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As expected, President Bush signed HR 3221 into law this morning, making billions of federal dollars available to home owners, shoring up Fannie Mae and Freddie Mac, and providing closer oversight of the financial aspects of home ownership to the Administration and Congress.

What a shame.

After speaking with a good friend of mine that is a CPA, the tax incentives, particularly the $7,500 tax credit (a topic which is burning up the search engines at this time), are going to make life harder for tax preparers, tax payers, and probably increase the cost of running the IRS.  As I’ve said before, There are going to be a lot of problems keeping track of this. 

Plus, this is just an unfair competition with banks.  The government can lend the money interest free with little in the way of rules and underwriting (and if a Bank tried to offer this program, they would get sued or have criminal charges pressed under Fair Lending laws).  Frankly, it would have been much more appropriate to manage this boondoggle as a special type of Mortgage-related product for banks to offer to ensure that appropriate controls are maintained. 

And how much fraud is this going to generate?  How about scams, like buying a house on December and selling it for the same amount in January… no mortgage, no bank, no lawyer, no real estate agent, all cash, and then sell it for the same amount in January.  Cool $7,500 and no repayment required.  I have family that live in a rental house who could pull this one off easily.  Who is going to pay for that? 

Thankfully, though I missed it until today, this feature is only available for first time principal residences purchased between April 9, 2008 and July 1, 2009.  But we’ve got the aftereffects until 2026.  And the IRS still needs to track it until at least 2029 (or 2033, not sure). 

Clearly, Bush is on the same wagon that most of Congress is: “it’s an election year, we need to give people money”.  I know, the economy is a mess and people are suffering.  Frankly, many people are suffering because they’ve built up expectations over the years from all of the existing handouts and inflated values in the housing and stock markets.  I won’t deviate from the topic here, but I will post something at a later time on the topic of Suffering.

Sorry, back to the Housing Bill, so it’s understood that there is a need to solve the current ecomomic dilemma.  It’s unfortunate that we think bailing out the Home Loan Banks is part of that.  No one is really maintaining accountability on the whole Market model that we always propose: “if you do well, you make a lot of money, if you do poorly, you lose a lot of money”.  This bailout definitely gives the riskier players an edge now since they get a safety net they don’t need or deserve.

And it all comes on the backs of American taxpayers.   As usual.

Senator Charles Grassley, who is the ranking member of the Finance Committee which is responsible for tax legislation, voted against the bill.  In June, he hosted a mortgage assistance event in Iowa to bring lenders and consumers together.  Here are his comments about his vote: 

“The problem with this massive bill is that it could do more harm than good.  It started out to help Americans who are losing their homes, but it ended up giving banks a $4 billion incentive to foreclose rather than work something out with homeowners who are in trouble due to downturn in the housing market.  The bill’s bailout of Fannie Mae and Freddie Mac doesn’t even begin to reform the excesses and the conflicts of interest that contributed substantially to the problems the mortgage giants face today.  And, more broadly, the bailout fosters moral hazard by diminishing any incentive for the housing sector to act more responsibly in the future.  Even the tax package, which I was involved with during Senate consideration of the measure, has been discredited by changes made by the House of Representatives that unraveled bipartisan tax reforms and did things like give favor to tenants who are artists or literary figures over low-income families.  I voted to proceed to this legislation because I very much wanted Congress to address the important housing issues facing the country today, but this bill has fallen prey to the special interests on Wall Street and K Street at an unjustifiable expense to taxpayers and homeowners on Main Street.”

Lastly, now that the Housing Bill is law, the language of the Fair Tax bill is going to have to be changed in order for it to be passed during the next 15 years.  Something to the effect of forgiving the remaining recapture amount.

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