Senators Go Wild!, Approve House Flipping Subsidy, Media Doesn't Notice

The reporters covering the stimulus have been so busy editorializing against it that they haven't had time to pay attention to what Congress is doing. Last night Congress approved the Isakson amendment which gives $15,000 (or 10 percent of the purchase price, whichever is lower) to every person who buys a home in 2009.

Somehow, Isakson puts the cost of his tax break at just $19 billion. Let's break the Washington rules and try a little arithmetic. Even with weakness in the housing market, it is still virtually certain that we will sell close to 5 million homes in 2009. The overwhelming majority would qualify for the full credit. So, we get 5 million times $15,000. That sounds a lot like $75 billion.

And this is before we get to any gaming. It's hard to see why tens of millions of people wouldn't figure out a way to buy a house from a friend or relative and get their $15k. If we can get one-third of the country's homes to change hands (lots of jobs for realtors) that would be good for $375 billion.

It also is worth raising a question or two about the wisdom of having Fannie and Freddie buying up mortgages at 4.0 -4.25 percent, as required by Isakson's amendment. Suppose that the economy recovers in a few years (not likely if this crew is controlling economic policy) and mortgage interest rates rise back to more normal levels.

The 30-year mortgages that Fannie and Freddie issue today at 4.0 percent interest will be worth about 20 percent less in 3 years if the interest rate has risen to 7.0 percent. If we get $2 trillion in mortgages at the 4.0 percent rate, then this gives Fannie and Freddie losses of $400 billion. This may be a cost worth enduring to boost the economy, but it would be worth at least noting in assessing the proposal. After all, a few hundred billion here and a few hundred billion there can add up to real money.

It would have been helpful if the reporters covering the debate could take a little time explaining these issues to readers.

[Addendum: I probably should have made clearer one of the obvious flaws in this proposal if the intention is to help the housing market. The overwhelming majority of beneficiaries of the credit will be people who already own a home. In these cases it is not increasing demand in the housing market, just encouraging people to move. So, I sell my home and buy someone else's home. That doesn't increase demand in the market, it just leads to a shuffling of homes. This could be avoided by restricting the credit to first time homebuyers, as is the case with the current credit.]

Comments

[rovezaleeker]

Just another case of Reagan era "I got mine already and screw you." What about first-time home buyers and low to moderate income people who really need the help? The rising wave of populism needs to continue to grow. We need to stop the privileged from continuing their assault on the rest of us. Stop the trickle down mentality that has gotten us to this point. We need a food stamp program ramped up on steroids. That would be a good start toward kick starting the economy. Help first time home buyers with real help not fly by night shyster mortgages. Let us have our UNIONS back!!! Reagan and Bush number two were the worst Presidents in the history of this country. We need to "burn the mother ------ down!"

[blackcat]

This is another subsidy for corporate america. Businesses are going to relocate to the cheapest states and they want a mobile workforce.

[Viper]

My god man you make no more sense that those who wanted to invade IRAQ... get help...

So the workforce will stay in one place when their house is forclosed? Yeah, that will keep'em there... I mean there is nothing like lots ofr closed in a neighborhod to keep stores open and create jobs...

Regards

[sloppyJoe]

The housing market just needs to right itself after too long a time of over building and over pricing. If they really want to help the average joe they need to make arm loans illegal. In my state they were target marketed to lower income less educated folks who didn't understand what they were getting into. Many say thats their problem...but it turns out it becomes all our problem when they can't pay after the balloon. I wonder what percentage of the forclosure rate has been from these arm loans.

[Viper]

Long past being subprime as a problem... forclosures are across the board...

True , oil speculation led to inflation and the Fed to fight inflation raised interest 5 points... which got the ball rolling on the the problems and people who were making payments could no longer afford to... nor could they sell... and the snow ball rolled down the hill.

Regards

[paixa3]

You are correct. However, I would still recommend passing a usury law at 10% maximum for ANYTHING and I would re-write ALL mortgages to be fixed interest, fixed terms at 2% above prime. I would give ALL mortgage holders a choice of 15, 20 or 30 year lengths and re-calcuate ALL loans.

I would also give 5000 to every household and take BACK the bank bailout. But, I would include automatic payment of mortgages out of the 5000. Those who fail would have failed in ANY circumstance.

There are multiple more points that cannot fit into this area. Surely reverse the king george tax breaks immediately as well.

[Thundrdrum]

Figures--I was hoping somebody would come along and stop the flippers--but no, give them a credit instead. Over 100 families had to move, or buy, the homes they lived in in my community when a Japanese billionaire needed to raise some money. That was, of course, at the height of the market and 90% didn't make the cut. Congress is totally out-of-touch with their constituents, and their needs--they only listen to the constituent billionaires.

[Viper]

The writer of this article needs to be pulled... The bill includes anti flipper protection.. Must be your primary residence and you must hold 2 years or refund....

