Extension to Fraud-Laced $8k Homebuyer Tax Credit to Piggy-Back on Unemployment Bill?

Here’s a pair of somewhat conflicting stories about the push to extend and expand the inefficient, expensive, economically stupid $8,000 first-time homebuyer tax credit.

From the real estate news source Inman News: Final push for tax credit

Real estate industry trade groups are mounting a final push for an extension of the first-time homebuyer tax credit, with Sen. Johnny Isakson planning to tie the issue to an extension of unemployment benefits.

In testimony before the Senate Banking Committee today, Isakson, R-Ga., said he plans to introduce an amendment to legislation extending unemployment benefits that would make the current $8,000 tax credit available until June 30.

Isakson’s amendment would raise the income limits for the credit to $150,000 for individuals and $300,000 for a couples. The existing tax credit can’t be claimed by individuals making more than $95,000 or couples with adjusted incomes of more than $170,000.

The estimated cost of his latest proposal would be $16.7 billion over five years, Isakson said, citing the Joint Committee on Taxation.

So apparently the latest plan is to pull a common DC trick and tack the bill onto something else that would be political suicide to vote against. This disgusting ploy usually works, and if they pull off adding it to the unemployment bill, it is almost guaranteed to be passed. Also, considering that the current credit is probably going to cost in excess of $15 billion versus an original estimate of $6.6 billion, it seems likely that if passed, this proposal would cost us another $30 billion or more that we don’t have.

Next up we have a different outlook on the credit, via Calculated Risk: Home Buyer Tax Credit DOA?

From Reuters: White House skeptical on renewing home buyers credit

And more from Reuters on the widespread fraud: IRS warned again of U.S. homebuyer credit fraud

From Diana Olick at CNBC: HUD Hints on Home Buyer Tax Credit . Olick reviews Donovan’s testimony and writes:

[T]hat sounded more like a “No” to me than a “Yes.”

And Rex Nutting at MarketWatch reviews many of the arguments against the tax credit: Kill the wasteful home-buyer tax credit

Note in the second story CR points out that the IRS “has opened 107,000 civil cases related to the credit.” If we go by the NAR estimate that around 1.9 million buyers “will take advantage of the $8,000 tax credit this year,” the 107,000 civil cases represent a potential fraud rate of over 5%. Who could have guessed that when the government starts handing out free money, people would race to game the system?

I apologize for the overload of posts recently regarding the $8,000 tax credit, but I feel strongly this is an important issue related to real estate. The tax credit is wasting money, harming potential buyers by hampering the natural correction of the market, and helping to push the rental vacancy rate higher, which causes further pain for local and regional banks. The government needs to stop trying to prop up a broken market and let home prices fully correct.

Here is the contact info for our senators. I encourage you to call or fax them and encourage them to vote against any form of extension, renewal, or expansion of this wasteful and counter-productive spending spree.

Patty Murray
Phone: 202.224.2621
Fax: 202.224.0238

Maria Cantwell
Phone: 202.224.3441
Fax: 202.228.0514

[This story was corrected on 10/20 at 11:00 AM to indicate that the 107,000 civil cases opened by the IRS represent potential fraud, not necessarily actual fraud.]

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.


  1. 1
    what goes up must come down says:

    hmmm white house against it, a republican pushing it OH where is Scotsman with his outrage against Obama?

  2. 2
    Kary L. Krismer says:

    Well, June isn’t what I’d hoped for, but it’s better than another November.

    On the fraud issue, I’m assuming most actually bought a new house, but didn’t qualify for the credit. If so, then the IRS pursuit of them could result in a foreclosure down the road. But for them to have over 100,000 cases to investigate, I have to assume that most/all of those probably had claimed home interest deductions within the past 3 years. If so, a rather stupid attempt at fraud.

  3. 3
    David Losh says:

    There was some radio chatter yesterday that NPR had a discussion about the tax credit and the fraud. It looks like the tax credit was going away in favor of giving federal dollars to State agencies for home buyer programs.
    That would make more sense, and I think that’s how the fraud issue ever came up. The argument is that State agencies are already set up to screen applicants.

    In my opinion the point to the tax credit was to stablize the housing market free fall, which it did. You would have to be brain dead not to figure out a 3% uptick in home prices doesn’t wipe out any savings from a $8K tax credit.

    So, the $8K did what it was meant to do, the TARP money is giving banks profits, and now it’s time to move on.

  4. 4
    patient says:

    By what goes up must come down @ 1:

    hmmm white house against it, a republican pushing it OH where is Scotsman with his outrage against Obama?

    I like Obama and have democratic values but to be fair:

    ” Isakson and Senate banking and housing committee Chairman Sen. Chris Dodd, a Democrat, are co-sponsoring legislation that would extend the tax credit until June 30, 2010.”

    As I said I like Obama but I have no love for Chris Dodd.

