As of January 1, 2012, a new law has eliminated the ability of large numbers of home buyers and owners to write off their mortgage insurance premiums (MIPs). Alongside the loss of the tax deduction, Congress now requires new fees on all conventional Federal Housing Administration (FHA) loans. Together, these regulations will lead to an increase in the cost of homeownership for buyers by the end of this year.

Millions of existing owners and new homebuyers will be affected by the elimination of the MIP deduction. The law will affect all newly originated mortgages with less than a 20% downpayment and may also apply to all low downpayment-mortgages made after 2007. [For information on personal savings and the 20% downpayment solution, see November 2011 first tuesday article, The 20% solution: personal savings rates and homeownership.]

Enacted in 2006, the MIP deduction allowed borrowers using private or federal insurance to write off their premiums. In most cases, borrowers saved significantly from their post-tax deductions, depending on marginal federal tax brackets (with higher income households saving more). Thus, the termination of mortgage insurance deductibility concerns middle-income and first-time buyers in terms of price consideration.

This elimination of the ability to write off premiums is not the only change in law to affect borrowers’ housing costs. Beginning in April, Fannie Mae and Freddie Mac will charge a surtax on guarantee fees charged to private lenders, which could add an eighth of a percentage point to rates, significantly increasing costs paid by the borrower over the life of the loan. FHA loans will raise annual premiums for new borrowers by one-tenth of a point annually.

first tuesday take: Embrace this change. Government sanctioned tax policies to supplement homeownership have artificially increased home prices as a tool to keep the economy going.  The American Dream, built on expectations of homeownership, has suffered as a result.

While the virtue of owning a home has become deeply embedded in the American psyche, our present model of homeownership is riddled with detrimental policies that serve only to increase debt for homeowners and, as we have seen again recently, increase their risk of losing their homes.

The homeownership driven economy of the past 30 years was created through government tax incentives, supporting loopholes to purportedly implement the nation’s housing policy rather than personal savings for that home purchase and a sustainable economic vision for those inclined to own. [For more information on government tax deductions in relation to homeownership, see the June 2011 first tuesday article, Subsidizing the American Dream.]

Rather than benefitting American homeowners, tax subsidies always both profit the rich and support loss-operating businesses – builders, mortgage banks and the Wall Street bond market.  Worse, they are bad for the economy, to say nothing about the inevitable violence these juiced up conditions bring to the real estate market.

As housing subsidies have been determined to have no effect upon the level of homeownership nationwide, the loss of tax deductions will not reduce the number of homeowners. Instead, this change will ultimately benefit homebuyers because the government will then have an opportunity to create a stronger plan for economic recovery rather than simply dropping interest rates and granting subsidies for homebuyers so construction jobs and lending activity take off again.

The removal of the MIP deduction is a first step toward the repeal of mortgage interest tax deduction subsidy, which has long been advocated by first tuesday. Such a repeal will have little impact on sales prices. The low- and mid-tier homebuyers and owners receive no value from these subsidies. Subsidies serve primarily to drive up the price of homes (evidenced most recently by the cycle in 2009-2010) and mortgages, both of which form the pass through of the subsidy to the rich.

It is the rich that scream about losing the subsidies (builders, lenders, provides of closing services and high-tier homeowners).

Better yet, without subsidies, prices will more likely remain at their fundamental equilibrium rather than be driven by conditions outside the basic need for a home. A change in the collective attitude regarding mortgage debt is needed, with the MIP deduction being a step in the right direction. [For more information on mean pricing and the historical pricing equilibrium, see October 2011 first tuesday article, The equilibrium trendline: The mean-price anchor.]

Re: “Federal tax deduction for mortgage insurance premium expires” from L.A. Times