Tax relief for more than 10 million homeowners who pay mortgage insurance premiums got a big boost last week when the Senate passed the Jumpstart Our Business Strength (JOBS) Act by a 95-2 margin.

The bill (S-1637), which still requires approval by a House-Senate conference committee, would repeal the IRS's longtime rule banning deductions of premiums paid by homeowners with private mortgage insurance and FHA mortgage insurance. Under an amendment to the JOBS legislation by Sen. Gordon Smith (R-Ore.), borrowers whose incomes do not exceed $100,000 would be able to write off 100 percent of their mortgage insurance premiums on their federal tax returns. Homeowners with incomes above $100,000 could write off portions of their insurance payments according to a phaseout formula.

The Smith amendment would expire in a year, effectively sanctioning the new writeoff for one tax year on the expectation that it would be made permanent by subsequent legislation. The one-year duration also limits the federal revenue loss caused by the provision -- a key political consideration on Capitol Hill at the moment in light of the ballooning federal deficit.

Bipartisan efforts have been underway in both the House and Senate for more than a year to permit mortgage insurance writeoffs. A House-sponsored deductibility bill (H.R. 1336) has been co-sponsored by 23 members of the influential tax-writing Ways and Means Committee.

An estimated 7 million-plus homeowners currently have FHA-insured mortgages, and approximately 5.5 million pay private mortgage insurance premiums. Most of those, along with an unknown number of homeowners with VA and US. Department of Agriculture-backed rural housing loans, would be affected if Congress reverses the IRS's policy.

Private mortgage insurance generally is required by lenders whenever a buyer's downpayment is less than 20 percent of the purchase price of the house. Most owners pay for the insurance as an added charge -- anywhere from $50 to $150 a month typically. The insurance covers a portion of a lender's losses in the event of a default by the homeowner.

Though mortgage interest is tax-deductible, the IRS has prohibited writeoffs of mortgage insurance on federal tax returns.That is because it defines mortgage insurance as a "service" rendered in connection with obtaining a home loan. Private legal authorities, however, have argued for years that mortgage insurance fits all the definitions of "interest" established by the IRS, and should be fully deductible.

The Senate-passed provision enjoys wide support within the housing and civil rights communities, and from major labor unions and local government groups. The heaviest users of mortgage insurance, both private and FHA, tend to be moderate-income first-time buyers who lack cash for large downpayments. Under current IRS rules, argue supporters of the Smith amendment, these buyers are discriminated against. Borrowers with large downpayments get to deduct all their mortgage interest on their tax filings every year. But buyers who pay FHA or private mortgage insurance every month are barred from deducting those premiums -- even though they function precisely like interest surcharges on top of their regular principal and interest payments.

No date has been set for final congressional action.

Published: May 17, 2004

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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, consumer 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.