Reuters Money

Scrap the mortgage deduction? Americans weigh in

What if the United States got rid of or changed the home mortgage interest deduction in the next round of tax reform?

For decades, that deduction has been considered sacrosanct, but as we move closer to tax reform in an era of budget cuts, ideas have been percolating to change or eliminate it.

Economists and tax analysts have long criticized the deduction — which permits American homeowners to deduct the interest on up to $1.1 million in debt — on both fairness and efficiency, but it was believed to be too entrenched in the tax code and the American psyche to change.

The double-whammy of the deficit and the bursting of the housing bubble have put the mortgage interest deduction in play, and a recent proposal by the Congressional “Gang of Six” is among those that have considered reducing it.

With that in mind, Reuters Money asked average Americans — along with a few financial advisers — what they think. We talked to homeowners and renters, those who’ve paid off their mortgages and those who are sinking under their weight, folks who live in expensive markets like New York and San Francisco and those who live in areas where housing remains cheap.

Their responses, by email and in phone conversations, were illuminating and sometimes surprising. Roughly half of those in our wholly unscientific survey supported keeping the deduction as-is; but the other half called for reducing, capping, changing or eliminating it.

What do you think? Have your say:

Trading up in a down housing market

There’s no getting around it: In much of the country, this is a terrible time to unload your home.

Roughly 11 million mortgages are now “underwater” and over a million properties are in foreclosure proceedings. Even after all the carnage, home prices in 20 U.S. cities just dropped by the most in 18 months.

Yeesh. It’s enough to bring to mind that classic quip of gallows humor: It’s always darkest before it’s pitch black.

But even if it’s not the perfect time to shop your home, sometimes life intervenes. A new child enters the world, or a toddler becomes a teen. Homeowners with growing families often have no choice but to trade up to something bigger and better, because the walls are starting to feel like they’re closing in.

And so begins the complicated kabuki dance, of selling one home and buying another. Because there’s so much at stake, with large sums of money on both sides of the equation, it can be a highly stressful moment. Kind of like those movie scenes where sweaty bomb-defusers are trying to figure out which wire to cut: One false move, and you could blow up your finances for good.

That’s what terrified Claire Benson-Mandl. This year, the healthcare consultant in Vancouver, Canada, traded up from a townhouse to a freestanding home with an extra suite and a roomy private yard. She did it so her family, which includes a 3-year-old daughter, would have space to grow. But the home juggling didn’t come without some sleepless nights.

“It was horrific, just terrible,” remembers the 40-year-old. “I’m sure the anxiety took a toll on my lifespan. There were times when I was considering crawling to friends, family, even Facebook associates, wondering how I was going to come up with the money to bridge the gap.”

Answers to the 7 big “what-ifs” of debt default

The debt negotiations are getting down to the wire. Republican and Democratic lawmakers are scrambling to broker a deal to raise the country’s $14.3 trillion debt ceiling before Tuesday, when the Treasury will no longer be able to borrow funds to meet all of its obligations. That’s why major credit rating agencies are considering a downgrade of U.S. debt.

What does that mean for consumers? Here are some answers we compiled from Reuters Money experts:

Should I be worried that I won’t receive my Social Security benefit in August?

Not immediately. Social Security’s coffers are full enough to make the August payments. And cash flow is positive – the system generates more from current revenue than it spends on benefits and its own administrative costs. The main source of revenue is the payroll tax paid by employers and employees (the Federal Insurance Contributions Act, or FICA); other income sources include interest payments on bonds in the Social Security Trust Fund (SSTF) and taxes paid by higher-income beneficiaries.

Last year, revenue totaled $781 billion, while outgo was $713 billion. And even if funds aren’t on hand in a given week to pay benefits for timing reasons, the SSTF can redeem bonds to make up the shortfall.

