The stealth bailout in the works for homebuilders

First developing news: The Republicans in the Senate, evidently fearing voter backlash, have agreed to work with Democrats on a big housing bailout. From The New York Times: "With both parties in Congress voicing a new urgency to help millions of homeowners at risk of foreclosure, the Senate voted overwhelmingly on Tuesday to move forward with a package of housing legislation."

The L.A. Times: "The breakthrough came after lawmakers returned from a two-week spring recess during which the federal government stepped in to rescue investment bank Bear Stearns Cos. and the country's economic troubles dominated the presidential campaign."

Now part of the bailout you haven't heard much about: tax breaks for homebuilders. "Corporate homebuilders -- including those responsible for the mortgage and housing crisis -- would receive billions of dollars in tax breaks under a provision of the Foreclosure Prevention Act currently pending in Congress," the Laborers' International Union of North America argued in a news release today.

More from the union: "Under the bill's little publicized 'carry-back' provisions, builders would get billions in tax breaks.  The carry-back provision would allow homebuilders to apply losses from 2006 and 2007 as far back as five years against taxes paid on profits."

Bloviation: When Congress is through with the omnibus foreclosure prevention legislation, it says here it will resemble the world's largest Christmas tree, with boxes of bailouts, goodies and giveaways for every Who down in Whoville and every interest group and corporate lobby remotely connected to the business of building, buying or financing houses.  Don't be surprised if the homebuilders find two piles of goodies under the tree: carry-back provisions to reduce taxes, and new tax incentives to encourage buyers to purchase new homes.

The tipping point in this debate was when the Fed backed the bad assets of Bear Stearns. Whether that event is most accurately described as a bailout, a liquidation or a burial is irrelevant. It opened the floodgates. "If we can bail out Bear Stearns, we can certainly provide aid to... (fill in the blank)."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo: Los Angeles Times

Comments

[imtired]

How do I get my share?

[JW]

Politicians are the biggest crooks on the face of the earth. The home builders give lots of contributions to politicians so the skids will stay greased. When things get nasty for the builders, this is bound to happen. Don't you just love the scumbag politicians that inhabit our nation's Capitol?

[Edgar]

The provisions you've highlighted make me sick. It is just shameful that we -- the tax payers -- are picking up this crap.

[mbagrad]

Buy a house in Highland Park that you can't afford, stop paying the loan and live for free until you get a "workout" that reduces the value of your loan to the market value of the house, then sell it and move on when the gang bangers get to your kids.

[Jack]

"The carry-back provision would allow homebuilders to apply losses from 2006 and 2007 as far back as five years against taxes paid on profits."

I wonder if a sharp lawyer might be able to argue this provision violates the US Constitution's prohibition against ex post facto laws.

[puckhead]

OK, taxes are not really my thing. But under IRS regulations, can’t companies carryforward their operating losses from the current year to future years to reduce their tax liabilities? So this “bailout” just allows the homebuilders to use this loss to recoup the taxes they paid in previous years instead of applying their losses to future tax years. Over the course of time, wouldn’t the homebuilders pay the same amount of taxes? They’re just getting the money back they had paid in previous years but will have to pay more in future years because they can’t carryforward their losses.

[Truth2Pwr]

Let's get one thing straight. "The Government" isn't bailing out anybody. "The Government" is reaching into the pockets of "The taxpayers", forcibly robbing us of our money at the tip of the sword of the IRS, and distributing it amongst those who lied and cheated to make an ill-begotten fortune for themselves so that they don't have to give up any of the luxuries of homeownership that they have grown accustomed to without having to actually sacrifice their leased Beemers or sand toys.

What's next? A liver bailout to sponsor transplants for alchoholics? A New England bailout for all those Patriots fans who bet big on the Super Bowl? A lazy crackhead loser bailout for all those wellfare Mom's with white powder around their nostrils and 6 kids hanging on their legs? (Ooops, we already have that one). How about a counseling bailout for people who cheat on their spouses? (I bet a lot of pols would be lining up for that one)

You get my drift. The precedent being set by all this nanny-state bailout-ism is a lot more like communism than capitalism if you ask me.

[CD]

So we are in a recession, after the big fake rally on Wall Street yesterday, the big gambling casino is posting lost today.Bernanke to bat, will not pronounce the big R word but lets us know we are in it.... On top of the housing crisis, the biggest ponzi scheme in American History, we now have a recession.
So how will people buy housing with their buying power reduced, with the fear of being fired any minute...So this now the double whammy we predicted all along.The great unwinding. I think RE at this point does not matter much, paying for gas and food and saving, if one can, in the fear of worse days, will take priority to shopping for a home. Last time RE went down it was because of the recession. Now we have a recession and a ponzi scheme that will aggravate the recession to a longer period and in return will aggravate the RE even more. I feel like a mouse on a wheel......What came first the hen or the egg?

