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Trying for a Bigger Tax Credit

By Kenneth R. Harney
Saturday, October 25, 2008

Reluctant potential home buyers could be in line for some additional tax and financing enticements, either through a post-election lame duck congressional session or from the new Congress arriving in January.

Though House and Senate leaders have not agreed on whether to hold a session immediately after the election, national housing industry trade groups are pressing hard for a second round of emergency economic stimulus legislation, ideally before the end of December.

The rationale: The housing debacle was the trigger for the current economic mess, and until the housing market is put back on track -- and the huge backlog of unsold new and existing homes is reduced -- a serious recession may be unavoidable.

The National Association of Home Builders is working on a plan for a new, more generous tax credit for home buyers, possibly as high as $10,000 to $12,000. According to Jerry M. Howard, president and chief executive, the association also wants to create a mechanism to "monetize" the new tax credit -- turn it into immediately spendable cash for a down payment. This might be achieved through credit-anticipation loans from private lenders that would be repaid by buyers following receipt of the credit on their next federal income tax return.

The National Association of Realtors is asking Congress and the Bush administration to jolt housing sales immediately. It has its own package it claims would do so. Among the proposals: Rework the $7,500 "first-time buyer" tax credit enacted by Congress this summer by removing the requirement that home purchasers repay the credit to the government over a period of years or when the property is sold. Under the Realtors' plan, the credit would remain at the current level but would be available to first-time or repeat buyers of primary residences and require no repayment.

Lawrence Yun, chief economist for the association, said that Congress's repayable $7,500 credit approved this summer has not been sufficiently attractive to pull large numbers of buyers into the market.

Potential buyers "view [the current credit] as a loan that they've got to pay back," he said, "but they don't want to be burdened with more debt" -- even at a zero interest rate. The repayment feature "is a big psychological barrier" for consumers, he said.

Although Yun said a "larger credit [than $7,500] would be better," simply getting rid of the repayment feature and broadening the spectrum to all buyers would spur significantly higher sales at a relatively modest cost to the Treasury. "I think it's a sound investment," he said.

Both the Realtors and the builders want Congress to step in before the end of the year to extend the early-2008 stimulus bill's high-cost mortgage limits, which are scheduled to expire Dec. 31.

The stimulus legislation temporarily raised loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration to $729,750. Absent congressional action, the limits could drop to approximately $625,500 next year. That's not high enough, according to the housing industry, to help thousands of buyers in high-cost areas of California and along the East Coast obtain favorable mortgage rates.

The builders' stimulus proposal also includes support for reinstitution of controversial down-payment assistance programs for certain FHA home buyers. Legislation passed this summer banned programs where sellers essentially fund all or portions of their purchasers' down payments by making charitable contributions to nonprofit organizations that then channel the funds -- minus administrative fees of $500 or more -- to buyers. The ban took effect Oct. 1.

Howard of the builders association said an improved version of down-payment assistance -- tied to higher credit scores -- would help cash-strapped purchasers acquire some of the unsold new houses now weighing down local markets. FHA officials adamantly oppose all forms of seller-funded down-payment assistance, arguing that they result in disproportionately higher delinquency and foreclosure rates.

Not all housing trade groups support a new, emergency stimulus effort aimed at stoking home sales. The National Multi Housing Council, a group that represents many of the largest apartment developers and owners, argues that special tax credits and revived down-payment assistance would merely continue the imbalanced housing policies -- overemphasizing homeownership compared with rentals -- that triggered housing boom abuses in the first place.

"Why should Congress re-stimulate one segment of the economy -- homeownership -- when there are so many economic sectors that need help?" said Jim Arbury, the council's senior vice president for government affairs. "Why not provide tax credits to buy cars or refrigerators or other products? After all the excesses we've been through, why should we be inducing people to buy more houses?"

Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.

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