Mortgage insurance tax break gains strength on Capitol Hill

Nation's Housing

March 30, 2003|By KENNETH HARNEY

THE CAPITOL Hill campaign to make home mortgage insurance premiums tax-deductible took a giant step this month with the introduction of a bipartisan bill co-sponsored by key members of the tax-writing House Ways and Means Committee.

The bill (H.R. 1336) would affect the mortgages of an estimated 12 million American homeowners and reverse a decades-old Internal Revenue Service prohibition against write-offs of mortgage insurance payments.

Co-sponsored by Reps. Paul Ryan, a Wisconsin Republican, and William J. Jefferson, a Louisiana Democrat, the bill would apply to home loans with private mortgage insurance, Federal Housing Administration insurance or veterans guaranty coverage, and to Rural Housing Service mortgages.

Besides the co-sponsorship of six other tax committee members, the measure has been endorsed by an unusual collection of 21 interest groups, including the National Urban League, the National Conference of Black Mayors, the National Taxpayers Union, the National Education Association, the National League of Cities, the Consumer Federation of America and the Mortgage Bankers Association of America.

Minority housing advocacy groups support the measure because mortgage insurance covers an estimated 57 percent of home purchase loans made to black and Hispanic borrowers.

Consumer and union groups back the bill because it would cut taxes for middle-income borrowers, an estimated 54 percent of whom use private or government-backed insurance with their home purchases.

In a statement last week, Ryan said that "the people who use mortgage insurance are policemen, firemen, teachers and veterans," yet under current IRS rules "they cannot deduct the cost of these [premium] payments for federal tax purposes."

Ryan estimated that his bill would also lower the after-tax costs of mortgages enough to enable 300,000 additional renters per year to buy a home.

Mortgage insurance, whether private or government-backed, allows borrowers to take out home loans with minimal down payments, frequently 3 percent or less. Private mortgage insurance is required by lenders on any loan on which the down payment is less than 20 percent. FHA mortgages are aimed at buyers who can afford even smaller down payments and might have imperfect credit histories.

Most mortgage insurance premiums are paid monthly as add-ons to the principal, interest, insurance and tax escrows. They range from less than $50 a month to $150, and sometimes more, depending on the size of the mortgage and the depth of the insurance coverage.

The premium payments are designed to reimburse lenders for the costs associated with borrower defaults or foreclosures. The payouts for mortgage insurance claims never go to the borrowers, only to lenders after they submit claims.

The IRS has prohibited tax deductions for mortgage insurance premiums by homeowners because it considers the premiums to be loan-related "service" expenditures - such as an appraisal or credit report - rather than an integral part of the cost of mortgage money, such as interest charges.

Private tax law experts argue that by all tests, mortgage insurance premiums function like interest payments, benefit the lender alone and should be tax-deductible.

The new House bill contains an income "phase-out" provision that would limit most tax write-offs to borrowers with household incomes of less than $100,000. Borrowers below that threshold would be able to deduct 100 percent of their monthly insurance premiums. Borrowers with incomes exceeding $100,000 would lose 10 percent of their deduction for each $1,000 that their incomes exceed $100,000.

Married homeowners filing separately would have a $50,000 income threshold and would lose 10 percent of their deduction for each $500 their incomes exceeded $50,000.

An estimated 7 million-plus homeowners pay premiums on FHA-insured home loans. An additional 5.5 million pay private mortgage insurance premiums. Presumably, not all would take advantage of the new tax-deductibility provision, either because their household incomes exceed the limit or, more likely, because they do not itemize on their tax returns.

A family with a $150 monthly insurance premium would be eligible for a new deduction of $1,800 a year. A family paying $50 a month in premiums would get a $600 write-off.

What's the outlook for the bill, and when might homeowners get the green light to start taking deductions? The bipartisan backing of eight Ways and Means Committee members - including the third-ranking Republican, Rep. Clay Shaw Jr. of Florida - suggests there is serious interest in moving the bill this session.

Mortgage insurance premiums would become deductible when the bill was signed into law. That means that if the bill is passed by the House and Senate this year and is signed by the president, premiums paid after the date of enactment would be deductible on the next federal tax return filed by homeowners, which would be next year for most taxpayers.

Ken Harney's e-mail address is

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