Will the Mortgage Interest Tax Deduction Go Away?

Recently there have been some news stories about politicians who may be considering the abandonment of the mortgage interest deduction. This tax deduction has been around for decades and allows homeowners to itemize their mortgage interest on their primary residence, second house and even home equity loans from their income.

It's clearly a benefit for current home owners who are levered up, and for realtors--because this deduction helps to make homes more affordable, and hence results in higher selling prices on real estate. However, with governments spending much more money than they're currently bringing in I figure that political leaders will consider either doing away with mortgage interest deductions, or else setting up some rules that limit the perk---These limits could include income limits, or rule out the tax savings from mortgage interest on second homes or equity lines of credit.

One important question that home sellers and buyers should be asking themselves is--"Can this happen?" I think it can. The next important question will be, "What does that mean for future home prices?" Clearly, if you take away what is effectively a subsidy on buying home -- all else equal -- the future transaction prices will have to fall. This is one of many reasons why I think it might still pay to be a renter for a few more years and enjoy the flexibility and optionality that renting provides.

Wells Fargo's Mortgage Delinquency Rates and Foreclosures are Better than Average and Better than Bank of America

Wells Fargo Chairman and CEO John Stumpf recently presented at the Morgan Stanley investors conference. One of the more interesting charts he talked about was on slide #21 in which he shows the Deliquency rate and foreclosure rate of his bank versus his peers during the third quarter of 2010. Specifically:

• Wells Fargo - 6.1% Delinquent + 2.1% in foreclosure
• Citibank - 6.9% Delinquent and 2.6% of mortgages in foreclosure.
• JP Morgan Chase came in at 7.8% and 3.7% respectively
• Bank of America was the laggard of the bunch (Thanks to their countrywide acquisition) with a whopping 3.7% of loans in foreclosure and 10.6% seriously deliquent..
• You can click on the chart above for larger view of the data that Mr. Stumpf presented.

The CEO also showed a comparison during fiscal year 2010 for the charge-offs as a percentage of all loans for Wells Fargo and its peers. Citi took the most in charge-offs on debt (4.6%), followed by Bank of America (3.6%), JPM (3.4%), Wells (2.3%) and US Bank had the best performance with just 2.2% charged off.

Interestingly enough over the last 10 years, Citi was the worst and US Bank was the best.

Unemployment Rate versus Mortgage Delinquency Rate

The chart can be expanded by clicking on it. But one interesting thing to look at is comparing the delinquency rate on all Freddie Mac and Fannie Mae Mortgages (The bar charts -- which use the left axis) versus the unemployment rate during the last 5 years. It's not surprising that as people lose their jobs and/or become under-employed they have less ability to stay current on their monthly mortgage payments.

consequently, the seriously delinquency rate experienced by America's largest mortgage companies really spikes up. You can see that Fannie has experienced far more mortgages going bad than Freddie has---but neither one did good in 2010. Fortunately, things seemed to have plateaued for now---However, as the chart shows---if people start getting laid off again, I think another step up in charge-offs and non-performing loans could pester these GSA's.

(Unfortunately, it had been months since I pulled the unemployment data, and I couldn't readily find the monthly U-6 data for much of 2009 and 2010---If you happen to have it handy, feel free to leave it in the comments and hopefully I'll be able to update the chart in a future month).

Fannie Mae - Delinquent Mortgage Chart and Data - Things improved in 2010.

Click on Chart for a larger image.

Fannie Mae publishes seriously delinquent data each and every month for mortgages that it owns. The good news is that the delinquency rate has started to come down during 2010; the bad news is that it is still elevated versus historic norms.

Fannie Mae saw it's highest delinquency rates during February 2010, when 3.9% of single-family homes (non-credit enhanced / i.e. conforming mortgages) were seriously behind their monthly payment. Things were even worse for Fannie's credit enhanced notes (i.e. lower down-payment levels and likely paying mortgage insurance)---A whopping 13.8% of credit enhanced mortgages were deliquent in February, 2010.

Since that time, things improved to 3.4% andd 10.6% by the end of 2010.

Although things have improved, Fannie is still in a little worse shape than Freddie (That will be the topic of another post).

Mortgage Charge Off-Rates Have Declined Significantly

The Federal Reserve puts out data concerning charge off rates for all commercial banks in the United States. During 2010, the charge-off rates have been declining. You can expand the chart above by clicking on it, but you can see that the charge-off rate for commercial real estate (excluding farmland) has fallen to around 2%, as has that for residential mortgages---The drop off in credit card charge offs has been even steeper dropping from a peak of nearly 11% in Q2-2010 to 7.7% in Q4-2010.

Banks first must place non-performing mortgages in the delinquent portion of their books for several months before fully charging them off.