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BUSH PROPOSES HAIR O' THE DOG FOR HOUSING BUBBLE HANGOVER

August 31, 2007

The nation wakes up from its easy housing credit binge, and its head hurts. Now that the housing market is reeling from overindulgence in no-money-down loans and "creative" lending standards, it's time to return to more sober credit terms, right? Well, maybe not. Here is what the White House proposes in a "Fact Sheet" issued today:

1. The President Calls On Congress To Pass Federal Housing Administration (FHA) Modernization Legislation. The President's FHA modernization proposal would lower downpayment requirements, allow FHA to insure bigger loans, and give FHA more pricing flexibility. These reforms would empower FHA to reach more families that need help – first-time homebuyers, minorities, and those with low-to-moderate incomes – and offer more options to homeowners looking to refinance their existing mortgage.

But there's more!

2. The President Calls On Congress To Change A Key Housing Provision Of The Federal Tax Code So It Does Not Punish Families Who Are Forced To Sell Their Homes For Less Than Their Mortgage Is Worth. Current tax law counts cancelled mortgage debt on primary residences as taxable income. For example, if the value of a home declines and $20,000 of the homeowner's loan is forgiven, the tax code treats that $20,000 as taxable income. The President proposes temporary relief to ensure that cancelled mortgage debt on a primary residence is not counted as income.

That's just great. We already subsidize excessive home mortgage borrowing by allowing tax deductions for 100% of the purchase loan up to $1,000,000, split among two houses, plus an additional $100,000 of home equity. When you can't flip the house and then actually have to make payments, and you can't or won't, you get a better tax deal than those who binge on their credit cards.

The government encourages reckless borrowing through the tax code and insures it through the FHA. That's compassionate conservatism - compassion for reckless borrowers and lenders, paid for by the rest of us.

Too bad the President doesn't read Arnold Kling's blog.

Hat tip: The TaxProf.

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