Home Mortgage Interest Deduction Limit May Decline

Real estate industry insiders are truly worried that the home mortgage interest deduction limit may fall thereby increasing the cost of ownership of more expensive properties.

Irvine Home Address … 81 PINEWOOD 41 Irvine, CA 92604

Resale Home Price …… $649,000

Another red letter day

So the pound has dropped and the children are creating

The other half ran away

Taking all the cash and leaving you with the lumber

It's not easy love but you've got friends you can trust

Friends will be friends

Queen — Friends Will Be Friends

Everyone whose livelihood is dependent upon real estate is frightened about the recommendations coming from the government commissioin studying what we should do about the deficit. California realtors Say Cutting Mortgage Interest Tax Deduction Will Devastate Nation. And now the homebuilders are beginning to worry that the limit on the home mortgage interest deduction may actually go down.

Tightening mortgage tax code limits housing recovery: John Burns

by JON PRIOR — Friday, November 19th, 2010, 9:57 am

John Burns Real Estate Consulting said in a report Friday that government intervention is hurting the housing market, and the firm is growing more concerned that lawmakers will reduce the cap on mortgage interest rates that qualify for tax deductions "significantly."

I know John Burns, and I doubt he put those two contradictory statements together like the writer of this story did. He is correct that government intervention is hurting the housing market, and all of it should be reduced or eliminated. He is also right that as we remove these government props, there will be pain for the housing market.

While John Burns graded the overall indicators of the economy in positive territory, such as gross domestic product, personal income growth and even employment, housing continues to remain weak as demand is vacant and distressed sales will continue to pressure pricing.

Big policy shifts from Congress are in store for 2011, according to the report.

"While big curveballs could be thrown at the housing business, the most likely scenario is that government intervention will make homes slightly harder to sell over the next few years," according to the report.

And as the government withdraws from the housing market, selling homes will become even more difficult.

When a commission was appointed by President Obama to overhaul the tax system and reduce the national debt, it came back earlier in November with an option to reduce the mortgage interest deduction, one of the primary incentives for owning a home. The Mortgage Bankers Association and the National Association of Realtors immediately recoiled at the idea, but John Burns said it was unlikely Congress would act until now.

"We have been saying that Congress won’t mess with the interest rate deduction, except maybe to drop the cap below $1,000,000," the report said. "We are becoming more concerned that the cap might be lowered significantly. A drastic decline in the cap, or a phased in decline, would impact the move-up builders and a minority of expensive states dramatically."

John Burns makes frequent trips to Washington, and he has been involved in the meetings and negotiations on this issue. If he is worried about what congress might do, there is genuine reason for concern. It appears the commission may make a recommendation to reduce the deduction limit.

With other reform to the government-sponsored enterprises and mortgage underwriting standards up for review in 2011, John Burns highlighted the impact Congress can have on housing.

"There is plenty of short-term risk ahead. Focus on good locations where people want to live, and plan for having to sell homes to higher credit quality buyers. Stay more informed than ever because surprise announcements could impact consumer confidence and sales positively or negatively," the report said. "In turn, that could dramatically affect home buying sales, volume and pricing."

Burning Bridges

People often come to the aid of friends in need. When it comes to financial matters, it is something to be very careful about. Friends may have a moral obligation to repay, but if they don't have the capacity, it may take a very long time to get the money back.

The owners of today's featured property must be very well connected. They received five private party loans to help them through the rough patch otherwise known as the deflation of the Great Housing Bubble. It is so bad that the five friends apparently banded together to buy the property at auction when the first mortgage finally foreclosed. The California Friends Foundation is now the deed holder subject to the first mortgage still in default. They are hoping to get some of their money back at the sale, but it doesn't seem likely they will recover it all.

