Mortgage Madness

Question: When is a $7,000 tax credit a problem?

Answer: When it makes a bad situation even worse.

And that’s just what might happen if Congress enacts a $7,000 tax credit for people who buy foreclosed homes.

As Bloomberg News columnist John M. Berry notes, the misguided tax credit may well “encourage foreclosures and drive down house values”-the very opposite of what’s needed.

Proponents of the measure say they want to stabilize home prices. But Berry notes that, by making it easer to sell foreclosed homes, “banks could be more inclined to foreclose on a house,” rather than renegotiate terms with homeowners struggling to make payments.

Berry also notes that the credit is as likely to depress real estate values as to prop them up. The Washington Post’s Steven Pearlstein neatly explained the problem in an April 4 column:

… a $7,000 tax credit … won’t do a thing to avoid foreclosures, or put a dime in the pockets of owners who lose their homes. But it will provide a direct subsidy to banks and other lenders who, to sell their newly acquired property, would otherwise have to lower the price by another $7,000….

But wait, it gets worse. If you’re a homeowner or builder trying to sell a similar house in the same neighborhood, your buyers would not be entitled to the tax credit. So that means that… you could lose a sale or have to lower your price $7,000 to compete.

Whenever Congress moves to meddle with the free market, you can pretty much bet unintended — and very bad — consequences will follow.

Click here for more insight into the housing crisis and what Congress should and shouldn’t do about it.