Washington Report: New Budget

Real estate took some whacks in the new 3.8 trillion dollar Obama budget presented to Congress last week, but there were some helpful proposals for housing as well.

On the negative side, the White House renewed its efforts, which were unsuccessful last year, to rein in mortgage interest writeoffs by high income homeowners, and to raise capital gains rates.

The budget proposes to limit the value of deductions for mortgage interest and charitable contributions for single taxpayers earning more than $200,000 and married couples earning more than $250,000. It also would allow the top federal brackets to move to 36 percent -up from 33 percent - and 39.6 percent, up from the current 35 percent.

Instead of writing off mortgage interest at the top current bracket of 35 percent - or 39.6 percent as proposed in the budget - the White House would have deductions on mortgage interest and charitable contributions limited to 28 percent.

To illustrate: say you paid $10,000 in interest on your home mortgage. Under current rules, you'd be able to get a writeoff worth $3,500 in the 35 percent bracket and $3,960 if the bracket moved to 39.6 percent.

Under the Obama plan, no matter which bracket you're in, the limit would be $2,800.

The White House proposed a similar change last year as a way to pay for health care reform, but housing, real estate, banking and charitable groups opposed it vigorously.

The same coalition would likely fight the idea this year as well. But lobbyists say the mere presence of the proposal in the president's budget makes it a serious threat - especially when the deficit is ballooning to all-time records.

Robert Story, chairman of the Mortgage Bankers Association, said limiting the mortgage interest deduction - even limited to the wealthiest Americans - sets a bad precedent and could hit high-cost housing markets disproportionately hard, especially California and New York.

Housing and mortgage groups praised other non-tax portions of the Obama budget, however, such as its effort to strengthen the FHA program.

The White House asked Congress to authorize FHA to raise its annual premiums charged to borrowers in order to strengthen the agency's reserve funds. FHA's annual premiums - which are typically rolled into the monthly payment - are capped at 55 basis points but the budget would nearly double them, to 90 basis points.

If Congress agrees with the move to increase annual premiums, said Stevens, the agency will be able to reduce its upfront premium charges to borrowers - thereby allowing more home buyers to qualify for an FHA loan.

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