Your Tax Dollars at Work

Congress is at it again. The Senate passed a bill that would, among other things, give a $7,000 tax credit to buyers of foreclosed homes. This is the stupidest idea yet for dealing with the housing crisis.

Let's say I'm a mortgage lender, and I've got a borrower who's behind on the payment on his adjustable-rate mortgage, which has reset to a rate he can't afford. I'm supposed to be working with him to keep him in the house, right (yet another stupid idea)?

Well, if I foreclose on the house, it's suddenly more attractive to a prospective buyer than the house next door, which also happens to be for sale, but the seller is a responsible homeowner who didn't buy more house than she could afford, always made her payments on time, and now just wants to move to a bigger place.

Why is the foreclosed property more valuable? Simple. If I buy the responsible lady's house, I just get the usual tax breaks associated with homeownership. If I buy the foreclosed house, I get those benefits, plus a $7,000 credit. Easy choice.

So this results in another foreclosure, one that perhaps could have been avoided with a workout. Multiply it by the huge numbers of serious delinquencies out there - which, for the first time in history, are double the number of foreclosures because of the bulging backlog of serious delinquencies that lenders face - and you have a sizeable increase in foreclosures on your hands. The Senate, in other words, would basically provide an incentive to lenders to become foreclosure trigger-happy.

It also hurts the responsible lady who's always made her payments on time, in that it will require her to discount her house to offset the advantage to the buyer of the tax break on the foreclosed property. And it brings with it the usual problems of increased foreclosure, such as devaluation of properties in the neighborhood, vandalism of the unoccupied foreclosed house, etc.

The bill's backers say that it would move foreclosed homes off the market more quickly, and they point out that it would "only" cost taxpayers $1.6 billion. But they're missing the point that it would increase foreclosures, as noted above. More foreclosures means more tax breaks. More tax breaks means higher costs. Potentially much higher.

This is yet another taxpayer bailout, and even worse, it only bails out the lenders, who were among the most culpable parties to begin with. Thankfully, the bill will likely either get modified beyond all recognition by the House, or vetoed.

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Thought for the day: the credit crisis is the new Mark Twain - rumors of its demise are greatly exaggerated.

And we have another stupid rally in equities today, with the Dow up about 100 points. Why? Because Wal-Mart reported higher-than-expected sales for the first quarter. And why did Wal-Mart do so well? Because other retailers sales have fallen out of bed, as recession-wary Americans do their shopping on the cheap. In other words, the economy is so bad that everyone's shopping at Wal-Mart to save as much money as they can. This is bad for the economy overall, but good for Wal-Mart.

So of course, the entire market rallies. I'm still glad I'm short.