[mike]

I HAVE SAIT IT BEFORE AND I WILL SAY IT AGAIN. I AM PAYING MY MORTGAGE ON credit cards I AM A VICTIM OF PREDATORY LENDING PRACTICES. i am all for a wide sweeping assistance plan but only for HARD WORKING PEOPLE LIKE MYSELF not flippers who were making big bucks. I GOT REAMED ON THIS HOUSING DEAL. THEY TOLD ME NOW WAS THE TIME TO BUY . call it a bailout or whatever you want. I NEED AND SHOULD GET GOVERNMENT HELP!!!!!!!!!!!!!!!!!!!

[Hector]

This is the biggest theft act in US history. I have been responsibly saving to buy a house, but it seems the US government loves to reward thieves/liers/irresponsible people. I think we are on the way to become another 3rd world country pretty soon

[Lou]

We make fun of the idiocy of the lenders, borrowers, realtors, and brokers but the homebuilder industry has to be one run by complete idiots.

These guys built thousands of homes in places like Victorville and the IE and expected to get $500,000 each. Seriously who does there forcasting? Did they really think the housing bubble could go on forever? They deserve to go bankrupt. Maybe I should start a homebuilding company and build thouands of houses in Death Valley and whine to the government for a bailout when I don't make the millions I projected. What a joke!

One a side note: I wrote Congressman Brad Sherman (who represents the 27th district that include Northridge where I live) an anti-bailout letter and I got a canned letter from him in return that talks about how he supports the bailout efforts. He and his staffers evidently didn't read my letter.

Peter, can we spotlight Congressman Sherman's votes on this blog on all these bailout measures? Or maybe we can spotlight all the Congressmen's votes in SoCal on these bailout measures Maybe if we put some heat on these politicians, they'll actually listen to us.

[gary]

when will the fools in DC especially bush understand that if consumers dont consume, if homeowners dont pay bills, if people with credit cards dont pay or spend we are all going to have problems and not just the banks. I dont have a real opinion on whether helping the banks is good or bad, but if the market must prevail than let the market decide the winners and loosers and no help from my taxes.

[Patrick Duffy, HousingChronicles.com]

While there are certainly 'moral hazards' to bailouts, it's also important to compare their costs against the risk of doing nothing (which was the primary defense of the Bear Stearns bailout).

In the case of homebuilders, I think it'll be important to watch (a) how much these tax breaks and incentives will cost U.S. taxpayers; and (b) how effective they'll be at injecting some confidence into the market. Like the Bear Stearns deal, any 'bailout' should also include some new regulations regarding mortgages so we don't ever have to repeat this scenario.

People don't seem to understand that if the future supply of housing -- and I mean after 2010 -- is wiped out because builders go bankrupt then you can forget about affordability rising in many markets. Less supply = higher prices.

Finally, builders hire people to build, market and sell those homes who are your friends and neighbors. People tend to talk about them like they're another species.

[William Jones]

Republicans will work to bail-out Wall Street, homebuilders, etc., while Democrats will seek to bail out borrowers who borrowed way too much in relation to their income. The only people who won't get a dime out of this deal will be those who saw the whole bubble for what it was and carefully saved their dough.

The downside of the cheap money strategy, and I hope no one overlooks this, is that it punishes savers. My Mom is very frugal - will borrow $10 from me and insist on paying it back the same day. The yields she gets on CD's now are pathetic.

[Gordito Mojito]

So let me ge this straight. If I choose to sign up for something I can't afford.... it's my hard-working neighbor who's responsibile for bailing me out?

America. WAKE UP! You should be utterly revolted by this political pandering. Not only does this form of redistribution inhibit your ability to be successful, these politicians are using your hard-earned money to buy votes.

[Cindy]

You're darn right builders had a hand in creating the mortgage mess now affecting the entire U.S. Economy...and earlier boasting by the builders that they were "saving the economy" post-Sep. 11th indicate that they're willing to take credit when everyone thinks it's great that prices are shooting up and builders are paving over acres of land, but they are NOT willing to take responsibility for the blame when the whole house of cards falls down. Inflated appraisals, fixing loan docs so buyers "qualify," setting up in-house lenders to engage in predatory lending, down payment assistance programs that essentially launder money for builders/sellers...it goes on and on. The houses were NEVER worth those inflated prices, and prices still need to come back to earh. The builders are NOT victims and do not deserve a bailout. Some should go to jail. I was glad to read this morning that Beazer is again/still under fire for its hand in mortgage fraud. This particular mortgage fraud scheme unfolded in NC but it's going on all over and with lots of builders. The building industry is running aggressive "buy now" campaigns, while telling the govt that they can't see bottom. It's the height of hypocrisy.

[JohnnyB]

Unfortunately, Wall Street is running a big part of the show now. The unregulated global financial products game plan gone awry. Establishing the flawed, proprietary, massively over-leveraged derivative-based mechanisms which ultimately feed vast sums of money to the top 1%, by hook or by crook. This is leveraged on the backs of U.S. citizens real assets and designed to create perceived wealth through debt and to veil corporate leadership’s greed run amok.

Our so called government is on the leash. The lines are so blurred, they might as well be running the government.

Anybody vote for Wall Street investment banks to represent their interests in D.C.?
Trust them to look out for middle class interests? Maybe with more Ponzi schemes?
Do anything but attempt to mitigate the housing declines and perpetuate the debt bubble?
Believe how they’re basically framing the debate… “give us a trillion or it’ll all collapse”?