Regards

[DenverJJ]

This is fine idea. It is simple and agents in Real Estate industry can evangelise it to get things going. The only thing I would add is a cap on the mortgage interest deduction to 75% of the interest instead of one percent as it is now or per year which ever is less and re-institute the deductions (same 75% maximum) on second residences. Though this will tend to curb huge luxury home building it encourages investment for second residences, boosts rural economies, travel industries and housing services.
DenverJJ

http://writerswheel.blogspot.com/

[diana68]

You people are high, good grief, complaining because you bought a house that isn't worth what you paid for it. You knew it was over priced when you bought it. The prices had been falsely inflated for quite a while. To buy a house for $450,000 that only two years previous was $125,000. Duh! I am in complete aggrement that the people who took advantage of others to make a quick buck should be punished/prosecuted in some way, but come on people take some personal responsibilty.

[Viper]

I agree with you... but the house was falsely inflated because loans were being given that should not have been made which pushed the prices up from the bottom.

In area, cape coral, florida the 60% devalued dollar had Europeans rushing in also to push up the price....

Actually given the devaluation of the dollar and the drop in vlaues... houses prices are now down below 2001 prices... and thats a problem! A big problem for the economy as more homeowners go upside down and their pledged security is worth much less... which devalues the assets held by banks and etc and increases the cost of the bailout

Regards

[white1]

Who came up with the idea that the tax code was created to influence behavior? Where are the "free market people" on this? Let the government deal with protecting me (tainted food, terrorists, etc.) and let ME decide what is the best way to behave. The tax code should be about funding the government not "encouraging" me to buy a house or stopping smoking or some such thing. SIMPLIFY THE CODE. INSTITUTE A FLAT TAX. FORGET ABOUT ALL OF THE LOOP HOLES AND DEDUCTIONS.

[pgsteward]

I couldn't help comparing what is happening in Congress. It is just like the Wizard of Oz! Three republicans, one with no brain, one with no heart and one with no courage. A wizard (Obama) who is all smoke and mirrors and no substance. The wicked witch of the west (Pelosi) and a group of Munchkins, the entire senate and congress. It will leave America like Kansas, a dust bowl of depression. God help America! From a foreigner: Just how will you get yourselves out of this one before your country completely collapses?

[bill75252]

I'm all for it. We're relocating to a different state anyway, this lessens the cost of the move. It's a dumb plan, though.

[eagledavey]

This is one of the few good ideas Ive heard come out of this debt bill so far. Buy your homes now before the dollar sinks.

[dobberdoss]

Unless your getting the entire house for 15k then forget it! Still got to have a mortgage and a job to keep it. Can you eat your house? NO

[breezi]

Someone suggested limiting this to first-time buyers only. How about just limiting it to owner-occupants. This would be a real savings and a chance for homeowners who have lost their homes due to adjustable rate mortgages. This should not be a windfall for property investors.

[dobberdoss]

It'll just put more property in the hands of the rich while middle and poor americans die on the street

[bill75252]

It's for primary residences only, but there will probably be loopholes.

[LeeCalif]

Check out Patrick.net.

The discussion blog is multifaceted.

[ReesieKitty]

What about those of us who bought our home in late 2007 and have a 6.5% mortgage and rising taxes- but cannot refinance because we have not lived in the home long enough to gain sufficient equity and because the bank has now DEVALUED our home to less than what we paid for it??? We have faithfully made all of our mortgage payments on time and yet we cannot refinance and our taxes are skyrocketing. Why don't we get $15,000 or even any kind of help with refinancing?? We have good credit- if we had defaulted on our loan we could get help, if we were buying a home now we could get credit.

So i guess our mistake was in actually PAYING our mortgage. It's really ticking me off - why are we expected to pay property taxes on the full amount of our mortgage if the bank says our house is not worth that amount?? grrr...

[twofish]

Go to your county assessor and ask to have your house re-appraised downward for tax purposes.

I lost a house during the Reagan recession in the early 80's. I had made my payments, too, but when it was time to pay off the 3-year note the original seller had carried, I went to the banks to refinance and they said, the house isn't worth what you paid for it, we won't lend you any money. Even if they had, mortgages were going for 12-16 percent then and I probably couldn't have afforded the payments on a new one. So I lost the house. My problem is that while a lot of people were losing/unable to buy homes then, it wasn't the firestorm of foreclosures happening now. People were more excited about the high mortgage rates than lower prices.

[Viper]

The 15K is too much.. they are already getting houses at 50% off or more in the case of foreclosures.. Should max at 7K.

However the interest rate at 4% is a very good idea especially letting people refinance at that rate w/o addtional down payments since their equity has been wiped out... and they cant refinance unless they can come up with another 25 to100K...

Your calculation however about the impact of what is now a 1.5 discount based on current rates... is not really correct... the cost to Fanny and Freddie is now much less than 4 percent... and thats the money they will be buying the mortgages with TODAY. In The future interest will go up and so will the cost of money to Frannie and freddie. Their profit spread will stay the same or may even be less than today.

This will prevent foreclosures and put money back into the economy with reduced mortgage payments. Many of the existing toxic variable interest rate loans will be replaced with refinanced loans... thats great. It should stop the decline in housing values which as they fall increases the bail out cost... as more people walk as the value of their house goes down... which causes additional drops and the security backing the loans goes down along with the money supply requiring more cash be put back into the system as assets deflat...

Regards