WASHINGTON — Hopes that tax reform might soften a weakening of the mortgage interest deduction were quickly dashed Thursday as the plan from House Republicans appeared to land a double punch on the incentive cherished by the mortgage and housing industries.

The plan, as expected, would double the standard deduction, compelling many middle-class consumers to abandon itemized deductions such as that for mortgage interest. Some housing industry advocates had urged policymakers to consider a new housing tax credit as a substitute.

Not only did the new proposal leave out the housing tax credit, but it also delivered a tougher blow: halving the loan limit eligible for a mortgage interest deduction to $500,000. That aspect of the plan was immediately attacked by banking and housing industry groups, as well as some lawmakers.

“The bill eviscerates existing housing tax benefits by drastically reducing the number of home owners who can take advantage of mortgage interest and property tax incentives,” said Jerry Howard, president of the National Association of Home Builders. “By undermining the nation’s longstanding support for homeownership and threatening to lower the value of the largest asset held by most American families, this tax reform plan will put millions of home owners at risk.”

Rep. Brad Sherman, D-Calif.
Rep. Brad Sherman, D-Calif., said the GOP proposal to halve the limit on loans qualifying for the mortgage interest deduction "poses a risk not only to homebuyers and home sellers and communities” but also to Fannie Mae and Freddie Mac. Bloomberg News

Even though the plan would allow current mortgage borrowers to apply for the deduction at the higher cap, critics charged that homeowners could still feel the negative effects as their home values rise.

At a House hearing Thursday afternoon, Rep. Brad Sherman, D-Calif., said resale values could be suppressed for homes that had previously qualified for the deduction but subsequently lost the tax incentive following years of inflation.

"It is deceptive in that it says if you have a mortgage now that is over $500,000 you are fine, except when you go to sell your house and no one can buy it at today’s prices so the value of the house goes down,” Sherman said at the hearing. “That poses a risk not only to homebuyers and home sellers and communities” but also to Fannie Mae and Freddie Mac by spurring a “decline in home buys that will occur if a tax bill basically takes away the home mortgage deduction from a big part of the market including those in L.A. County.”

Others noted that the $500,000 limit generally penalizes home buyers in areas with higher real estate costs.

“In Iowa, the cost of housing is a lot different than New York or Washington, D.C., so $500,000 purchases a different amount of home in those areas. It does get kind of a geographic penalty by lowering the deductibility of mortgage interest,” Paul Merski, executive vice president of congressional relations at the Independent Community Bankers of America, said in an interview.

Housing groups are also bracing for the effects of doubling the standard deduction, meaning most middle class consumers would take the flat deduction instead of itemizing. Even before the proposal released Thursday to halve the cap on loans receiving the interest deduction, the Tax Policy Center think tank estimated that only 4% of households would claim the mortgage deduction instead of 21% under current law.

“At first glance it appears to confirm many of our biggest concerns,” said William Brown, president of the National Association of Realtors, of the GOP plan. “Eliminating or nullifying the tax incentives for homeownership puts home values and middle class homeowners at risk, and from a cursory examination this legislation appears to do just that.”

The homebuilder association had floated a housing tax credit to House Ways & Means Chairman, Rep. Kevin Brady, R-Tex., who is leading tax reform talks on the House side. That plan would have eliminated the mortgage interest deduction, but would have allowed middle class homeowners who opt to utilize the doubled standard deduction to also take an additional home ownership tax credit. But the GOP plan omitted a housing credit.

“The House leadership killed a cost-effective plan proposed by NAHB that Ways and Means Committee leaders agreed to include in the legislation,” Howard said. “It would provide a robust homeownership tax credit that would have helped up to 37 million additional home owners who do not currently itemize.”