Mortgage rates decline a bit
By Chris Kissell • Bankrate.com

Mortgage rates slipped back this week.

The benchmark 30-year fixed-rate mortgage dropped 16 basis points, to 5.96 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.31 discount and origination points. One year ago, the mortgage index was 6.31 percent; four weeks ago, it was 6.39 percent.

The benchmark 15-year fixed-rate mortgage fell 14 basis points, to 5.56 percent. The benchmark 5/1 adjustable-rate mortgage slipped 9 basis points to 5.95 percent. The 5/1 ARM has now fallen 49 basis points in three weeks.

Weekly national mortgage survey

Results of Bankrate.com's April 9, 2008, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

In recent months, mortgage rates have seesawed. However, one thing has remained consistent during that time: New-home sales have gone nowhere. Even when sharply plunging mortgage rates spurred a wave of refinancing in January, potential buyers continued to keep their options open and wallets closed.

Tax credits to the rescue?
Now, congressional policymakers appear to have stumbled upon a new solution du jour to the housing crisis: tax credits.

Both the U.S. House and Senate have made tax credits a centerpiece of legislative attempts to right the listing ship that is the housing market. Ideas currently being floated include:

Ideas for housing crisis legislation

• A House proposal would entice first-time buyers into the market by offering them a 10 percent temporary tax credit -- up to $7,500 -- on the purchase of a new home. The credit would be available on purchases made in the next year and would have to be repaid in equal installments over 15 years. The House legislation also would expand tax credits for investors purchasing low-income housing. • A Senate proposal would give a $7,000 tax credit to people who buy homes that have either been foreclosed on or that are in the process of foreclosure.

These new tax credits are intended to reduce the number of foreclosures from the market, stabilize home prices and boost overall sales. But critics say such congressional efforts may be misguided.

David Abromowitz, a senior fellow at the Center for American Progress, says the proposed tax credits are unlikely to turn housing around because they don't specifically target neighborhoods that need the help most.

"The tax-credit proposal is pretty diffused," says Abromowitz, who closely studies housing policy. "It doesn't limit the (tax) credit to buying homes in neighborhoods where there's a cluster of foreclosures."

While the proposed tax credits may help spur some home sales, the criteria for earning these credits are not precise enough to encourage shoppers to look in neighborhoods "that had been stable, middle-class communities but are in danger of dropping back into troubled communities," he says.

Instead, Abromowitz champions policies that reward the purchase of homes in neighborhoods that meet very specific criteria: high rates of foreclosures, large number of defaults and significant loss of property value.

"If you follow those measures, you're going to be pretty on-target where the greatest need is," he says.

He praises pending "block grant" legislation in the Senate and the House as more likely to positively impact housing.

Last month, Rep. Barney Frank, D-Mass., chair of the House Financial Services Committee, introduced a housing rescue package that includes $10 billion in loans and grants for communities to purchase and rehabilitate foreclosed homes. A similar Senate proposal allocates $4 billion in grants for local governments to buy foreclosed properties.

"Targeting block grant funds to responsible local groups to buy up vacant foreclosed houses and get them back as homeownership for low and moderate income buyers is the fastest, most direct route to turn the tide on a problem that's devastating many communities," Abromowitz says.

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Unintended consequences
Eric Toder, a senior fellow at the Urban Institute and co-director of the Tax Policy Center, also questions the wisdom of the proposed tax credits. "I don't feel that using tax credits to artificially move prices around in short times is terribly good policy," he says.

Housing already enjoys significant tax advantages compared with other investments, Toder says. Such tax breaks have created "a huge incentive" for Americans to buy bigger and more expensive houses, which has contributed to a speculative bubble that is partially responsible for today's real estate mess, he says.

Proposed tax credits may boost housing prices temporarily, but they simply delay the inevitable solution to the housing crisis, Toder says.

"I think in the long run what really needs to happen is that prices need to come down to some long-term sustainable level," Toder says. "That's a painful adjustment."

Tax credits can also have unintended consequences, Toder says. For example, the Senate's proposal to create a tax credit for people who purchase homes in foreclosure may end up hurting home sellers whose homes are not in foreclosure.

"If you give a tax credit to the foreclosed properties, the nonforeclosed properties become even worse off in competition to that," he says.

Instead of tax credits, Toder would like to see Congress patch up holes in the current regulatory structure, "so that investors have more confidence that they really know what they're getting into and people are not being encouraged to take out loans that in the long run they can't service."

He also prefers to see policymakers concentrate on solutions that help people at risk of foreclosure to stay in their homes.

"A tax credit for houses that are foreclosed doesn't do a whole lot for people who are trying to hold on to their houses," he says.

Apparently, the White House agrees. President Bush already has threatened to veto the Senate legislation, with administration press secretary Dana Perino saying the bill "will likely do more harm than good."