Long considered a key ingredient of American home ownership, the income-tax deduction for mortgage interest now is on the menu of the commission looking for ways to trim the federal deficit.
Among the $3.8 trillion in debt-cutting options being considered by National Commission on Fiscal Responsibility and Reform is a scaled-down tax deduction eliminating second homes, mortgages of more than $500,000 and home-equity loans.
Reaction to even the hint of a change came quickly — and stridently.
"For a battered housing industry, which is struggling with a 21 percent unemployment rate among construction workers, this is absolutely the worst time to be considering changes," said Bob Jones, president of the National Association of Home Builders.
Diminishing or ending the deduction "would exert further downward pressure on home prices, leaving more homeowners with mortgages larger than the value of their property and fueling even more foreclosures," he said.
Michael Berman, chairman of the Mortgage Bankers Association, said that while his group's members shared in the growing concern about the federal deficit, limiting the use of the mortgage-interest deduction "will have negative repercussions for consumers and home values up and down the housing chain."
Given "the fragile state" of the housing market, Berman said, "now is not the time to be scaling back incentives for home ownership."
The National Association of Realtors has decided to wait and see. The deficit commission is not scheduled to submit its report until Wednesday, so "any comments at this point would be premature and based on conjecture," said spokesman Walt Molony.
The mortgage-interest deduction is to housing policy "what Social Security reform has traditionally been to politics: the third rail," said Kevin Gillen, vice president at Econsult Corp. in Phila-delphia, though consensus among economists is that the deduction is regressive and promotes overconsumption.
Regressive because "it not only favors homeowners over renters — renters are, on average, poorer — but it also favors wealthier homeowners over relatively low-income homeowners," who typically don't itemize on their tax returns, he said. And it promotes consumption of more housing than one might otherwise purchase "because you can take on more mortgage debt."
Moody's Analytics chief economist Mark Zandi called the deduction counterproductive: It costs the Treasury $100 billion a year, and is simply reflected in higher house prices and "thus does not result in higher housing affordability or home ownership."
"Limiting the deduction is a good idea," he said, "but will result in lower house prices, and thus should not be implemented until the housing market is operating normally."