  5. 5
    Kary L. Krismer says:

    RE: David Losh @ 3 – How does it make more sense to qualify unqualified people to buy a house?

  6. 6
    cheapseats says:

    Kary @ 2 … from the calculated risk comments on the subject.

    “They use stolen identities and file a return claiming the credit. They have the credit direct deposited to a prepaid card they purchased. The IRS processes the credit and transfers the money to the prepaid card account and the fraudsters are gone. The IRS is so screwed up, they have no way to verify the return before sending the credit out. Once they review the return, they send the taxpayer whose identity has been stolen a deficiency notice. The fraudsters may file a hundred or more returns.”

  7. 7
    Matsayswhat says:

    I still have mixed feelings about extending the home credit. I don’t think it would be “good” long term, but congress seems to be all about the handouts, and I’d rather see a handout go to home buyers than national banks.

  8. 8
    Courtney says:

    Raising the income ceiling seems pretty ridiculous.

    Tim, have you done any numbers of fraud percentages on other tax credits housing or not to see if the 5% figure is truly fraud laced or an average number of investigations for any given tax credits? I haven’t, but would be curious to know how that compares to other IRS “free” money. I guess it is also important to note that investigation does not always equal fraud.

    I had a few clients take advantage of the credit this year, but I would not say it directly affected their decision to buy or not.

    Thanks for bringing all these posts together:)

  9. 9
    Hugh Dominic says:

    I want to refinance my $150,000 mortgage. Should I refi, or sell it to my live-in domestic partner so he can claim the credit?

  10. 10
    AMS says:

    RE: Courtney @ 8 – How do you run numbers on “fraud percentages?”

    Is this like running numbers on Madoff? Obviously it’s much more interesting to run the numbers before the fraud is known, but I am not sure how one does that. How do you know you are the victim of fraud until it’s too late, and then how do you know how many non-fraudsters there are in the population to get the percent of fraud? Finally, if there are a bunch of small frauds that does not have the same impact as one mega fraud–the sum of all the small frauds may be smaller than the amount of one mega fraud.

  11. 11
    Tyler says:

    I think the R in from of Sen. Johnny Isakson’s name stands for Realtor, not Republican.

    If they don’t extend the credit, at least the industry can point to something when houses prices start falling faster after the expiration.

  12. 12
    One Eyed Man says:

    The Tim, I have a great deal of admiration for what you provide to the public at Seattle Bubble and the following criticism is only meant to be constructive and not some kind of indictment of you, your integrity, Seattle Bubble, or the substantial benefit I believe you provide to the community. With that said, I have the following criticism of this post.

    When I saw the title to the post, I assumed that when you used the term “fraud” you were referring to the lack of substance to the political rhetoric put forth by those who support the credit. Although that may amount to hyperbole, I think that would be a reasonably appropriate use of the term “fraud” as a purely editorial comment.

    However, your reference to a 5% fraud rate on the credit claims is an inaccurate conclusion from the facts presented in the Reuters’ article. Reuters never said that the 107,000 civil cases constitute fraud, as opposed to just allegations which might in a much smaller percentage of cases constitute fraud. The majority of the 107,000 cases probably constitute only negligence on behalf of the taxpayer and some will likely be found to be altogether unfounded claims by the IRS. By referring to allegations that may be unfounded and actions that may only constitute negligence as fraud, you are unintentionally distorting the facts to further sensationalize the story. You don’t need to go there.

    Your editorial point regarding the problems with the credit is well made without the potentially ill founded rhetoric regarding issues of taxpayer fraud.

  13. 13
    Sorin says:

    The credit with the income limit has been a reason for me to avoid seriously looking for a house while it is in effect. I’m single, and my income is above the limit, so it effectively puts me at an 8k disadvantage in this market.

    Mind you, I’m arguing to kill the credit, not raise the income limit. For places like Seattle, NY, etc, where there are high income earners and high real estate prices, I suspect there are other people in my situation that have looked at this credit, and seen that it creates a further disincentive to buy.

  14. 14
    patient says:

    By Matsayswhat @ 7:

    I still have mixed feelings about extending the home credit. I don’t think it would be “good” long term, but congress seems to be all about the handouts, and I’d rather see a handout go to home buyers than national banks.

    And that is exactly what they want people to think. Look a bit deeper than the glossy surface and you realize that this is just another funnel of tax money to the big banks. It’s awesome for them, not only do they get more time to suck on the FED teet in form of cheap money that they can re-invest in Treasuries with guaranteeed profits to offset their losses they also get more buyers ( who over pays with $8k + any bonus from increased competition ) for their reos. For the home buyer, not so good, increased risk to over pay, getting under water etc, etc. It’s a bank bailout dressed up to be a helping hand to home owners. It’s not even good for realtors since it delays the road to sustainable volumes. I still have god hopes that this scam will be killed, the whispers of out of control spending is getting louder, soon even a senator will hear it.

