The mortgage interest deduction: loophole or noose?

INCOME tax time has arrived, and most of us are feeling the effects of the Tax Reform Act. Congress should be applauded for closing most of the special-interest loopholes. Unfortunately, they left the biggest one open: the deduction on home mortgage interest up to $1 million. I'm a homeowner, and I used to be tickled to death that one house payment a year was on Uncle Sam. That was before I discovered that I never really see the money; it goes to the bank. I also realized that the government gets its cut one way or the other. My mortgage interest deduction and everyone else's are made up in higher taxes elsewhere. That's unfair to the millions of Americans who cannot afford to own a home. Finally, I concluded that the ultimate beneficiary of the mortgage interest deduction is not Mr. and Mrs. Average American, but the real estate industry - the developers, contractors, brokers, and lawyers.

It may not be much of a choice, but I'd rather have my money go to the feds than the developers. Why should an industry that is notorious for mismanagement and corruption be favored by such a generous subsidy?

The mortgage interest loophole has lured many into its noose. What prospective home buyer has not endured a high-pressure agent insisting that the more you spend, the more you save? This makes about as much sense as a 5,000-calorie-a-day weight loss diet. But people fall for it every day, mortgaging or remortgaging themselves up to their eyeballs. The consequences can be seen in foreclosures and bankruptcies, and not so easily seen in stressed marriages and latchkey kids. The collective results are skyrocketing real estate prices.

Besides promoting the greed factor, the mortgage interest deduction contributes to a blatant waste of natural resources. In such yuppie Utopias as Fairfax County, Va., singles with six-figure incomes rattle around in four-bedroom, three-bath tax shelters while the police, schoolteachers, and others who service the county must commute 20, 40, even 60 miles one way if they want to buy a house they can afford.

The home builders' lobby - one of the richest - claims that eliminating the mortgage interest deduction would trigger a plunge in real estate prices, massive layoffs in the construction industry, and untold hardship to millions of homeowners. These are the same folks who scream that any restrictions on growth will cause astronomical price increases.

If phased in over a period of four or five years and tied to a tax break that would benefit everyone (such as increasing the personal exemption to $3,000), closing the mortgage interest loophole would help all but the incurably greedy. Home buyers would be more likely to stick to their budgets and put aside their dream-house wish lists with their lottery tickets. Homeowners would have an incentive to pay off their loans early, saving themselves thousands of dollars. Banks would benefit by less paper work in qualifying applicants, and fewer foreclosures, and might require bigger down payments - an incentive to saving.

Closing the loophole would bring a small but permanent reduction in building activity. This would be more than welcome in areas of explosive growth. Developers' profits might shrink, but an industry that can afford high-priced lawyers and lobbyists is in no danger of demise. Many of the busts in this volatile market are the developers' own fault. Such was the case in Houston, where overbuilding and the dumping of homes on unqualified buyers caused far more harm than reversals in the oil industry did.

In the long run, eliminating the mortgage interest deduction would help bring a measure of stability both to the real estate industry and to prices. It would also provide an incentive to live within one's means.

The perks of home ownership are not all measurable on Schedule A. And people have to live somewhere. As Will Rogers pointed out, land is a finite commodity. It's a shame the same can't be said for avarice. So come on, Congress - close that loophole!

Sara L. Smith is a free-lance writer living in Manassas, Va.