WASHINGTON — Though weakened by the financial crisis, the banking industry is preparing to fight key provisions of President Obama's budget plan released Thursday.
Chief among the industry's concerns is a provision that would eliminate a tax deduction on mortgage interest for filers who earn more than $250,000 a year. The proposal, which the White House says would save nearly $180 billion in the next nine years, is in line with President Obama's repeated promises to fix financial markets by tackling income inequality. But bankers argue that the plan would essentially make homeownership unattractive.
"What we're worried about is a reduction in the inherent incentive in our tax code to own a home," said Josh Denney, an associate vice president of public policy at the Mortgage Bankers Association. "We think that today's economy calls for additional tax stimuli, not a reduction in housing-related tax benefits."
The Obama administration's inaugural budget also calls for a reduced role for the private sector in student lending and sets aside an additional $250 billion that may be needed to stabilize markets through the Troubled Asset Relief Program. But the phaseout of the tax deductions, which would begin in 2011, could be especially problematic for financial institutions.
Rep. Michele Bachmann said getting rid of the deduction would introduce more uncertainty into mortgage markets.
"That's very troubling," the Minnesota Republican said in an interview. "The housing industry — no shocking news — is in a very difficult position right now, and to phase that out at a time when on one hand" Mr. Obama "is trying to stimulate the market and on the other hand he's trying to send a poison dart into the market makes no sense. What we are lacking more than anything in financial markets is certainty."
Chris Low, the chief economist for First Horizon National Corp.'s FTN Financial Capital Markets, said ending the deductions could end up hurting the quality of the mortgage market.
"It's going to provide an incentive for higher-income individuals to pay down their loans," he said. "If the pool of total loans shrinks and the good ones are paid off, then the ratio of bad loans is going to be higher, and bad loans are already at the heart of our banking crisis."
Officials from the Treasury Department who met with reporters Thursday said the tax code retains other incentives for homeownership.
"I'm not sure I accept the premise that" eliminating the deduction "would lead to a significant number of people who want to pay off their mortgage early," an official said.
The Obama administration is also seeking to stabilize the market for student loans by effectively shutting down the Federal Family Education Loan program, which involves private-sector participation, in favor of direct lending to students. The White House says the move would save $4 billion, but industry representatives called that an overstatement.
"The lenders I work with indicate they lose money on each loan they make, so it's hard to imagine they're going to save $4 billion," said John Dean, a special counsel for the Consumer Bankers Association.
The budget proposal also set aside a placeholder for the funds the Obama administration may request of Congress in the coming months. The president said Tuesday that the cost of Tarp would likely go beyond $700 billion.
While not committing to the number, the administration set aside $250 billion in additional government funds, saying it could help spur purchases of $750 billion worth of toxic assets from banks.
Provisions for the Small Business Administration include a $50 million increase from last year's budget.
There is no indication yet how the money will be spent. Allowances for loan guarantees for the 7(a) and 504 lending programs are to remain the same, with 7(a) to receive $17.5 billion and 504 to receive $7.5 billion.
If approved by Congress, the budget would also provide the Department of Housing and Urban Development with $4.5 billion for community development block grants and $1 billion for an affordable housing trust fund.