for massive federal intervention in the housing market. In 1933, as one of the signature programs of his first 100 days, Frankin Roosevelt created the Home Owners’ Loan Corporation to provide low interest loans to help out foreclosed home owners. In 1934, F.D.R. created the Federal Housing Administration, which set standards for home construction, instituted 25- and 30-year mortgages, and cut interest rates. And in 1938, his administration created the Federal National Mortgage Association (Fannie Mae) which created the secondary market in mortgages. In 1944, the federal government extended generous mortgage assistance to returning veterans, most of whom could not have otherwise afforded a house. Together, these innovations had epochal consequences.

Easy credit, underwritten by federal housing programs, boosted the rates of home ownership quickly. By 1950, 55% of Americans had a place they could call their own. By 1970, the figure had risen to 63%. It was now cheaper to buy than to rent. Federal intervention also unleashed vast amounts of capital that turned home construction and real estate into critical economic sectors. By the late 1950s, for the first time, the census bureau began collecting data on new housing starts—which became a leading indicator of the nation’s economic vitality.

It’s a story riddled with irony—for at the same time that Uncle Sam brought the dream of home ownership to reality—he kept his role mostly hidden, except to the army banking, real-estate and construction lobbyists who rose to protect their industries’ newfound gains Tens of millions of Americans owned their own homes because of government programs, but they had no reason to doubt that their home ownership was a result of their own virtue and hard work, their own grit and determination—not because they were the beneficiaries of one of the grandest government programs ever. The only housing programs prominently associated with Washington’s policy makers were underfunded, unpopular public housing projects. Chicago’s bleak, soulless Robert Taylor Homes and their ilk—not New York’s vast Levittown or California’s sprawling Lakewood—became the symbol of big government.

Federal housing policies changed the whole landscape of America, creating the sprawlscapes that we now call home, and in the process, gutting inner cities, whose residents, until the civil rights legislation of 1968, were largely excluded from federally backed mortgage programs. Of new housing today, 80% is built in suburbs—the direct legacy of federal policies that favored outlying areas rather than the rehabilitation of city centers. It seemed that segregation was just the natural working of the free market, the result of the sum of countless individual choices about where to live. But the houses were single—and their residents white—because of the invisible hand of government.

But by the 1960s and 1970s, those who had been excluded from the postwar housing boom demanded their own piece of the action—and slowly got it. The newly created Department of Housing and Urban Development expanded home ownership programs for excluded minorities; the 1976 Community Reinvestment Act forced banks to channel resources to underserved neighborhoods; and activists successfully pushed Fannie Mae to underwrite loans to home buyers once considered too risky for conventional loans. Minority home ownership rates crept upward—though they still remained far behind whites. Even at the peak of the most recent real-estate bubble, just under 50% of blacks and Latinos owned their own homes. It’s unlikely that minority home ownership rates will rise again for a while. In the last boom year, 2006, almost 53% of blacks and more than 47% of Hispanics assumed subprime mortgages, compared to only 26% of whites. One in 10 black homeowners is likely to face foreclosure proceedings, compared to only one in 25 whites.

During the wild late 1990s and the first years of the new century, the dream of home ownership turned hallucinogenic. The home financing industry—at the impetus of the Clinton and Bush administrations—engaged in the biggest promotion of home ownership in decades. Both pushed for public-private partnerships, with HUD and the government-supported financiers like Fannie Mae serving as the mostly silent partners in a rapidly metastasizing mortgage market. New tools, including the securitization of mortgages and subprime lending, made it possible for more Americans than ever to live the dream or to gamble that someone else would pay them more to make their own dream come true. Anyone could be an investor, anyone could get rich. The notion of home-as-haven, already weak, grew even more and more removed from the notion of home-as-jackpot.

And that brings us back to those desperate homeowners who gathered at Atlanta’s convention center, having lost their investments, abruptly woken up from the dream of trouble-free home ownership and endless returns on their few percent down. They spent hours lined up in the hot sun, some sobbing, others nervously reading the fine print on their adjustable rate mortgage forms for the first time, wondering if their house is the next to go on the auction block. If there’s one lesson from the real-estate bust of the last few years, it might be time to downsize the dream, to make it a little more realistic. James Truslow Adams, the historian who coined the phrase "the American dream," one that he defined as "a better, richer, and happier life for all our citizens of every rank" also offered a prescient commentary in the midst of the Great Depression. "That dream," he wrote in 1933, "has always meant more than the accumulation of material goods." Home should be a place to build a household and a life, a respite from the heartless world, not a pot of gold.

