Limiting mortgage deductions would encourage more owners to pay off their principal to reduce their total interest. This is not a bad idea anyway, but this choice would affect consumption and have unpredictable effects across the economy.
It would also cut down on the purchase of second-residences, bad news for those who own the properties someone might buy for that purpose.
But, is it right to give a tax benefit to one group (a government subsidy), while not giving it to another?
Obama gives tax benefits to “green companies,” but not to regular companies.
Big corn gets big tax benefits to produce ethanol.
Volt buyers get tax benefits buyers of other cars don’t get.
Renters don’t get a tax benefit to help them pay the cost of their housing.
From a pure math perspective, the HMD has the effect of increasing home prices (because buyers feel they can afford more home because of the tax benefit). But, who really benefits from higher home prices? Agents (who work on commisions) and banks (who make larger home loans).
Without the HMD, the price of homes would not be as high, and thus the loans to purchase them would not be as big.
My main point was though, that we get all exercised about government tax breaks/subsidies for others, we shouldn’t be crying foul when our sacred-cow tax-breaks are targeted.