But here’s the rub: the bonds are obligations of the U.S. Treasury back to the SSTF. A government debt default would put us in uncharted waters, and it’s entirely possible that the Administration could refuse to redeem bonds or divert payroll tax receipts to meet other pressing obligations.

Social Security advocates don’t agree on what might happen.

It’s time for banks to pay back their debt to the rest of us

The devilish deficit dance going on in Congress right now has been a convenient distraction for big U.S. banks. They’ve not only escaped new taxes for now, but they also are relishing their taxpayer bailout by earning robust profits.

Except for Bank of America, the major U.S. banks are doing just fine, thank you. Yet for all of the abundant generosity and forgiveness of the American people, have banks lent out enough money to Americans to make a difference to the economy at large?

No. Banks are lending less to consumers than they did in 2007, the year before the full-blown financial meltdown, according to recent Federal Reserve Consumer Credit tallies.

Outstanding consumer credit was $2.5 trillion in 2007 compared to $2.4 trillion through May of this year. Revolving credit was down fivemo percent in the first quarter of this year. Total consumer lending was down about $100 billion in 2010 and 2009 alone from 2007 levels.

The net effect was less money flowing to consumers, who are the engine of the U.S. economy. Even if you wanted to build that addition to your home or buy a foreclosed home, good luck getting a large loan from a bank — unless you have perfect credit ratings.

Banks’ bowstring-tight standards for mortgages and home-equity loans triggered the lending squeeze. The Fed’s July 13 Monetary Policy report told the story:

“Mortgage originations trailed off with the end of the refinancing wave that occurred last fall, when interest rates declined … Bank lending through home equity lines also remained extraordinarily weak, reflecting in part tight lending standards amid declines in home prices that cut further into home equity.  Both credit card and other consumer loans from banks contracted, on balance, over the first half of the year.”

Our homes, our tax deductions?

Even if you realize how indebted to our homes we’ve become, the numbers in a new report from the Joint Committee on Taxation are mindboggling: Mortgage debt at the end of 2010 reached nearly $10.1 trillion, and accounted for 88.4 percent of total household income.

That’s down slightly from the peak, in 2007, of 101.1 percent of household income, but it’s “roughly 40 percent higher than 2000, 50 percent higher than 1990, and 230 percent percent higher than 1960,” according to the report.

The upshot: Our ever-larger mortgages have ballooned total household debt, at $13.4 trillion, to 90.2 percent of gross national product, vs. 69.9 percent in 2000.

Is this a good thing? And to what extent has tax policy, which permits homeowners to take a deduction for home mortgage interest on their tax returns, impacted it? And, most important, as budget talks continue in Washington without resolution, should that deduction go the way of previous tax benefits for other forms of consumer debt?

As the JCT report retells the history, prior to 1986, most consumer debt, including auto loans and credit card debt, could be taken as itemized deductions on Americans’ tax returns. The 1986 tax reforms got rid of those deductions, reasoning that they had created a significant disincentive to saving. But the home mortgage interest deduction remained.

For as long as I can remember that popular deduction has been sacrosanct; a bipartisan proposal to get rid of it six years ago failed, and President Obama’s calls to limit it for wealthy taxpayers have yet to find agreement. But as budget discussion in Washington come to a head, with no agreement in sight, the Joint Committee on Taxation report shows how big our mortgage debt has become, the costs of maintaining that deduction, and how those tax benefits skew toward the wealthiest Americans.

The mortgage interest deduction creates incentives to buy rather than to rent by lowering the cost of capital for home ownership. Supporters of the deduction believe that this has a positive impact on the U.S. economy, by encouraging home ownership, and, therefore, helping to maintain communities that otherwise might fall into disrepair. However, according to the report, it also creates financial distortions — and such distortions could have been a factor in the housing bubble:

5 reasons why banks hate Elizabeth Warren

Elizabeth Warren, it’s not you they hate. It’s what you represent. You want to be an honest cop when so many before you in Washington have looked the other way and pretended that the banking industry could police itself.

