First-Time Homebuyer Tax Credit Program: Morally Hazardous?

While traveling this past weekend, I picked up a real estate booklet in the charming middle-of-the-U.S.A. town which I found myself in.

Most interesting was the inside cover page note to prospective home buyers:

First-time homebuyers who would otherwise qualify for the $8,000 tax credit, but don't have the money for a down payment or closing fees, may now be able to get a loan to help cover those upfront costs.

The U.S. Department of Housing and Urban Development (HUD) announced in May that the Federal Housing Administration (FHA) will allow state housing finance agencies to provide second mortgages "monetizing" the tax credit so that borrowers can use the funds toward their down payments and closing costs for the purchase of homes with FHA-insured mortgage loans.

"This is great news for thousands of families who want to take advantage of today's low interest rates, competitive prices, great selection and the federal tax credit that is only available until Nov. 30, but could not save enough money for a down payment and closing costs," said National Association of Home Builders Chairman Joe Robson.

HUD also announced that FHA-approved lenders may purchase the tax credit from the home buyer in advance, so the home buyer can use the funds for closing costs or to make a down payment in addition to the 3.5% minimum. Home buyers who go directly to FHA-approved lenders will still need to come up with the 3.5% minimum down payment that is required for an FHA-insured loan.

The National Council of State Housing Agencies has a list on their website (ncsha.org) of state offering first-time home buyers tax credit loan programs. For information on the $8,000 first-time homebuyer tax credit, go to federalhousingtaxcredit.com.

Now, admittedly, this is old news, and is dated June 11, 2009. But sometimes it pays to step back and look at what has just happened and is happening. We just had a near melt-down of our entire economy. It was largely caused by a housing bubble from lax lending standards and low interest rates which in turn caused irrationally elevated home prices. SIVs and other quant-crafted ponzi investment bubbles took advantage of this inflated housing loan industry.

You can't solve a problem by doing more of the same things that caused the problem in the first place. How many times have you heard that now?

In response to the crisis, it didn't take long for our government to establish this program which promoted further lending with no down-payment to young new workers who, sorry to say, are at high-risk for default. Since when are people who owe no taxes eligible for home loans and $8,000 credits? Add kerosene to the fire.

I am personally acquainted with one couple who has purchased a newly constructed home under this plan. They are 25-year-old newlyweds who are both employed in the service industry, one as a hairdresser and the other, a lawn-service and snow-removal provider. This also makes me recall that I considered buying a condominium when I was in my 20s but after finding out that there was a required 20% down payment, I quickly gave up the idea. In retrospect, I realize that the lending standards then, in the 1980s, were written in my favor. I didn't need to become a debt slave in this period of my life when I still needed freedom, mobility and income for other expenses.

So, above, is the promotion of the first-time home owner tax credit plan when it started. Below, is the report of the results of the program and a promotion for its extension in a bigger and better way:

First-time homebuyer tax credit claims soaring

More than 1.4 million Americans have already claimed the new tax credit for first-time home buyers, according to a report from the Internal Revenue Service.

The credit, which applies to sales as of January 2009, is good for 10% of the price of a home, up to $8,000, and supporters assert it has helped stabilize the housing market. It's available to anyone who has not owned a home for three consecutive years prior to purchase, and to qualify for the full credit buyers must be purchasing a primary residence, and couples can earn no more than $150,000, while individuals must make less than $75,000.

The credit has been an important stimulus tool for two reasons. It's fully refundable, meaning that even if buyers owe no taxes whatsoever, they'll get an $8,000 check from the IRS. And this refund will put money in consumers' pockets for good, as opposed to the $7,500 first-time homebuyer tax credit that could be applied to sales made between April 2008 and July 1 2009.

Buyers must close on their homes before Dec.1. But because much of the recent uptick in home sales has been attributed to this tax credit, housing industry advocates worry that the market could quickly turn down again after the credit expires.

"Just like the Cash-for-Clunkers program, there could be a hangover effect," said Mike Larson, a real estate analyst for Weiss Research.

That's why housing industry participants are pushing Congress to keep the tax credit in place.

"We're calling for extending the credit until the end of next year and expanding it to all homebuyers," said NAR spokesman Walter Molony. "We do think that housing will recover without it but the market will come back faster and stronger with it."

Some 1.8 million people are expected to participate in the program by the time it lapses and the National Association of Realtors (NAR) estimates that it will result in an extra 350,000 sales. The NAHB more conservatively predicts 165,000 more home sales than would have occurred. The associations don't want that momentum to slow. The associations don't want that momentum to slow.

"If we don't extend and expand the program, the seeds of growth planted could [die]," said NAHB president Jerry Howard.

There are six bills before Congress that would extend the tax credit, two in the Senate and four in the House of Representatives.

On Wednesday night, Senator Ben Cardin, D-Md., along with Senators John Ensign R-Nev., Harry Reid, D-Nev., Johnny Isakson, R-Ga., and Debbie Stabenow, D-Mic., introduced a bill extending the tax credit program for six months.

Reid released a statement saying, "Yesterday we learned that new home sales have increased in Las Vegas, and that's good news. I hope this credit will build on that so more Nevadans can realize the American dream of home ownership."

Senator Isakson, a former real estate broker himself who has become a leading voice on housing market issues, had introduced his own bill several weeks ago. That would not only extend the credit for a year after it's renewed, it would allow all homebuyers, not just first-timers, to claim it, as long as the property is for a principle residence. The bill would also increase the tax refund to as much as $15,000.

The house bills all extend the deadline through at least the end of December 2009 and two of the bills, introduced by Howard Coble, R-NC and by Dan Burton, R-Ind., would have it run through 2010. They would also open it up to all homebuyers.

