Home buyers need a real tax credit, not a $7,000 loan, to turn around the housing market and save the economy, said Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., New Jersey's largest homebuilder.
"We need to incentivize borrowers. The housing bill did not go far enough. We need something of substance," Hovnanian said.
Congress must also allow down payment assistance, he told Bloomberg TV, referring to the Housing and Economic Recovery Act that provides first-time homebuyers with up to a $7,500 tax credit.
Unlike a tax deduction, the credit reduces the homebuyer's tax liability dollar-for-dollar. But homeowners must pay back the credit over 15 years, making it essentially a 15-year interest-free loan.
HERA also bans seller-funded down-payment assistance for FHA-backed loans, effective Oct. 1.
Nonprofit down payment assistance firms would give homeowners money for down payment, but then be reimbursed by sellers, often home builders. Critics charge that sellers would raise the home's price to cover the down payment gift.
The programs, they say, are little more than schemes that benefited sellers more than buyers and lead to inflated home prices and higher foreclosure rates.
Nevertheless, a group of congressmen, backed by housing industry lobbyists, are pushing to allow down payment assistance indefinitely. Their bill would allow the donations for borrowers meeting minimum credit score hurdles and would require higher insurance premiums for some.
"These circular funding programs come with good intentions, but produce loans that are three times as likely to go into foreclosure and merely perpetuate the tragically failed policy of zero-down payment lending that helped create the current foreclosure crisis," says Jim Arbury, an executive with the National Multi Housing Council.
Allowing these programs would be "a mistake that would lure more individuals into unsustainable homeownership and put taxpayer dollars at risk," he said.
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