This is kind of a follow-up to this story here. And it reinforces the notion that the Administration and the Democratically-controlled congress are dead set on re-inflating the housing bubble.
There are two proposals at play: 1) extending the first-time homebuyer tax credit and 2) Increasing the loan limit amounts for Fannie, Freddie and FHA.
First-time Homebuyer Tax Credit
According to Bloomberg:
House Speaker Nancy Pelosi said lawmakers might extend an $8,000 tax credit for first-time homebuyers that is set to expire Dec. 1.
Why? As Calculated Risk has pointed out this tax credit cost is costly, inefficient and really causing problems elsewhere. Calculated Risk originally estimated that it cost taxpayers $100,000 per additional house sold. But if the tax credit availability was expanded to included all potential buyers (as advocated by the National Association of Home Builders) the cost would shoot-up to $104,400 per additional home sold. There is no bang for the buck.
There are unintended consequences with this tax credit. It is shifting renters to first-time homeowners there by possibly increasing vacancy rates and decreasing rental income. There is also a question of buyers using the tax credit as a downpayment and we know where this leads - potentially higher default rates for these buyers. The economics for this tax credit are not good.
Increase Loan Limit for Fannie, Freddie and FHA
Then there is this great idea:
Senate Banking Committee Chairman Christopher Dodd said he is “hopeful” that lawmakers will allow Fannie Mae, Freddie Mac and the Federal Housing Administration to continue financing larger mortgages past the year’s end.
But wait. As just reported below; a congressional committee was warned that FHA is in deep trouble because of the increase in loan limit. And same probably goes for Fannie and Freddie.
Do we really need the loan limit increased to $729,750? This is insane.
Here is a suggestion - how about resolving the billions of dollars in distressed mortgages before we go and make any new mortgages?