The "Foreclosure Prevention Act of 2008" hurts homeowners

You may have read about the "Foreclosure Prevention Act of 2008," which recently passed the Senate with an 84-12 vote. The bill's provisions will cost an estimated $21 billion dollars over the next 10 years, of which the lion's share -- $15 billion -- would go to giving $7,000 tax credits to people who buy properties in or near foreclosure.

If you can explain how this will prevent a single foreclosure, you're a lot smarter than I am. And if you believe it will, but can't explain how, you're a lot stupider.

As many commentators (including a New York Times editorial) have pointed out, this plan will increase foreclosures, as those who hold mortgage notes will more easily find a buyer for the homes they repossess. On the other hand, people who aren't in foreclosure will have a harder time selling their homes, as they effectively end up costing $7,000 more. It's completely upside-down!

Investors also benefit from this law. "But wait," some say. "Buyers have to occupy the homes to get their $7,000 tax credit! That will stop speculators from driving up prices and further ruining homeowners' chances to own again." Oh, I say, you doubt the rapacious cleverness of those driven by greed. I've already run into one online discussion about how to cheat the system, and I'll bet my left arm similar discussions are happening in investment circles around the world.

The law also sets aside $200 million dollars (improperly cited as $200 billion in some places, including the bill's text) for "pre-foreclosure counseling," which will be of help -- especially if it's used to bolster existing free programs, as are described in Chapter 5, "Call for Help". But on the whole, this one's a stinker. It harms those who need help the most, while helping those who need it the least.

What do you think? Post your comments here.