Wednesday Waste, Mortgages and Unpaid Taxes?

Wednesday Waste | June 27, 2012

Through the stimulus program, the Federal Housing Authority backed $20 billion in home mortgages for approximately 87,000 homeowners in the U.S., but 6,327 of those were mortgages held by delinquent taxpayers. This means the FHA insured about $1.4 billion in mortgages for 6,327 individuals who owed $77.6 million, around $12,000 apiece, in unpaid taxes, according to a new report released today.

Unfortunately, the FHA also provided some of those same borrowers with a first home tax credit worth up to $8,000 per mortgage, totaling $27 million paid out to individuals with unpaid taxes. Since this tax credit is refundable as well, any amount that was not used for that individual’s liabilities was then added to their refund and sent as a check, essentially paying the individual for buying a new home, while they owed the IRS back taxes. While the IRS would normally dock this amount from the amount owed in back taxes, one in three of the case studies conducted by the Government Accountability Office, who authored the report, had filed for bankruptcy, preventing the IRS from action. Oddly enough, there is no regulation that prevents the FHA and IRS from providing this tax credit to those who are delinquent on their taxes.

Under current White House policy though, these buyers would have been ineligible to receive mortgage assistance provided by the FHA, but FHA does not prod private lenders to ask for the necessary information regarding their current tax status, and the FHA has no system to check on that status with the IRS. Overall, FHA’s regulations and lack of coordination with the IRS resulted in $1.4 billion of taxpayer money to be used to back much riskier mortgages than normal.

In fact, those with tax problems run a much higher risk of foreclosure than those without, three times higher to be precise. While the FHA has promised to work with the Department of Housing and Urban Development and the IRS in the future to avoid this problem, $1.4 billion of risky mortgages are now backed by taxpayer dollars, and $27 million in tax credits were provided to those who, well, don’t pay their taxes.

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