Discussion on the Pros and Cons of the New Housing Rescue and Foreclosure Prevention Act
Posted in Real Estate Bloggers By Stefan Swanepoel, Monday, August 4, 2008.The American Housing Rescue and Foreclosure Prevention Act of 2008 (the Housing Act) was signed into law last week as the most sweeping housing legislation since the Great Depression. The new Act authorizes the Department of the Treasury to stem the tide of home foreclosures and provide a lifeline to mortgage lenders.
It’s significant as the last legislation addressing a large group of homeowners was the National Housing Act of 1934 that created the Federal Housing Administration and authorized the creation of Fannie Mae.
With inventory in many large cities sitting at almost a one year level, and foreclosures expected to surpass 6 million by 2012, will this legislation put the brakes on the downward real estate slide of the last three years or not? Is it the long-awaited silver bullet or not? Love to have your thoughts and comments.
I am no legal expert but here is my quick take on the key items in the new Act:
1. $300 billion in FHA loans for Homeowners to Refinance
CLIFF NOTES: The Act could avoid foreclosure through refinancing into lower-cost mortgages insured by the Federal Housing Administration (FHA).
THE GOOD NEWS: It will help an anticipated 400,000 people whose loan servicers are willing to accept a write-down on principal.
REALITY: To qualify, borrowers must have a relatively high level of debt to income, use their homes as primary residences and agree to share any profits from any eventual resale with the government.
2. $4 billion to Buy and Rehab Foreclosed Homes
CLIFF NOTES: The Act offers $4 billion for local communities to buy homes at a discount, rehabilitate them, sell them and use profits for neighborhood development.
THE GOOD NEWS: This could help many low- and moderate-income families in holding on to the American Dream.
REALITY: Should reduce crime, especially in the inner city and low income areas.
3. New Home Buyer Tax Credit of up to $7,500 for Qualified Buyers
CLIFF NOTES: It’s not really a credit but really a loan.
THE GOOD NEWS: It’s refundable credit and it’s a zero-percent loan. An estimated 3 million buyers could be eligible for the tax credit.
REALITY: You got to pay it back.
4. New Deductions for Real Property Taxes
CLIFF NOTES: New deductions, in addition to the existing standard deductions.
THE GOOD NEWS: It’s effective immediately.
REALITY: These are “above the line” deductions.
5. Change in Vacation-home Status
CLIFF NOTES: The personal resident exclusion is still good on your personal home but not on your vacation home or rental property converted to a home.
THE GOOD NEWS: It’s effective until Jan. 1, 2009 so you still have time.
REALITY: The decade-long free ride is over.
Now it's your turn. What do you think?
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Submitted by Steven Stearns on August 4, 2008 - 8:17am.
This legislation is as important as the creation of the WPA in the Depression era.
Many have expressed the opinion that the mortgage industry seems to be loosely goverened and inconsistently regulated.
True enough at this point to have other legislation pending for federal minimum standards for brokers and industry practices.
...and it all came about because of greed-or call it leveraging the market opportunities. It's the same thing.
There is no promise: we are all waking up from the dream of home ownership.
Steven Stearns
www.obeo.com
http://obeoman.blogspot.com
262-325-8687
Submitted by Bruce Hahn on August 4, 2008 - 8:20am.
American Homeowners Grassroots Alliance (from the August issue of "Home Base"):
The key question about this legislation is “how much will it help?”.
Opinions on that question vary widely. Supporters of the package have acknowledged that the housing rescue bill is not going to be a panacea – only a small portion of homeowners currently at risk of foreclosure can be helped, given both constraints in the measure and economic realities. Proponents estimate that the package might rescue as many as 400,000 homeowners who face the risk of foreclosure, out of a total population that some economists have estimated to be as high as 5 million. To put it in even more stark contrast, the foreclosure-tracking firm RealtyTrac estimated last week that 740,000 homes received foreclosure or pre-foreclosure notifications in the second quarter of 2008 alone, more than double the amount than in the second quarter of 2007. And on July 29 the S&P/Case-Shiller index, which tracks home prices in twenty U.S. markets, reported its steepest drop in a history – a 17% decline from May, 2007 to this May, and a 23% drop since the July 2006 peak.
