The First Time Home Buyer tax credit has spurred recent home sales. Several options are being considered to extend the credit, in some form.

While the credit has at present increased sales, there are questions about whether the credit has stimulated new sales or just encouraged already decided buyers to purchase sooner rather than later. In other words, no real boost to the overall housing sales that would have occurred anyway over the next several months.

If this is the case, then the sales in the coming months may be adversely impacted by the present tax credit incentive.

Other objections are the cost to the treasury, and the apparent fact that the buyers and the areas benefiting from the tax incentive may not be those most needing the help.

The good news for the economy is that in a few months there will be billions of dollars in tax credits being spent by the lucky recipients. Of course it is billions of dollars that will be provided by us good old tax payers.

In a recent post, I tried to review the considerations for extending the credit - its effectiveness, its cost, its target. One comment suggested that I had mentioned the problems, but had not offered an alternative solution. I felt that was a fair criticism of the post.

How else might the government stabilize the housing market, if the tax credit idea is not effective and is too costly?

An alternative to the First Time Home Buyer tax credit.

Here is my alternative solution, using the same $11 billion that is the reported cost of the credit to date. (Of course, with still another several weeks before the deadline, I suspect the final cost will be close to double.)

Use the $11 billion, in increments of up to $8,000, to encourage new home buyers - those who want to purchase but have found that in the new lending realities, they are no longer qualified to purchase.

A year they could have purchased with lower scores or with a lower down payment. Today they are locked out.

One of the problems with the housing market is that prices have dropped because of surplus homes and the impact of foreclosure sales.

Another reason for depressed prices is that the pool of qualified buyers has dropped significantly. Credit score requirements have increased. Unemployment has increased. Down payment requirements have increased.

Fewer buyers. More inventory. Lower prices.Less sales.

If we use the tax credit money to offer a guarantee, matching dollar for dollar, to private and government mortgage insurance then it might enable the qualifying requirements to be lowered. Providing more qualified buyers.

More buyers. Less inventory. Higher prices. More sales.

For those who would participate in the subsidized MI program, they could receive a higher rate that could offset some of the cost and risk. But these new borrowers would be able to qualify with less down or with lower credit scores.

These borrowers would still meet underwriting guidelines, just relaxed guidelines.

If we used the $11 billion so far spent in the credit, largely by people who would have bought anyway (no net increase in home sales over time), then there might have been over 1,300,000 home sales that were actually new buyers.

(A real net increase in home sales over time.)

Most home buyers who would qualify unter tighter guidelines would not take the higher rate or higher MI required for the subsidized MI program. Those buyers would still purchase, without the incentive.

We would have the funding for over 1,000,000 new purchasers who would not have qualified without the subsidized MI.

The MI companies could charge the full premium and cover only half the risk. This would help restore the MI industry. (Damage to the MI industry has not received much discussion, but it is a critical issue.)

It might be possible to subsidize MI even for qualified buyers who purchase in targeted, depressed areas. This would give a reduced MI premium, and be market driven solution.

If we consider that the MI subsidy would not really be all be spent, but only for those homes lost to foreclosure, most of the buyers receiving subsidized MI would keep their homes, then the $11 billion could be used to subsidize even more purchases.

Using a 30% default rate, the $11 billion might be stretched to cover 4.5 million new home sales.

Now that would stabilize the housing market.