Housing tax credit: Cure or curse?

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.

The grand prize is a $500 American Express gift card (wouldn’t Home Depot or Lowe’s been a better tie-in?) and the honor of having the video played at the NAR’s upcoming annual meeting. The NAR was even good enough to make a video explaining to its members how to make the video, complete with suggested material: “Tell us about the single mom who never thought she’d be able to afford her own house.” The NAR stopped short of suggesting a soundtrack of tear-rendering strings

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?