imf calls u.s. mortgage interest rate deduction "expensive and regressive"...
Posted by
x (aka dmuck)
Apr 6 '11, 10:34
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"The IMF, in an analysis of housing finance systems around the world, said an Obama administration paper released earlier this year makes progress toward needed changes in the U.S. mortgage system. But the report criticized the U.S. for not tackling the popular tax deduction for mortgage interest, which the report termed �expensive and regressive.�
The U.S. government�s support of the housing market �has been pervasive but has not yielded many of the expected benefits to prospective or existing homeowners,� the report said. �It is clear that an overhaul is needed.�
�As a first step, we would very much recommend that the U.S. would at least cap the mortgage interest deductability,� said Ann-Margret Westin, an IMF senior economist and one of the authors of the housing report. She approved of the recommendation by the U.S. fiscal commission to halve the mortgage limit for deductions and to let it apply only to private residences, but the IMF said any such move would have to be undertaken over time.
The report is one chapter of the IMF�s larger annual Global Financial Stability Report that will be published in full next week.
More generally, the IMF confirmed that government participation in housing finance throughout rich countries exacerbated house-price swings and amplified mortgage credit growth during the run-up to the crisis. The warning advises emerging countries as they seek to develop their own economies.
�Countries with more government involvement also experienced deeper house price declines,� the IMF said. Pointing to the U.S., both the explicit and implicit subsidies offered by authorities fueled a boom in housing debt and helped overinflate prices. The popping of the housing market helped to spark the global credit crisis. �The faster you grow, the harder you fall,� said Westin.
The U.S. has a long tradition of providing government support for housing through government-controlled mortgage giants Fannie Mae, Freddie Mac, the Federal Housing Administration and other government agencies. Lawmakers on Capitol Hill are starting what promises to be a lengthy debate about whether to reduce federal support, including winding down Fannie Mae and Freddie Mac.
The two mortgage buyers have been under federal control since September 2008, a rescue that has cost taxpayers $134 billion to date. Fannie Mae and Freddie Mac buy up loans and package them into securities with a guarantee against default.
A presidential deficit commission proposed late last year to reduce the mortgage-interest deduction, the largest U.S. government subsidy for housing. Congress, however, has repeatedly fended off efforts to pare back the mortgage tax break, arguing it makes homeownership more affordable and the real-estate industry is warning that any policy changes could be disastrous for the fragile housing market.
The deduction is generally disliked by economists, who say it mostly encourages wealthier Americans to take on more debt. The deduction applies only to the roughly one-third of taxpayers who itemize their returns, typically those with higher incomes."
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