Despite its brief existence, the federal government’s $8,000 tax credit for first-time homebuyers already has proven to be a costly boondoggle. And in what appears to be an act of unintended comedy, Congress is primed to extend and expand this “temporary” program beyond its November 30 deadline. On Thursday, October 22, J. Russell George, inspector general for the Internal Revenue Service, testified before a House Ways and Means subcommittee that the tax credit has been rife with inefficiency and fraud. Among those scamming the program, he believes, are more than 50 IRS employees. This interim report, George emphasized, if anything, understates the problem.
Such an outcome shouldn’t come as a stunner. With homeownership now almost a matter of moral right and mortgage lending becoming more than ever nationalized, the tax credit is ripe for the picking. Congress passed and President Bush signed the program into law in July 2008 as part of the Housing and Economic Recovery Act. Anyone buying a primary residence during April 9, 2008 through June 30, 2009 would receive a tax credit worth 10 percent of the home’s value, or up to $7,500. The credit would have to be repaid over 15 years and would be awarded after the purchase. Thus, it functioned as an interest-free loan. At the time, the housing downturn already had begun. Mortgage defaults and foreclosures were rising significantly.
As part of President Obama’s economic stimulus proposal, Congress this year transformed the program into a virtual giveaway. Lawmakers extended the eligibility period through November 30, raised the credit limit to $8,000 and eliminated the repayment requirement on all purchases after January 1, 2009, save for cases in which the owner sells within three years or uses the dwelling for rental or vacation purposes. What’s more, a “first-time” homebuyer actually refers to a buyer who hasn’t owned a home over the previous three years. Moreover, the law established income limits of $75,000 for single-adult households and $150,000 for married couples, with a phase-out (rather than elimination) of the credit at higher levels. The home price ceiling is $800,000, which includes pretty much most for-sale dwellings in the U.S.
All in all, it’s a sweet deal. Indeed, it resembles nothing so much as the housing market equivalent of the Obama administration’s come-and-get-it “Cash for Clunkers” motor vehicle trade-in program. And as evidence indicates many of that mercifully brief program’s beneficiaries had been planning to buy a new car anyway, it also indicates that many of the first-time homebuyer tax credit claimants had been ready, willing and able to become homeowners. Any estimate of the program’s per-household cost, in other words, has to take into account tax credits that haven’t been indispensable to home purchases, not just those that have. Brookings Institution Senior Fellow Ted Gayer has conducted just such a study. He concluded that each home sale under this program costs the government $43,000, not $8,000. Of the 1.9 million buyers receiving the tax credit, he noted, 85 percent would have bought a house anyway. Declining home prices and low interest rates have been the main motivators for the purchases. Gayer estimates the final price tag at $15 billion, twice what Congress had intended.
Beyond this massive built-in inefficiency has been outright fraud. For one thing, noted the IRS’s George, more than 19,300 applicants claimed $139 million in credits on their 2008 tax returns prior to purchasing their homes. As mentioned earlier, the law specifies the credit can’t be awarded until after purchase. Worse yet, nearly 74,000 buyers, accounting for around $500 million in credits, likely already had owned a home within the last three years. And in a touch of low comedy, the IRS audit found that 580 “taxpayers” under age 18, including some as young as 4, claimed $4 million in credits. Presumably, their parents sought to circumvent income limitations.
Perhaps the most egregious fraud is attributable to IRS employees. Mr. George stated to the Ways and Means panel that his staff had uncovered at least 53 cases of agency employees filing “illegal or inappropriate” claims. He added, ominously: “In all honesty this is an interim report. I expect that the number would be much higher than that number.” If this is true, then the IRS is an agency in need of housecleaning. Out of all types of government agencies, a tax collection agency, most of all, can ill afford a reputation as a home for scammers.