—Thomas J. Sugrue is Kahn professor of history and sociology at the University of Pennsylvania. He is writing a history of real estate in modern America.

Not only do we agree, we have been saying exactly this same thing for years.

Long before recent events made this argument thinkable, let alone somewhat fashionable.

This article was posted by Steve on Saturday, August 15th, 2009. Comments are currently closed.

19 Responses to “Why The Mortgage Deduction Is Wrong”

  1. Colonel1961 says:

    Please tell me why the elimination of the mortgage interest deduction would not further decimate the housing market?

    • knowshon says:

      bc it would bring the market back to reality and not inflated by govt direction. The benefit for homeowners is subsidized by those who dont own. People who cant afford to buy… rent. Owners get a sweet tax refund to plant prettier flowers, while renters, similarly situated, get ..zilch. Part of the reason that home prices have deflated is bc the next generation cant afford new homes.

      Colonel, please dont pretend to be a conservative and say that your tax breaks are any better than those that unions get etc.

      The mortgage deduction is the middle class all over the government teet, just as bad as any hand out class.

    • proreason says:

      “Colonel, please dont pretend to be a conservative and say that your tax breaks are any better than those that unions get etc.”

      oh yeh, the unions and “poor people” don’t get any tax breaks.

      oh yeh, I get it.

      Sheez, what a fool.

  2. wirenut says:

    Colonel, for the same reason a reduction in taxes for charitable contributions will lead to greater contributions. Oops , they killed that one too. It’s not just about health care anymore is it. Now we have to defend our investments.

  3. mrbeverage says:

    Once again, we learn about the unintended consequences, good and bad, of laws that are directly designed to influence behavior. BTW, why is it when we talk about tax breaks on home mortgage interest it is called a deduction, and when we talk about tax breaks for corporations and businesses the are referred to as “loopholes”?

  4. GetBackJack says:

    Any tax created to modify behavior is unConstitutional. Mortgage deduction is a reward in tax law which itself is unConstitutional. .

    Let’s review. What’s in the Constitution concerning taxes? Direct taxes shall be apportioned among the several states. Imposts and Excise taxes to pay the debts of the federal government. No capitation or direct tax shall be laid unless in proportion to the Census. The infamous 16th Amendment – The Congress shall have power to lay and collect taxes on incomes, from whatever source derived – [1] Poll taxes barred.

    And that’s it. See anything about mortgage deductions?

    The federal government involved in the private sector of housing, loans, construction and any other facet of home ownership is unConstitutional prima facia. Usurpation via the unchallenged power to write law they want written.

    Virtually everything done by Congress since the time of the Civil War has been not just unConstitutional, but egregiously unConstitutional.

    But so many many people get paid this way, so it’s best not to speak the Truth in these matters. The vast majority of Americans have their tin cup in hand loving every drop of squeezins that Congress allows to flow their way.

    There should be no mortgage [2] deduction because Congress Constitutionally cannot be involved in the private affairs of it’s citizens.

    [1] let’s rely on the Supreme Court to straighten it out for us.

    In 1920, the Supreme Court said:
    Eisner vs Macomber 252 U.S. 189 at 205 (1920). “The Sixteenth Amendment must be construed in connection with the taxing clauses of the original Constitution and the effect attributed to them before the Amendment was adopted.”

    But, before this, in 1916, there were two landmark Supreme Court cases that also helped to clear up the confusion. The first was:

    Brushaber vs Union Pacific R.R. Co 240 U.S. 1 at 10-11 (1916).
    It states “The various propositions are so intermingled as to cause it to be difficult to classify them. We are of opinion, however, that the confusion is not inherent, but rather arises from the conclusion that the Sixteenth Amendment provides for a hitherto unknown power of taxation, that is, a power to levy an income tax which although direct should not be the subject of apportionment applicable to all other direct taxes. And the far-reaching effect of this erroneous assumption will be made clear by generalizing the many contentions advanced in argument to support it, …”

    Let’s continue with this Brushaber case at pg 11-12:
    “But it clearly results that the propositions and the contentions under it, if acceded to, would cause one provision of the Constitution to destroy another, that is, they would result in bringing the provisions of the Amendment exempting a direct tax from apportionment into irreconcilable conflict with the general requirement that all direct taxes be apportioned. Moreover, the tax authorized by the Amendment, being direct, would not come under the rule of uniformity applicable under the Constitution to other than direct taxes , and thus it would come to pass, that the result of the Amendment would be to authorize a particular direct tax, not subject either to apportionment or to the rule of geographic uniformity, thus giving power to impose a different tax in one State or States, than was levied in another State or States. This result, instead of simplifying the situation, and making clear the limitation on the taxing power, which obviously the Amendment must have been intended to accomplish, would create radical and destructive changes in our constitutional system and multiply confusion.”

