The first-time homebuyers’ tax credit was probably a bad idea to begin with, but it has been made worse by its expansion and poor oversight.

The credit started out as part of the recession-busting $787 billion stimulus package adopted by Congress. The provision allowed first-time homebuyers a tax credit of up to $8,000. The credit, according to reports, did indeed stimulate the housing market, generally on the lower end where first-time homebuyers tend to buy. It also likely propelled into the market buyers who wanted to take advantage of the credit, but who cannot really afford the monthly mortgage payment of their new digs.

Congress, with the support of the White House, then extended the credit, raising the income limit for eligibility from $75,000 for a single purchaser to $125,000 and from $125,000 to $225,000 for a couple.  The new legislation also provides a $6,500 credit for folks who have been in their current home for at least five years and who want to move.

Well. What a bad idea. Most likely, papering the country with $6,500 to $8,000 subsidies just increases housing prices by that amount. The subsidy very well may motivate people who were planning to move anyway to do so, and again will encourage people who can’t really afford to buy to act against their long-term best interests. On the bright side, real estate agents will be getting larger commissions because sales prices will be a bit higher.

And when the subsidies go away, sales will, to a significant extent, go away. Will Congress continue to subsidize this specific industry even beyond the traditional home mortgage interest deduction that already has really bad sprawl effects?

Unfortunately, too, the tax credit of the stimulus bill is more or less a warm welcome to fraud. According to OMB Watch:

The problem is that the IRS did not require additional documentation for the new credits and deductions. For instance, the Recovery Act provides funding for the First-Time Homebuyer Credit, which provides a fully refundable $8,000 tax credit for first-time homebuyers, but the IRS does not require additional documentation for this credit, such as a HUD Settlement Statement, nor does it check the return against any third-party source, such as a housing database. Tax filers can claim the housing credit without providing any proof that they actually have purchased a house or even that a purchased house is a first-time purchase for the taxpayer.

So the tax credit may be a bad idea, but at least the IRS isn’t insisting that people claiming it abide by pesky legalities.