The housing and mortgage industry has seen the House Republicans’ tax reform plan, and no one is popping champagne bottles—although some aspirin or antacid bottles might be opened.
David H. Stevens, President and CEO of the Mortgage Bankers Association, initially greeted the legislation on his Twitter channel by messaging, “Here it comes: Republican tax plan to lower cap on mortgage interest deduction to $500,000 loans.” He later issued a longer statement questioning the mortgage-related aspects of the bill.
“We have serious concerns about how the provisions introduced today will impact the housing markets in this country,” said Stevens, who previously served as the commissioner of the Federal Housing Administration during Barack Obama’s presidency. “In particular, we believe that the proposed changes to the mortgage interest deduction, deductibility of state and local real estate taxes and the exemption for capital gains treatment when families sell their principal residence would have a negative impact on the housing market and potentially the national economy as a whole. We are also concerned about the potential impact of certain provisions on the production of affordable housing, which is vital.”
However, Stevens acknowledged that the legislation was “the opening bid in the discussion on tax reform” and praised the bill for “retaining the deductibility of business interest for real estate, section 1031 like-kind exchanges for real property, and the low-income housing tax credit that are important to maintaining strong housing and real estate markets.”
Less conciliatory was National Association of Realtors (NAR) President William E. Brown.
“This legislation closely tracks with the House Republican Blueprint for tax reform, which threatens home values and takes money straight from the pockets of homeowners,” Brown said. “Realtors believe in the promise of lower tax rates, but this bill is nowhere near as good a deal as the one middle-class homeowners get under current law. Tax hikes and falling home prices are a one-two punch that homeowners simply can't afford.”
More unhappiness was expressed by Granger MacDonald, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Kerrville, Texas.
“The House Republican tax reform plan abandons middle-class taxpayers in favor of high-income Americans and wealthy corporations,” said MacDonald. “The bill eviscerates existing housing tax benefits by drastically reducing the number of home owners who can take advantage of mortgage interest and property tax incentives. And capping mortgage interest at $500,000 for new home purchases means that home buyers in expensive markets will effectively lose this housing tax benefit moving forward … By undermining the nation’s longstanding support for homeownership and threatening to lower the value of the largest asset held by most American families, this tax reform plan will put millions of homeowners at risk.”
But is MacDonald’s anger justified? Jade Rahmani, an analyst with Keefe, Bruyette & Woods, questioned whether a controversial aspect of the bill—slashing the mortgage interest deduction cap from its current $1 million to $500,000—would wreak havoc, especially for builders.
“While a lower cap on the mortgage interest deduction may limit deductions on higher-end homes, most homebuilders offer more affordable product below $500,000,” said Rahmani. “We note that most homebuilder production is in the range of $200,000 to $400,000, while the median new home sales price totals $320,000, according to the Census. Homebuilders have also benefited from energy tax credits, manufacturing tax credits, and business interest deductibility. Most homebuilders currently are not paying cash taxes due to large NOLs from the last cycle.”
ATTOM Data Solutions issued a statistical report noting that the mortgage interest deduction changes would impact a small minority of homeowners.
“Out of all loans originated this year nationwide, 5.4 percent were more than $500,000,” said Jennifer von Pohlmann, Senior Public Relations Manager at ATTOM. “The District of Columbia will be affected the most with 35.1 percent of loans in 2017 being over $500,000. This is followed by Hawaii (15.1 percent), California (11.5 percent), Delaware (9.3 percent), Massachusetts (9.1 percent) and Washington (9.1 percent).”
American Bankers Association (ABA) President and CEO Rob Nichols did not weigh in on the homeownership aspect of the bill, but stated concern that the bill did not address the status of lenders that he viewed as having unfair advantages against banks.
“We are disappointed the House has not taken this critical opportunity to address the tens of billions of dollars in outdated, unfair and unreasonable tax advantages enjoyed by credit unions and the Farm Credit System,” Nichols said. “We will continue to make the case that businesses offering similar services should be treated equally under the tax code.”