For years, it has been generally assumed that tax-deductible home-equity loans were the best consumer products to come along in decades. Beyond the tax deduction, they allowed homeowners to free up some of the equity in their houses that otherwise would have been unavailable until they sold their homes. Thanks to home-equity loans, many individuals could make badly needed home improvements or borrow enough to ease the burden of college tuition for their children.
Unfortunately, as with most tax loopholes, there has been abuse. Last year, only 28% of home-equity lines, or hels, went for home improvement, according to the Consumer Bankers Assn. Nine percent went for education. Instead, many homeowners traded away their equity for loans to buy new cars or boats, even to make investments.
Such borrowing has gotten out of hand. Using hels to purchase big-ticket items clearly violates the spirit of the Tax Reform Act of 1986, which phased out deductions on most consumer loans. There's also a question of fairness. Those who don't own a home have no such tax-deductible benefits. Finally, for generations owning a home has been like having a forced savings account. Individuals counted on their homes for their retirement nest egg. But the big boom in home prices is over. If homeowners continue to borrow against their remaining equity, the future looks bleak for any improvement in the U.S. saving rate.
To protect current and future generations, Congress should limit deductibility to loans made for borrowing for home improvement or education. Taking away breaks from voters is far from popular, especially in an election year. But the last thing the U.S. needs is another bout of excessive lending and another banking crisis.