I can’t think of a better reason why this presidential adviser shouldn’t be the new chief of an unfettered Consumer Financial Protection Bureau.

She knows where the bodies are buried — in countless toxic forms and statements that only bank lawyers fully understand. She’ll make every attempt to end the silent rip-offs and myriad shenanigans that cost consumers billions.

As the debate about Warren — and what she stands for — rages on, here’s a look at why the banks despise the idea of her as a strong regulator:

Weak consumer regulation was the norm, but banks love the status quo Prior to the Dodd-Frank financial reform law, which established the consumer bureau, there simply was no real consumer watchdog over banks. The Comptroller of the Currency, Federal Reserve and state regulators wrote rules, but rarely enforced them in a meaningful way to consumers. The CFPB will be the first regulator in American history that didn’t answer to the banks, but to their customers. It will be a true watchdog.

Mortgage abuses were rampant More than three years after the biggest financial meltdown since 1929, we’re still trying to unravel what the banks did to foul up the global financial system. Did the banks fudge mortgage documents simply to grease the way to securitizing loans? Did they trigger foreclosures even when homeowners were paying their bills? Did they push people into bad loans they knew they would default on? If any or all of these things were true, it certainly wasn’t because the banks were over-regulated. Somebody fell asleep on their watch in Washington like Rip Van Winkle. A consumer financial bureau would keep an eye on an industry that’s operated in darkness for too long.

Credit abuses are rampant Take a look at your credit card disclosure statement. Do you have any idea how much you will owe if you’re late or lose your job and can’t pay? This is not a mystery to the banks, who have conceived elaborate formulas for charging you more money for credit.

Is real estate for suckers?

Are you a dope for buying a home in the U.S. right now?

If you need and want one, there’s no harm in that. Yet if you think it’s an investment that will actually appreciate, you’re taking a sucker’s bet.

During the bubble years, the “greater fool” theory prevailed. When you bought a home, you were confident that someone would buy it for a higher price than you paid. “Flippers” prospered from this mass psychology.

Right now, it’s a “lesser fool” market: You’re hoping that you’re not foolish for buying a depreciating asset in a troubled economic climate. Millions stay out of the market just to avoid the feeling of doing a fool’s errand.

Home prices are still dropping in many areas with no real bottom in sight. Zillow, the real estate tracking service, recently reported that first quarter prices were approaching the declines last seen in the Great Depression.

The U.S. home market is no longer in triage mode. It’s a train-wreck. Zillow said home prices “are no longer due to bottom out” this year. When will they, then? It may take years, and here’s why.

Anyone who bought during the bubble may never see any appreciation. Since most of them are “underwater” — the mortgage is more than the home’s value — they have no economic stake in the house. They may join a growing wave of “strategic defaults.” At least one quarter of the entire market is stuck in this way.

Need a loan? 4 tips to improve your debt health

You’re young, ready to start a family and make the most significant investment of your life — the purchase of your first home. You’ve saved for a sizable down payment, but have you assessed your debt health?

The Great Recession has driven home the perils of plastic dependency, yet the average credit card debt per household in the U.S. is $14,750, according to CreditCards.com. And, in March alone, there were 144,657 consumer bankruptcy filings, up 41 percent from February’s total of 102,686.

“Right now, in this economy, credit is essential to getting a mortgage. There are different kinds of mortgages, but credit is a huge factor, along with the value of the property and your income,” says Tracy Becker, author of the Credit Solutions Kit and founder of credit restoration company North Shore Advisory.

Debtscore.com — a free financial tool developed by oweing.com — is designed to take the guess work out of assessing your debt health and help “borrowers understand for the first time how much debt is appropriate for their age, income and educational level.”

A debt-to-income ratio — the number used by many lenders to assess loan candidates — doesn’t adjust according to age, whereas this tool grades your debt health more strictly as you get older, taking into account your earning power through the years, JB Orecchia, CEO of oweing.com and former executive vice president of marketing for freecreditreport.com, says.

