Posturing for Progress

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cover story Such programs are important additions to the current administration's roster of assistance initiatives to aid struggling homeowners. HAMP, of course, helps homeowners who are struggling to keep their loans current or who are already behind on their mortgage by lowering their monthly payments. The streamlined modification initiative, announced by the FHFA on March 27, gives borrowers who are least 90 days late another path to avoid foreclosure and lower their monthly payments without requiring financial or hardship documentation. As a result, more especially in the realm of taxes. According to recent testimony by DeMarco on near-term issues and the future of housing finance, the Federal Home Loans Banks currently have advances outstanding of about $418 billion. At the outset of the economic downturn, advances increased dramatically from $640 billion in June 2007 to $1 trillion in September 2008, before declining fairly rapidly to current trends. The decline in advances to their current level has a number of causes—some are structural and may produce long-lasting The recent "fiscal cliff" deal reinstated a limit on itemized deductions for high-income taxpayers known as the Pease provision, which policymakers created as part of the 1990 bipartisan deficitreduction package, but which the Bush tax cuts phased out between 2006 and 2010, according to the Center on Budget and Policy Priorities website. Meantime, Viard says that without the adoption of a broad tax reform, there will be no change to the mortgage deduction. If a broad reform is adopted, some direct changes to the mortgage deduction—in the "The private market for mortgage securities needs to come back to sustain a healthy housing market." — Celia Chen, Moody's Analytics homeowners are staying in their homes showing that the move to join the GSEs was a smart decision. Since the first full quarter in conservatorship, which occurred in Q 4 2008, Fannie and Freddie have completed more than 2.7 million foreclosure prevention actions. Approximately half of those actions are permanent loan modifications, including more than 435,000 permanent HAMP modifications. With the extensions, these numbers are expected to grow as borrowers continue to benefit from these programs. Still, borrowers will have other pressing concerns as a result of fiscal policy. Taxing Issues T he year began with fears of how the American economy would be affected by the impending sequestration— 18 | The M Report changes for the FHLBanks, while others are cyclical and likely to ease as the economic climate improves, DeMarco reported. However, the difficulty in protecting future demand for advances lies in assessing the relative importance of the structural and cyclical factors, he added. Yet Alan Viard, resident scholar at the American Enterprise Institute, believes the only real change to the mortgage deduction that was made in the fiscal-cliff legislation is that the deduction is now more valuable—39.6 rather than 35 cents on the dollar—for those in the top bracket, due to the rate increase. "Bear in mind that the Pease provision, despite being advertised as a limitation on itemized deductions, does nothing to change the marginal value of the mortgage deduction for most taxpayers subject to the provision," he commented. form of restrictions on tax relief for large mortgages—are likely. Furthermore, a broad tax reform would lower tax rates, which would automatically reduce the marginal value of the mortgage deduction—along with all other deductions—even if there was no specific modification of the mortgage deduction, Viard notes. Despite the active discussion going on, a broad tax reform does not appear to be likely in the near future, Viard predicts. But there's no way to know for sure, he emphasizes. "The 1986 reform looked unlikely pretty much right up until it happened, and it's still unclear, even in retrospect, why it happened when it did," he said. Examining the MID S o, where does the consumer turn for answers on how the mortgage interest deduction (MID)? Celia Chen, senior director at Moody's Analytics, says the impact of HAMP and HARP on the home affordable extensions will be marginal since the number of borrowers who qualify and will take advantage of the programs is shrinking. The Home Affordable Refinance Program (HARP) is designed to help individuals obtain a new, more affordable and stable mortgage. The MID is one of the largest tax expenditures in the U.S. tax code, but the rate at which it's claimed and the average amount deducted vary widely across states, according to a report released in April by the Pew Charitable Trusts. For example, the percentage of tax filers deducting mortgage interest ranged from nearly 37 percent in Maryland to 15 percent in West Virginia and North Dakota. The variation across metropolitan areas within states is even greater. In Texas, for example, the state's highest claim rate—in the Austin area—is four times larger than the lowest rate, in the Odessa area. The MID generally allows tax filers who own a home and itemize their deductions to subtract interest paid on mortgage debt from their gross income. In 2011, tax filers deducted nearly $360 billion in mortgage interest, resulting in foregone federal tax revenue. The number of filers who take the deduction and the size of the actual deduction also vary across states. In 2010, the average deduction ranged from a high of $4,580 per filer in Maryland to a low of $1,192 in North Dakota. The national average was $2,713. Similar to the variation across states, tax filers within states claim the deduction at different rates depending on where they live. In 2007—the latest available data for intrastate analysis—tax filers in and around larger metro areas generally claimed the mortgage interest deduction at much higher rates than those in less populated states, according to Pew. As for the MID, the January 1 budget deal did reinstate a small

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