The Mortgage Bankers Association of America is expected to unveil a far-reaching, $58 billion real estate "economic stimulus" package at its annual convention tomorrow in Toronto.

The package of proposals, an advance copy of which was obtained by RealtyTimes, involves no new federal spending, but is chock-full of recommendations for tax cuts and improvements to federal housing programs. Among the proposals are capital gains tax reductions, and improvements to a variety of other housing-related areas of the federal tax code.

For home buyers and mortgage borrowers, one of the most intriguing concepts is a call for an expansion of mortgage interest tax deductions to all taxpaying homeowners, including those who don't itemize. Under current law, only households who itemize on their federal returns can write off mortgage interest payments.Under the MBA's plan, non-itemizing homeowners who take the standard deduction would get a new write-off -- the mortgage interest they paid their lender during the tax year.

Although the new proposal does not include operational details, presumably non-itemizers would be able to attach an interest-reporting form from their lender to their tax return, and take a deduction at their appropriate marginal tax rate. The MBA says expanding the deduction not only would be equitable, but would help stimulate homeownership, particularly among lower and moderate income households who currently receive minimal tax benefits from their home mortgages in comparison with higher income families who itemize their deductions.

The real estate stimulus package also calls for:

• Saving home buyers using FHA (Federal Housing Administration) mortgages an average $1,500 apiece by making the current, temporary simplifications to downpayment calculations permanent and statutory. That change alone, says MBA, would generate $1.5 billion in new revenues for FHA in the coming five years, with no additional program spending.

• Creation of a new FHA program for moderate-cost rental housing. Mortgages under the program would come with an interest rate subsidy to allow rents to be affordable by working families. That would generate $5 billion a year in new federal revenues, and would produce 50,000 new apartment units and 51,500 new jobs.

• Modification of the current Low-Income Housing Tax Credit (LIHTC) program to promote a more diversified mix of tenant income levels. Current rules, says MBA, force developers to reserve most or all of their units for households with incomes below 60 percent of the metropolitan area median. Developers could create more "economically viable" projects if there were greater latitude in federal rules to rent more units to people with incomes above the 60 percent of median ceiling.

• Preservation of the current, generous definition of "like-kind" real estate in tax-deferred property swaps. Under present law, property owners can exchange real estate and defer recognition of capital gains taxes on their profits, provided the real estate exchanged is of "like-kind".

  The IRS traditionally has defined like-kind for real estate broadly, allowing farmland to be swapped for condominiums, office buildings for beachfront acreage, raw forest land for downtown commercial property. But congressional critics say real estate swaps get special treatment in the tax code, and have frequently sought to tighten the definition of like-kind to limit the number of qualified exchanges. Joining other real estate groups such as the National Association of Realtors and the National MultiHousing Council, the MBA now opposes any change to the rules.

• Preservation of mortgage lenders' right to see loan applicants' tax filings at the IRS. When evaluating certain borrowers -- especially self-employed applicants -- mortgage lenders prefer not to rely simply on the income tax returns supplied by the applicant, since they can be readily falsified. Instead, they ask borrowers to fill out the equivalent of a permission form, granting lenders the right to contact the IRS, electronically or otherwise, to request one or more years' worth of the actual returns on file.

  The IRS willingly participates in this program because it helps the agency identify taxpayers who under-report their incomes to the government. Some critics says opening confidential IRS tax files to private lenders is potentially abusive, but the MBA's new stimulus plan is emphatic: Lenders can make more loans to more home buyers if they have confidence in the income estimates those buyers supply at application.

For more articles by Ken Harney, please press here.

Published: October 15, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.