Your House is Not An Asset - Part II
WASHINGTON - OCTOBER 21: The headquarters of Fannie Mae are seen October 21, 2010 in Washington, DC. The Federal Housing Finance Agency announced today that U.S.-backed mortgage firms Fannie Mae and Freddie Mac, which have already required $148 billion in bailouts, may now need up to $363 billion in taxpayer-funded Treasury Department aid under worst-case scenarios. (Image credit: Getty Images via @daylife)
As Robert Kiyosaki (Rich Dad, Poor Dad author) says, "Your House is Not An Asset." This is because your house takes money out of your pocket each and every month for the mortgage, property taxes, HOA dues, repairs, etc. Investment property, if it is cash flow positive, is an asset because it puts cash into your pocket every month. A bigger house is not better - only more expensive.
Now here is some news that you may find chilling, especially if you are a homeowner in the most expensive markets of the United States, such as the East or West coast.
The White House has recently announced plans to restructure Fannie Mae and Freddie Mac (which currently buy almost all of the mortgages originated in the United States). This would restrict and potentially eliminate the government's role in the housing finance system. This could mean that the days of the 30-year fixed rate mortgage are numbered, or at least that the days of low rates for these types of loans are numbered. The fact is, without a government guarantee, very few private investors would want to own a 30-year mortgage.
As if that weren't bad enough, Congress is struggling with the massive federal debt and is looking for ways to raise taxes. One of the ways Congress is looking at raising taxes is to modify the deductibility of mortgage interest (which is one of the highest tax expenditure items at $88.7 billion annually). What's more, the Tax Foundation's take on the mortgage interest deduction is that it really only benefits the real estate industry and doesn't increase home ownership:
Economists find that the MID gets capitalized into the price of homes and may amplify price volatility,[3]which offsets whatever effect it has on promoting home ownership. The actual economic benefits of those capitalized costs tend to flow to the home builders and realtors, who have naturally been the most vocal opponents of eliminating the MID. One study determined that the MID is "an ineffective policy to promote homeownership and improve social welfare."[4] While the lion's share of the blame for the current housing crisis properly rests with government-sponsored enterprises Fannie Mae and Freddie Mac, the MID certainly played a role in encouraging some families to purchase homes that they really could not have afforded otherwise. Canada does not have a mortgage interest deduction, yet its rate of homeownership is equal to that in the U.S. Even the Washington Post has editorialized that it is time to "[t]rim the excessive tax subsidy for real estate."[5]
There are several proposals being considered, including eliminating the deduction altogether, "capping" the maximum mortgage amount at $500,000 (currently $1,000,000), eliminating the deductibility of Home Equity Lines of Credit (currently up to $100,000 if used to acquire or improve your primary residence) and/or potentially providing a tax credit of 12% instead of a tax deduction for mortgage interest. For anyone with a mortgage over $500,000 who is underwater, this could mean the difference between staying in the home or finally handing the keys over to the lender. As you can see in the table below, in the "Cap with Credit" scenario, it would cost a homeowner with a $765,000 mortgage with a 35% marginal tax rate over $1,000 more per month to continue to own their home because of the lost tax benefit. Those with higher mortgage balances (and higher marginal tax rates) will be even worse off. This would potentially be a boon to the entry level buyer, especially under the "Cap with Credit" scenario if they don't itemize their deductions (they now get the tax credit, which is a dollar for dollar reduction in their tax liability). Everyone should pay close attention to this debate as it unfolds in the coming months.
$500K "Cap" Current Law $500K "Cap" w/Credit Mortgage Balance $765,000 $500,000 $500,000 Interest Rate 6% 6% 6% Annual Interest Deduction $45,900 $30,000 $30,000 Tax/Credit Rate 35% 35% 12% Tax Benefit $16,065 $10,500 $3,600 Additional Annual Cost
$5,565 $12,465
Related articles
Fannie Mae and Freddie Mac: Where the Taxpayers Money Went
Countrywide Used Loans for Favor With Fannie Mae, Report Says - Bloomberg
Jumbo Loans: Financing in Texas
