I think you'd find the mortgage tax credit is as dangerous to tinker with as social security politically. That is, no politician would dare try to get rid of it due to the uproar from their "entitled" constituency.
I say that it is regressive because the bigger your mortgage the bigger your tax credit (given some small print about AMT etc), which means that people who qualify for larger loans (read richer people) get a better tax rate.
As far as it being harmful there are some disputed studies about US home ownership rates being much higher than the "natural" economic rate, which subsidizes all manner of non-essential middle men (real estate agents, lawyers, title companies etc) and increases the impact of mortgage rates on the larger economy.
My personal problem with it is that I've seen estimates that it costs the government close to half a trillion dollars. This is a very similar number to Medicaid. Medicaid is constantly being attacked yet the mortgage credit isn't, when basic health care seems like a better fit for governmental spending to me than real estate industry subsidies.
Well, given that they presented this advantage as an incentive to buy a home, there better be an uproar. Many people based their decision to spend a huge amount of money on the presence of this benefit.
And of course, what the government won't do is give them a second stab at that decision after they cancelled their end of the deal. Especially since making this decision will cause a massive drop in home prices as well, so there's very good reasons for most people to want out.
The second reason is that removing this entitlement will, for a huge number of people, effectively be a tax increase of 20, maybe even 30%. Since most people also have a discretionary spending budget of about 15% of their income, this will effectively mean they go bankrupt (selling the house won't work as it'll drop -a lot- in value as a result of the repeal of this credit).
There is no way the banking sector can absorb a 5% drop in house prices, and this policy sounds like it'll drop them by maybe even 50%.
So no, you can't repeal this without an uproar. There are very valid reasons for these people to feel entitled.
I think your assumption about the tax increase is way off. The deduction is for the _interest_ paid on a mortgage. Let's assume you buy a $400,000 home with 20% down and a 30-year loan with a 4.5% interest rate. Because it's a deduction -- not a tax credit -- your savings in the first year is only about $6600, and that savings decreases every year after that as interest becomes a decreasing portion of each payment.
I don't think people are going to avoid homeownership in droves because of $6600 per year -- especially people who are in the financial position to own a home. It would, however, remove some of the perverse incentives that make people buy homes who might otherwise be happy to rent one.
You could phase it out, with some combination of grandfathering existing homeowners and gradually decreasing caps on the benefit or percentage of your interest that applies.
I say that it is regressive because the bigger your mortgage the bigger your tax credit (given some small print about AMT etc), which means that people who qualify for larger loans (read richer people) get a better tax rate.
As far as it being harmful there are some disputed studies about US home ownership rates being much higher than the "natural" economic rate, which subsidizes all manner of non-essential middle men (real estate agents, lawyers, title companies etc) and increases the impact of mortgage rates on the larger economy.
My personal problem with it is that I've seen estimates that it costs the government close to half a trillion dollars. This is a very similar number to Medicaid. Medicaid is constantly being attacked yet the mortgage credit isn't, when basic health care seems like a better fit for governmental spending to me than real estate industry subsidies.