Critics argue, among other things, that the number of beneficiaries is more likely to be tiny rather than small. AHGA’s view is that the direct results are likely to be somewhere between the two estimates. The indirect consequence of the legislation’s passage could be far more important, and may include helping to restore public confidence in our financial system.
One of the main features of the package is the funding of up to $300 billion in FHA-insured mortgages to help borrowers who are at risk of foreclosure refinance into affordable loans. To cover potential government losses on the refinanced mortgages rescued borrowers would in return have to agree to share future home price appreciation with the federal government upon the sale of the home. A downside is that the bill also effectively eliminates the use of increasingly popular down payment assistance programs provided by nonprofits such as Nehemiah Corporation and Ameridream in FHA financing. These programs effectively allow low income buyers to purchase a home with nothing down, even in today’s markets. They have been criticized as more risky than other mortgage loans by the Bush Administration, although the organizations have questioned the reliability of the data.
The FHA program’s success also depends on how many lenders and mortgage loan servicers are willing to voluntarily write down the value of a distressed loan to an amount that would enable the homeowner to qualify for the new FHA-backed loan. That is hard to estimate. The weakening portfolio of many lenders is increasing the pressure on them to get non-performing mortgages off their books. Costs for many lenders are also rising because a growing number of local governments are starting to impose maintenance charges on owners of vacant homes, which the governments use to keep the properties presentable. If the outlook for housing values continues to deteriorate (and there aren’t many good signs out there), it will be smarter for a lender to take a smaller write-down today than to hold on to a nonperforming mortgage only to take a bigger loss later.
The amount of the lender write-downs would be significant in any case, and many of those lenders’ stockholders would not be happy. In many cases it might be in the lenders’ best interest to instead agree to some form of loan modification with the homeowner that ends up lowering the monthly payments to an affordable level, while trying to eventually recover as much of the debt balance as possible through loan restructuring options such as 40 year mortgages, balloon payments, etc.. Such restructurings are also a positive outcome in that they would enable the homeowner to keep their home, and it avoids adding to the inventory of home foreclosures. Whether mortgage lenders will respond in significant numbers is another story. Lender participation in the Administration’s touted (and also voluntary) “Hope Now” program has been spotty by many accounts.
Another critical feature in the package is a provision which will guarantee the debt of Fannie Mae and Freddie Mac added at the last minute at the request of the Administration. The provision makes explicit what has long been implied in the minds of investors – that the government will step in if necessary to protect the viability of these critical huge quasi-public mortgage financing institutions. Almost 68% of all new mortgages in 2008 were bought by Fannie Mae and Freddie Mac. As the Bush Administration began stepping in to bail out private firms, beginning with Bear Stearns, it has become increasingly apparent that adhering to a free market philosophy in the current economic environment risked a total meltdown of the entire U.S. financial system. The Administration has been forced to do the same thing reluctantly for these two government sponsored enterprises (GSEs). The legislation also expands government oversight over the GSEs, a long sought goal of both the Administration and large private mortgage lenders who for years have been seeking to reduce the GSE’s market share.
The legislation also permanently increases the size of loans eligible for purchase by Fannie Mae and Freddie Mac (to a maximum of $625,000), which should lower the interest rates on many “jumbo” loans that would otherwise be above Fannie and Freddie’s maximum allowed limits in 2009 and beyond. It imposes new fees on Fannie and Freddie to be used to fund affordable housing and cover the cost of the aforementioned FHA loan guarantee program.
