The Senate Defaults on a Foreclosure Bill
Why is it that the biggest problems always seem to encourage the worst possible solutions? The latest case in point: The Senate's housing bill, grandly titled “The Foreclosure Prevention Act of 2008.”
If only it were so. Instead, this bill, which will almost surely get worse as it grinds through the legislative process, combines a few modestly good ideas with some that are merely bad and a few that are truly dreadful. As tax policy, it is execrable. One provision may even encourage more foreclosures.
The worst idea may be a $7000 tax credit for buyers of homes in foreclosure. Under this bill, a bank that owns a foreclosed house will get a big selling price advantage over the single mom who lives next door and has been faithfully paying off her loan. Indeed, because lenders would expect a higher price when they put a foreclosed house on the market, such a law might even encourage banks to repossess properties more quickly.
Now, it might not be a bad idea to replace all mortgage interest deductions with credits, since they would increase benefits to moderate-income homeowners, who presumably need them more than wealthy buyers of mini-mansions. But if Congress does this only for foreclosed property, it is asking for big trouble.
Another proposal would give homeowners who do not itemize a new above-the-line deduction of up to $1000 to offset their property taxes. This would mostly benefit seniors and others who have paid off their mortgages and who, despite the recent slump in prices, often have huge equity built up in their homes. They seem to be the last people who need help. Besides, home ownership is already among the most highly tax-subsidized things we do.
The bill would also allow companies to use this year’s losses to reduce their tax bills from the boom times of 2004 and 2005. The big winners: financial institutions and homebuilders, the very firms that helped generate the real estate bubble in the first place. Perhaps, without the extra tax breaks, some will fail in the wake of their speculative madness. What's so bad about that?
The bill would also allow state and local governments to sell an additional $10 billion in tax-exempt mortgage bonds to refinance subprime loans. As I have written in the past, these bonds were supposed to make homes more affordable for first-time homebuyers. But by bailing out underwater borrowers, they will artificially prop up prices and only make homes more costly for new buyers.
To be fair, there are some useful nuggets in the bill. More honest closing documents for buyers may help, so would modernizing the antiquated and horribly inefficient FHA program. But these proposals are vastly outweighed by the truly awful tax provisions. This is being touted as a rare instance where Senate Democrats and Republicans are working together on a bill. Maybe partisanship isn't so bad after all.