Good comparison with credit card interest deductibility...though the mortgage problem must be a couple of orders of magnitude greater. Any phaseout would have to be extremely complicated, with grandfathering provisions that could last up to 30 years. It can be done--the fact that people adjusted to the distortions of the tax code in one direction is evidence that they can adjust to a different set of distortions (or removal of distortion--at some point it all seems relative). Allowing enough time is key.

I'm not sure if points and fees are deductible, unless they're rolled into the loan (I've mentioned before the irony that I've worked as a loan processor without ever having a mortgage of my own--mea culpa). Tax deductibility is an argument for doing that, and that does give the brokers some wiggle room for inflating the costs--"it really only costs you 2/3 of that amount". In general, in my experience processing mortgages, the lenders are less prone to play tax-related games than procedural games, like delaying processing of a loan out of the lock period, when interest rates have gone up and the locked-rate is less favorable. The biggest abuse of all, though, is the system by which the broker gets paid "backend points" by the lender in addition to the borrower's points. This sets up a fundamental conflict of interest--the backend points are paid for by an increase in the interest rate, while the borrower is assuming that he/she is paying the broker points to find the lowest interest rate. Whenever a broker offers a low commission, you can be sure that he's getting paid by the lender and that your interest rate is higher than it would otherwise be. Pay the broker yourself, it costs a lot less in the long run. TAANSTAFL.

Likewise, encouraging people to buy homes more expensive than they can afford is bad policy, IMO.

Welllll, to offer a somewhat technical quibble, by definition most mortgages are affordable relative to the current economic and tax regime. The mortgage interest deduction is essentially an affordability subsidy, artificially making more expensive homes affordable relative to income. Prices inflated to consume the artificial affordability, resulting in a net wash. At the end of the adjustment period after getting rid of the deduction homes would, on average, be equally affordable, but getting there's going to be a painful journey.

I agree that tax deductions are a seductive trap. The complexity of the tax code makes their application look like magic to the uninitiated, and I think that fosters an attitude that everybody should grab a piece of the "magic" for themselves, just to be able to say they possess it. Even when it actually doesn't make economic sense.