When is Congress likely to give the final go-ahead to homeowners to deduct their monthly mortgage insurance premiums on their federal tax returns?

Hopefully soon, say the two influential authors of pending legislation that would reverse a decades-old prohibition by the IRS against such writeoffs. The bill (H.R. 1336) has already passed the Senate this year, and has over 100 co-sponsors in the House. If action is delayed until 2004, the bill will need to pass the Senate again and be approved by the House.

Reps. Paul D. Ryan (R-Wisconsin) and William J. Jefferson (D-Louisiana) want the estimated 12 million homeowners who currently pay either private mortgage insurance or FHA insurance premiums to have the right to treat those payments like interest -- and deduct them. Last week they got support from a new economic study by the Financial Services Roundtable that projected 300,000 additional home sales per year following passage of the bill, and creation of an additional 150,000-250,000 new jobs in home building and related industries.

The pending bill not only has strong bipartisan political support, but endorsements by dozens of national trade groups ranging from unions to banks and municipal governments. A member of Ryan's staff told Realty Times last week that "there still is a chance" to add the bill's language to any federal tax legislation scheduled to come before Congress for a vote. Absent that, said the staffer, "this will be a top priority" in 2004.

Both Ryan and Jefferson are members of the key tax-writing committee of Congress, the House Ways and Means committee, which originates virtually all tax bills.

Mortgage insurance -- whether on FHA loans or private conventional loans -- allows borrowers to take out a mortgage with a minimal downpayment, often just three to five percent. Most premiums take the form of add-ons to monthly mortgage escrows, ranging anywhere from $50 to $150 per month, depending on the size of the loan and the perceived credit risk of the borrower.

The IRS has long ruled that mortgage insurance costs are non-deductible loan "service" expenditures -- like an appraisal or a credit report -- rather than an integral part of the cost of mortgage money, such as interest charges. Some tax law experts argue, however, that mortgage insurance premiums are functionally and legally the same as interest payments: They benefit the lender alone, they are part of the price of getting the loan, are paid periodically, and should be tax-deductible. Several lawyers go even farther and urge homeowners to write off their mortgage insurance payments now, even in advance of Congressional action.

Under the Ryan-Jefferson plan, a family with a $150 monthly mortgage insurance payment would be eligible for a new deduction of $1,800 per year. A family with a $50 monthly premium would qualify for a $600 writeoff. Besides private mortgage insurance and FHA, the bill also extends to VA guaranty payments and Rural Housing loans.

Whatever the size of the individual writeoffs, according to the new Financial Services Roundtable study released last week, the macroeconomic effects would be to improve the affordability of homeownership for thousands of moderate-income families and to pump up the economy with thousands of new jobs.

Published: October 27, 2003

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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.