Though its demise drew little attention because of the partisan year-end brawl over the payroll tax cut extension in Congress, a key mortgage financing benefit disappeared at the end of December: the ability of large numbers of home buyers and owners to write off the premiums they pay for mortgage insurance.
The loss of that tax deduction — plus mandatory new fees imposed by Congress on all new conventional and FHA loans — could effectively increase the costs of homeownership this year.
The expiration of mortgage insurance deductibility will hit many low-down-payment conventional loans originated since 2007, plus virtually all new mortgages closed this year whose down payment is less than 20%. Though industry experts do not have precise numbers, their estimates range into the millions for existing owners and new buyers potentially touched by the deductibility termination. Borrowers using guaranteed veterans (VA) and rural housing loans, whose down payments can drop to zero, also are affected.
The change in the law took effect Jan. 1 along with the expiration of 58 other tax code benefits that Congress failed to renew, such as credits for home energy improvements, credits for builders of energy-efficient houses and deductions for state and local sales tax payments. They were all components of what would have been an annual "tax extenders" bill authorizing continuation of relatively noncontroversial expiring benefits for another year or more. Congress could still reauthorize all or some of the write-offs retroactively this year, but the political atmosphere on Capitol Hill raises doubts about the timing of that scenario.
The mortgage insurance premium deduction dates to legislation enacted in 2006. It allows buyers and refinancers who use either private mortgage insurance or federal insurance or guarantees, and who itemize on their federal tax returns, to write off their premiums. Borrowers who are single or married and filing jointly with adjusted gross incomes of $100,000 or less can write off 100% of their annual mortgage insurance premiums. Married homeowners filing singly can write off 50% of premiums. Borrowers with incomes above $100,000 may qualify for partial deductions on a sliding scale.
In many cases, the post-tax savings for these borrowers are significant. New buyers with an income around $100,000 and a mortgage of $200,000 would save between $600 and $1,000 a year, depending on their credit score and loan-to-value ratio, according to MGIC, one of the largest private mortgage insurers in the country. For households with lower incomes, the effect would be less, depending on their marginal federal tax brackets.
David Stevens, who served as Federal Housing Administration commissioner and is now chief executive of the Mortgage Bankers Assn., says the loss of deductibility of mortgage insurance hits a segment of consumers — middle-income and first-time buyers — "where affordability is especially important."
But mortgage insurance was not the only housing-related casualty of the pre-Christmas skirmishing. As part of the temporary extension of the payroll tax cut, negotiators tacked an unusual provision that raises fees on most conventional mortgages — those originated for sale to or guarantee by Fannie Mae and Freddie Mac.
Starting in April, Fannie and Freddie will impose a surtax on the guarantee fees they charge private lenders equal to one-tenth of 1%. Lenders are virtually certain to pass those fees to consumers in the form of a higher note rate or loan charges upfront. Industry estimates suggest that the surtax could add an eighth of a percentage point to rates and raise costs to borrowers over the life of the loan by more than $4,000 on a $200,000 mortgage.
Unlike standard guarantee fees, which are used by Fannie and Freddie to defray loan-default expenses, the new funds will be sent directly to the Treasury to help pay for the $36-billion cost of the temporary payroll tax cut. FHA loans also will be hit with a fee increase by the payroll bill, raising the annual premiums the FHA charges new borrowers by one-tenth of a point.
At a time when the Federal Reserve is warning that there can be no broad economic improvement until housing recovers, it may strike the public as odd policy to raise costs for home buyers and refinancers to fund unrelated, temporary tax relief. But that's not the way they saw it on Capitol Hill in the rush to holiday recess.
Bottom line: The mortgage insurance deductibility problem may disappear if mortgage insurance gets included in an election-year "extender" package. But the fee hikes on most new mortgages are here for the foreseeable future, so factor them into your housing budget.