All about New York's 29th Congressional District http://www.fighting29th.com/node/4733/atom/feed 2008-04-08T08:37:15-04:00 http://www.fighting29th.com/2008/04/the-subprime-noncrisis.html 2008-04-08T08:37:15-04:00 2008-04-08T08:37:15-04:00 Rottenchester

Given that we've dodged the worst of the mortgage bubble, I wondered why Randy Kuhl co-sponsored a bill to provide a one-time $10,000 tax credit to home buyers.  In Monroe County, this tax credit will apply to homes costing as much as $417,000.  This bill, HR 5670, expires in one year.

There's nothing really wrong with this bill -- if housing prices are falling yet prospective homeowners are feeling skittish about the market, this tax credit might get them to make the jump and therefore stimulate the market.  It might also get them to make a bad investment if they mis-time the bottom of the market, but that's always a risk.

The real issue with the bill is that it won't do much good.  The fundamental driver behind weak housing demand is lack of credit, not fear of taxes.

Mortgage originators have been burned by insiders and outsiders gaming the system, and by over-leveraged borrowers.  A "subprime" mortgage is another name for a low- or no-downpayment mortgage.  When a borrower has no equity, they're more likely to exit their home than make payments.  Even if a borrower made a significant downpayment on their first mortgages, many took out home-equity lines of credit which put their debt at 100% of the value of their home. 

The net result is that borrowers in this market will face extreme scrutiny and will also be expected to make a significant downpayment.  Since a lot of prospective homebuyers were expecting to be able to get into a home with low downpayments, they're going to have to save up longer than expected.   At least in the short-term, easy mortgages based on sketchy applications are a relic of the past.  It will probably take years for the market to adjust to this new reality, and $10,000 in tax credit won't alter that fact. ]]>

Given that we've dodged the worst of the mortgage bubble, I wondered why Randy Kuhl co-sponsored a bill to provide a one-time $10,000 tax credit to home buyers.  In Monroe County, this tax credit will apply to homes costing as much as $417,000.  This bill, HR 5670, expires in one year.

There's nothing really wrong with this bill -- if housing prices are falling yet prospective homeowners are feeling skittish about the market, this tax credit might get them to make the jump and therefore stimulate the market.  It might also get them to make a bad investment if they mis-time the bottom of the market, but that's always a risk.

The real issue with the bill is that it won't do much good.  The fundamental driver behind weak housing demand is lack of credit, not fear of taxes.

Mortgage originators have been burned by insiders and outsiders gaming the system, and by over-leveraged borrowers.  A "subprime" mortgage is another name for a low- or no-downpayment mortgage.  When a borrower has no equity, they're more likely to exit their home than make payments.  Even if a borrower made a significant downpayment on their first mortgages, many took out home-equity lines of credit which put their debt at 100% of the value of their home. 

The net result is that borrowers in this market will face extreme scrutiny and will also be expected to make a significant downpayment.  Since a lot of prospective homebuyers were expecting to be able to get into a home with low downpayments, they're going to have to save up longer than expected.   At least in the short-term, easy mortgages based on sketchy applications are a relic of the past.  It will probably take years for the market to adjust to this new reality, and $10,000 in tax credit won't alter that fact. ]]>