So how have so many people managed to game the system to their own advantage? Linda Stiff, the IRS deputy commissioner for services and enforcement, states that her agency’s hands are tied. The IRS, she says, lacks the capability to electronically accept document attachments verifying that a home purchase had been made. Nor does it have the authority to reject a claim if such documents are not attached. She did provide a hopeful note, stating that all claims have been resubmitted through a computer filter designed to recognize irregularities. Thus far, the IRS has identified more than 160 potential violations that have resulted in dozens of criminal investigations. The agency has selected 107,000 claims for a special audit.
Despite the waste, the program has achieved too-big-to-fail status. After all, it’s designed to promote the holy grail of homeownership. Who could argue with that? Most members of Congress won’t. To the contrary, they’re looking for something bigger and therefore better. At the time of the IG report, Senate Majority Leader Harry Reid had been working on a plan to extend the program for four months after its November 30 expiration and to phase it out by the end of 2010.
Yet such a proposal now looks like a beacon of fiscal responsibility. By the end of October, the Senate reportedly had reached a consensus to not only extend the program, but expand its eligibility as well. Sources say that under the updated proposal, applicants buying their first home would receive an $8,000 tax credit if they sign a contract by next April 30 and close by June 30. “First-time homebuyer” would have an even more creative definition under a separate reduced credit of $6,500: an applicant who has owned a home for at least five consecutive years out of the previous eight. As a further inducement to participate, income eligibility limits would be raised for singles and married couples, respectively, to $125,000 and $250,000. If this can be believed, even that’s a taxpayer bargain compared to an alternate $16.7 billion proposal being floated by Sens. Chris Dodd, D-Conn., and Johnny Isakson, R-Ga., to raise income limits to $150,000 and $300,000.
Leaders in both parties are confident a bill of some kind is close to a done deal. “We do expect this tax credit plan to be considered as a part of the unemployment bill at some point,” said Regan Lachapelle, a spokesperson for Senator Reid. Senate Minority Leader Mitch McConnell, R-Ky., added that “most members” of the Senate support the plan and the idea of making it part of the larger unemployment bill. The Obama White House has not taken an official position on extending the credit, but it’s hard to believe the president would oppose it, especially given that his economic stimulus program enacted this February includes $50 billion for mortgage foreclosure prevention.
In a real sense, the ongoing fiasco and its imminent boost are the consequences of an almost unchallengeable assumption that renting is a social stigma at any income or asset level, and must be rectified by any means necessary. Such a conviction can be found in abundance among Republicans and Democrats. More than anything else, this attitude of “homeownership at any cost” has driven the overinvestment in housing that helped trigger the financial meltdown a year ago. Housing expert Charles Lane, writing in the Washington Post last month, explained it this way:
For decades, the U.S. government has subsidized homeownership – via FHA insurance, the mortgage interest deduction, Fannie Mae and Freddie Mac, and many other programs. The resulting overinvestment in residential real estate is a major cause of the current crisis. Yet, in trying to cope with the crisis, Washington is pouring on more housing subsidies, thus deepening the federal commitment to the old strategy and making it harder to move to a new one.
…Homeownership is not for everyone – it can’t be. Transient young people don’t need or want mortgages and maintenance; ditto the frail elderly. More broadly, there are some people who just can’t afford it.
This is essence of the problem. But getting lawmakers on Capitol Hill or anywhere else to act upon it is an almost impossible task, especially since it’s so intertwined with a sense of racial and ethnic entitlement. The lowering of mortgage credit standards and the obsession in Congress and successive presidential administrations with raising homeownership rates for blacks and Hispanics have gone hand in hand. Not coincidentally, these two groups have exhibited far higher default and foreclosure rates than whites.
Mentioning these inconvenient facts would be near-political suicide, as real estate/mortgage industry lobbyists would team up with civil-rights activists for a one-two punch. The debate thus is over how – as opposed to whether – to extend and expand the homebuyer tax credit. “There are simply too many Democrats and Republicans that want to see this program extended for it to get derailed by the inspector general’s report,” said Jaret Seilberg, a policy analyst at the Washington Research Group. That’s another way of saying that reality shouldn’t get in the way of fiscal responsibility – or public integrity.