TO DEDUCT or not to deduct?
Congress is about to answer that question for an estimated 12 million-plus American homeowners who pay either FHA or private mortgage insurance premiums every month.
With a bipartisan list of 161 co-sponsors in the House, a companion bill in the Senate and strong support from a diverse political coalition of business, labor and public interest organizations, you would think that a bill allowing federal income tax deductions for mortgage insurance premium payments would be a slam-dunk.
But political math is rarely that simple on Capitol Hill, especially in election years. The Mortgage Insurance Fairness Act (HR 1336), co-authored by Reps. William J. Jefferson, a Louisiana Democrat, and Paul D. Ryan, a Wisconsin Republican, would allow millions of homeowners who pay mortgage insurance premiums to deduct them on their federal tax returns.
Beyond the 5.5 million homeowners who pay PMI (private mortgage insurance) and 7 million with FHA (Federal Housing Administration) loans, the bill would also cover veterans and Rural Housing Service loans. An unknown number of borrowers would not make use of the write-off provisions because they take the standard deduction on their federal taxes and do not itemize.
If enacted, the bill would nullify a decades-old prohibition by the IRS against deducting mortgage insurance premiums. Federal tax law explicitly sanctions write-offs of mortgage interest payments on principal residences, and proponents of the bill argue that FHA and PMI payments are functionally identical to interest. The IRS says it will continue to view insurance premiums as nondeductible, unless instructed otherwise by Congress.
What is intriguing about the mortgage insurance debate is that it slices across traditional partisan and ideological lines. Its main sponsors in the Senate (SR 846) are Gordon H. Smith, an Oregon Republican, and Blanche Lincoln, an Arkansas Democrat. The combinations of groups supporting the measure in both houses make a highly unusual set of bedfellows: big banks, the Teamsters, the National Taxpayers Union, the Consumer Federation of America, the Fraternal Order of Police, large insurance companies, Latino and African-American groups, the American Federation of Teachers, to name just a handful.
That mix derives from the broad range of people served by mortgage insurance, whether federal or private. The two largest users of FHA insurance are first-time buyers with modest incomes, and minority homebuyers. FHA insurance, which allows down payments of just 3 percent and finances closing costs as part of the loan, has been the prime gateway to homeownership for consumers unable to obtain credit on affordable terms in the private marketplace.
Private mortgage insurance also heavily benefits first-time and minority buyers. In 2001, according to industry estimates, mortgage insurance covered over half of all new loans to African-American and Hispanic homebuyers, and 54 percent of all mortgages extended to borrowers with incomes below the median for their area.
That heavy tilt to moderate-income and first-time buyers explains the strong support of teachers unions, police, firefighters and other public employees, many of whose members have difficulty buying homes near their places of employment. The House and Senate bills also attempt to further target tax breaks to families no wealthier than the upper-middle-income segments of the population.
The bills contain a "phase out" provision that would limit the lion's share of tax write-offs to borrowers with household incomes below $100,000. Borrowers below that threshold could deduct 100 percent of their mortgage insurance premiums.
Borrowers with incomes above $100,000 would lose 10 percent of their deductions for each $1,000 that their incomes exceeded $100,000. Married households filing separately would have a $50,000 income threshold and would lose 10 percent of their deductions for each $5,000 their income exceeded $50,000.
With such diverse and bipartisan political support, why does the Mortgage Insurance Fairness Act face an uncertain future this year on Capitol Hill? Timing is a key reason: The bill would drill still another hole into the federal budget, which already is gushing deficit red ink. It would cost an estimated $600 million over 10 years in lost taxes - a budgetary pittance by Washington standards, but a revenue loser nonetheless.
Many members of Congress are determined to lower the deficit and may not be eager to pass bills for fear of adding to the deficit.
Another problem: Tax bills in presidential election years tend to be fractious and relatively few. Republicans and Democrats may agree that mortgage insurance deductibility is a good idea, but they may bitterly disagree about other tax issues that inevitably would have to be welded into any tax legislation.
The bottom line for FHA and PMI borrowers at the moment? Their write-off bill has impressive support. It's just not clear if this is going to be their year.
Ken Harney's e-mail address is firstname.lastname@example.org.