Fed Foreshadows End of Mortgage Interest Deduction

The mortgage interest deduction has been under attack by politicians looking for money to deal with the national debt. A comment from a Federal Reserve Bank is foreshadowing that the deduction will soon be gone. 

There have been many lessons that have come out of the Great Recession. Chief among them is the fact the golden rule still applies. As much as you either like or dislike Obama, the truth of the matter is this country is run by the Federal Reserve Bank. While we all froth at the mouth over issues like abortion, the Fed controls the monetary strings of the economy and we blindly follow along. 

The Fed is actually a collection of bank branches. New York is the central branch, which is why Ben Bernanke is always in the news. That being said, the Fed often foreshadows future action by having the head of other branches discuss a particular issue. This is exactly what has happened with the mortgage interest deduction. 

Narayana Kocherlakota is the key figure here. No, I am not talking about a dish in an Indian restaurant. Kocherlakota is the President of the Fed branch in Minneapolis. Kocherlakota is arguing the deduction should be reduced or eliminated. In exchange, a tax credit should be created to help with the down payment on a home, an offset if you will. 

What is the reason for this new approach? Kocherlakota is arguing that the current deduction encourages people to go further into debt by taking out home improvement loans and so on. By cutting down or eliminating the deduction, people would be forced to live within their means. The tax credit, in turn, would create impetus to buy homes, particularly for first time buyers. 

What are we to make of all this? The mortgage interest deduction is going to be slaughtered. The only question is when. The answer is most likely in 2012 after the next election. If Obama is re-elected, he will be able to do pretty much as he pleases since his political career will end in 2016. In fact, his re-election could finally see the third rail of politics be dealt with for better or worse. This would mean major changes to social security, military spending and Medicare, changes that would be far more damaging than the elimination of the mortgage interest deduction. 

If you own a home, it is important to plan ahead. You soon will be unable to deduct your mortgage interest. Just what you need, huh? Another blow to the old budget.