By: Favian ClaiThe tax credit responsible for 350,000 new home sales is set to expire in November. Congress is divided as to whether or not expand it while the National Association of Realtors and others push to get it extended. Senator Johnny Isakson (R-Ga.) wants to increase that credit to $15,000.
The opponents of extending the tax credit believe that the debt already incurred by the program, estimated at $15 billion dollars, which was added to the federal deficit, did not offer benefits that outweigh the debt caused by the program.
The opposition instead believe that with hundreds of billions of dollars in support from the Federal Reserve, The Treasury, and the FHA still in place, the housing market can recover and survive without the tax credit. However, agencies like the FHA are getting in troubled waters in their own, as defaults continue to increase while they continue the push for new home loans.
It is too early to predict the final outcome from the tax credit benefits, but they should not be ignored. Since the inception of the program, home sales have slowly increased while home values slightly increased in 15 of the 20 major metropolitan areas. In July, new home sales, while lower where they were a year previously, rose at nearly 10 percent.
The Risk with the FHA
Recently, the Federal Housing Administration reported to Congress that their secondary reserve was about to fall below the legal minimum dictated by Congress. While the FHA Chief does not believe this poses any risk for taxpayers at this time, they are taking corrective action to reduce the risk.
The FHA is fully-funded by the fees levied to homeowners who have FHA-backed loans and are not funded by taxpayer dollars. Despite the danger with the FHA currently, the FHA chief commissioner David H. Stephens does not believe they will need a cash infusion by the Government to continue operation.
Instead, they will put tighter standards on lenders who want to participate in the FHA program. This includes capping FHA backed refinancing to 125% of a home's current value, requiring lenders to have $1 million in cash and other assets and stop certifying mortgage brokers to issue FHA-Backed loans.
About The Tax Credit
In February, the United States Congress created an $8,000 tax credit for individual first-time homebuyers who make under $75,000 or couples who make less than $150,000. This initial credit was set to expire in November. It was a slightly less generous "temporary" credit Congress had adopted back in 2008 in attempt to stimulate the housing industry.
How Government Intervention Has Stabilized the Market
Here is how each government agency involved in the stabilization of the housing market has helped so far.
- Federal Reserve
The Federal Reserve has bought hundreds of billions of dollars worth of "toxic" mortgage-backed securities, on its way to $1.25 trillion to re-encourage lending.
- The Treasury
The Treasury Department has taken on the debts and operational losses of Freddie Mac and Fannie Mae. These two organizations own / guarantee a combined value of mortgages of $5.4 trillion dollars.
- Federal Housing Administration
The FHA, designed to help low-income home buyers by insuring their mortgages, has steadily increased their portfolio, covering 23% of the market as of last quarter.