    The contention that the Amendment treats a tax on income as a direct tax, although it is relieved from apportionment, and is necessarily therefore, not subject to the rule of uniformity, as such rule only applies to taxes which are not direct, thus destroying the two great classifications which have been recognized and enforced from the beginning, is wholly without foundation…” Brushaber at page 18

    Continuing: ” The conclusion reached in the Pollock Case did not in any degree involve holding that income taxes generically and necessarily came within the class of direct taxes on property, but on the contrary, recognized the fact that taxation on income, was in its nature, an excise, entitled to be enforced as such…”

    Stanton vs Baltic Mining Co. 240 US 103, at 112 (1916) “By the previous ruling, it was settled that the Sixteenth Amendment conferred no new power of taxation, but simply prohibited the previous complete and plenary power of income taxation, possessed by Congress, from the beginning, from being taken out of the category of indirect taxation, to which it inherently belonged…”

    Congress agrees with this: House Congressional Record 3-27-1943 page 2580
    “The income tax is, therefore, not a tax on income as such. It is an excise tax with respect to certain activities and privileges which is measured by reference to the income which they produce. The income is not the subject of the tax: it is the basis for determining the amount of tax.”

    From a report by The Congressional Research Service. Report No. 84-168A, 784 / 725 titled “Some Constitutional Questions Regarding the Federal Income Tax Laws”, dated May 25, 1979 and updated Sept. 26, 1984

    “The Supreme Court, in a decision written by Chief Justice White, first noted that the Sixteenth Amendment did not authorize any new type of tax, nor did it repeal or revoke the tax clauses of Article I of the Constitution, quoted above. Direct taxes were, notwithstanding the advent of the Sixteenth Amendment, still subject to the rule of apportionment and indirect taxes were still the subject of the rule of uniformity. Rather, the Court found that the Sixteenth Amendment sought to restrain the Court from viewing an income tax as a direct tax because of its close effect on the underlying property.” (pg 5)


    [2] Mortgage – Latin; death pledge

  5. VMAN says:

    So you’re saying that the mortgage deduction SHOULD be eliminated? Please forgive me but that’s just stupid. Hey instead of eliminating the deduction why don’t we give the same deduction to renters? But wait all of us home owners would still have property taxes (which I believe most states have) that renters don’t have. We don’t have a mortgage so why not impose an imputed tax on people like us? I thought is was stupid when Reagan eliminated most deductions back in the 80s. No I realize that the tax rates were lowered too but all I could see was the libs raising taxes back up and with no deductions and guess what. Credit cards used to only be able to charge 18 1/2% interest and anything over that was usury. Didn’t Reagan have something to do with that also? Now before you jump all over me I realize that is you have good credit and pay your bills you will have a low interest rate but don’t miss one payment. Do credit cards have anything to do with mortgage deductions? Maybe not but it seems that this country sure has spiraled out of control in the last 20 or so years.

    • MattInTexas says:

      VMAN, the point is the entire system of taxes and credits/deductions is corrupt/immoral and unConstitutional. Congress has no Constitutional authority to modify behavior by manipulation of the tax code. Mortgage deductions is just a small part of this. Get rid of it, and people with start taking the true cost of home ownership into account, and treating homes as just that, a home, rather than a get-rich-quick scheme.

    • VMAN says:

      and exactly how are taxes unconstitutional? Article 1 section 8 of the constitution states “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;” and “To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.” Sounds to me like taxes are constitutional. I think the problem is that they are not “uniform” and stated in the constitution. What’s good enough for the richest Americans is good enough for the poorest Americans. This should apply at the state level too.

    • knowshon says:

      I couldnt decipher most of what you said, but in response to your point that owners have to pay property taxes and renters dont, dont you think that is silly? Owners dont raise rents when property taxes go up? In commecial leases these things are anticipated.

    • VMAN says:

      I realize that property taxes are built in to rent. Maybe renters should have to pay a tax for renting. I’m not saying that this should happen but to point out that is silly to do away with a mortgage deduction. The fact is any time you eliminate a deduction you just open yourself to the libs raising taxes even more with no way to counter it.

