(1) If I buy a property and rent it out, then my income is equal to the rent that I get, minus expenses, including interest payments on a mortgage. Thus, I get to deduct mortgage interest.

(2) If homeowners could not deduct mortgage interest, then landlords would have an advantage. That is, the landlord could deduct mortgage interest, but the homeowner could not.

(3) As a homeowner, I do not count as income the “rent” that I earn on the house. This gives me an advantage over a landlord.

(4) Also, I do not count as income a capital gain from selling the house. This is another advantage over a landlord.

One can argue that the main distortions in the tax code are (3) and (4), rather than the mortgage interest deduction. If you took away (3) and (4), then I think one could argue that you want to keep the mortgage interest deduction.

Of course, the main reason we have the mortgage interest deduction is that the mortgage industry loves it. Yes, it is popular with people who currently use the deduction. But even if you “grandfathered” the deduction for everyone currently using it, you could never get a repeal past the housing lobby.

Congressman Jeb Hensarling did not get the memo. He said,

Will our generation perpetuate a system that demands “more house” today only to ensure that our children are confined to “less house” tomorrow? Today’s system of boom, bust, and bailout is retarding economic growth and helping fuel what all acknowledge as unsustainable levels of national debt.

The wind is blowing the other way. Nick Timiraos reports,

An earlier proposal, issued in April 2011, said the skin-in-the-game rules wouldn’t apply to mortgage securities containing loans where borrowers made at least a 20% down payment.

Now, regulators want to scrap that requirement, meaning that banks would have to retain 5% only of mortgages that allow borrowers to make “interest-only” payments or that don’t fully document a borrower’s ability to repay a mortgage—a much smaller portion of the market that includes the riskiest loan products that caused much of the crisis-time losses.

Hensarling wants to get the government out of the business of deciding what makes mortgages eligible for government insurance subsidies, by eliminating those subsidies.

Right now, because of the Dodd-Frank Act, Washington has more control over who can buy a home than your local bank. The PATH Act addresses these devastating rules head on, getting Washington out of the way to allow banks to lend, builders to build, Realtors to sell, and home buyers to buy.

Matt Yglesias writes,

the administration isn’t pushing for any major rethink of housing policy in the wake of the crisis. The idea that the government should encourage people to make leveraged investments in owner-occupied housing and that these investments should be the cornerstone of middle-class savings is alive and well with us.

There are real estate agents and mortgage brokers in every Congressional district. That tells you everything you need to know about how housing policy is going to be made.

He writes,

In my testimony, I introduced the fact that this week Wells Fargo (the largest mortgage lender in the US) was offering a 30 year fixed rate non-government mortgage for 4.5%, while the government form of the same mortgage was 15 basis points higher at 4.65%. Apparently, Wells had found a way — previously said by the Left to be impossible — to hedge a 30 year fixed rate loan.

Some remarks:

1. Government-guaranteed rates will not automatically be lower. These days, for various reasons, Freddie, Fannie, and FHA are under pressure to boost margins, which means charging high rates.

2. As a too-big-to-fail bank, Wells is in a position to compete against Freddie and Fannie. Investors can treat Wells Fargo debt as if it were government guaranteed. (I imagine Wallison would agree with me on this.) Wells’ disadvantage vis-a-vis Freddie and Fannie–if there is one–is more subtle. That is, Freddie and Fannie may have to hold less capital than Wells. But I would say that we don’t really know where the interest rate on a 30-year mortgage would settle in a world where no mortgage lender enjoys a government guarantee.

3. On the larger issue, Wallison is of course correct. There is no public-policy reason to steer the market toward a 30-year fixed-rate mortgage. As he points out, a 20-year fixed-rate mortgage would be just fine. So would a 30-year mortgage where the interest rate adjusts every five years.

Bipartisan because both parties are captive to special interests. Bloomberg, among others, covered the story, shallowly.

A bill to be offered by Senators Bob Corker and Mark Warner reflects a prevailing view among lawmakers that the two government-sponsored enterprises should cease to exist while a federal role in backing mortgage lending should remain. Corker, a Tennessee Republican, and Warner, a Virginia Democrat, held a news conference to introduce the measure yesterday.

Mortgage-backed securities have not proven that they can survive without a government guarantee. Without mortgage-backed securities, the mortgage banking industry probably would do very poorly. Hence the head of their trade association is quoted as praising the bill.

The big winners in the bill would be Wall Street, which has always wanted a government-guaranteed mortgage securities industry minus Freddie and Fannie. If you think that Wall Street firms did such a great job in helping the mortgage market over the past ten years that they deserve to be rewarded, then this is the bill you want to get behind.

Peter Wallison also sees this as the same-old, same-old.

It would be easy to love a bill that gets rid of these two institutions [Freddie and Fannie]—unless it fosters the same loose lending that led to the housing debacle. By keeping the government in charge, this bill does just that.

So says Joseph Gyourko.

I propose replacing FHA with a new subsidized savings program that provides matches of qualified households’ savings. The goal would be to help those households achieve a 10 percent down payment on the home they wish to purchase.

Of course, the interest groups that benefit from the current FHA will dominate the political discussion and smother this idea. But I still think it is worth articulating good policy proposals, in spite of the interest-group politics. If nothing else, this exposes the importance of public-choice considerations.