With the financial and housing markets in turmoil and the recent
actions of the Federal Reserve being cited as a reason why Congress
"must" act to help overstretched homeowners, attention has been
focused on several plans to ease problems in the housing market.
Unfortunately, there are no simple or quick solutions to a highly
complex financial situation. While Senator Johnny Isakson (R-GA)
has clearly put some thought into his proposal, it is unlikely to
improve the current mortgage situation.
Senator Isakson's Proposal
Senator Isakson has introduced legislation (S. 2566) that would
provide buyers of either a newly constructed house or one that is
in foreclosure or default with a one-time, $15,000 refundable tax
credit. The bill would apply to purchases made between February 28,
2008, and March 1, 2009. To qualify, newly constructed houses would
have to have been built on or before September 30, 2007.
Owner-occupied structures in default or foreclosure must have been
in default prior to March 1, 2008, even though the actual sale
would take place after that date, although there is no such
restriction on foreclosed structures owned by a mortgage company or
its agent.
The proposal suffers from the following weaknesses:
- As a general principle, an explicit federal subsidy for the
purchase of certain homes is both bad tax policy and bad housing
policy.
- This subsidy rewards those who have been the most
irresponsible. It would benefit homeowners at any income level who
either irresponsibly borrowed all of their home equity or took out
a loan that they could not repay but hoped to profit from by
reselling the property in a rising market. However, those who have
made the effort to pay their mortgages on time would not be
assisted at all, regardless of their financial circumstances.
- Homebuilders who ignored signs that the market was slowing and
built houses in hopes of finding a buyer would get assistance in
selling houses that should not have been built in the first
place.
- Responsible homeowners who must move for a new job or for
family reasons would suffer because the sale of their homes would
not qualify for a tax credit, while those of their less responsible
neighbors would qualify for one. The potential plight of
responsible homeowners could be cited as a reason to expand this
credit to all home sales, thus increasing the cost to all
taxpayers.
- Since the credit is refunded only after the end of the next
taxable year, the money would not be available at the time of
purchase. In practice, this limits its effect to those buyers who
have the money to make a purchase up front; i.e., upper-income
homebuyers.
- By applying the credit only to homeowners in default before
March 1, 2008, the bill leaves out those homeowners whose mortgage
interest rate will reset after that date. This provision may be
intended to reduce incentives for default, but it is so poorly
written that it essentially rewards those who were irresponsible
early while excluding those who were victims of circumstance after
that date.
Conclusion
The press for Congress to "do something" about the large number
of mortgages that are either in default now or at risk of
defaulting once their interest rates rise to market levels remains
extremely intense. Unfortunately, the Isakson approach, while well
intentioned, is bad policy and would not really do anything to
solve the problem.
David C. John is
Senior Research Fellow in Retirement Security and Financial
Institutions in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.