To extend or not to extend, that is the question. Is it nobler to extend the first time buyer tax credit, enlarge it to 15,000.00 for all, or to bring back down payment assistance programs instead?
It is late evening September 25th as this is written, leaving only 20 days until October 15th, the last reasonable day to apply for a mortgage and still be able to close by the November 30th deadline. Of course this is assuming that the home being purchased is completed and ready to move in. So, it is time that some decisions are made by Congress. Are they going to extend, enlarge, or not.
Senator Johnny Isakson R-GA, drafted a bill co-sponsored by Chris Dodd D-CT, that would expand this tax credit to anyone no matter what your homeowner status, and would have doubled it to 15,000.00. This bill has caught very little traction, in fact it was the first bill addressing the idea of this tax credit before the Stimulus Bill was even written by the Apollo Alliance. It was reduced to the 8,000.00and only for the first time buyers to punish Isakson for voting against an earlier Bail Out Bill. There is now another bill by Isakson that has been co-sponsored by Senator Harry Reid, D-NV the Senate Majority Leader, that would extend the 8,000.00 tax credit for first time buyers for six months.
This bill is being endorsed by John Howard, President of the National Association of Home Builders. He has said that it is critical to get the industry through the winter, with hopes that job improvement would have time to kick in by mid summer in 2010. Mark Zandi, Chief Economist for Moody Economics.com believes that the credit will add nearly 400,000 sales throughout it's use. Zandi believes that it will cost American taxpayers somewhere between 15-17 billion dollars to extend the credit for 6 more months. Zandi believes that money would be very well spent. That math tells me that he believes it will generate somewhere near 2 million home sales across the country. That would equate to nearly 622 per county, if it truly was 2 million homes. Let's cut it in half to just 1 million, and 8 billion in tax payer funds, creating about 311 sales per county across America. If the 400,000 was more accurate it would be only about 125 per county, and cost around 3.2 billion. No matter how you look at it, it is effective and it is expensive.
What if instead of doing any of these, we just bring back Down Payment Assistance programs such as Nehemiah, and AmeriDream? What would the plus and minus be to that?
First of all, it wouldn't cost one dime of tax payer's money. Second, it would open the market to millions of people who have been shut out on the tax credit because they don't have the 3.5% down payment saved to put down. My question is would he credit be as effective during the extension as it has been? How deep has it penetrated the available market of first time buyers who have the down payment saved? There is a huge untapped group of qualified buyers who could buy if they had a down payment, because they have been on the outside looking in.
Do you hear what I hear? I am sure there is a chorus rising saying that "They need skin in the game!" I think this is a pretty lame argument, look at my past blogs on the DPA subject where I show the math disproving that argument. Beyond that I have heard of so many people, Realtors, and mortgage lenders telling buyers to get a gift from family to make their down payment and then pay it back when their tax credit comes in. In fact even Congress for about 4 hours passed a resolution to allow this, and them pulled it back the same day. Of course everyone who has suggested that realizes that they are recommending a felony by using a gift that is really a loan.
Let's make a worse case scenario, and say that the government would have to step in and use taxpayer money to prop up lenders if these DPA loans had higher foreclosures than those with the current tax credit would. There is no evidence that would happen, in fact there is no evidence that loans with DPA have any higher default than those without at any time before or after this current mortgage crisis we have just experienced. However, for arguments sake, let's assume that they are double the foreclosure rate and 5% more foreclose than just those with the tax credit would. If you say that 1 million homes sold because if DPAs return, then 5% foreclose that would be 50,000 multiply that by 150,000.00 and you would have a total of 7.5 billion dollars of loans, say that it cost taxpayers 20% of those loans to make lenders whole, that would cost us 1.5 billion, compared to the 8 billion that would automatically cost us to do that some million homes with the credit.
As a person who makes his living selling new homes, professionally I would love to see both the DPA returned as well as the tax credit extended not only to fist time buyers, but to all buyers. However as an American taxpayer, I really like the math of bringing back DPAs. All we have to do is get Congress to move HR-600 out of committee and pass it and we are up and running.
It is critical that one of these does happen, and happens quickly. I would like to add that when Congress makes a new bill that deals in an industry that they get more involvement from those in the industry to help them write it. Not just those who are in National Associations but those who are daily on the front lines. For instance, this tax credit has a major flaw in it. The language is not at all clear if someone can buy a new home to be built and use a construction to perm loan to do a front end close to qualify. If you go onto irs.gov you will see on the form you send in for your credit that the day you purchase according to the IRS is when you occupy it. However there is an FAQ on the same site where someone says he "bought in 2008, but home wasn't habitable until 2009, would he get the 2008 or 2009 credit?" The IRS answer was 2008 when you bought it. As I have tried to get an answer to this all the way to calling Congress, it is evident that no one I talked to has any idea what a Construction to Perm loan is.
Hopefully, we will hear that the credit has been extended soon. However, as a taxpayer, and someone who makes his living selling homes, I would much prefer the DPA.