I know many fall for the last one.

Fear this, crisis in confidence that. Show us your hand gamblers. Whose got the full house and whose got nine high.

You put your “default swap” (or whatever artificial investment junk you want to call it) chip on the Vegas crap table… and you lose. Well, you lose. Period. You want to go to the back office and ask for your money back?

You placed a bet on a 50 to 1 horse named “Pie In The Sky” and he tripped over his own feet… you lose. Period.

Where’s “Guido the Enforcer” when you need him?

Extending a LIMITED helping hand to the seriously deserving citizen is one thing. Attaching elephant sized ear marks and tax breaks for mega wealthy corporations in the name of that helping hand is criminal.

[A Scanner Darkly]

The Republican branch of the American Communist Party is now seen once again protecting their economic bretheren. These monied econs have thus far been very successful in stealing property, and lives, in their never-ending quest for domination and secrecy. I don't know why we put up with these schizoid $$ cretins.

[Gene J]

"But under IRS regulations, can’t companies carryforward their operating losses from the current year to future years to reduce their tax liabilities? So this “bailout” just allows the homebuilders to use this loss to recoup the taxes they paid in previous years instead of applying their losses to future tax years. Over the course of time, wouldn’t the homebuilders pay the same amount of taxes? They’re just getting the money back they had paid in previous years but will have to pay more in future years because they can’t carryforward their losses."

No actually. With a tax loss carry forward they can recognize the losses only when they make money again. GM lost a lot of money and was never able to take the write off against profits. They wrote off a big chunk of tax benefits in the last year they were unable to take.

If the builders make no future profits they get no write off. If they go bankrupt they get no write offs. Now these guys will just get the tax money they had paid, shut down and run away with the money.

Is it likely a builder will turn a profit in the next 5 years? I don't think so.

Let them go bankrupt so we can get on with this. The land and houses they are carrying will go to the highest bidder who will do something with them.

[MKB]

quote "HAVE SAIT IT BEFORE AND I WILL SAY IT AGAIN. I AM PAYING MY MORTGAGE ON credit cards I AM A VICTIM OF PREDATORY LENDING PRACTICES. i am all for a wide sweeping assistance plan but only for HARD WORKING PEOPLE LIKE MYSELF not flippers who were making big bucks. I GOT REAMED ON THIS HOUSING DEAL. THEY TOLD ME NOW WAS THE TIME TO BUY . call it a bailout or whatever you want. I NEED AND SHOULD GET GOVERNMENT HELP!!!!!!!!!!!!!!!!!!! ' unquote Posted by: mike | April 02, 2008 at 11:02 AM
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I am making the assertion you are not a troll. If you are incapable of independent thought and didn't conduct your research before buying or realize that the house you were buying was far and above what you could afford (and we all know, it is a simple matter of mathematics) I am sorry, you reap what you sow. You just can't fix stupid.

[Cal]

While you could make all sort of arguments for stopping banks from going under and homeowners form being foreclosed on, the tax provision is a straight handout. The NAHB is lobbying hard and even pulled funding at one point.

[tew]

Peter,

I'm not a Dem but you give the Republicans way to much credit when you say they were "evidently fearing voter backlash" when they joined in the bailout efforts. I disagree. They're not much different than the Dems and just want to skew the bailout in a certain direction.

Also, the tax loss carry-back provision isn't as much of a "bailout". It is a way for homebuilders to get what would be future tax deductions now, but only to the extent they paid taxes in the past five years. This is a break, but it's not an egregious bailout.

Any tax breaks to buy new homes will probably have a provision that the new home was permitted before a certain date (in early 2008). This will provide an incentive to clear builder inventory (a handout to builders) while not incentivizing them to build more new construction.

[tew]

Lou writes "We make fun of the idiocy of the lenders, borrowers, realtors, and brokers but the homebuilder industry has to be one run by complete idiots."

Well Lou, it's looking like many of those folks were smart enough to walk off with bags of money. It looks like suckers who scrimped and saved for a downpayment are the idiots. Wouldn't you agree?

[InspiredLA]

You know, I love my country - I've been around the world and for me there's no place better. But I'm feeling like one of the few lemmings not running toward the sea. I've never seen so much stupidity - the political and financial "powers that be" are driving our nation toward the cliff. What's up with that?

In two or three years, I may look back and wish I'd cashed out and fled the U.S. about now. That's how serious I think it's going to get. If only there were someplace that won't be touched by the growing mess...

[amm]

Why doesn't the government send the money they are going to use for a bailout to all the folk who have not yet bought their first home and who showed fiscal restraint during the housing bubble? My guess is that this strategy would admit far less corruption than the one that seems to be shaping up currently, and that these dollars would be put to much better use than if they were distributed to all the profligate corporations and careless borrowers that caused this bubble in the first place. Who knows, it might even be enough to stimulate the economy out of the recession. For those poor souls who are losing their homes to forclosure as a result of non-bubble-related factors (e.g., divorce, job loss, etc.) this strategy would of course not be helpful, but then these sorts of foreclosures happen all the time and the government never bats an eye.