GOP in foreclosure bind

A Senate GOP proposal to address the national housing crisis has attracted fierce criticism from conservatives, placing Republicans in a bind as lawmakers return from recess and grapple with spreading foreclosures and falling home prices.

As lawmakers return from the break, Democrats have initiated a broad push to address the mortgage crisis, pressuring Republicans to support a legislative fix. Senate Majority Leader Harry Reid (D-Nev.) has unveiled the Foreclosure Prevention Act of 2008, which offers a variety of policies to protect endangered homeowners.

{mosads}For their part, Senate Republicans have coalesced around a counter-proposal of their own sponsored by Sens. Kit Bond (R-Mo.), Lamar Alexander (R-Tenn.) and Johnny Isakson (R-Ga.). Among other things, it would offer a $15,000 tax credit for the purchase of homes in or near foreclosure.

Conservative policy experts have slammed the Republican proposal, however, leaning on GOP lawmakers to back away from striking a deal with Senate Democrats this week.

At the same time, Republican senators have spent the recess hearing complaints from constituents about foreclosures and falling home prices, and they feel pressure to act by passing legislation.

In addition, some Republicans think they must move on the issue in the wake of Housing and Urban Development Secretary Alphonso Jackson’s embarrassing resignation. Jackson stepped down Monday amid accusations that he tried to steer federal contracts to political allies.

Sen. Hillary Rodham Clinton (D-N.Y.) pounced on the resignation to criticize the Bush administration for failing to aid the struggling housing market.

The roiling forces have put Senate Republicans into an uncomfortable position as they ponder whether to let Democrats proceed to debate on the crisis, which has become a highly charged issue.

For now, Reid and Senate Minority Leader Mitch McConnell (R-Ky.) are negotiating the ground rules for debating the legislation.

The two leaders failed to reach agreement on how to organize a housing debate earlier this year, but the political dynamics have since changed. The presidential contenders — Clinton, Sen. Barack Obama (D-Ill.) and Sen. John McCain (R-Ariz.) — all spoke out on housing over the recess, reflecting mounting public concern over the issue.

But as the Senate Republican plan emerged, it quickly sparked opposition from the right.

An analysis published Monday by the conservative Heritage Foundation blasted the heart of the GOP alternative plan, calling the GOP tax credit idea “bad tax policy” and “bad housing policy.”

“The subsidy rewards those who have been the most irresponsible,” stated the Heritage critique. “It would benefit homeowners at any income level who either irresponsibly borrowed all of their home equity or who took out a loan they could not repay but hoped to profit from by reselling the property in a rising market.”

David C. John, the author of the analysis, also dismissed another piece of the GOP package, a proposal to reform the Federal Housing Administration (FHA).

John said reducing the minimum down payment from 3 percent to 1.5 percent was “stupid” because low down payments are linked to higher rates of default.

Isakson rebutted the Heritage critique point by point in an interview with The Hill.

He argued that people who took out irresponsible loans would still face the financial penalty of losing their homes. He said the tax credit, which he crafted, would not bail out borrowers but merely give incentives for buyers to purchase homes that would otherwise soon stand empty. This would keep home values from sinking and help all homeowners, he said.

Isakson will have to convince Senate Republicans turning against the proposal, which several conservative Republican Senate aides have blasted.

One aide called the plan to give tax credits for the purchase of homes in foreclosure “garbage.”

Another aide said: “It’s awful policy. It’s in no way conservative and it punishes those who play by the rules and keep up with their payments.”

Ryan Ellis, tax policy director of Americans for Tax Reform, a conservative anti-tax group, said: “There are definitely more pro-growth tax cut measures that can be done.

“Indexing the basis of capital gains to inflation, cutting the corporate income tax rate, or replacing depreciation with expensing would all do a lot more good than a new housing tax credit,” said Ellis.

The fact that the GOP tax credit proposal has attracted so much criticism has surprised the 20-plus Senate Republicans backing it. Republican Conference Chairman Alexander and Republican Steering Committee Chairman Jim DeMint (S.C.) are among those supporting the plan.

Other co-sponsors include fiscal conservatives such as Sens. Tom Coburn (R-Okla.) and Judd Gregg (R-N.H.). Sen. Mary Landrieu (La.) is the only Democrat backing it.

One GOP aide pledged that an effort would arise within GOP ranks to strip support from the tax credit plan.

The Republican alternative would also provide $10 billion in bond authority to refinance sub-prime mortgages and $180 million for counseling services to help families avoid foreclosure.

Isakson said the government successfully offered tax credits for homebuyers during a similar crisis in the mid-1970s.

“This is not a new idea,” said Isakson.

Isakson also disputed Heritage’s argument that his tax credit would prove ineffective because it spreads out over three years and thus would not be available at the time of purchase.

He said the purpose of pacing the credit is to reward buyers who will live in newly purchased homes for several years instead of speculators who plan to sell immediately to make a quick profit, a practice that led to the current crisis.

Meanwhile, House Democrats are also planning to move ahead aggressively on housing. House Financial Services panel Chairman Barney Frank (D-Mass.) is expected to hold a hearing on legislative proposals next week. Frank has unveiled several ideas, such as allowing large groups of homeowners to refinance their mortgages at once.

Senate and House leaders also hope to reach final agreement on a separate FHA overhaul bill by the end of the month.