IMF Does Not Support the Mortgage Interest Deduction

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The International Monetary Fund believes the U.S. should consider cutting the popular tax deduction for mortgage interest, according to the Wall Street Journal.

The IMF reportedly said an Obama administration paper released earlier this year seems to be headed toward the right direction to make progress with the U.S. mortgage system. However, according to the Wall Street Journal, the report criticized the U.S. for not tackling the popular tax deduction for mortgage interest, which the report termed “expensive and regressive.”

The report states that, “It is clear that an overhaul is needed.” The report is one chapter of the IMF’s larger annual Global Financial Stability Report that will be published in full next week.

“As a first step, we would very much recommend that the U.S. would at least cap the mortgage interest deductability,” said Ann-Margret Westin, an IMF senior economist and one of the authors of the housing report. She approved of the recommendation by the U.S. fiscal commission to halve the mortgage limit for deductions and to let it apply only to private residences, but the IMF said any such move would have to be undertaken over time.

More generally, the IMF confirmed that government participation in housing finance throughout rich countries exacerbated house-price swings and amplified mortgage credit growth during the run-up to the crisis.

The U.S. has a long tradition of providing government support for housing through government-controlled mortgage giants Fannie Mae, Freddie Mac, the Federal Housing Administration and other government agencies. Lawmakers are starting to gear up for debates about whether to reduce federal support, including winding down Fannie Mae and Freddie Mac.

A presidential deficit commission proposed late last year to reduce the mortgage-interest deduction, the largest U.S. government subsidy for housing. Congress, however, has repeatedly fended off efforts to pare back the mortgage tax break, arguing it makes homeownership more affordable and the real-estate industry is warning that any policy changes could be disastrous for the fragile housing market.

The deduction is generally disliked by economists, who say it mostly encourages wealthier Americans to take on more debt. The deduction applies only to the roughly one-third of taxpayers who itemize their returns, typically those with higher incomes.

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