Home Buyer Tax Credit Extension

by Linda Beale

Part of the reason for our ongoing Great Recession is that we have had so many measures in the tax code to favor home ownership that (i) banks started to think of mortgage securitization business as money growing on trees and (ii) homeowners started to think of their homes as money-growing trees. The bubble burst when the whole house of cards almost came tumbling down–it was revealed that banks had lent money through sub-prime mortgages to people who couldn’t afford to make the payments, that people were hoodwinked into getting subprime mortgages (at higher costs) that could have afforded a regular mortgage, that house prices could not just keeping climbing.

Nobody liked the way the “market correction” worked–foreclosures, evictions, job losses and home losses heaped on top of each other. Made especially bad when banks foreclosed on individuals for falling short on payments, refused to accept “short sales”, and then ended up letting the houses deteriorate and selling them for much less in foreclosure sales. Made worse when we watched the bailout drama unfold, with investment banks and companies like AIG (investment banks’ friendly insurer and credit default contract counterparty) saved with trillions of dollars of federal tax money on the line, while home foreclosures for ordinary people continued.

Congress couldn’t get the will to pass a bill to permit modification of home loans in bankruptcy–the one bill that would have done the most to save current homeowners from losing their homes and the social/economic disruption such a loss causes.

But somehow it managed, as part of the economic stimulus bill, to pass a tax cuts to encourage people to buy homes who hadn’t owned one before. I thought that bill was problematic from the beginning. First, it was not an ineffective stimulus, in that it was not as effective as, and much more costly than, permitting mortgage loans to be modified (i.e., principal to be reduced) in bankruptcy. Second, it was not fair–those who’d bought homes earlier and were now struggling with underwater mortgages got no help, but someone who managed to put together a deal made possible by the many foreclosed properties would also get a boost from tax funding.

At least, I thought, it’s temporary–so we won’t be saddled with another one of those monster tax expenditures that gets built into the Code and pricing expectations and is well nigh impossible to repeal, like the home mortgage interest deduction and the home gain exclusion provisions that permanently distort investment decisions in favor of housing over many other valuable capital expenditures–such as college and post-graduate education.

Well, it looks like that was wrong. Congress is close to enacting an extension and expansion, trying to save the crisis caused in part by the housing bubble by creating incentives to invest in more housing. Today (Nov. 2), the Senate voted 85-2 to invoke cloture on H.R. 3548, the Worker, Homeownership, and Business Act. It will extend the deadline for the $8000 credit through the end of April 2010. But it will also provide a new credit to existing homeowners to help them buy a different house. See BNA Daily Tax RealTime (nov. 2, 2009 at 7:20pm). Presumably that’s aimed at those who’ve relocated and have to sell and maybe have rented for a few years but are still unable to sell for full price. See this blog for more info, which also notes that the expansion will also raise income limits to $225,000 for married couples.

Egads! I can see why real estate professionals and people who will get the windfall would support this. But it is hard to believe that it makes sense to provide more tax breaks for housing, especially when it is only to a select group that just happens to be in a position to purchase this year, who are already likely to get pretty darned good deals anyway, and especially if it includes well-off couples who make almost a quarter million annually (the current credit phases out starting at $150,000 for couples)? Especially when this extension alone will cost us another $17 billion or so.

They’re also extending and expanding the provision allowing carrybacks of business losses. Before, it was just open to small businesses. Now, there will be an NOL carryback for five years for all businesses, so long as they had losses in either 2008 or 2009.

The only good thing in this bill, as far as I can see, is the provision for extension of unemployment benefits.

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