  • This property was purchased on 7/15/1999 for $315,750. The owners used a $306,250 first mortgage and a $9,500 down payment.
  • On 2/5/2002 they borrowed $25,000 from a private party lender.
  • On 4/1/2003 they borrowed $75,000 from a private party listed as a retirement trust.
  • On 9/6/2007 they borrowed $32,000 from a private party lender.
  • On 11/20/2007 they borrowed $78,000 from a private party lender. These lenders all have names of people rather than corporations or banks. People who know this couple loaned them over $200,000.
  • On 12/13/2007 — a few weeks after the last loan — the owners were issued a notice of default followed by a notice or rescission.

Foreclosure Record

Recording Date: 01/30/2008

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 12/17/2007

Document Type: Notice of Default

Foreclosure Record

Recording Date: 12/13/2007

Document Type: Notice of Default

  • on 3/19/2008 there is a loan for an astonishing $825,000 from a private lender. I think that number may be in error as it seems very large, and other loans follow. Not long after, he received another notice of rescission.

Foreclosure Record

Recording Date: 03/25/2008

Document Type: Notice of Rescission

  • On 4/8/2008 he received a loan from a corporation for $130,000, but it does not look like a bank loan. Later that year they went back into default.

Foreclosure Record

Recording Date: 08/17/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/23/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/15/2008

Document Type: Notice of Default

  • On 3/8/2010 the California Friends Foundation (whoever that is) bought the property at auction for $318,755. Since this almost certainly would have been bid up much higher at auction if the lien was in first position, it is likely the new owners are still subject to the original $306,250 first mortgage, plus late fees, interest and so on.

There is no way to be certain from my view of the records how much is truly owed on this property and by whom. It's a mess.

The owners of this property have not consistently made mortgage payments since sometime in 2007. They used friends as HELOC lenders, and now it looks like those friends are likely going to lose a lot of money.

When a friend asks for a loan, ask yourself if you would give the money. If the answer is no, you shouldn't loan it either.

Irvine Home Address … 81 PINEWOOD 41 Irvine, CA 92604

Resale Home Price … $649,000

Home Purchase Price … $315,750

Home Purchase Date …. 7/15/1999

Net Gain (Loss) ………. $294,310

Percent Change ………. 93.2%

Annual Appreciation … 6.3%

Cost of Ownership


$649,000 ………. Asking Price

$129,800 ………. 20% Down Conventional

4.55% …………… Mortgage Interest Rate

$519,200 ………. 30-Year Mortgage

$127,583 ………. Income Requirement

$2,646 ………. Monthly Mortgage Payment

$562 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$108 ………. Homeowners Insurance

$455 ………. Homeowners Association Fees


$3,772 ………. Monthly Cash Outlays

-$443 ………. Tax Savings (% of Interest and Property Tax)

-$678 ………. Equity Hidden in Payment

$220 ………. Lost Income to Down Payment (net of taxes)

$81 ………. Maintenance and Replacement Reserves


$2,952 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$6,490 ………. Furnishing and Move In @1%

$6,490 ………. Closing Costs @1%

$5,192 ………… Interest Points @1% of Loan

$129,800 ………. Down Payment


$147,972 ………. Total Cash Costs

$45,200 ………… Emergency Cash Reserves


$193,172 ………. Total Savings Needed

Property Details for 81 PINEWOOD 41 Irvine, CA 92604


Beds: 3

Baths: 1 full 1 part baths

Home size: 2,065 sq ft

($314 / sq ft)

Lot Size: n/a

Year Built: 1977

Days on Market: 71

Listing Updated: 40452

MLS Number: P751943

Property Type: Condominium, Townhouse, Residential

Community: Woodbridge

Tract: Wc


According to the listing agent, this listing is a bank owned (foreclosed) property.

