Monday, April 7, 2008
WE'RE REALISTS. We know that legislation can involve a certain amount of moral and intellectual corner-cutting. But is it too much to ask that a bill called the "Foreclosure Prevention Act of 2008" not contain a provision that might, at the margin, encourage home foreclosures? Apparently so, because the bipartisan Senate housing relief package includes just such a measure.
We refer to a $7,000 tax credit (payable over two years) to anyone who purchases a foreclosed home within a year of the proposal's enactment. Supposedly, this would help clear the nation's swollen inventory of repossessed properties, thus propping up home prices more generally. Here's the catch. For lenders as well as borrowers, foreclosure is an expensive hassle. If at all possible, most banks would rather avoid repossessing a house, which they must then try to resell. But, by making it cheaper to buy a foreclosed house than a comparable unforeclosed property, the tax credit makes it more feasible to sell one. The cost and hassle -- for the lender -- of foreclosure go down, and the benefits go up. Other things being equal, lenders would be that much more likely to foreclose -- rather than to help homeowners stay in their houses on modified terms.
At a time when the Bush administration's voluntary mortgage workout program is struggling to show results, this is no time to be introducing perverse incentives, even marginal ones. Indeed, the $1.6 billion tax credit works at cross-purposes with the Senate bill's $100 million in foreclosure-avoidance counseling money.
Perhaps the only provision that's more objectionable is the bill's $6 billion tax break for money-losing home builders -- who threatened not to give any more campaign money when they got shut out of the economic stimulus bill in February. The bill is studded with economically questionable sops to this or that segment of the populace: It would allow 28.3 million homeowners who do not itemize deductions (often because they're seniors who have paid off their homes and have no mortgage interest to declare) to write off property taxes of up to $500 for single filers and $1,000 for couples. This might be a nice add-on to the coming stimulus checks but hardly progressive -- and hardly a cure for what ails the housing market. The bill lets states sell $10 billion in tax-free municipal bonds to subsidize mortgage refinancing for "underwater" subprime borrowers. But this method of supporting home buying has proven notoriously inefficient.
The Senate bill is not a total loss: It contains a needed tweaking of Federal Housing Administration loan insurance, which would permit the FHA to insure bigger mortgages in return for slightly larger down payments from eligible home buyers. There is also talk of simplifying federal loan disclosure forms, so that borrowers can better understand what they are signing up for. But, on the whole, the legislation looks like an election-year turkey, stuffed and cooked to order for lobbyists.