THE Senate worked speedily last week to cook up a bipartisan rescue package for the nation’s housing market. This $15 billion to $20 billion package may be just a downpayment on what could become, by Election Day, a housing bill costing hundreds of billions.
This bill, though small, presages what a big bailout would look like: It calls for homeowners and taxpayers who don’t need rescuing to sacrifice their individual private wealth for a collective public benefit. And it won’t even achieve its goal.
Democrats and Republicans have agreed on the package because it contains something each side wants: for the Left, cash for nonprofit aid groups; for the Right, false gestures toward conservative principle.
If the House passes the bill and President Bush, who seems receptive, signs it, the Democrats will deliver $100 million to nonprofits to offer foreclosure-prevention counseling, plus $4 billion in block grants to local and state governments to buy foreclosed properties. For the Republicans, the deal contains what many members will pretend is a free-market approach to the crisis – tax breaks.
Anyone who buys a foreclosed home or a home approaching foreclosure in the next two years will get a $7,000 tax credit. Plus, homebuilders, banks and other firms taking a big financial hit in the crunch will get to apply this year’s losses to taxes they paid in past years – retroactive tax benefits that will cost taxpayers about $6 billion.
Another feature has won support from both parties, as well as from Bush and Treasury Secretary Hank Paulson: The bill grants local and state governments the ability to raise $10 billion in tax-exempt bonds to refinance distressed mortgages in their communities.
Problems abound:
* The $100 million of foreclosure-prevention counseling is preordained to fail unless followed by a much larger taxpayer bailout: If you can’t afford your mortgage, counseling won’t help.
* The $4 billion in block grants would let cities and states buy properties from grateful banks at still-inflated prices – a plunge into the property-ownership and landlord business, at which government has never excelled.
* The retroactive tax breaks for homebuilders and banks are blatant favoritism driven by these groups’ powerful lobbyists. Why do these institutions deserve to be shielded at taxpayer expense from the full brunt of their massive business misjudgments of the last half-decade?
* The plan for governments to borrow money with which to issue new, more affordable mortgages to struggling homeowners exposes taxpayers to a huge risk. As I’ve already written in The Post, local governments would be issuing – and guaranteeing – these mortgages at a time when most cities and many states are strapped by drops in tax revenues, and so can least afford to get stuck with the bill when some homeowners default on the new mortgages.
Compared to the other proposals, the $7,000 tax credit for buyers of foreclosed properties looks innocuous. But it’s actually a perfect example of how the government is willing to sacrifice private benefit in a futile quest to thwart the markets’ necessary correction.
It’s easy to understand Congress’ motive: Federal, state and local leaders don’t want to see houses sitting vacant and deteriorating, encouraging squatting and other crime in beleaguered neighborhoods. Congress wants to achieve a public benefit by encouraging private investors to buy up tens of thousands of these foreclosed homes – halting neighborhood decay, thus benefiting all homeowners and citizens.
But it won’t work. Between last year and this year, the National Association of Realtors reports, the median price of existing homes fell from $213,500 to $195,900. That $17,600 drop is more than double the proposed $7,000 tax credit – and we have yet to see a bottom.
In other words, potential investors think that prices have further to fall, especially in overbuilt regions where prices more than doubled between 2000 and 2006. A $7,000 transfer from taxpayers to buyers of foreclosed homes won’t magically halt this necessary slide.
But it will ensure that homeowners not in foreclosure will be penalized if they try to sell – because the few potential buyers taking a chance in the current climate will insist that sellers cut their prices to compete with the tax credit for that foreclosed house down the street.
It also means that when the market does finally find a bottom – if it does so before the tax credit expires – that the floor price will be higher than it otherwise would’ve been, because buyers setting the price on foreclosed homes will have that extra government subsidy with which to bid.
Key members of Congress have located another flaw in the bill: It isn’t ambitious enough. Rep. Barney Frank (D-Mass.) would have the feds guarantee up to $300 billion in distressed mortgages in return for the banks’ taking some losses on those mortgages by cutting the amount owed. Sen. Chris Dodd (D-Conn.) would let judges modify the mortgages of homeowners who declare bankruptcy, either by reducing the amount owed or by changing the interest terms.
Either plan would wantonly sacrifice private benefit in a quest for social gain. Frank’s would put all taxpayers on the hook for future mortgage defaults. Dodd’s would mean higher interest rates on mortgages in the future – because mortgage investors would demand higher payments to protect them against the risk that bankruptcy judges could change the terms of the new loans.
When some version of the current bailout package comes his way, Bush should veto it. Otherwise, he’ll find himself explaining why an even bigger bailout isn’t even better.
Nicole Gelinas is a contributing editor for City Journal, from whose Web site this is adapted.