Kenneth Harney
Newsday.com
July 16, 2004

A bipartisan tax bill with the potential to cut monthly mortgage costs for millions of homeowners is stuck in Capitol Hill's slow-motion legislative meat grinder and faces an uncertain future.

The measure, which passed the Senate in May as part of an omnibus tax bill, would allow many of the estimated 12 million-plus homeowners who pay mortgage insurance premiums to deduct them on their federal tax returns, just as they write off mortgage interest payments.

An identical proposal in the House has attracted co-sponsorship of more than 200 Republicans and Democrats -- almost a voting majority.

Yet partisan squabbles over unrelated issues have delayed action by a House-Senate conference committee and could endanger congressional passage of the entire mortgage insurance deduction provision.

That, in turn, is certain to upset an unusually diverse coalition of 36 minority, labor, housing, banking and public safety groups that have joined in support of the mortgage insurance deduction concept.

The groups include the American Federation of Teachers, the Consumer Federation of America, Fraternal Order of Police, Financial Services Roundtable, League of United Latin American Citizens, International Brotherhood of Teamsters, Mortgage Bankers Association of America, National Urban League and the National Conference of Black Mayors.

How can a Senate-passed bill that's backed by nearly half of the membership of the House and unites big bankers with civil rights and labor leaders fail to sail through Congress? Welcome to Washington in a contentious election year, where even the most popular proposals can be left stranded, or held hostage, for months.

The plan has attracted support because it focuses on an inequity in federal tax policy toward home buyers. Under the current tax code, consumers who can afford to make substantial down payments get to deduct the interest payments on their mortgages up to a principal balance ceiling of $1.1 million. But first-time buyers and moderate-income households who don't have much money for a down payment typically must pay large monthly mortgage insurance premiums that are nondeductible.

Most lenders require home buyers who make down payments of less than 20 percent to pay monthly mortgage insurance premiums of $50 to more than $200. Those premiums -- which benefit only the lender -- are the functional equivalent of monthly mortgage interest payments, tax law experts say. Yet the IRS has ruled them nondeductible.

The tax proposal awaiting congressional action would allow homeowners who pay FHA (Federal Housing Administration) mortgage insurance, private mortgage insurance (PMI), and Veterans and Department of Agriculture rural housing guaranty premiums to deduct these expenses as if they were mortgage interest.

Stephen Brobeck, executive director of the nonpartisan Consumer Federation of America, said mortgage insurance deductibility is needed "to level the playing field" between wealthier homeowners and moderate-income owners.

"This is very important legislation," said Brobeck, "and delaying it is most costly to families who pay the highest proportion of their incomes toward their home mortgage expenses." John Berthoud, president of the National Taxpayers Union, said that it "is unfortunate that Congress has not moved forward" on the deductibility plan, which "would create important social benefits and offer relief to overburdened taxpayers." FHA mortgage insurance is used predominantly by first-time buyers, including large numbers of African-American and Hispanic consumers.

FHA loans come with low down payments -- just 3 percent and sometimes less -- and offer flexible credit underwriting rules for applicants who have imperfect credit. Roughly 7 million homeowners pay nondeductible FHA insurance premiums.

Private mortgage insurance covers over half of the new home purchase loans made each year to Hispanic and African-American households and over half of new loans made to borrowers with incomes below the median for their area, according to industry estimates. Approximately 5.5 million homeowners pay PMI premiums monthly.

The pending bill comes with some key restrictions. Borrowers whose annual household incomes do not exceed $100,000 would be permitted to write off 100 percent of their mortgage insurance premiums on their federal tax returns. Homeowners with incomes above $100,000 could write off portions of their insurance payments according to a phaseout formula.

The Senate-passed plan would expire in a year, effectively sanctioning the new writeoff for one tax year on the expectation that it would be made permanent by subsequent legislation.

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