  6. GetBackJack says:

    MIT – exactly. Well said.

    And quit looking to The State to be daddy.

  7. 4USA says:

    I think it may help if people were allowed to actually own the property they buy.

    There is no such thing as debt-free homeownership so long as you must pay your annual rent to the government in the form of property tax.

    If people could realize the right to own property, then homeownership would have real value regardless of the loopholes, deductions, tax-breaks, etc…it takes to get it.

    • VMAN says:

      Well said 4USA . We have no mortgage yet we have to pay rent to the state each year. I got one for you let’s do away with ALL 501C3 organizations. If you attend a church then you pay money to an organization that is completely tax exempt and for what reason?. That stinks in my opinion mostly because they have their hands and tongues tied behind their backs at least if they’re conservative. During the American revolution churches were place of great debate and support for political causes.

    • GetBackJack says:

      Amen, amigo. People think they “own” their property, but don’t pay your “property taxes” and find out who owns what. Congress has criminally over stepped their authority by taking away our right to property. And the judges go along. Of course it ain’t Law simply because they can enforce their Will with more guns than you can bring to bear. That’s merely rule-making backed up by violence.

      Any ‘church’ that has 501(c)3 protection, has defiled their relationship with God by bowing the knee to The State. It’s wrong on every count. But … if we’re going there, then we also have to blast Congress for passing Lyndon Johnson self-serving Title 26 tax code violation of the free speech clause of the Constitution, where he got a a provision passed to prevent free speech in 501(c)3 churches. Meaning, pastors and ministers couldn’t preach the Gospel against his socialist state he was determined to build.

      In short, it’s all upside down, inside out and backwards, and this Is Not a free country.


      After all, America’s Revolution was preached from the pulpit.


  8. proreason says:

    I’ve been hammered and driven to the brink of bankruptcy by changes in the tax code before….and that was Reagen!!

    This country is simply too big and the tax code too complex for massive one-time changes, even if the change is arguably principled.

    The enactment of principles shouldn’t ruin peoples’ lives.

    The essence of conservatism is caution, not jump-off-the-cliff ideology.

    That’s why it’s lunatic to massively overhaul the Health Care system. The unintended consequences would be immense, and many people would suffer. Ditto for every other aspect of the Moron’s agenda. Also ditto for revoking Social Security and Medicare, which are socialist programs, but too imbedded to be reversable. The point to draw the line is at new socialist programs.

    And making a change as significant as eliminating the mortgage decuction is just as dangerous. The unintended, as well as intended consequences would do great harm to many people.

    Likewise for the flat tax and any other huge change.

    Incremental and gradual change is the only reasonable solution. That’s what the Constitution encourages and that’s what makes sense.

  9. GetBackJack says:

    VMan – as a commenter on S&L, it is my responsibility to extend to you the grace of a reasonable reply.

    What part of Erie, Brubaker, Pollock, Baltic Mining et al inter-alia do you not understand?

    That is a serious question, and not snarky.


    • VMAN says:

      I am certainly not a special tater I too am just a common tater. I know that many people believe that the only constitutional taxes called for in the constitution are “Duties, Imposts and Excises” however the word “taxes” is also in the series and is not separate from the other forms of income to the Federal government. Maybe the founders did not intend for there to be a direct tax but they did not indicate such. I am by no means in favor of an income tax either flat, graduated any other way. I just don’t see how anyone can pull out of section 1 article 8 that the founders never intended or foresaw that happening. The best thing that could happen to this country is if no one was ever elected in this country again if they utter the word taxes, other than eliminating or lowering them, or speak about anything that increases the size of government.

  10. GetBackJack says:

    Very good, sir. I may have misunderstood your previous remarks.

    But it’s pretty clear to me that (a) our Founders well understood the power to tax is the power to destroy, (b) they hated tax as much as any of us, and (c) that ‘tax’ is only mentioned in the Constitution explicitly as cited.

    That Congress has criminally overstepped is clear, creating whole cloth tax laws that are not Constitutional. This is a criminal act but no one possesses the power to make them stop. Courts bow in accordance. The military bows its head in obedience. Everyone seems okay with taxes, except those few of us who believe the Constitution as it was written and originally interpreted. Everybody else profits from this conspiracy.

    “The only law that is Law is of God. Everything else is just rules made by Man to enforce his will usurping the title and appearance of law but being in every particular the act of men in their own self-interest”. – Daniel Geer, Jr. Ph.D.

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