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New Government Policy: Tax Credit as Mortgage Down Payment

Forget the homebuilders, they are unlikely to benefit as the pull forward of demand will simply help them liquidate their current inventory. While that may be a benefit in terms of cash flow it probably won't do much for earnings as the margins will continue to be weak and future demand will be reduced. The government is desparate to prop up the major banks. The government needs to put a floor under home prices to break the foreclosure induced home price and mortgage security devaluation cycle. The policy also has the additional benefit of giving the banks more time to benefit from the great wealth transfer from creditors to debtors (banks are just conduits) by virtue of the steep yield curve. Once debt capital providers stop being satisfied with essentially zero real yield, mortgage rates will spike and home prices will stagnate. Look to short banks once the yield curve flattens or there is a parallel shift to higher rates.


As policy it is probably better to put some full price buyers (owner/occupiers) into the homes even if the credit risk is high versus having the properties trade at discount valuations to higher credit quality buyers with the government taking the stealth loss through TARP, PPIP, TALF etc. The model would be similar to the credit card company model whereby the high interest rates offset the high default rates. From a societal prospective, the positive externalities of "stabilized prices" and increased homes sales velocity need to be factored into the credit loss equation to determine the true impact to the taxpayer. To make a rationale investment decision, investors need to focus not on what should be and what is fair and right, but on what is. Ultimately we are price takers, which is why the government can set interest rate artificially low. The essense is whether you would you rather earn negative real return by holding cash or an essentially zero after tax return by buying government bonds. Once business risk appetite returns worldwide, the government will lose control of interest rates and will not be able to artificially have credit providers subsidize the mortgage market.