STEAL THIS HOUSE!!! Private lender foreclosed, wants quick re-sale!!! CLOSE IN 30 DAYS!!! Large, spacious home with 3 BR, 2 BA, 2,065 sf and 2.5 car garage. Remodeled kitchen with maple cabinets, granite countertops, new electric range & microwave, new sink, garbage disposal, fixtures. Sunny breakfast area off kitchen. Very light & airy with 4 skylights. Upstairs addition (3RD BR, and loft) is permitted, adds almost 700 sf to original floorplan. New flooring in most of house. Wraparound patio with 2 patio covers offers multiple entertaining areas. Park & HOA pool across the street are great for get-togethers. Short walk to North Lake. Access to association pools, parks, & sports fields. Very friendly area for biking, hiking, jogging, walking, other outdoor activities. ALL THIS CAN BE YOURS AT A VERY REASONABLE PRICE!!! And, your kids can go to the highly acclaimed Irvine USD schools. MAKE THIS YOUR NEXT HOME!!! CAN CLOSE IN 30 DAYS OR LESS.

STEAL THIS HOUSE!!! The realtor should be careful. Some squatter may take them literally.

wants quick re-sale!!!




Have you had enough ALL CAPS and exclamation points?

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

40 thoughts on “Home Mortgage Interest Deduction Limit May Decline

  1. awgee

    The NAR is truly dense. If they thought for three seconds rather than react, they would realize that as home prices decline both the supply and demand for homes increase. On the supply side, the more underwater and defaulting homes that exist, the greater the number of homes that are listed for sale. On the demand side, … well you have to be a moron to not understand that more families can afford to buy as prices decrease.

    1. Shevy

      Exactly! Yet they push for loan mods that will lock people into properties and ensure less economic mobility and fewer transactions, they encourage tax credits that push demand forward and artificially inflate prices for a short period of time, and then cause people to wait for the next one thus making it worse etc etc etc. Not smart.

      I asked the head of OCAR’s political relations department why they continue to push policies that artificially inflate prices. He said they really believe that this is beneficial to the group. What about clients? In reality, the guy that can afford a $700,000 home will still buy a $700,000 home, he will just have a lot more options and get a better house.

  2. MovinToOC

    On a strictly selfish scale, I am against cutting out the mortgage interest deduction. Why should the people that are still renting get screwed just as they want to buy a home?

    Does anyone honestly think home prices will correct downward to account for the lost interest deduction?

    1. Walter

      The people getting screwed are those that bought assuming the deduction would continue.

      Prices will fall over time to the new economics of the new deduction scheme. New buyers are in a better position because at least they know what to plan for and will almost certainly get a better price.

    2. winstongator

      The sensitivity to marginal changes – interest rates or HMID (removing HMID is roughly the same as interest rates moving from 4.5% to 5.5%) – is highly dependent on your percentage of income going towards housing. If you’re at a 35% DTI and something happens that causes your housing to cost 5% more, you are much closer to a problem area than someone who starts out putting only 20% towards housing.

      Median home value/median household income
      CA: 510k/61k
      NC: 146k/46k

      My hypothesis is that housing markets react extremely differently depending on how overall leveraged/highly priced relative to incomes they are.

      Introducing no-doc/IO/op-arm loans helped boom prices in some areas, but had limited impacts other places. Likewise for lower rates.

    3. Laura Louzader

      As a renter looking to buy, I’m all for ending the mortgage interest deduction as this will drive prices down further. I will benefit much more from lower prices than I will from an indirect subsidy that only helps levitate prices.

      As a renter, I’m sick of subsidizing buyers via a tax break I don’t get. As a prospective buyer aiming to buy a modest 2 or 3 bed condo and who intends to pay down the note within five years, I resent subsidizing: A)vastly more affluent buyers who take on 30 year notes on hugely expensive houses and thus get a huge tax break, and B. subsidizing borrowers who carry a lot of debt while I pay mine down as quickly as possible.

      The home interest deduction is of very little help to lower-bracket buyers, who are usually much better off on their taxes when they take the standard deduction. Only people who itemize get the benefit of the home buyer deduction, and if you make less than $100K, you are usually (though not always) better off taking the standard deduction.

      1. winstongator

        Renting and owning are so fundamentally different from a tax perspective that saying renters subsidize owner’s HMID is taking a very narrow view. Your landlord can depreciate the new dishwasher they installed. Should I, as an owner complain about that? Right now, the mortgage interest on many properties, rentals and owner-occupied is deducted from tax returns. I’m not opposed to the changes in HMID proposed – lowering the cap and raising the standard deduction, throughout time, so that it eventually gets to the point that it is a non-issue. It would only cover mortgages for people who would be better off with the std deduction.

