Recently, Congress has passed legislation lowering the mortgage interest deduction limit from $1,000,000 to $750,000.

A. What is the mortgage interest deduction? Which types of mortgage borrowers benefit most from it, and why?

B. The mortgage interest deduction is often criticized by economists and others. What are some of the key problems or issues which are highlighted by these critics? Can you think of any counterarguments?

C. Thinking about the user cost model we studied in class, what effect would cutting or eliminating the mortgage interest deduction have on the cap rate for residential real estate. Would this effect be larger when interest rates are low or when rates are high? Explain.