  15. 15
    AMS says:

    RE: Sorin @ 13 – Believe me, there are plenty of people who would rather have an income level that disqualifies them for the credit rather than have lower income and qualify…

  16. 16
    Herman says:

    RE: Hugh Dominic @ 9 – Hugh, as long as you sell the house to your partner for a small enough value that the cost of the transaction (sales tax…) does not exceed the $8, your family is in the black.

    I think if you swapped it over to him for $150k, the sales tax is only about $2k. If the extension goes through, you should do it and let the .gov pay for your refinance-by-proxy.

  17. 17
    mukoh says:

    The Tim might not realize though that 107k investigations will probably amount to 1k-2k actual cases of fraud. Called our disabled senators on the phone numbers listed, left a message to extend the credit. Emailed as well.

  18. 18
    Scotsman says:

    I think they should stop toying with this program and put some teeth in it. Folks making up to $300K a year won’t be swayed by a lowly $8K credit- they should increase the credit to something really meaningful, say $50,000. The government can’t pay for it anyway, so why not pump it up to the point where it’ll have some impact? The Chinese will be paying for this, the American taxpayer essentially gets an interest-only loan for their grandchildren, and Realtors get to eat. Shock and awe, baby, shock and awe!!!

    Oh, and the “R” in front of Sen. Johnny Isakson’s name stands for “re-elect me!”

    Me? I’m holding out- my house will be free, at least to me! ;-)

  19. 19
    The Tim says:

    RE: One Eyed Man @ 12 – Good point. I have updated the post to indicate that the 107k cases represent potential fraud, not necessarily actual fraud. Some of the cases will no doubt be found legitimate, but I think we can also agree that there is likely to be some additional number of people who are gaming the system in some illegal way that have not yet been caught and may never be. The term “fraud-laced” was merely meant to point out that there is a non-negligible amount of fraud running through this program.

  20. 20
    Urban Artist says:

    I agree Tim, about the housing market correcting on its own. I would like to buy in the next few years but as long as the government keeps propping up the market the prices will stay high and I wont be able to buy. On a side note, since when is a first time buyer someone who has not bought a house in three years. In my book first time means you never before bought a house….ever owned a house. I get the feeling this is not benefiting the people it should but just keeping the game in play for Real Estate and people still tying to live off their houses.

  21. 21

    Its Horrifying Tim: These Budget Buster Welfare Tax Credits are the Straw(s) Breaking the American Government’s Back:

    8/2009 Article in part:

    “…The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation’s plate and struggling to find money to pay the tab

    Read more at: http://www.huffingtonpost.com/2009/08/03/tax-revenues-post-biggest_n_250108.html

    If this phony stimulus spending was helping things, why to we currently have a chronically worsening unemployment/underemployment rate at 17%?

  22. 22
    Scotsman says:

    RE: softwarengineer @ 21

    Softy- the government just released the new unemployment numbers. Under the now revised plan, the metric formerly known as U-3, commonly quoted by all MSM sources, will only included those who have been unemployed for at least two years. Federal spokesperson Ilie Freely said the revised measure is an attempt to more accurately capture the true number of unemployed after filtering out “job hoppers,” semi-transient workers, the merely bored, etc.

    As of 10-21-2009 the comprehensive revised unemployment rate for the U.S. is 4.3%. Analysts immediately expressed concern that the now tight labor market would lead to wage inflation and subsequent sharp increases in housing prices. Realtor Buffy Myass was quoted on CNN as suggesting those on the fence about rising home values should “buy now, or be priced out forever!”

    Barrack Obama, humbly accepting credit for the now ongoing economic recovery, announced he will indeed be running for re-election in 2012, as well as 2016, 2020, and 2024, then moving on to other challenges and fulfilling his desire to spend more time with his family….

  23. 23
    One Eyed Man says:

    RE: The Tim @ 19

    I agree that the 8K credit program is probably “fraud-laced” when compared to other tax programs.The federal tax system is an honor system. With the exception of withholding and information reporting like w-2’s, 1099’s, K-1’s etc. done by employers and other sources, the taxpayer is trusted to report and pay their tax accurately. When you throw in a refundable credit the size of 8K, it opens the door for those who aren’t so honorable, especially in an internet world where one can put together the information necessary to file a bogus return without leaving the house. Because this refundable credit is so large, I think that as compared to other tax programs, this program is probably “fraud-laced” on at least a relative basis.

    As to the 107K cases however, the vast majority of those probably only involve allegations of taxpayer negligence and not fraud. Civil tax fraud is almost always (if not always) also actionable criminally if the justice department and the IRS want to pursue it. The Reuters article also says that the IRS has identified only 167 criminal schemes. It’s probably also true that most of those schemes involve multiple credit claims. But whether the amount of fraud is greater or less than the 107K credit claims, the 107K metric of IRS cases probably includes mostly claims of taxpayer negligence and just isn’t a good gauge by which to estimate the true amount of fraud related to the credit.

