Monday, February 21, 2011

Mortgage Interest Deduction Limitation Included in President’s Budget Proposal

As part of President Obama’s Fiscal Year (FY) 2012 budget proposal submitted to Congress on February 14, 2011, the ability for individuals making over $200,000 per year and couples making more than $250,000 per year to deduct their mortgage interest has been limited. The proposal calls for taxpayers in the 33 percent and 35 percent tax brackets to be limited in deducting their mortgage interest payments down to those at the 28 percent rate or below. The President’s budget proposal is now before Congress. 


The NATIONAL ASSOCIATION OF REALTORS® (NAR) will be analyzing this proposal and working with the Congress to fight for the continued ability for mortgage interest to be fully deducted by all homeowners who currently have the ability to do so. Stay tuned for additional information as this proposal is debated in Congress.

FHA Mortgage Interest Premium Hike, 28% Deduction Cap

The fiscal year 2012 budget that the Obama administration released on February 14th, would pare back most housing and community development programs, including jobs-rich community development block grants, implement a planned hike in the annual FHA mortgage insurance premium, and even take a third stab at a twice-rejected proposal to trim the value of itemized deductions, including the mortgage interest deduction, available to upper-income households.

These are all important matters that will bear watching as lawmakers take up their budget resolution and decide which proposals to keep and which ones to scrap or modify. But one thing the budget doesn’t do is propose reducing the value of MID by changing it into a credit. That change to MID was one of the recommendations of the president’s bipartisan deficit reduction commission, which released its final report in December.

In fact, the deficit commission very much got short shrift in the budget proposal. Its signature recommendations, including scaling back entitlements by raising the age of Social Security beneficiaries, among other things, were left out, leaving those high-profile decisions for another day.

To be sure, the president’s budget wields a sharp knife when it comes to cuts. It proposes cuts to 200 programs, including the majority of the programs administered by the U.S. Department of Housing and Urban Development, which saw its budget cut by almost 3 percent. Most of the budget savings across the spectrum of government programs come from a five-year freeze on discretionary domestic spending (largely everything except military and entitlements), which is estimated to produce $400 million in savings.

Importantly, a part of the budget savings would come from the administration’s proposal to trim the value of itemized deductions for higher-income households. Individuals earning at least $200,000 and couples earning $250,000 could still take all their deductions, including MID, but the value of the deductions would be capped at 28 percent instead of 35 percent. NAR will be watching closely to see how lawmakers, which rejected the proposal in the president’s first two budget proposals, respond this year.

From the standpoint of residential real estate, one of the provisions having a key impact is the 25 basis-point increase in the annual mortgage insurance premium (MIP) on FHA-backed loans, which the administration already has the authority to implement. That hike will raise the premium to 1.15 percent from 0.9 percent of the loan amount, and is expected to generate $2 billion in funds for the agency, which will help it ensure the soundness of its actuarial position, but the other side of that gain is reduced volume in FHA lending. HUD Secretary Shaun Donovan in a conference call on Wednesday said he expects lending volume on FHA loans to drop to $218 billion. “That is substantially below the volumes which we’ve done this past year,” he said.

Overall, HUD programs would be funded at $41.7 billion, about $1 billion less than what the agency received last year. The most striking cut is to CDBG, which is popular among states and localities because it makes available to them a significant amount of money that they can use for projects largely of their choosing. The program would drop by 7.5 percent, or about $300 million. Public housing and many assisted housing programs, both for development and operations, would also see significant shrinkage.

The administration’s release of its budget proposal is just the first step in a multi-step process that in years past has taken much of the year to complete. Already Congress has scheduled hearings. Once the House and Senate Budget Committees put forward their resolutions for setting spending parameters (which might end up bearing little resemblance to what the administration has proposed), the appropriations committees will write the legislation to flesh out the actual spending bills, and the tax writing committees will work on their side of the legislation. The deadline for all this action is the end of the fiscal year, Sept. 30. But it’s not uncommon for Congress to let that deadline slip.

Read a summary of the budget for yourself. 

Information Provided by Donna Antonucci
Prudential Castle Point Realty

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