There was remarkably little analysis of President Bush's plans to aid homeowners facing foreclosure in the papers this morning. Two proposals should have gotten more attention. First, according to the Post article, the plan would allow the Federal Housing Administration (FHA) to waive the current 3 percent equity requirement and allow it to insure mortgages that exceed the market value of the home. In other words, the FHA will be helping moderate income homeowners to borrow $200,000 on a home that is worth $180,000. That doesn't sound like a very good plan for the homeowner and is probably not an especially good use of government money. It essentially means paying off the current mortgage holder -- who otherwise would be holding bad debt -- with taxpayer money. The other item that deserved some additional attention is the plan to temporarily waive the taxation on forgiven debts. The deal here is that if someone owes $400,000 on a home, which is subsequently sold in foreclosure for $350,000, then they have had $50,000 of debt forgiven. Under currently tax rules, this $50,000 is treated as taxable income. According to both the Post and Times, Bush's plan would at least temporarily exempt this money from taxation. It is important to recognize that most moderate income homeowners will face relatively low tax rates, so this tax break will probably not be of much benefit. On the other hand, many of the people now defaulting on their loans were relatively affluent people who were speculating in real estate. In the example given here, if an investor was in the 33 percent tax bracket, President Bush's tax break would be worth $16,500, more than twice the average annual TANF payment for a family of four. It would be a simple matter to restrict the benefits of this tax break by capping the savings and only allowing the tax break on owner occupied homes. It is possible that Bush's plan will include such restrictions, but the news reporting did not address this issue. [addendum-- The Bush plan did not include some of the worst features mentioned in these articles. The plan does not relax the requirement that buyers put up 3 percent equity on their home. The special tax break on forgiven debt will only apply to owner occupied homes and it will be capped, although the limit has not yet been made public. ]
--Dean Baker
