Mortgage interest deduction under the microscope

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Somewhat buried in the Obama budget plan is a new restriction on the mortgage interest tax deduction (MID). The proposal is to limit the deduction to 28% for those in the top tax brackets, now 33% and 35%. That’s basically households earning $250,000 a year. In other words, the top bracket taxpayer who currently would deduct $350 out of $1,000, would only be able to write off $280. The spread would be greater if another budget proposal -- raising the top tax rate to 39% -- becomes law as well.

The National Assn. of Realtors, National Assn. of Home Builders and the Mortgage Bankers Assn. are among those who’ve declared war (their statements are linked).

But many economists have long argued the MID just gives money back to affluent people who would buy a house anyway and encourages over-leveraging by lower-end home buyers. Harvard economist Edward Glaeser has written one of the more thorough studies of the deduction.

In addition, the change will not occur until 2011, perhaps muting its impact on the current housing market crisis.

-- Peter Y. Hong