It seems that the decision makers running the Fannie Mae and Freddie Mac government refinance programs did not learn anything from the current, and continuing, housing bust.  If bad loans got us into the current mess, why do Fannie and Freddie think that more bad loans will get us out?  In a recent press release it was announced that the two government-owned agencies will now refinance loans up to 125% of the current homeâ??s value!

Does this spell trouble for the FHA home loans? All facts from the mortgage industry and government point to the fact that mortgage default rates take a huge spike upwards with high loan to value loans.

I would venture to say that many of the mortgage debtors (in trust deed states) may not realize that by refinancing through this program, they will be going from a non-recourse loan to recourse refinancing, in many cases.

My bet is that actions like this will give a false sense of recovery for awhile, only to have us fall further in the future, much like the stimulus money is currently doing.

In his statement FHFA Director Lockhart said, â??The higher LTV refinancing will allow more homeowners to strengthen their finances.â? Do you really believe this? If the government really wanted people to stay in their houses, they would allow them to go into foreclosure and help them find alternative housing. Moving them into a 125% LTV recourse loan is setting them up for disaster and setting taxpayers up to take on the resulting new losses.

Perhaps the government is not being 100% honest in their touting this 125% refinancing program as a way to help people stay in their houses. In reality, it may actually be a way to help banks keep from writing down assets while they earn enough money to increase their capital base.

Some folks like to say that where California goes, so goes the rest of the country.  The â??tax and spendâ? government in California did not yet come up with a comparable plan and have been beat to the punch by the Feds.  Californiaâ??s 26 billion (or more) deficit, the absence of a viable budget, and the need for issuing IOUâ??s rather than cash payments, is no excuse.  Only a few months ago California tossed out $100 million towards a credit to new home buyers for 5% of the purchase price (up to $10,000).  Now that the first pot of money is depleted, there are two new bills pending in Sacramento proposing to double or triple the original $100 million.

The American Dream is often paired with owning one’s own home.  For decades Legislator’s have protected that dream with allowing home owners to claim the mortgage interest paid on their homes as a tax deduction.  With a possible phase out of this deduction, could the dream fade?

“There are no cows more sacred in the tax code than the deductions for mortgage interest and property taxes. Together, they add up to at least the $ 75 billion annual subsidy for housing and Homeowners. ” The New York Times.

In 2002, 37.2 million taxpayers claimed the deduction, writing off $336.6 billion, or about $9,000 per taxpayer. Representing about 37% or so of itemized deductions, it was slightly more than itemized deductions for deductible state and local taxes, and twice as much in deductions as charitable donations.  Clearly, the mortgage deduction is important and worth a huge amount of money.

In 2005 it was estimated that:

* The mortgage interest deduction will cost the Treasury $72.6 billion, according to congressional estimates.

* The $250,000 and $500,000 tax-free exclusions of home sale profits for single sellers and joint filers, respectively, will cost $23 billion .

* Property tax write-offs cost $20 billion, and tax subsidies for local and state housing bond programs account for $1 billion.

When a congressional committee examined the distribution of homeowner benefits for 2004, it found that people earning $200,000 and more a year – just one-half of 1% of all homeowners filing for deductions – pocketed 22% of the $70.2 billion in write-offs in 2004.

In 2007, Rep. John D. Dingell (D-Mich.) unveiled a draft of his “carbon tax” legislative reform package. Part of this draft legislation was a phase out the mortgage interest deduction on large homes. The phase-out schedule for the mortgage interest write-off, beginning with houses of 3,000 square feet, which would lose 15 percent of their deductions, and ending with houses of 4,200 square feet and larger, which would receive no deductions at all.

Dingel said: “In order to address the issues of climate change, we must address the issue of consumption-we do that by making consumption more expensive.”

Naturally, with the real estate market bust, the Dingell package was shelved. Once the housing market recovers, lets’ say two years from now, it’s a very good bet the administration will be looking hard at ways to increase taxes to pay down the huge bailouts. The unusual financial troubles and the move to green, will be the perfect time to push through such legislation.  Unlike the Dingel proposal ,which was aimed at larger homes, the future legislation will most probably cover all mortgage interest deductions. To increase its’ chance at passage, it is a good bet it will be a phased in plan with deductions decreasing over a number of years.

To get the reversal of the sacred deduction started, President Obama’s impending budget proposes a cap on the mortgage interest rate deduction.  Couples earning $208,850 or more would loose the deduction. Where currently households at the 33% and 35% tax rates are allowed the deduction, Obama would reduce their deduction to only 28% of the value of those payments.  This is likely a first step to what seems to be a total elimination of mortgage tax deduction.  If (when) this passes, Obama will find it easier to lower the earning cap for the mortgage tax deduction, leading up to an even lesser amount in the future.  It seems on the horizon that the mortgage interest rate will be only for low income earners.