Last week the Senate passed H.R. 3221, its version of a bill to provide housing reform in the wake of the downturn in the market and the mortgage crisis. The $25 billion legislation passed the Senate by a vote of 84-12. There are many problems with the bill but the most notable is its attempt artificially to correct the housing market.
The cost of the bill, which would be incurred over ten years, is so high because it would provide tax breaks for banks and homebuilders. Under what is known as the carry-back rule, businesses could count their current financial losses against taxes from prior years when business was very profitable. In other words, companies that made millions of dollars during the height of the housing boom would now receive a Federal bailout on their taxes because times are tough.
Other provisions in the bill include allowing companies which are losing money to use accumulated tax credits for new business investments, raising to $550,000 the limit on the size of mortgages that the Federal Housing Administration can insure for homeowners, giving people who buy homes in foreclosure a $7,000 tax credit, providing $180 million for counseling for homeowners in severe financial trouble and authorizing $10 billion in revenue bonds for mortgage financing.
Contrary to the remarks of Senator Christopher J. Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, the purpose of Congress is not to prevent housing foreclosures. Foreclosures, while difficult for many families, are a natural correction to a market in which home prices were hyper-inflated, lenders were willing to offer mortgages to those without a strong credit history or proof of income, and people irresponsibly took out adjustable-rate-mortgages, in which the interest adjusts to the market (generally upwards) while putting no money down on their purchase. Such a combination of factors was a recipe for disaster.
In spite of the millions of dollars homebuilders earned during the market craze, the Senate is now offering to bail them out when times are tough. What if the Senate did this for every industry, every business? How much would it cost American taxpayers? It is outrageous that the Senate bill would subsidize homebuilders until the housing market picks up again. Working in a relatively free market as we have in the United States presumes the possibility of difficult periods, even failure, when demand for one's product is not as strong as it once was. This is a risk businesses take when they enter the market. Those who succeed generally have a long-term plan in which they shore up profits in expectation of a weaker market.
Fortunately the House of Representatives has not included the carry-back provision in its version of a housing stimulus. Presumably the House will pass its housing legislation within the next two months. If it does the two chambers will meet to reconcile the two separate bills and agree to a compromise. House Leaders should insist that, at a minimum, the carry-back provision be dropped from the build. Otherwise, our politicians and bureaucrats could set a negative precedent for businesses, reinforcing irresponsible behavior and further aggravating the housing crisis.