Inviting irresponsibility

The Wall Street Journal reported today that the IRS is seeing massive fraud in the homebuyer tax credit.

The article mentions something I hadn’t noticed:  the tax credit is refundable, which means that if you don’t owe any tax, then the government actually pays you.  This one fact brings the whole picture into focus, and reveals what a bad idea the credit and other incentives are, even without borrower fraud.

Let’s say you are a renter with a short planning horizon, no understanding of finance, and no moral compass, other than a desire to avoid jail time. Carpe diem, dude!  One day, the government offers you a rich tax credit for buying a house. The FHA is falling over itself to offer you a subsidized loan.  A friendly homebuilder points out that, if you buy enough house, your interest deduction will exceed your income tax obligation.  This lets you stop all your salary withholding right now(!), and you’ll still actually collect $8,000 in April.  Maybe the builder even happens to know someone — unaffiliated, naturally — who will lend you the down payment.

Carpe Diem Dude’s perspective:  you pay nothing down, and immediately get a new house, a 25% raise in take-home pay (which mostly goes to the mortgage payment), plus an $8,000 check next April.  If you wipe out and default, well hey, that’s a long time from now — months, maybe — and it was never your money anyway.  Besides, you keep the $8,000.  Why not?

Friendly Homebuilder’s perspective:  you get a desperately needed home sale, which saves your job.  It costs you and your company nothing, assuming that you jacked up the purchase price by enough to pay your cousin Icepick to loan the down payment to Carpe Diem Dude (oops, did I say that, or just think that?).  If the buyer defaults, hey, it’s the FHA’s money, no harm no foul.

FHA’s perspective:  you are a government-backed agency receiving constant pressure to write new loans. Your Congressional taskmasters say publicly that writing bad loans is the policy, so keep up the good work.  And hey, if it all comes apart, you were just following orders.

This is an incredibly great deal!  If only I didn’t already have a house.  Is there an age requirement?  Maybe my elementary school-age kids can each buy a house…

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