Problems with the Foreclosure “Fix”

Posted on April 17th, 2008 by saman

The senate has been working tirelessly to develop a rescue package for the country’s housing problem. It is likely that the Foreclosure Prevention Act is only the beginning. This twenty billion dollar package may just be the beginning of a housing bill that would cost billions more. The bill is small but it may be the preview of what a taxpayer bailout will look like. The bill calls for taxpayers and homeowners that are not in distress to sacrifice their own money for the benefit of all. Sadly, this would not even achieve the intended goal.

Both Republicans and Democrats have come to an agreement on the package because there is something in it for everyone. The Left will get cash for nonprofit groups that will help in this crisis and the Right gains untruthful gestures toward some conservative principles. If the bill passes and President Bush signs it, the Democrats can give one hundred million dollars to nonprofit organizations that will give foreclosure counseling and four billion dollars worth of grants to give to state and local governments to purchase foreclosed properties.

The Republicans will get tax breaks. Any individual or organization who purchases a home in pre-foreclosure, or foreclosure will receive a seven thousand dollar tax credit within the next two years. Next, banks, homebuilders, and firms that have taking big financial hits because of the current problem will be able to put these losses on their tax returns and receive a retroactive tax benefit. This will cost taxpayers about six billion dollars.

There is a feature in the bill that all parties seem to embrace and this feature grants state and local governments the capacity to raise ten billion dollars in bonds that are tax-exempt in order to refinance mortgages in their respective communities.

There are problems with each part of the bill. The one hundred million dollars of foreclosure counseling will not be effective. If you cannot afford your mortgage than receiving foreclosure counseling will not help you. The four billion dollars in block grants will let state and city managers purchase properties from banks but at prices that are still inflated. This will make city and state managers landlords and the government has never done this well. The tax breaks for banks and homebuilders is obvious favoritism.

The plan to have governments borrow money so that they can issue mortgages that are more affordable would expose taxpayers to more risk. If the struggling homeowners default on these loans than local governments will be footing the bill when they truly cannot afford additional spending, especially with declining tax revenues that are property related.

The seven thousand dollar tax credit shows that the government will sacrifice the private benefit for social gain. The motivation is clear. Governmental leaders do not want to see homes remain vacant and becoming run down because this encourages squatting and crime in distressed neighborhood. Congress believes that if private investors buy up foreclosed homes, this will stop the decay of the nation’s neighborhoods.

This will not work, however. Between 2007 and 2008 the average price of homes fell from about $213,000 down to about $195,000. This is a drop of about $17,000 and this is twice as much as the seven thousand dollar tax credit that is being proposed.