The election-year discussion of how political parties planned to push interest rates lower didn’t really materialize this year. In fact, the subject was moot.
The Federal Reserve took away the popular saying "interest rates never rise in an election year" when it announced long ago that it planned to do all it could to keep rates down at least through 2014.
After wrapping up their latest meeting last week, members of the Fed’s Open Market Committee said they expect to keep their target for short-term interest rates at "exceptionally low levels" at least through mid-2015.
The Fed is also keeping a lid on mortgage rates, boosting purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac by $40 billion a month. Economists at Fannie Mae think the Fed may keep the open-ended program going through next year and into 2014. That could help keep mortgage rates at or near historic lows.
Contrary to popular belief and despite the influence of Democrats and Republicans, interest rates typically have risen twice as many times as they have dropped in the past 11 presidential election years.
Any political pressure on mortgages went out the door with deregulation, taking interest-rate caps away from states and ushering in the Alternative Mortgage Transaction Parity Act of 1982 (AMTPA) that ended the era of fixed-rate-only loans.
By the late 1980s, the new way of selling mortgages on the secondary market had settled in and the perceptions of Wall Street far outweighed any other influence on mortgages, except for consumer confidence. The power of the corner banker was gone, and customers were confused as to why this was so. The late Thomas French, president of the Mortgage Bankers Association in 1985 who died in 2009 after a career of terrific quotes and banking wisdom, summed up the change in the lending industry with perhaps his best lines:
"I don’t think anything as puny as a political party or candidate can move mortgage rates in this world," French said. "They may hope, but it won’t happen."
What has taken the place of election-year interest-rate debate has been the mounting discussion of eliminating or altering the mortgage interest deduction (MID). Much to the chagrin of the National Association of Realtors (NAR) who will spend millions of dollars to keep the MID in place, the idea is gaining steam.
In a recent survey, a majority of the nation’s leading economists, real estate experts and investment strategists said eliminating or drastically changing the mortgage interest deduction would benefit the country’s economic outlook. Only 11 percent of the 113 respondents believed the MID should remain as is.
The deduction, once felt to be "in stone" and a write-off that would never be eliminated, is now used by fewer than 30 percent of all taxpayers. It is not a dollar-for-dollar deduction; rather, the amount of interest paid reduces taxable income. That means the tax break benefits wealthy families who are taxed at a higher rate the most, critics say.
According to the Internal Revenue Code, mortgage interest is deductible to an outstanding mortgage principal balance of a combined $1 million for a principal residence and one additional residence. In addition, interest payable on a home equity line of credit is limited to a loan balance of $100,000. Interest payments from money used to finance home improvements are not included in those ceilings.
Some of the more popular proposals include eliminating the deduction entirely for second homes; converting the present MID to a 12 percent tax credit; reducing the $1 million ceiling to $500,000; and dropping the deduction in favor of lower taxes rates.
The threat to the MID has never been stronger, but not all economists believe an alteration will actually take place, especially those who have spent years speaking with members of Congress who also know the power of NAR dollars.
Why is it so important for NAR to remain in the face of our members of the U.S. House of Representatives and Senate on the MID? Many of them have two homes.
The main reason we are able to deduct the mortgage interest on two homes rather than just one is because congressional members "need" two homes — one in their home state and another in the nation’s capital. Some accountants even refer to the curious guideline as the "congressmen’s rule."
"The MID will not fall into the tax Mixmaster that is about to hit the Congress," said John Tuccillo, NAR’s former chief economist and now the chief economist and the head of industry data and analysis for the Florida Realtors. "If the president is re-elected, this is a certainty. If not, the fate of the deduction will hinge on which of the two Romneys is elected."
So, what the economists would like to see happen may never come to pass — especially in an election year.
Tom Kelly’s new e-book, "Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a Tearful Retirement," is available online at Apple’s iBookstore, Amazon.com, Sony’s Reader Store, Barnes & Noble, Kobo, Diesel eBook Store, and Google Editions.
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