Academic

The mortgage interest deduction is funny.  For many people, it's one of thebigger tax deductions.  But, the more prudent you are, the smaller your deduction becomes.  As you pay your loan down, your deduction becomes smaller.  If you take out a 15 year instead of a 30 year, your deduction will be smaller.  However, if you do questionably prudent things, your deduction is larger.  If you take out a home equity loan to go on vacation, your deduction becomes larger.  Mortgage interest is secured, which makes it low to begin with, and then it is subsidized by the deduction.  So, paying extra on your mortgage loan each month instead of putting that money into the (non-recession) market is not mathematically smart.  If you can borrow at 5% and invest at 10%, then shouldn't you do that?  Except that it leaves you vulnerable to losing your home, which is bad.

After the sub-prime mortgage crisis, many thought that the mortgage interest deduction had a part to play.  The deduction really incentivizes debt, not home ownership.  There is no equity deduction, just a debt deduction.  Maybe we should repeal the deduction or decrease it.  Right now, mortgage rates are low (5% on a 30-year this morning), so the effect of repeal would be lessened, right?

But no one seems to have an appetite for changing the deduction according to this WSJ story.  Though Treasury is proposing a decrease in the deduction, no one is biting.  Lobbyists for the real estate industry say it would hurt an already ailing industry.  Last week, the NYT noted that mortgage applications were down.