New federal legislation introduced by congressional tax heavyweights could save millions of dollars per year for consumers who now pay private mortgage insurance or FHA insurance premiums.The legislation has broad-based bipartisan backing and could be enacted this year, creating new tax deductions immediately for homeowners nationwide.

The legislation, co-sponsored by eight members of the tax-writing House Ways and Means Committee, would for the first time make home mortgage insurance premiums legally deductible on federal income tax returns. A companion bill is expected to be introduced this Wednesday by two members of the Senate Finance Committee, RealtyTimes has learned.

The bills would countermand a long-standing policy of the IRS that prohibits deductions for mortgage insurance premiums. Roughly 5.5 million homeowners currently pay private mortgage insurance (PMI) premiums on their loans. Another 7 million-plus homeowners pay Federal Housing Administration (FHA) premiums. The bills would also extend deductibility to guaranty fees or payments mde by borrowers in connection with veterans (VA) and rural housing loans backed by the Dept. of Agriculture.

Private mortgage insurance is charged to borrowers who make downpayments lof less than 20 percent. FHA insurance is charged n connection with federally-insured loans carrying very low downpayments, generally 3 percent or less. Mortgage insurance premiums typically range from $50 to $150 a month, but can go considerably higher--well over $300 a month--for consumers with damaged credit or large loans.

The IRS never has allowed taxpayers to write off premiums on mortgage insurance, arguing that it is a loan-related ÒserviceÓ, like an appraisal, rather than an ongoing cost of obtaining money, such as interest. Prominent tax attorneys have argued that mortgage insurance premiums function just like legally-deductible interest charges--theyÕre paid monthly, they benefit only the lender directly, and they are in fact a lender-mandated cost to obtain money.

The new legislation would reverse the IRS policy and make insurance premiums deductible, beginning this year, for any taxpayers who itemize on their federal tax filings.

The House bill (H.R.1336) was co-authored by Rep. Paul Ryan (R-WI) and Rep. William Jefferson (D-LA), both members of the House Ways and Means Committee. The Senate companion bill is expected to be introduced this week by bipartisan sponsors from the SenateÕs key tax committee, Finance.

Reps. Ryan and Jefferson argue that making mortgage insurance deductible will primarily help moderate-income home buyers--teachers, firefighters, young families, minorities and immigrant households. According to Ryan, 57 percent of all mortgage purchase loans made to African-American and Hispanic borrowers carry mortgage insurance. Fifty-four percent of buyers with below-median incomes pay mortgage insurance premiums.

Rep. Jefferson, current chair of the Congressional Black Caucus Foundation, says his goal is Òto assist one million minority and low-to-moderate income families become homeowners over the next five yearsÓ--and this legislation will help accomplish that by lowering the after-tax costs of owning and paying for a home.

Both co-authors estimate that an additional 300,000 renters per year will be able to buy a first home as a result of the new tax deductions for mortgage insurance premiums. The legislation restricts deductions primarily to families with incomes of $100,000 or below.

Already lined up in support of the bills are nearly two dozen interest groups, including the National Urban League, the National Conference of Black Mayors, the National Taxpayers Union, the Consumer Federation of America, and a variety of labor groups including the American Federation of Teachers and the National Education Association.

The outlook? Very positive. Look for this popular, pro-housing plan to get tacked on to a larger tax bill sometime this session and be signed into law.

Published: April 7, 2003

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