A new law that will allow some taxpayers to deduct the cost of mortgage insurance seemed silly but relatively harmless when it was enacted late last year. Yet now, in the spotlight of a subprime lending "tsunami," this law stands as an egregious example of poor public policy: In effect, the short-lived deduction creates an incentive for home buyers to make smaller down payments. Mortgage insurance, whether purchased in the private market or obtained from the federal government, enables some people to purchase homes they otherwise wouldn't be able to afford. That's not all bad. But even with the new tax break, many homeowners still would be better off if they could qualify for a second "piggyback" loan or better yet, made a bigger down payment. Down payments exist for good reasons: They enable home buyers to obtain a mortgage on more favorable terms and at lower cost. They create equity and cushion new homeowners from the cyclicality of housing markets. And they reduce the l...
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