A third important component of the housing rescue package is a tax incentive for future home buyers and a tax benefit for existing homeowners. Consumers with incomes below a threshold level who bought or will buy a home between April, 2008 and June 30, 2009 will receive a tax credit for 10% of the home’s selling price, up to $7,500. The credit must be repaid in future years, but its immediate impact will be to effectively enable many consumers to buy a home with no net cash outlay. This could bring many new buyers into the market and may help to substantially reduce the inventory of unsold homes. Another significant benefit is that first time home buyers usually trigger multiple upstream sales, as the sellers of that home are then able to buy their own replacement home, and so on up the food chain. Another provision will allow current homeowners who presently do not have enough deductions to make it worth itemizing on their federal tax returns to deduct up to $1,000 of their real estate property taxes anyway.
Other parts of the bill include $4 billion in funding for state and local governments to use to purchase and rehab foreclosed homes. These homes would then be offered to lower income families. Funding for counseling at-risk homeowners is also expanded. The legislation calls for background checks, testing, registration in a national database, and annual continuing education requirements for all individual bankers and brokers.
The American Homeowners Grassroots Alliance believes that this legislation is may be the critical plug that prevents an enormous upheaval in financial markets around the world. “We have yet to realize all the repercussions of the housing crisis,” said AHGA President Bruce Hahn. “It will have been worth the effort to avoid a major meltdown of financial markets, even though we still have a ways to go before home prices bottom out. By helping out some homeowners who are on the margin of being able to maintain ownership of their home, bolstering public confidence in the financial stability of Fannie and Freddie, and offering incentives for first time home buyers to enter the market, we have hopefully set the stage for a much softer landing. If the market continues to deteriorate at a rapid pace we’ll know this legislation wasn’t enough. If the market stabilizes we’ll only be able to speculate on how much this bill helped.
Submitted by Jeff Manson on August 4, 2008 - 11:17am.
Yeah it’s great that the Government is stepping in to help people, but does anybody think that people should be held accountable for there actions? Many of these buyers lied on their loan applications about their income knowing that they were stretching their limits as to what they could afford.
The lenders are to blame as well. I have heard that some lenders reps were telling the buyers that it was ok to put false information down to get the loan approved.
I know things are tough out there for consumers, lenders and real estate agents, but sometimes it is good for things to cycle without intervention from the government. The real estate market will not be able to get affordable for more consumers if the Government bails everyone out and doesn’t let it drop to where the market should be.
Jeff Manson
American Dream Realty
Maui real estate | Hawaii real estate company
Submitted by Mark Owens on August 4, 2008 - 11:59am.
It is amazing that the government would encourage "flipping" to solve a problem that many feel was caused in part by rampant "flipping" schemes.
The foreclosure "flipping" plan will not work. When local communities buy homes at a discount, rehabilitate them,over improve them, and then try to sell them,(usually by owner) there is rarely, if ever, a profit... let alone enough profit for neighborhood re-development.
Submitted by John Blogger on August 4, 2008 - 1:31pm.
Saw some interesting stats about how much the bill is going to cost over the next 10 years:
First-time home buyer credit = $4.8 billion
Property tax deduction for non-itemizers = $1.5 billion
Low-income housing tax credit = $1.0 billion
Housing and mortgage bonds = $1.8 billion
Reform to real estate investments trusts = $0.5 billion
Other aspects of the bill = $5.7 billion
Estimated total cost of the bill $15.3 billion
Submitted by Vicky Chrisner on August 8, 2008 - 4:52am.
My thoughts on these 5
1-Banks who were willing to work with borrowers were already doing short refi's. I don't see a benefit, but I hope your numbers are right.
2-I am against flipping, especially in a bad market. Locally, my county plans to use the funds to put the homes toward buying homes they will maintain in the ADU program - a program that I think needs to be overhauled completely. It rewards the fraudulent and restricts profits for the owners of these homes.
3 - Exactly, call it what it is. When you call it a credit, I get excited and think - wow, a tax credit! But now it just irritates me. Had they called it a loan in the beginning, I would have thought - huh, some people might use it.
4 - Didn't know anything about this.
5 - Didn't know about this either.