  24. 24
    kfhoz says:

    RE: Sorin @ 13 – Yeah, I’m not going to buy while that credit is in effect.

  25. 25
    wreckingbull says:

    RE: kfhoz @ 24 – Bingo. Same reason I am pretty much done with the casino for now. (oops I mean stock market). Fool me once……

  26. 26
    patient says:

    All this “stimuli” is making investors very suspicious. Noone trusts the “recovery” or the artifical state of housing and the financials. I think that’s one reason why we see so much funds pouring into easy trades (stocks, gold ) instead of being invested in longterm business ventures through risk capital, expansions etc. The consumers are likewise skeptical and holds back on spending. The government needs to stop propping up things and let the markets stand on their own legs if they want capital to come back to long term, growth, job creating investments and consumptions.

  27. 27
    Pegasus says:

    The Story Of 21 Year Old With The Underwater FHA Loan Is Even Worse Than You Think

    A few days ago we told the story of Denise Tejada, the 21 year old California woman who bought a house with an FHA backed loan with almost no money down.

    Readers were outraged.

    And rightfully so. It’s our money on the line and it is simply outrageous that our government is still encouraging these kind of loans to be made. Even if Tejada pays off her loan in full, it was an insane gamble on our behalf to have the government back her loan.

    But as it turns out, the gamble was even more insane that we originally reported.


  28. 28
    Scotsman says:

    Tejada? Racist!!!!

  29. 29
    patient says:

    RE: Pegasus @ 27 – Pegasus, that’s awesome. If I buy a home in Detroit for $80k with FHA, 3.5% down and then never make a payment, I pocket nearly five grand and say thank you uncle Sam. I’m far from qualifying but for someone older with no need for credit anymore. Say a retiree who has been renting for the last couple of years it could be a sweet deal. Or a youngster who don’t need credit for a few years. Awesome.

  30. 30
    rentRloser says:

    Why not give 8K to everyone who bought and will buy a primary residence regardless of income and what so ever. It is unfair to many people if not bad to boost the economy at the moment. Maybe not 8K but in forms of rebate of interest paid.

  31. 31
  32. 32
    Scott Weitz says:

    RE: rentRloser @ 31

    Good luck with that. Foreclosures had their highest week EVER this week in King County!!…and BKs are up dramatically.

  33. 33
    Scotsman says:

    Two sides to every market- put your money down! Cash talks, BS walks.


  34. 34
    David Losh says:

    RE: Kary L. Krismer @ 5

    The State programs are already in place. They do qualify people to get a loan, be home owners, and talk about the finances of home ownership.

    I think you are under the impression that this program is set up for those agents, and mortgage brokers, who go through the time to be certified. You are correct it’s not a y’all come, bring your buyers, and do a deal kind of thing.

    I look at this $8K tax credit as the next wave of foreclosures.

    First we had the up tick in pricing which wiped out the credit. Second we had the weasel Real Estate agents hyping people to buy now, or the credit will be gone forever. Third is that this lower priced inventory has now sold for premium prices.

    We need to bring the Real Estate industry under control and protect consumers.

    We gave the banks a ton of money and now they have profits. The stock market is manipulated by these huge institutional investors. In my opinion it’s about time every body went back to work and stopped shopping for hand outs.

    We can’t pay for health care, but we can pay for Warren Buffet to make a profit.


  35. 35
    David Losh says:

    RE: rentRloser @ 31

    Funny article.

    OK San Francisco, maybe, Rochester, no, Oakland,no, Birmingham, no, and all the numbers are way out of whack.

    It’s this kind of article that makes the Real Estate market so crazy.

  36. 36
    alex says:

    RE: rentRloser @ 30

    Yes, that 8K is all that stands between me and my million-dollar mcmansion! 8k for all!!!

  37. 37
    Kevin says:

    Tim, I am a faithful reader of your blog. I understand where you are coming from – hoping for a complete market crash and maybe swoop some homes at the bottom. But I think the credit has done a lot in stabilizing the market and proping up the general economy.

    I would expect the market to “smoothly recover” – sales go up and prices go steady if the credit is extended. And I don’t think that’s a horrible thing.

    Your posts seem to get increasingly angry from someone whose bubble-busting expectation are misaligned with how the market behaves.

  38. 38
    wreckingbull says:

    RE: Kevin @ 37 – C’mon. Let’s put that straw man away once and for all. The Tim has never advocated a massive crash, in fact he has recently admitted that he is starting to kick some tires now.

    Did Cash For Clunkers stabilize auto sales? No. It was a disaster. It borrowed from the future. I think this is Deja-vu all over again.

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