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Give bankruptcy judges right to impose sanctions

By   /   Friday, March 6th, 2009  /   Comments Off on Give bankruptcy judges right to impose sanctions

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Now that the Obama administration has opened the door to reducing the home mortgage interest deduction for taxpayers earning more than $250,000 per year, we’ll throw another idea up against the wall and see if it sticks.

Jeff Dinkin, a Santa Barbara attorney, has suggested that people who file fraudulent applications for mortgages or speculate recklessly in buying a home also lose their mortgage interest deduction. We’d expand his idea one step further and give bankruptcy court judges the right to impose tax sanctions on borrowers, if Congress changes the rules and allows courts to grant individual mortgage bailouts.

Dinkin thinks the threat of losing the mortgage deduction would be a big deterrent to fraud and abuse in the housing market. It would have a way of balancing the scales between borrowers who did things right and saw their home values shrink considerably and those who gamed the system and screwed things up for everybody else.

The White House opened the door to this sort of a conversation by putting new collars on home mortgage interest as part of its plan to halve the budget deficit. A host of higher taxes on income and capital gains would hit the “near rich” — that is, professionals and senior managers earning just over the $250,000 threshold.

Up until now, the mortgage interest deduction has been subject to very few limits. It has been viewed as a sacred cow among tax and legislative experts. It still may be as the White House proposals are a framework that’s not even been put into a line-item budget to be placed before Congress.

But the very thought of floating the ideas of an income text for home mortgage interest deductions gives us pause to think about all of the billions of dollars in fraudulent loans taken out by folks who saw the interest deduction as a way to cheat on taxes and cheat lenders into giving them a home loan they did not deserve.

There’s no guarantee that the Dinkin rule will become law, and separating deadbeats from stupid borrowers or people who were just plain unlucky would be tricky. But billions of dollars were stolen from the government by fraudulent borrowers who got big tax breaks and still couldn’t keep up with their debt obligations.

Dinkin is right in one respect. Turning deductible mortgage interest into a privilege, not a right demands that the whole system get a thorough scrubbing. You might say it is time to clean house.

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