        If you want to talk about the Great Recession and macro impacts, you’d be better off talking about the tax treatment of corporate interest. It definitively promotes excess leverage, and leverage was one of the key fundamental problems driving the crisis. Without interest deductions, banks would tend to be more equity funded instead of debt funded. Increasing the equity of share of bank funding at the cost of decreasing the debt share would make our banking sector significantly more robust to system-wide shocks. Few would argue that.

        1. Misstrial

          imo, your views (homeowner/renter)would be appropriate pre-2008.

          Since then, economy has changed, the job market has changed, and the way of life for many working Americans has changed.

          Now its vital for a worker to remain flexible relative to employment relocation. Buying a home to live in for at least 5 years or more is no longer an option for many working Americans.

          For older Boomers and WW2 Generation, the nation’s economy was robust and most of our manufacturing base and natural resources were not offshored or locked up.

          The employment situation is completely different for younger workers such as myself (Gen X).

          EX: My spouse works in another State and I work in two States. This is what we have to do to remain employed at the salary level we earn.

          I think its hard for older people to accept that the nation’s economy is alarmingly bad for younger workers.

          They are in denial that younger people simply cannot afford homes at the current prices – prices which older Boomers were counting on to fund their retirement, pay off their personal loans, pay off their kid’s college education(s), pay off their car loans, pay off their multiple divorces and remarriages: basically several lifetimes worth of lifestyle expenses.


      1. Andrew

        I think it would take a few years to correct. People can’t simply lower their asking prices. Their current obligations on the property put an effective floor on the price that they can accept.

        The only way that the market would clear would be through foreclosure. And while I think it is quite reasonable for people who can’t afford their mortgages to be foreclosed upon, I don’t see how its fair to make such an enormous change to the terms after the fact and deliberately force otherwise viable loans into foreclosure. Today’s sample property includes $5000 per year (roughly) in mortgage interest deduction. Eliminating that on existing loans would be a huge, unfair rewriting of the contract after the fact.

        Of course, eliminating it on new loans without eliminating it on existing loans would be only slightly less unfair — this time to the renters (like me).

        This is like proposing to end the tax-free status of Roth IRA and 401(k) plans. I can understand a law that says going forward we won’t offer the plan, but not suddenly reneging on the promise.

        If the deduction has to go (or be capped), I think it would be only fair to have it transition out gradually and in a manner in which existing loans are effected only slightly. Maybe place a cap, and then say that the deduction only applies at 90% of face value above the cap on existing loans, 85% on new loans in the next 12 months, and then reduce it by 5% (for amounts above the cap) every 6-12 months.

        1. Misstrial

          Elimination of the MID has been discussed as a probability for at least 15 years by the House of Representatives, however NAR and other lobbying interests have been successful at shooting it down.

          Bearing in mind that the possibility existed for congressional dissolution of this tax deduction (along with other tax deductions), it would have been prudent to purchase a home based upon one’s ability to afford the purchase price and the monthly payment *without* said deduction.

          The fact that certain mortgage-owners failed to properly account for this possible change is NOT the fault of renters and we should not subsidize the unwary and unprepared any further.


        2. winstongator

          They (Bowles-Simpson) aren’t talking about removing it completely, just lowering the cap from 1M to 500k. In that case, this house should barely be affected (10% DP, would yield about a $1200/yr delta). Saying that would push people to foreclosure means that those people were too close to begin with.

          There is nothing about the tax system that is explicitly a contract. I think you’re confusing Roth IRAs and 401k’s. 401k money will be taxed when you take it out, while Roth is taxed before you put it in, and is tax-free when you take it out. There wouldn’t be enough revenue created from taxing Roths for it to be anywhere near worth the double-taxing it would create. The scare stories about 401k taxes are mostly urban legends.

