Shelter, the chance to build equity and tax deductions are just some of the perks associated with homeownership and overhauling the current tax laws may remove the final perk from the equation. As the Bush Tax cuts are on the verge of expiring lawmakers are working on several compromises within the system. One such revision to the current system may extend to a reversal or revisions in the current mortgage interest tax deduction provided to homeowners. Industry insiders are not thrilled with the potential change in this aspect of the system as the move could further depress the weakened national housing market.

In 1986, Congress made changes to the tax system in regards to what could be legally claimed as a tax deduction. At that time, the legislative group put an end to the ability for consumers to write off the expenses associated with interest being charged on credit-card debt and other consumer loans. Mortgage interest rate deduction was left intact and operates as is today, however, proposed changes to the current system could end up eliminating or restricting one of the best benefits to buying a property financed with a mortgage.

Potential Changes to Existing Tax System

Courtesy of big ticket stimulus packages and the financial woes of government assisted mortgage lenders Fannie Mae and Freddie Mac, the national debt has grown an average of $4.15 billion per day to a whopping $14 trillion U.S. deficit. In response, the presidential deficit commission is looking for an effective way to balance the books, and one potential revenue stream would include adjusting the mortgage interest tax deduction as it currently stands. The proposal for these changes is entitled "The Moment of Truth."

The National Commission on Fiscal Responsibility believed that the proposed revisions would reduce the national debt by $4 trillion by 2020 and some of the recommended changes to implement the cuts include:

• Converting the current itemized system into a flat 12 percent for homeowners to non-refundable 12 percent tax credit for all taxpayers.
• Reducing the benefit cap from jumbo mortgages of $1 million to a cap on home loans up to $500,000.
• Only homes used as a primary residence would qualify for deductions.
• Deduction claims on home equity loans would be eliminated.

Proposed Changes Could Further Weaken Housing Market

By years end it is estimated that nearly 1,000,000 homes will enter foreclosure further saturating the market with a surplus of inventory. It is that trend combined with the subprime mortgage industry meltdown that has prevented a housing market recovery and industry insiders believe that if implemented "The Moment of Truth," would do more harm than good.

National Association of Realtors (NAR) is the strongest supporter of the current mortgage interest tax deduction and a vocal opponent to the proposed revisions. According to NAR President Ron Phipps, changes to the current system could further reduce home prices and market value by a staggering 15 percent. This price variants would be in addition to slashed home prices already plaguing the nation.

The tax deduction incentive has long been promoted as one of the most enticing perks converting renters to homeowners. A recent survey conducted by the NAR of approximately 3,000 homeowners and renters in October has shown that around three-fourths of homeowners and two-thirds of renters believed the mortgage interest deduction was "extremely or very important to them."

The NAR is not the only organization concerned about removing the mortgage tax deduction from the home buying equation. Michael Berman, the Chairman of the Mortgage Bankers Association, believes that the policy changes would further cripple an industry that is just starting to rebound. Berman has stated, "...would effectively increase the cost of homeownership for millions upon millions of people," and could force the industry to a screeching halt.

What Is Next For the Proposal

The first draft of "The Moment of Truth" was completed in early November, and the proposal recently faced an 18-member congressional panel in order to convert it into law. Based on the vote that was cast early in December, the proposal has failed 11 for the changes and 7 against. Only 5 negative votes were needed to squash the concept. The rejection occurred because the measures pitched were deemed too drastic and the commission is now tasked with developing a new, more conservative option.