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Wednesday, April 2, 2008

The Senate's Turn for Housing Lunacy

A bi partisan proposal to deal with the housing crisis has apparently come out of the Senate.

The plan contains $4 billion in grants to local governments to buy and refurbish foreclosed homes, new authority for states to issue bonds to be used to refinance subprime mortgages and a $7,000 tax credit for people buying new homes or properties in foreclosure.

"It is a robust package," Reid said. "This is good news for the American people."

But economists across the political spectrum sounded skeptical that the measure would have much practical effect to ease the wrenching crisis in the housing market and the wave of foreclosures spreading across the country.


The measure also contains a provision dropped from February's stimulus measure that would permit homebuilders and other money-losing businesses to reclaim previously paid taxes, new disclosure requirements aimed at preventing unsophisticated borrowers from being duped by mortgage brokers, and additional money to provide counseling to people threatened with foreclosure and help them in negotiating with their lenders.

Now, let's take these measures one at a time. First, the sorts of funds that the Senate is making available to help municipilaties try and buy up foreclosed properties appear, to me at least, to be nothing more than a drop in a massive bucket. We will have over one trillion dollars worth of expiring mortgages over the next couple years. Over half a billion dollars worth of mortgages will expire and adjust just in the first half of this year. I do not believe that setting aside four billion dollars to deal with foreclosed properties will be anywhere near what is necessary.

Furthermore, the Senate wants to provide municipalities with funds so that they can refinance problem loans. Here there is a massive and very important fundamental disagreement on the dynamics of the crisis. I am of the opinion that irresponsible loans were given to irresponsible borrowers. My opinion is that in order to move forward we must do everything possible to extricate these folks from their properties. The Senate, on the other hand, wants to take measures to try and help these folks. I personally believe this is another example of throwing good money after bad.

As for the tax credit to help follks buy foreclosed properties, that portion of the measure I like. I believe that in order for the economy to move past the crisis the so called vultures, those folks that take advantage of the malaise, must swoop in and take advantage. No one will take advantage more than those that buy foreclosed properties. This tax incentive gives them just one more piece of motivation to do so.

Finally, there is the issue of extending tax allowing home builders and other businesses recoup previously paid taxes more quickly. This portion of the measure appears to clearly reward those that took too great a risk. By fast tracking refunds for those that expected their cash flows to be larger, what the government is doing is bailing out private industry after it made mistakes. Capitalistic societies CANNOT function if mistakes don't have consequences. This is another in a long line of bad ideas that reward irresponsible behavior.

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