  3. Misstrial

    The mortgage interest deduction has been used as an excuse for the high prices of residential property. It should end.

    Folks got along perfectly fine in times past prior to this deduction: society will not collapse with its demise.

    Further, if mortgage interest rates rise, then home prices will fall.

    This is good for the buyer since property taxes would be calculated on the lowered property price.

    Maybe this troubles the public entities, tax authorities, and those dependent upon a commish…*shrugs*


    1. Anonymous

      People in times past had no personal income tax. The mortgage deduction was invented when personalmincome tax was invented, as a way to make income tax more platable to the voters.

      1. Misstrial

        Please state the exact year the mortgage interest deduction was made available to taxpayers.

        Please state the exact year that the federal income tax was required of the taxpayer.

        Thank you.


        1. winstongator

          Prior to the Tax Reform Act of 1986 (TRA86), the interest on all personal loans (including credit card debt) was deductible. TRA86 eliminated that broad deduction, but created the narrower home mortgage interest deduction under the theory that it would encourage home ownership.[9] A New York Times article notes that Congress (in 1913 when interest deductions started) “certainly wasn’t thinking of the interest deduction as a stepping-stone to middle-class homeownership, because the tax excluded the first $3,000 (or for married couples, $4,000) of income; less than 1 percent of the population earned more than that”; moreover, during that era, most people purchased homes with cash rather than taking out a mortgage. Rather, the reason for the deduction was that in a nation of small proprietors, it was more difficult to separate business and personal expenses, and so it was simpler to just allow deduction of all interest.


          Wikipedia is awesome…

  4. BD

    When does AMT kick-in and nullify most of the mortgage interest deduction? I am continually told that if you are a household (two wage earners) above $250K AMT tends to eliminate or drastically reduce this deduction anyway…

    Any thoughts??



    1. awgee

      The MID is not subject to AMT, but the overall itemized deductions are, so the effect is the same. I don’t remember the phase ins and outs, but you can look them up on irs.gov.

  5. wheresthebeef

    John Burns Real Estate Consulting said in a report Friday that government intervention is hurting the housing market. John Burns is an idiot, if it weren’t for unprecedented government intervention…the housing market (in places like Irvine) would probably be 20% lower today. Looks like the gimmicks have finally run out and reality is setting in. All the those buyers from a year ago who had to have that 8K home buyer tax credit will soon all be upsidedown. What a great time to be a renter.

  6. Vincenzo

    Generally, homeowners are wealthy and Obama has always promised to tax rich people more and more.
    I don’t think a Walmart or Target employee can buy a house in California, it’ll be a big problem even for those who earn $60,000.

    Also, the government helps homeowners from taxes, so homeowners must chip in.

  7. winstongator

    1. CA already sends more to DC than it gets back (even counting for shared receipts like defense).
    2. CA has 3.5M homes worth more than $500k (census.gov 2006-2008 survey, so it may be slightly off)
    3. Say average is $750k, and half are fully mortgaged.
    4. 1.75M*250k = $437.5B in mortgage under limit.
    5. Say 5% blended rate = $20B in interest.
    6. 25% tax rate -> $5B in net transfer from CA to DC.

    I support lowering the amount that can be deducted, but wonder if right now is the best time to be pulling $5B out of California. It’d be like Fannie/Freddie. Sure they are causing market distortions, but they are also cushioning the market from a depression-esqe plunge. We might be eventually better off without them being state controlled/backed, but is today the best time to start that experiment?

  8. Self Storage Units

    We see similar things in our real estate portfolio. Most of it is smoke and mirrors. It is like we are adults pretending not to know things that we actually know.

    1. South County

      Please give more detail. I understand that many commercial portfolio’s are running at libor plus two and that’s keeping things from going to hell. The real problem is the portfolio is at 135% LTV.

    1. BD

      Cash Buyer – … you better not ever hope to sell, becuse if you do MID will impact your potential buyer. But, doesn’t sound like you care sense you are a rich cash buyer and money is of little issue.

