Marketplace Scratch Pad


Scott Jagow Nov 4, 2009

With the Federal Reserve meeting today and Congress poised to extend the home buyer’s tax credit, many forms of the word “bubble” were tossed about at our morning meeting.

You’ll hear more on Marketplace tonight, but here are some things to consider:

Not only is Congress likely to extend the $8,000 first time home buyers tax credit, it’s being expanded to include non-firsters. From the New York Times:

The homebuyers’ credit — enacted last year, expanded this year and scheduled to expire Nov. 30 — would be extended to cover homes under contract by April 30. Also, it no longer would be limited to first-time buyers; people who have owned a home for at least five years could get a $6,500 credit on a new residence. Income limits for eligibility would be raised, making many more people qualify.

The current limits are $75,000 for individuals, $150,000 for families. The new ones are $125,000 for individuals, $225,000 for families.

If a goal of this credit to help reduce housing stock on the market, does it make sense to offer it to people who’ve owned a home for 5 years? To take advantage of the credit, they’ll have to sell one home to buy another. Plus, is a 2% credit on the value of a purchase going to motivate most people? Interest rates are low. Home prices are low. Why is this necessary?

Another important sentence from the Times story, emphasis mine:

It would be a big victory for the housing and real estate lobby and for the Senate majority leader, Harry Reid, Democrat of Nevada, who faces a tough re-election race next year in the state with the most claims for the credit per capita.

Let’s move on to FHA loans, with their measly 3.5% down requirement and “flexible” credit score standards. According to NPR, FHA loans are now responsible for a third of all new mortgages. That’s 10 times what it was a few years ago. NPR’s story this morning said the FHA is focused on lenders who might be taking advantage of the government’s generosity. Check this out:

The days of “if you can breathe, you can get a loan” are over. But it might be hard to tell from watching some of the ads out there.

In one ad from a company called Premium Capital Funding LLC, also known as Topdot Mortgage, a pitchman says, “We’re authorized by the federal government to offer FHA loans to homeowners with less than perfect credit … and your credit score may not even be a factor.”

According to housing administration data, Topdot’s loans issued over the past two years have defaulted at nearly 2 1/2 times the national average. In some cases, the borrowers never made a single payment.

FHA Commissioner David Stevens says a rate like that is “very bad.”

Yes, it is.

This discussion wouldn’t be complete without mentioning the Federal Reserve, and all the free money it has made available to Wall Street. That money has poured into stocks, commodities and real estate overseas. With the Fed keeping interest rates low, investors are borrowing dollars and investing in countries with higher interest rates. Today on CNBC, economist Nouriel Roubini predicted this will all end badly when the dollar snaps back:

“Eventually there’s going to be an end to this carry trade,” he said in an interview. “When that snapback of the dollar is going occur it’s not going to be 2 percent or 3 percent, it’s going to be more like 25 or 20 percent. And then everybody will have to close their shorts on the dollar, they’ll have to sell these risky assets across the world and you could have this huge asset bubble going into an asset bust.”

All of this seems to add up to — people are doing exactly the same things that created the last bubble. Borrowing over their heads, over-leveraging, taking advantage of free money from the government or lax credit requirements. But maybe there’s another way to look at this. I’d love to hear it. In the meantime, I’m gonna run and get a pack of gum. For some strange reason, I’m craving it.

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