WASHINGTON — The hottest consumer financing concepts in the American economy -- home equity loans and credit lines -- have entered the sights of a congressional committee.
The staff of the influential Joint Tax Committee, which advises both the House and Senate on tax policy issues, has proposed the elimination of interest deductions for all second mortgages and credit lines. The proposal is included in a wide-ranging "options" paper that identifies revenue-raising measures to stem the federal budget deficit, simplify the tax code and "improve tax compliance."
The staff paper also proposes eliminating the current tax-free status of income received by homeowners when they rent out their properties for less than 15 days a year.
The curtailment of home equity deductions would raise an estimated $22.6 billion in federal tax collections between 2005 and 2009, according to the committee staff. The home rental proposal would raise far less -- an estimated $100 million.
Both proposals are potentially highly controversial and may never make it into legislative form. The home equity plan in particular takes aim at products that are booming in popularity.
Home equity lines and second mortgages accounted for nearly $400 billion in new loan business for banks during the fourth quarter of 2004 -- up from $285 billion during the same period the year before, according to the Federal Deposit Insurance Corp. At thrift institutions, home equity lending increased by 62.5% in 2004 to $79.3 billion, according to the federal Office of Thrift Supervision.
Some banks have seen their home equity business more than double in the last 12 months. According to the lending industry trade newsletter, Home Equity Wire, Bank of America increased its home equity originations by 167% in the last year, racking up $16.2 billion in new loans during the final quarter of 2004.
A key attraction of home equity lines and mortgages is the federal tax-deductibility feature of their interest payments, which reduces the effective cost of the loans to borrowers. Better yet, equity line dollars can be spent on any purpose, while all other forms of consumer debts receive no federal tax preferences.
The tax panel staff cited that disparity between federal tax treatment of ordinary consumer debt and home equity debt as a reason to change the law.
