The Foreclosure Tax Credit: Blessing or Curse?

The Foreclosure Prevention Act of 2008 (H.R. 3221) was passed April 10 by the U.S. Senate with a vote of 84 in favor, 12 opposed and four present/not …

The Foreclosure Prevention Act of 2008 (H.R. 3221) was passed April 10 by the U.S. Senate with a vote of 84 in favor, 12 opposed and four present/not voting. The bill includes a $7,000 tax credit for buyers of foreclosed properties, but whether the foreclosure tax credit will ultimately be helpful or harmful to the real estate market is a topic under hot debate in Washington.

H.R. 3221 was originally introduced as The Renewable Energy and Energy Conservation Tax Act of 2007 in July 2007, sponsored by Sen. Nancy Pelosi (D-CA). In early 2008 the bill was amended by S. 2636 to become The Foreclosure Prevention Act of 2008, sponsored by Sen. Christopher Dodd (D-CT). The Act’s primary goal is to help individuals and communities that have been adversely affected by foreclosures and to prevent future foreclosures. It will increase funds to pre-foreclosure counseling, modify the bankruptcy code to allow modification of nontraditional and subprime mortgages, allow localities with high foreclosure rates to access funds to purchase foreclosed properties for rent, resale or rehabilitation and amend the Truth-in-Lending Act to improve disclosures throughout the original loan and/or refinancing process, according to the official Senate Democratic Party website. The foreclosure tax credit is intended to help get foreclosed properties off the market by encouraging homebuyers to purchase them.

The foreclosure tax credit will give buyers of foreclosed properties a $7,000 tax credit, to be divided equally between the two years following the home’s purchase. For married couples filing separately, the credit will be divided into $3,500 per person. The credit is only available for property purchased as a principle residence, so investors would need to use the home as such for the 24 months following the purchase date in order to receive the full $7,000 credit. If the investor opts to dispose of the property or fails to use it as a principal residence at any time during those 24 months, whatever portion of the tax credit remains will be disallowed.

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The $7,000 credit makes foreclosures more affordable as long as investors are willing to use the home as a principal residence for two years. Once those two years are up, investors could sell or rent the property for a profit. The other positive effect that this credit could potentially have is on the market itself. Foreclosures drag down the values of other homes in the vicinity, but with this incentive in place, it is likely that more buyers will purchase foreclosed properties. This, in turn, could raise the values of other homes in the area. Investors with existing real estate investments in areas devalued by foreclosures could stand to benefit as a result.

But the foreclosure tax credit has a couple of potential snags. Some experts argue that making foreclosures easier to sell may result in lenders that are quick to foreclose and unwilling to negotiate terms with homeowners in default, according to The Associated Press. If this is the case, such a measure could actually increase the number of foreclosures on the market.

Additionally, “economists say the $7,000 credit could distort the market by making foreclosed homes owned by lenders more attractive to buy than other homes. That has the effect of lowering the value of homes occupied by people who are up to date with their mortgages,” according to The AP. Press.

Further, it is considered by some a method of bailing out lenders, who will be able to offer their foreclosure properties with the tax credit as an incentive.

In a Statement of Administration Policy (SAP), the Bush Administration stated that the president’s senior advisors will recommend he veto H.R. 3221 if it reaches his desk. The Administration opposes the appropriation of $4 billion to assist state and local governments to redevelop abandoned and foreclosed homes, as it believes the program would help lenders and speculators more than individual homeowners, according to the SAP. The Administration also said it opposes modifying bankruptcy codes, stating that such alterations would likely prolong the real estate market’s recovery process.

Having passed both the House and the Senate, the bill will proceed to a committee of representatives and senators to work out differences between the versions of the bill approved by each chamber, according to GovTrack. After this process has been completed, the bill will go to President Bush for approval.

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