The Senate is debating a $7,000 tax credit designed to help sell foreclosed homes and the proposal is getting a chilly reception from both the Bush administration and Democrats in the House.
Primarily sponsored by Republicans, the $7,000 tax credit is designed to stabilize home prices and keep neglected houses from dragging down neighborhoods, the Associated Press reports. But economists point out that banks could be more likely to foreclose on a house instead of working with a homeowner who is delinquent on mortgage payments. Also, the tax credit could make foreclosed properties more attractive than other homes that are for sale and subsequently decrease the home values of people who are paying their mortgages on time.
"A bank that owns a foreclosed house will get a big selling-price advantage over the single mom who lives next door and has been faithfully paying off her loan," Howard Gleckman of the Tax Policy Center, an Urban Institute and Brookings Institution joint project, told AP. "Indeed, because lenders would expect a higher price when they put a foreclosed house on the market, such a law might even encourage banks to repossess properties more quickly."
But Sen. Johnny Isakson, R-GA., disagreed, saying, "All these houses in foreclosure are doing a whole lot more damage to the (house) value of the homeowner who's making their payments than having a $7,000 tax credit to induce people to absorb those foreclosures. It helps you to fix the bottom of the market so the market can turn around."
While the White House traditionally issues an official policy statement on important legislation, it did not with this proposal.
Foreclosure, so commonly discussed now, wasn't on the radar screens of the average American until the housing market crashed. Before then, most home could be sold for more than the value of the mortgage.
"There weren't too many instances from 2001 to 2005 when someone owed more than their property was worth," Lynette Briggs, a housing counselor at the DuPage Homeownership Center in Wheaton, IL, told the Daily Herald in suburban Chicago. "It rarely came up."
Illinois had nearly 91,000 foreclosure filings in 2007, according to the online firm RealtyTrac.
The foreclosure tax credit proposal does not benefit people who have already lost their homes or those for whom foreclosure looms in the near future. It makes it easier to sell the house once it goes into foreclosure. Proponents of the proposal, which AP reports will cost $1.6 billion over the next several years, say foreclosed properties drag down prices and this measure would help stabilize housing prices and boost the housing market.
House Democrats are not planning to include the foreclosure tax credit in a bill they are scheduled to compile this week.