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Reid Seeks Bubble Re-Inflation

Nevada is one of the “sand states” which has experienced a serious crash to their housing market, along with Arizona, California and Florida. Those four states – along with the depression state of Michigan – accounted for a majority of all foreclosures and value loss on mortgages. You can even pinpoint 35 counties with the majority of foreclosures, and almost all of those counties are in the four sand states. So housing policy and foreclosure mitigation for those states will look different than for the rest of the country. And that’s the backdrop for sand-state Senate Majority Leader Harry Reid pushing a crazy policy to extend the home buyer’s tax credit, which does nothing but prop up the housing market.

Home buyers hoping to take advantage of a lucrative federal tax credit would get three extra months to complete their purchases under a proposal introduced in the Senate on Thursday.

Senate Majority Leader Harry M. Reid (D-Nev.) co-authored a proposal that would allow those eligible for the tax credit to close on a home by Sept. 30 to give lenders more time to process a crush of applications.

Reid and his co-sponsors hope to attach the measure to a separate bill moving through the Senate that would extend a variety of tax breaks as well as emergency unemployment benefits. But even if senators succeed in attaching the tax-credit initiative, Democrats are still struggling to assemble the votes needed to pass the overall tax bill.

The home buyer’s tax credit ended on April 30, but the deadline for closing on those transactions was June 30. This would extend that closing date, ostensibly because of application processing, to September 30.

While the sales have already been made, and this would just extend the processing, handing out this money to incentivize home purchases, basically to keep prices from bottoming out, is bad public policy. Moreover, it will encourage tax fraud on a large scale:

The danger is that this extension would also give more time to people who are merely pretending they were under contract in April and intend to backdate their documents.

Some real estate brokers see signs of dubious behavior. Glenn Kelman, chief executive of Redfin Corp., a Seattle-based broker that operates in nine states, says he started to wonder if tax fraud was on the agenda after hearing from some customers who were very insistent on closing by June 30 even though they went under contract after April 30.

Schahrzad Berkland, an agent for Fidelity Pacific Real Estate in San Diego, who helps produce analyses of that market, found that the number of homes listed as pending sales agreed upon in April continued to rise over the past few weeks. Normally, that number should decline as some deals fall through. Ms. Berkland thinks some buyers are backdating to April.

The IRS is aware of and investigating the backdating issue, but they’re not likely to catch everyone. And we know that unscrupulous mortgage brokers exist, who would love to dangle the carrot of a big tax credit at prospective buyers, backdating the sale to ensure it.

Who does this help? Well, it certainly won’t hurt the depressed housing market in the sand states. If more sales result from a big tax credit, maybe construction goes up, or lending, and the economy stabilizes. Harry Reid, running for re-election, certainly wouldn’t be upset about that. It also helps people with enough money to buy a house, many of whom would have purchased housing anyway, if not at that particular time.

So we have bad policy, encouraging criminal behavior and sending $30 billion or more into the hands of the moderately well-off, for the purpose of blowing some air back into the housing bubble. Yuck.

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David Dayen

David Dayen