“The main need for the service was we saw people were paying the minimum payments on their bills and they weren’t making any headway in terms of paying down their debt and they also didn’t know exactly where to start,” Orecchia says.

A credit score tells you what you can borrow whereas a debt score tells you what you should borrow. Everyone is entitled to a free annual credit report from each of the three nationwide credit agencies: Experian, Equifax and TransUnion. Log on to annualcreditreport.com for your quarterly update.

Warren calls for accountability in consumer agency

Elizabeth Warren, a Harvard law professor and the engineer behind the new Consumer Financial Protection Bureau (CFPB), laid out her blueprint for making the new consumer agency accountable to consumers during a speech on Friday.

Prior to the financial crisis that began in 2008, oversight for consumers was scattered among seven tangled government agencies “with gaping holes in oversight,” Warren told attendees at the Society of American Business Editors and Writers 48th Annual Conference at Southern Methodist University in Dallas. “A single regulator with a clear mission is more accountable,” she said.

Warren used the words “account” “accountable” and “accountability” at least 20 times in her prepared remarks and during the question and answer session with reporters. “Accountability means someone can be held responsible to failure,” she said.

The role of the agency is to police mortgages and credit cards and try to curb predatory lending and abusive card accounts. While the consumer agency will fix some basic structural problems in those areas, the CFPB cannot block other government agencies from doing their jobs.

“While we cannot interfere with other agencies’ rulemaking efforts, no matter how much we think consumers will be harmed by their rules, other agencies can veto our rules,” said Warren. “This is an extraordinary restraint, another assurance that we can be held to account for our actions.”

Politics got in the way of launching the CFPB, which is a “well thought out” agency, Warren said. She said she fears the debate around the CFPB’s funding will prolong the problem. “Politicizing the funding of a banking agency can undercut its effectiveness,” Warren said. “Political independence is critical for a bank supervisor to be strong enough to be truly accountable to the American people.”

To increase accountability, Warren said it is crucial to set goals for the CFPB and make them known to the public. “We don’t need one more agency that kinda, half-pretends to do something but doesn’t do anything,” she said.

Homeowners, don’t be fooled by this foreclosure scam

Looming foreclosure can be one of the scariest times for any family down on its luck. So, it stands to reason that crooks would design scams to target that vulnerability and try to squeeze whatever money these people who can’t pay their bills can scrape up.

The state of California has issued a warning about a scam that involves getting these vulnerable homeowners to pay fees up front with the idea of winning a lawsuit that will get them their homes free and clear. The cost to participate in this heavily marketed scam is $5,000.

The scam is particular elaborate since a federal ban went into effect earlier this year against requiring up-front payments to those offering mortgage relief. Rules being what they are, there is an exception to it — for lawyers. While the terms are a bit more specific than that, it opened the door to people supposedly working on behalf of lawyers to still preying on those whose homes are being foreclosed.

“Those who continue to prey on and victimize vulnerable homeowners have not given up,” the warning by Wayne S. Bell, chief counsel of the California Department of Real Estate, says. “They just change their tactics and modify their sales pitches to keep taking advantage of those who are desperate to save their homes. And some of the frauds seeking to rip off desperate homeowners are trying to use the lawyer exemption above to collect advance fees for mortgage assistance relief litigation.”

Those running the scam are making claims across the country, using the web as their vehicle in many instance, to try to sell these folks on the idea they will not only not lose their home to the bank, they’ll win full ownership.

The scammers try to convince their targets that they will be participating in a “mass joinder” or class-action lawsuit. Here are a few of the claims being made that were highlighted by California officials:

• If you join in the suit, you can remain in your home and stop paying your mortgage.
• When the lawsuit is filed, your obligation to the bank ends.
• Lawyers are “turning the tables on lenders and getting cash settlements for homeowners”.