=================
And yet, so many other parts of the bill were not mentioned in your post. The bottom line is this - they HAD to come up with a way to bail out Freddie and Fannie. All the rest is intended to be smoke and mirrors so no one complains about the bail out because everyone is so busy trying to figure out what the rest of the bill says.
I love honesty, I had smoke and mirrors. I hate politics.
Submitted by Christi Borden, CIPS, ABR, GRI on August 8, 2008 - 6:03am.
Like it or not, the bill has been passed. So the best we can do, as professionals, is to understand how this might impact our clients.
Your Katy, TX Realtor,
Christi Borden, CIPS, GRI, ABR
Prudential Gary Greene, Realtors
Email: Christi@ChristiBorden.com
Web: www.ChristiBorden.com
Cell: 832-372-7470
Submitted by Gene Urban -- The Urban Team on August 8, 2008 - 8:30am.
I fear that government intervention will be another band aid fix with long term downside implications.
Many supposed beneficiaries of the 300 billion in FHA loans will be unable to qualify for these products. Many used no-doc loans to qualify the first time and, in truth, did not have the means to satisfy their debt obligations. In the current economy it is unlikely things have changed.
A core issue with the plan is the inefficiency of government at either the Federal or local level. For every dollar spent, only a small percentage will reach the problem as most of the money will be lost in administrative costs.
I believe allowing the free market economy to resolve this problem would have been the best and fastest solution. In parts of the Greater Phoenix market we are already seeing stability. This legislation is likely to provide more confusion than solution.
However, such a solution does not provide politicians with sound bites and votes. Heaven forbid "we the people" resolve social problems on our own without the help of our wise leaders.
Gene Urban
The Urban Team at Realty Executives
602-234-5777
www.UrbanTeamAZ.com
www.UrbanLifeBlog.com
Submitted by Stefan Swanepoel on August 8, 2008 - 8:50am.
Here is my summary as the week draws to a close on yet another good thread.
Steven started the discussion by reminding us that this legislation is as important as the creation of the WPA in the Depression era and even though most real estate professionals seem to feel is not enough, Christi also reminds that like it or not, the bill has been passed. So the best we can do, as professionals, is to understand how this might impact our clients.
Good comments guys and gals…now lets focus with the world on enjoying the Olympics.
Submitted by Lori Reece on August 11, 2008 - 9:01pm.
Good analysis, I have a question or 2. Can anyone shed light on #5 regarding the change in vacation home status? That's a new one to me, and I've read quite a bit on this bill. I'm also a little confused about #3, the $7500 tax credit/interest free loan/whatever you want to call it. Is it 10% up to a maximum of $7500? Not that I've seen anything out there in the $75,000 and under range, even in these days of plummeting prices.
Great blog, glad I found it.
Submitted by Kaye Thomas on August 12, 2008 - 8:02am.
As I understand the new rule.. the vacation home/income property change affects purchases after 2009... prior purchases are grandfathered. Begining in 2009 if you buy a vacation home and move into it for a short time you can only write off a portion of the capital gain.. i.e if you own a vacation home/ income prioperty say for 8 years and decide to rent out your primary home and move into the property for 4 years then sell to get exemption they divide the number of years you have owned the property by the number of years you occupied it as a primary residence and the percentage is what you use to calculate gain.. In the above example if you had a gain of $200,000 then you could exclued 50%( 8 divided by 4) of the gain( $100,000) and the balance($100K) would be taxable at long term capital gain rates.
Submitted by Vicki Lloyd on August 13, 2008 - 8:30am.
In Kaye's example, my interpretation was that the seller would still have 50% of the capital gains exemption available - so that either $125,000 if single, or $250,000 if jointly owned would be used to reduce the gain.
(I think I need to read this bill and talk to some tax experts after the IRS publishes their interpretation!)
Submitted by Maryellen Garasky on August 17, 2008 - 1:17pm.