          1. Marc

            There is a lot of supply of rental units and prices are dropping. If anything maybe the rental price drop would slow. Also, there wouldn’t be less buyers, they would just pay less if you were ever to sell.

  9. Charlie Potts

    I always assumed the million dollar ceiling on mortgage interest deduction would never get indexed for inflation, so eventually, the deduction would disappear. Looks like that scenario is taking too long.

  10. Chris

    It would be great if this actually happens. It will have very little impact on the average person. I mean, come on, are we really supposed to feel bad for those near the million dollar deduction point? I don’t really like the deduction for anybody, but this deduction was originally created to encourage home ownership. If you are buying a million dollar home, do you really need extra incentive?

    The ironic part, it’s always the wealthy that cry “free market,” yet they’ll throw a fit if you got rid of this. The lesson we learn – gov’t incentives are fine, as long as they help me. If they help someone else, it’s a “handout.”

  11. Mark R.

    When I was renting, I was getting creamed on my income taxes as I’ve been a higher earner in California. I’ve had no shelter whatsoever. I was getting absolutely destroyed every April. Still I trudged on, spent less, went without and tried my damnedest to save like a mother.

    When I bought a house, I got the shaft again because home values where I live have fallen considerably since buying. The income tax shelter, while substantial on paper, is not the main reason I bought a house. The reason I bought was because of monthly affordability vs. total cost of ownership. So it’s not that I wouldn’t care that the interest deduction may disappear in the future. Honestly I would feel pretty ticked off, but it’s not like I organized my entire life and financial household budget around that tax shelter in the first place. People who banked on this being there forever? Yeah, maybe they’ll be shitting bricks when their tax bill comes.

    To me the really important thing is employment that comes with health insurance for my family and the ability to save. You lose those things and you are really, truly and verifiably screwed.

    I was pretty pissed off as a renter. And I find myself pretty pissed off about all that comes with being a home debtor too. But I never considered myself a helpless boat adrift in the sea against the winds of government intervention

    I mean, come on, the government makes dumb-ass tinkering moves every day of the year on the state and federal level to make up for ridiculous deficits and PAC favors, but the economy and taxpayers always adjust and respond – and usually quite swiftly. If income taxes are going up and tax protections are being removed, the adjustment comes in the form of focused efforts to reduce costs/spending and increase net income. This will have a major effect on the economy too.

  12. IMLN

    Can we dispense with the talk about homes being hard to sell? Homes are not hard to sell, even right now. I was told by all my neighbors how difficult the market is in my neighborhood as we got ready to list, how most homes were on the market 4-6+ months and many still hadn’t sold. How the summer busy season was over and there are no buyers out there.

    I talked with my agent, we looked at where homes were selling (and not just where they were listed), and our home went into escrow, with a solid buyer, in 30 days. We tracked most people who came to see our house, and most of them, even if they didn’t offer on ours, ended up offering on other homes and buying them.

    It became quite obvious to us when we looked at homes getting offers and homes closing, that there was a liquid market, and that our home going relatively quickly was not surprising.

    Maybe in some markets there are relatively few buyers. But in my personal experience, there appears to be a good market for nice, fairly priced home. Buyers are out there and ready. They aren’t stupid though.

    1. Misstrial

      Hi Shevy:

      This article on MarketWatch has a number of interesting posts by landlords such as “georgehatfield” (p. 2):

      “I had to add a comment to this as a one-time real estate investor.

      At my peak I had 13 rental properties all rented up with tenants. Around 2006, my best tenants started losing jobs and I began to have repair issues as well. I had been buying since 2000. Things really went sour in 2007 and by 2008 I was a wreck…”
      see the comment section, page 2 for conclusion.


  13. HomeBeggar

    I sure hope Obama and Congress use common sense and lower the limit of the mortgage deduction. For God’s sake, please be smart about money and people’s livelihoods and stop this huge benefit for the upper and upper-middle classes to make more money off lower classes

Comments are closed.