Sentiment backing efforts to extend the credit appears to be on the rise, according to Jaret Seiberg, an analyst with Concept Capital's Washington Research Group. He put the odds of an extension at 2 to 1. Isakson's version has already attracted 16 co-sponsors, according to his deputy chief of staff, Joan Kirchner.

[...] Another hurdle: The growing sentiment among fiscal conservatives that any extension must be paid for by finding savings in some other areas. There has already been $14 billion allocated to the program -- and any extension would surely cost billions more. [...]

This above article explains how the starving tentacles are reaching out in a big way for more, more, more. It has been estimated by Calculated Risk that the true costs of the program have been $ 43,000 per tax credit instead of the $8,000 face value. We also know that the benefits go to the banks and help keep home costs higher, which is not desirable for the consumer. It helps protect the CDO values that the banks have on their books. It helps the construction industry sell new houses, as well as helping realtors and loan originators.

This program is, on the surface, politically palatable because it appears to be for the little guy until you look deeper. Then it becomes absurd, more of the same, difficult to end, and morally hazardous in quite a number of ways.

Disclosure: No stocks or ETFs owned.

Comments

[Tony Petroski:]

Ms. Kalpa. You are spot-on in noting that there is a moral hazard in the subsidy and that it replicates the very problem that led to the financial crisis--0-down purchases of homes by people who couldn't afford them.

You are wrong in thinking that the program would be good if it was "for the little guy." It still would be wrong.

You note that "It helps the construction industry sell new houses, as well as helping realtors and loan originators." Yes, that's true. But don't get too indignant. There are many "little people" working in the construction industry and most realtors are little people (not meant as an insult fellow real estate pro's). Their jobs and businesses have been devastated, so this subsidy, while goosing sales for a few months, won't turn those little people into fat cats.

Sep 23 12:58 PM

[stink726:]

Good article; thanks. I can't believe the guvment, in trying to help, has set up possibly more future foreclosures. Using the $8000 to get into a house for basically no money down means some of these buyers will have 'no skin in the game' and be more likely to walk away if they choose.

Sep 23 01:26 PM

[aubrey:]

It was great to learn that this program could get extended into next year and potentially get better. We were going to buy ourr first home this year but decided to save more money going into it and waiting until next year. We did not want to lose the tax credit but it was something would just have to lose. I really hope it is there for us next year. We have 3 children and it is definately needed

Sep 23 01:57 PM

[Pat C:]

First time buyer programs/portfolio's be they homes or cars are loaded with delinquency and repossession issues. They happen pretty quick too. Six months into next year you will be hearing all about them.

Sep 23 03:02 PM

[OptimizedPrime:]

FREE HOUSE FREE HOUSE FREE HOUSE FREE HOUSE

At a 3.5% down payment with an $8000 down payment means that you get a FREE $228k house for 12-18 months.

Yes, ABSOLUTELY FREE. No rent, no payments, no NOTHING. The only downside is your personal credit rating will be diminished (a little) for 2-3 years. But who cares? Think of the money you will save by having FREE RENT FOR A YEAR!

How? Simple.

First, locate yourself a nice under-$228k house. You'll start to notice that number being a well-known threshold in the real estate biz. Realtors will create custom "under 228k" portfolios for you to look at and sellers will start making houses that are priced at that EXACT amount or less (the close the better, but not over).

Second, get yourself one of those government-backed free-money "loans" using your monetized tax credit. They are "loans" in name only.

Third, buy your house for $228k and live in it. Do NOT make ANY house payments. HOUSE PAYMENTS ARE FOR SUCKERS!

Fourth, apply for every possible "foreclosure help" government handout. Uncle Sam is here to help "unfortunate" people like you. They will make sure those evil banks don't evict you from YOUR house. Remember to always talk about it as YOURS. This might be a little difficult at first since you have absolutely no stake in this house and you are going to move out in 18 months, but a little practice in front of a mirror will go a long way.

Finally, wait to be foreclosed upon. Keep track of the process so you can adequately prepare for your move-out date and conveniently find a new rental.

Your credit rating will take a hit, but you shouldn't worry about this since there will be MILLIONS of people just like you. Banks will eventually have no choice but to extend credit to you lest their entire market dry up. The smart banks will actually treat you BETTER because they know you are one of the SMART ONES that took advantage of free money being given out by the government.

That, and without paying any rent, you should have no trouble building up a nice savings account. You could pay cash for your car(s) and stay off credit cards. Financially speaking, this could be the best thing you've ever done!

Now, will this virtually annihilate our economy? You bet! You know what our government's response to THAT will be? That's right, MORE FREE MONEY.

You CANNOT LOSE. Start looking for your dream home TODAY.


FREE HOUSE FREE HOUSE FREE HOUSE FREE HOUSE

Sep 23 03:48 PM

[Kalpa:]

Einstein, you made me laugh until I cried. However, now that I've started crying, not sure I'll be able to stop.

Sep 23 04:36 PM

[Rubicon Str...:]

This is a fundamentally disasterous situation. First time home buyers using the tax credit to purchase a home. If they don't have a down payment they should not be purchasing a home. BAD IDEA. This partly the reason the housing market is currently such a mess!

Sep 24 01:47 AM

[ewhitney:]

A lot of doom an gloom comments here. I wonder if some people wanting to buy took at look at this site www.firsthomeexperienc... if maybe might help them make a more infomed choice.

Obviously, getting your first house should be great, and if the tax credit was used by people correctly it would could really help someone. I wish I had been able to have a bit extra of my tax dollars back when I bought my first house.

Just an idea :)

Oct 09 10:55 AM