When this bill passed, our offices were FLOODED with questions from potential clients seeking advice. As with almost everything else passed by the Federal Government, its interpretation, and how it will affect people in the real world, are yet to be seen.
We have not been able to find CONSISTANT information from one source to another. What one person says will work, is what another person says will back-fire.
Regardless, however, what this Act hopes to do in the long run will only pale into comparison to what RESPONSIBLE buying/lending would have done in the first place!
Our market has been labled a "Declining Market" and has made lending to good borrowers nearly impossible. And, it's all thanks to (what once was) irresponsible underwriting, selfish Loan Officers (before you get all worked up, know that I AM a Loan Officer), and plain-and-simple, pure consumer and Real Estate Agent greed.
I cannot tell you, when our "boom" was happening, how many loans I actually TURNED DOWN because they wanted to flip the property or get a "payoption" loan - AKA (in my book): "make the equity in your house disappear and become no better than the equity in your automobile" loan.
I am like the rest of you who have posted here, I truely hope this helps. I really do. But, I'm being cautiously optimistic.
Maryellen Garasky
Co-Owner - President - Managing Broker
KMG Mortgage Group
www.kmgmortgagegroup.com
Submitted by Anum Hafeez on August 24, 2008 - 7:05am.
I am a huge fan of http://pakistanhousing.pk/. It's by far the most complete and cutting edge Real Estate and Housing Related website offering for consumers on the 'net today. I hope to see more websites like this.
Submitted by Justin Britt on October 1, 2008 - 4:47pm.
1. If people borrowed more then they could afford, that's their fault.
2. If banks made bad loans, that's their fault.
What's happening with the economy is a natural correction that is taking place because Americans are constantly spending more money then they make. If we put a rescue plan in place, we as Americans learn nothing, and we'll put a band aide on the economy for now, but will fix nothing.
Let some people lose their homes, let some banks go out of business. Let us go into a recession and let us learn from our mistakes.
--
Justin Britt
Head-Web-Head
Hawaii Life Real Estate Services, LLC
Honolulu real estate | Real Estate Website Promotion
Submitted by Jeff Manson on October 1, 2008 - 5:03pm.
This so called Rescue Plan is jus another step towards socialism and away from capitalism. People better be careful for what they wish for.
Jeff Manson
American Dream Realty
Hawaii real estate
Oahu real estate company
Submitted by Jon Strum on October 1, 2008 - 5:10pm.
What's happening in the economy is not "a natural correction." That's an absurd comment to make. It is a credit feeze the likes of which haven't been seen in most of our lifetimes. And the current credit freeze threatens so much more than just those people who borrowed more than they could afford and those institutions that enabled them.
The reality of today's credit freeze means that even those folks who have paid all of their bills, avoided over-burdened mortgages, etc. will find that their credit card limits (and, therefore, their buying power) are arbitrarily reduced -- even to zero. It means that student loans will not be available to college students next semester. It means that car loans will be as difficult to get as home loans have become -- even to those people with ideal credit because it's the banks themselves that can't borrow money! Small businesses that rely on lines of credit to manage the ebb and flow of normal cash flow will find that they can no longer make their payroll.
And when that happens, imagine what happens next as far as massive layoffs and the affect they will have on local economies across the nation. Don't wish for a recession before you fully appreciate how it will affect you, your friends, family, neighbors and community. Amidst a serious recession, guess what happens to those plans for taking a Hawaiian vacation? And we've already seen (following 9/11) how killing tourism has an immediate and profound affect on the Hawaiian economy. Have you factored any of this into your cavalier proclamation here?
You recommend that we should "let some people lose their homes, let some banks go out of business," -- we already have, an many more are likely to follow. But you just can't turn this into a simple problem to fit a simple world view. The solution is one that no one particularly likes. But to talk about it as if doing nothing will solve anything is simply applying more of the misguided free market de-regulation philosophy that brought our country to this dubious moment in the first place.
Jon Strum
President
homsho
Web: www.homsho.com
Blog: www.LARealEstateBlog.com