An interesting take from the editorialists over at the Washington Post argues Monday that one of the little-noticed provisions in the Senate’s most recent housing proposal may actually encourage foreclosures. We’re referring, of course, to the $7,000 tax credit, payable over two years, to anyone who purchases a foreclosed home. The WaPo considers:
Supposedly, this would help clear the nation’s swollen inventory of repossessed properties, thus propping up home prices more generally. Here’s the catch. For lenders as well as borrowers, foreclosure is an expensive hassle. If at all possible, most banks would rather avoid repossessing a house, which they must then try to resell. But, by making it cheaper to buy a foreclosed house than a comparable unforeclosed property, the tax credit makes it more feasible to sell one. The cost and hassle — for the lender — of foreclosure go down, and the benefits go up. Other things being equal, lenders would be that much more likely to foreclose — rather than to help homeowners stay in their houses on modified terms.
Our head spins thinking about the pricing implications here, but as best we can tell, the tax credit wouldn’t be likely to make it less expensive to foreclose — the buyer is getting the credit, not the lender, after all — but it could make foreclosed properties easier to move, which would reduce loss severity. But we don’t know, on first blush, that doing so is really such a bad thing. Greater concern would seem to warranted for those properties that haven’t been foreclosed on, which could be pressured downward further in price. Imagine property A, an REO listing, and property B, a owner-occupant listing — property A has a $7,000 tax credit and property B does not. How is the owner of property B supposed to justify their price relative to the $7,000-cheaper property across the street? The issue here isn’t whether the proposal will increase foreclosures; we think the issue here is whether the proposal will force a further downward adjustment in housing prices right when the housing market can least afford such a move.
