United for Homes: Fix mortgage inequalities and generate billions for affordable rental housing

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Every state in our country, and particularly Texas, faces a chronic shortage of affordable rental housing. Meanwhile, the structure of federal mortgage taxes creates racial inequalities in housing payments. One proposal bridges these two problems and finds an innovative solution.

We’re proud state partners in the National Low Income Housing Coalition (NLIHC) and recently participated in their annual meeting, a chance to connect with colleagues from around the country and discuss the coalition’s national priorities. Congress is currently engaged in the budget appropriations process, and the coalition is closely following the status of the National Housing Trust Fund and HOME, two critical sources of funding for housing that have been pitted against each other, along with other housing programs.

The meeting coincided with the release of NLIHC’s new report, “A Rare Occurrence: The Geography and Race of Mortgages Over $500,000.” The coalition has advocated for the National Housing Trust Fund for years, not just to see the trust fund through its thorny implementation stage but also to expand its funding for housing for extremely low income families through an important campaign called United for Homes.

The campaign proposes growing the trust fund by lowering the cap on mortgage amounts eligible for tax breaks from $1 million to $500,000, and then converting the mortgage interest deduction (MID) into a 15 percent tax credit, using the revenue to supplement the trust fund and other housing assistance programs.

As “A Rare Occurrence” notes, almost all mortgages in the United States are under $500,000 – 95 percent of the country’s 20 million mortgages originated between 2012 and 2014 were below that amount. Additionally, the 5 percent of mortgages above $500,000 are highly concentrated in 10 states (including Texas) with booming housing markets. More than 45 percent of the nation’s mortgages above $500,000 are in California.

Crucially, the report also focuses on the racial disparities between mortgage borrowers. NLIHC researchers found that whites were 2.5 times more likely to have a mortgage above $500,000 than African-Americans, and almost twice as likely as Hispanics.

What does this mean for tax breaks? This year, taxpayers will receive around $75 billion in MID. But that money disproportionately goes to higher income mortgage borrowers who make larger interest payments (and thus take larger deductions). In 2014, households earning more than $200,000 per year received 42 percent of MID benefits despite comprising only 18 percent of taxpayers. And because racial and ethnic minorities are much less likely to have higher mortgages than whites, they received much less benefit from MID.

By changing MID in the manner the coalition proposes, everyone with a mortgage would still receive tax relief – but only on the first $500,000 of the mortgage, leveling the playing field for the vast majority of Americans with mortgages below that amount. By converting the deduction into a 15 percent non-refundable tax credit, it’s estimated that $213 billion in new revenue would be created in the next decade.

Mortgage interest reform is likely to happen in some manner, and soon. The newly appointed Speaker of the House, Rep. Paul Ryan, supports reducing the cap to $500,000, as do many others on both sides of the aisle. The overwhelming majority of Americans would be unaffected (in Texas, just 2.5 percent of all mortgages would be over the cap), and those with mortgages above the cap would still be able to claim the deduction on the first $500,000. The alarming racial gap in MID relief would shrink. Meanwhile, billions of dollars in funding could be generated – and if the NLIHC proposal was adopted, that money could go toward desperately needed affordable housing.

Three out of four low income households that are eligible for federal housing assistance do not receive it, NLIHC has found. The National Housing Trust Fund was created with bipartisan support in the wake of the 2008 financial crisis to expand housing assistance and, specifically, to address the serious lack of affordable rental housing for extremely low income families, with the funding targeted at households earning below 30 percent of their area’s median income. The trust fund was blocked from implementation for several years but is now (if some members of Congress are unsuccessful in their current meddling in the appropriations process) set to begin its first year of funding in 2016, with money available for each state sometime next summer.

The trust fund receives a small percentage of the new business generated by mortgage giants Fannie Mae and Freddie Mac, so the annual funding level is based on the housing market. While the official numbers for 2016 funding won’t be released until this spring, the U.S. Department of the Treasury estimates that the trust fund will have $196 million in its first year. If that’s true, Texas will receive about $6 million next year to expand the state’s stock of rental housing affordable for extremely low income families.

That would be a start. According to NLIHC’s 2015 “Housing Spotlight” report, Texas has a deficit of more than 549,00 rental units affordable for households earning below 30 percent of area median income. While the National Housing Trust Fund is a necessary tool for addressing that deficit, and while its funding is likely to grow in the coming years, it is still a drop in the bucket compared to the dire need. NLIHC’s MID proposal would grow the trust fund from a few hundred million every year to potentially tens of billions for affordable rental housing. The impact on the lives of low income families in Texas and around the country would increase exponentially as well.

The coalition is working to build political support for the United for Homes campaign, already receiving endorsements from 2,150 state and local organizations, 91 national or multi-state organizations, 37 elected officials and 10 local governments around the country, including the Austin City Council. The campaign continues to grow, gaining support for reducing racial inequalities in tax relief while greatly expanding rental housing for the families who need it most.

Learn more about the United for Homes campaign by visiting the NLIHC website.