It’s not shocking that the National Association of Realtors is working hard to have the $8,000 first-time home buyer tax credit extended past its current December 1st expiration. But what is surprising is how little public discussion there is of the downside of this extension.
It’s a full-court press from the NAR: The powerful trade association has its lobbyists pushing the case on the Hill, and it’s asking its members to get the message out too. In a video featuring member Realtors talking up the virtues of the credit, the NAR includes a message superimposed on a wave of stars evoking the U.S. flag: Congress: Don’t Let America’s Real Estate Recovery Expire.
As if NAR members don’t have enough incentive to get the credit passed, the trade association is even sponsoring a contest for the best Realtor video imploring Congress to extend the credit.
Congress is listening. Six different bills are floating around the House and Senate that would extend the credit into 2010; one bill even calls for increasing the credit to $15,000. And the growing sense in Washington is that the credit could indeed live on into 2010. According to a source quoted in U.S. News & World Report the odds have recently increased from 50-50 to 75-25.
Which is sort of interesting given that just last week there was this lovely bit of news: the Federal Housing Administration, which has seen its insured mortgages grow from under 5% of the mortgage market just a few years ago to more than 20% today, is taking an ugly financial hit. The default rate on its insured loans is now up to 7.8%. In this Washington Post article, the head of the FHA insisted that although the FHA’s reserves have been whittled down to its lowest level ever (reserves will be below 2% when the new fiscal year begins October 1, down from 6.4% a few years ago), there would be no need for a taxpayer rescue of FHA. That’s a bit of a head scratcher, but I will leave that topic for another post.
What I can’t get past right now is why there’s seemingly no discussion of how these two issues might, um, be related. Does it really make any sense to encourage more first-time buyers by extending the tax credit into 2010, when the FHA data sure make a case that there’s a problem brewing with plenty of those first-time buyers?
While the FHA does more than back loans to housing-market newcomers, it undisputedly has become the go-to lender for first-timers. An FHA-insured loan requires a down payment of just 3.5%, compared to the 10%-20% down you need these days to land a conventional mortgage (read: those backed by Fannie Mae or Freddie Mac). FHA-insured mortgages also became a more viable product for many borrowers this year courtesy of another Congressional gift: Loan limits were raised to as much as $729,750 in high-cost areas. But given the deteriorating finances of the FHA, do you really want Congress to rubber-stamp extension of the first-time buyer tax credit?