Current deduction: Deduction available only to itemizers for interest up to $1.1 million of mortgage debt.
Extension of important tax benefits for home ownership and charitable giving to all taxpayers, not just the 35 percent who itemize
Home Credit equal to 15% of mortgage interest paid; available to all taxpayers; mortgage limited to average regional price of housing (limits ranging from about $227,000 to $412,000)
My back of the envelope analysis:
Impacts: High income taxpayers in high marginal tax brackets, who itemized their deductions, who own expensive homes with large mortgages would have tax credits that would be lower than the tax savings under the current plan.
Middle income taxpayers in the 15% marginal bracket with median priced mortgage balances, who itemized deductions would have tax credits roughly equivalent to their current tax savings
Those who do not currently itemize and those who have marginal tax brackets below 15% would generally benefit from higher tax credits than any tax savings that they currently receive.
Industry lobbyists will ignore the benefits to lower and median priced mortgage holders and wage an apocalyptic ( and apoplectic ) campaign against such a reform. They will claim that it hurts all homeowners.
As far as the effect on the housing markets, I doubt that it would affect homes at our below the median price very much. Homebuyers using Jumbo loans in the $417,000 to $1.100,000 range and above would lose some of the tax subsidy they receive under current code, but not all tax subsidy.
If the reform occurs after the current housing bear market has ended, and is gradual enough it could be beneficial by keeping the re-inflation in check.
The best way to gradualize the reform would be to allow taxpayers to choose the new tax credit OR itemization under current criteria for a couple of years until the housing market has stabilized. This could be done by monitoring an average of some reliable housing price indices such as the Case Shiller Index and others, for a trigger that would signal a reduction of the subsidy to the highest income tax payer, without disrupting the housing market while it is down.