Despite the possibly significant number of the frauds, which were revealed Thursday by the Treasury Department and the IRS in testimony before the House Ways and Means Oversight subcommittee, there's bipartisan support for extending the first-time homebuyers tax credit, with over two dozen bills seeking to keep it going in some form. Clearly, based on existing homes sales figures, the credit is working.
Senate Majority Leader Harry Reid (D-Nev.) wants to extend the current $8,000 tax credit for first-time homebuyers for another four months, and then lower the amount by $2,000 every three months to gradually phase out the benefit.
Even more enthusiastic about the credit are Sens. Christopher Dodd (D-Conn.) and Johnny Isakson (R-Ga.), who want to extend the tax credit to all homebuyers until June 30, and raise the income limits to $150,000 for a single person and $300,000 for a couple. Currently, the income limits are $75,000 for a single person and $150,000 for a couple. Some lawmakers are balking at this option because it would cost about $16.7 billion in lost tax revenues.
Mark Zandi, the chief economist of Moody's Economy.com supports extension of the tax credit. He writes, "Based on simulations of the Moody's Economy.com macro model, the expanded tax credit, if extended through the end of 2010, would increase 2010 sales by almost 600,000. This in turn would generate $33 billion in additional real GDP, lifting growth in 2010 by about 25 basis points." In addition, he adds, "Benefits would flow to a range of hard-pressed industries, including mortgage lenders, real estate firms, insurance companies, property maintenance and repair businesses, and building supply retailers."
The White House right now is not excited about extending the tax credit, and has sent out its deputies to try to quash efforts to do so. In testimony before the Senate on Tuesday, Shaun Donovan, secretary of the Department of Housing and Urban Development, said there is evidence the tax credit benefited the housing market, but questioned whether the cost was worth it, according to a report in The Wall Street Journal. Donovan told the Senate he does not expect to see a "catastrophic decline" in home sales if the tax credit expires on Nov. 30, but does think an expiration could have some "negative implications" for the market.But the bigger attempt to try to kill the tax credit is being led by the IRS and its testimony about fraudulent claims. The IRS testified before the House Ways and Means Committee that:
- 19,300 people claimed the credit on their 2008 tax returns before they had purchased a home, for a total of $139 million;
- 74,000 buyers, including some IRS employees, claimed $500 million even though they had owned a home before; and
- 580 taxpayers under age 18, including some as young as 4 years old, claimed the credit, resulting in another $4 million in fraudulent claims. The IRS suspects some parents used their children to dodge income limitations.
In total, the IRS has identified 160 potential schemes relating to the first-time homebuyers tax credit that could result in criminal investigations, and has targeted 107,000 claims for reexamination, some of which have been frozen. The problems occurred because the tax credit program began before fraud monitors were put in place. Now that the IRS has identified potential fraud schemes and knows what changes might be needed in the law, it says it can prevent a recurrence of these problems. The fraud-detection software is already in place to catch most of the known frauds. Also, lawmakers already plan to add a provision requiring taxpayers be at least 18 years old to claim the tax credit.
Anything that improves the situation in the housing market will help everyone. House prices will continue to fall until the backlog of foreclosures and other homes on the market has been cleared. Zandi writes, "Since the peak in housing wealth, homeowners have lost more than $5 trillion in home equity, and close to 15 million homeowners -- more than a fourth of all those with first mortgages -- are estimated to be under water; their homes are worth less than they owe. With nest eggs so cracked, households are in no mood to spend more."
Consumers' moods must be improved before the economy can hope to rebound. Improving home values will certainly go a long way to making that happen.
Lita Epstein has written more than 25 books, including The 250 Questions You Should Ask About Buying Foreclosures.