All of the wrangling is over and after the pendulum swung widely on the issue of a credit for home buyers, we ended up with virtually the same first-time home buyer credit we already had with the following modifications: 1) the credit is increased to $8,000; 2) the payback provision is eliminated for houses purchased in 2009; and 3) the purchasing window is extended to November 30, 2009.
Here is the summary of the conference committee first-time home buyer credit:
Refundable First-time Home Buyer Credit. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10 percent of the purchase of a home (up to $7,500) by first-time home buyers. The provision applies to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit are currently required to repay any amount received under this provision back to the government over 15 years in equal installments, or, if earlier, when the home is sold. The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The bill eliminates the repayment obligation for taxpayers that purchase homes after January 1, 2009, increases the maximum value of the credit to $8,000, and removes the prohibition on financing by mortgage revenue bonds, and extends the availability of the credit for homes purchased before December 1, 2009. The provision would retain the credit recapture if the house is sold within three years of purchase. This proposal is estimated to cost $6.638 billion over 10 years.
The amendment was proposed by Georgia Senator Johnny Isakson, a former realtor, to stimulate the housing market. In a nutshell, it provides for a nonrefundable tax credit (the word nonrefundable means that the credit offsets one's tax liability, but to the extent that the credit is larger than the tax liability, it goes unused) of up to ten percent of the purchase price of a principal residence, capped at $15,000. It would apply to real estate closings occurring for one year from the date that Obama signs the bill into law.
The credit would be paid over two tax years at $7,500 per year, generally the year of the purchase and the year after, though it’s looking like purchases made in 2009 may qualify for a credit on your 2008 tax return. Presumably this would apply to closings that occur prior to the personal tax return extension deadline of October 15th or possibly any closing occurring in 2009 and reported on the 2008 Form 1040 via an amended return.
This proposal is different from the current $7,500 first-time homebuyers (defined as people who have not owned a principal residence for more than three years) “credit” (which requires repayment of the $7,500 “credit” over 15 years) as well as the modified House version (which makes the credit refundable and eliminates the payback provision). The amount is increased, obviously, but the major change is that Isakson’s proposal applies to anyone’s purchase of a principal residence, not just first-time homebuyers.
That’s where the unintended consequences come in. Let’s say that there are next door neighbors who both bought their houses during the loose credit heyday, qualifying for their interest-only mortgages without even having to substantiate their incomes (often called “no-doc” or “Alt-A” loans). The interest rates have moved up substantially from the teaser rates that expired a year or two after the loan documents were signed.
Normally, people in this situation would be looking to refinance their mortgages into conventional fixed-rate loans, a no-brainer given the low interest rates available in today’s marketplace. So, let’s assume that our next door neighbors both have the means to qualify for a refinancing, but there’s a much better option out there thanks to Senator Isakson.
Since the first-time homebuyer requirement has been dropped, our next door neighbors are eligible for the $15,000 credit. Rather than refinancing their current loans, why not buy each other’s houses? They’ll still incur closing costs, but they eliminate the realtor’s commission, which is usually six percent of the sales price. They’d have to pay closing costs on a refinancing transaction anyway. Nothing lost there.
What’s to be gained, however, is that each family can then get a $15,000 credit on their tax returns. That would cover all of the closing costs and most likely leave $12,000 or so for pocket change. Multiply that by two and we have $24,000 transferred from the rest of us to our next door neighbors.
Has this transaction bolstered the housing industry? Hardly. Do realtors benefit? I don't see how. The $24,000 might have a stimulative effect, assuming they spend the money on something besides debt reduction, but the primary purpose of Isakson’s proposal would have been circumvented. The neighbors wouldn’t even have to move into each other’s houses as long as they change their addresses for legal purposes or just use post office boxes to hide what’s happened.
I’m certainly not advocating that anybody should pull a stunt like this, but I am painting a scenario that needs to be dealt with in the enacting legislation or by the IRS. The shift from first-time homebuyers to any homebuyers opens this loophole.
There is no doubt that the stimulus package will involve huge amounts of wasteful spending, unimpeded by any diligent oversight; just as we saw with Katrina aid and the financial sector bailout. So, if I can help plug at least one hole in our ship that is quickly sinking into the ocean of socialism, I feel better.
(My concerns have been communicated to Senator Isakson’s office in an email I sent last week.)
Copyright 2009 Randy Hunt