Many people believe that Trump will be good for business and real estate, due to his career which was heavily involved in commercial and real estate. This is yet to be seen, but right out of the gate Trump had an effect on the real estate market by his issuance of his first Executive Order on inauguration day.
The issue in question was the action by President Obama, in the waning days of his administration, to reduce the premium for mortgage insurance on mortgages guaranteed by the Federal Housing Administration (FHA). These loans are usually financed with only three to five percent down, and as such, require mortgage insurance to cover the possibility of a deficiency upon default due to the limited amount of equity in the property.
The mortgage insurance premium is a monthly fee tied to the loan size, loan term and includes an upfront premium of 1.75% of the loan amount and between 45 and 105 basis points (0.45% to 1.05%) annually on the loan balance, paid in monthly installments with the principal and interest payments.
Earlier in January, 2017, President Obama directed a 25-basis point (0.25%) cut in the premium which was estimated to save consumers, on average, at least $25.00 per month. This decision was based, in part, on the belief that the funds that insure these mortgages have sufficient reserves to allow for a premium reduction. However, only four years ago, taxpayers funded a 1.7-billion-dollar bailout of the FHA to fund shortfalls in the insurance fund due to a large number of loan defaults.
In response to the action by the outgoing President, Trump issued an Executive Order cancelling the reduction. This action was taken, in part, as a reaction to the Obama administration adopting new policies as it prepared to leave office, but was also taken due to the concern that a premium reduction puts taxpayers at risk due to decrease in the insurance funds available to the FHA to cover defaults.
Another issue on President Trumps agenda is reducing or eliminating the mortgage interest deduction. Currently married homeowners who itemize their taxes can deduct interest on mortgages of up to one million dollars ($500,000 for single persons). The deduction is supported by Realtors, home builders and bankers who use it as a selling point to potential home buyers.
However, the number of home owners who itemize is not as popular as some believe. At least a third of homeowners have no mortgage, and many lower and middle income homeowners do not itemize their taxes, losing any potential deduction from the interest that they pay on their mortgage. The Tax Policy Center states that the mortgage interest deduction mostly benefits wealthier Americans. “Instead of turning renters into homeowners, homeownership tax expenditures encourage middle- and upper-income individuals to purchase more expensive homes, take on more debt, or buy second homes.”
Trump’s plan is to cap total available deductions at $100,000. This cap will only affect the wealthiest, since even on a $500,000-dollar loan at five percent, the total interest deduction in year one of the loan would be $25,000. However, when you consider other deductions that come into play such as property taxes, charity, medical expenses and the like, the cap will affect some homeowners, especially wealthier homeowners who now have deductions that far exceed $100,000.
The National Association of Realtors will strongly oppose any measure to reduce the mortgage interest rate deduction, as they believe that this will impact home ownership. With ownership levels continuing to fall, the President of NAR has said that NAR is “adamant about protecting tax deductions for residential mortgage interest and property taxes—for primary and secondary homes.”
Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County. They can be reached at 561.594.1452, or at firstname.lastname@example.org