Well, the big Housing Act of 2008 has been signed. Based on what I’ve read and studied, this political move will do little in the long run. It may simply postpone true recovery in the national housing market by impeding the movement of the real estate to where it eventually wants to go. It might bail out some home owners, at our expense, but people who get themselves into financial trouble like that will probably do so again.
The borrower bailout is intended to help stem foreclosures. HUD Secretary Preston isn’t sold though. When asked in a Bloomberg TV interview if he was confident that money for the loan bailout program would be spent effectively with no loss to the taxpayer.
“No, I’m not,” Preston said. “Roughly a third of the people who get this assistance will end up in foreclosure,” he said, citing Congress’ own estimates, “and many more, we believe, will be chronic delinquencies.”
Another way the act is suppose to help America and the economy is to generate more buyer demand by offering a $7,500 tax credit to “first time” home buyers”. I put “first time” in quotes because the word “first” means something different to our government than it does you or me.
Using the govenment’s definition of “first time”, your marraige would be a “first” if you’ve been single/divorced for at least three years. If you haven’t bought a new car in at least three years, your next one would be your “first” car purchase. If you give birth to a new baby this year, that baby would become your “first” if all your other children are older than three years.
Thus, you are a “first time buyer”, as defined by this new Housing Act, if you haven’t purchased or owned a home in the past three years. What will the tax credit do for you?
As a “first time buyer”, you will receive up to a a $7,500 tax “credit” if you purchase(d) a home between April 8, 2008 and June 30, 2009. I put the word “credit” in quotes because it’s not really a credit. Since you have to pay it back over 15 years, the tax “credit” is really an interest free loan. If you take the full $7,500 tax credit, your income tax bill will increase by $500 a year for 15 years. If you sell the house before then, you’ll have to pay the remaining balance after you sell.
It’s also not clear to me whether a buyer who has tax liabilities of less than $7,500 would receive the balance as a refund. I have not yet found anything written about this. The only current federal income tax credit that can result in a refund is the Child Tax Credit for lower income people.
I called my accountant and asked if he knew how this would be handled, and he said he doesn’t yet know, but he doubts that the credit would generate a refund for those with a liability less than $75,00. He says also that until he sees exactly how the IRS interprets the law and where the credit appears in tax forms, it’s hard to be 100% certain of how it will be used.
Nevertheless, if I were a “first time” buyer, I would certainly look into this tax credit (interest free loan) to see if it’s something that makes sense. If someone wants to loan my money interest free, I would certainly consider it. On the other hand, taxes are complicated emough already, aren’t they.
There is of course a lot more to the Housing and Economic Recovery Act of 2008 than what I’ve outlined above. A summary as issued by the National Association of Realtors is included below. You can also visit the links I’ve gathered below (at bottom) for more info and opinion.
National Association of REALTORS® Summary of Key Provisions of H.R. 3221 – The Housing Stimulus Bill (as of 7/30/08)
H.R. 3221, the “Housing and Economic Recovery Act of 2008,” passed the House on July 23, 2008, by a vote of 272-152. On Saturday, July 26, 2008, the Senate passed the bill by a vote of 72-13. The President signed the bill on July 30, 2008. The bill includes the following provisions:
GSE Reform – including a strong independent regulator, and permanent conforming loan limits up to the greater of $417,000 or 115% local area median home price, capped at $625,500. The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).
FHA Reform – including permanent FHA loan limits at the greater of $271,050 or 115% of local area median home price, capped at $625,500; streamlined processing for FHA condos; reforms to the HECM program, and reforms to the FHA manufactured housing program. The downpayment requirement on FHA loans will go up to 3.5% (from 3%). The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).
Homebuyer Tax Credit – a $7500 tax credit that would be would be available for any qualified purchase between April 8, 2008 and June 30, 2009. The credit is repayable over 15 years (making it, in effect, an interest free loan).
FHA foreclosure rescue – development of a refinance program for homebuyers with problematic subprime loans. Lenders would write down qualified mortgages to 85% of the current appraised value and qualified borrowers would get a new FHA 30-year fixed mortgage at 90% of appraised value. Borrowers would have to share 50% of all future appreciation with FHA. The loan limit for this program is $550,440 nationwide. Program is effective on October 1, 2008.
Seller-funded downpayment assistance programs – codifies existing FHA proposal to prohibit the use of downpayment assistance programs funded by those who have a financial interest in the sale; does not prohibit other assistance programs provided by nonprofits funded by other sources, churches, employers, or family members. This prohibition does not go into effect until October 1, 2008.
VA loan limits – temporarily increases the VA home loan guarantee loan limits to the same level as the Economic Stimulus limits through December 31, 2008.
Risk-based pricing – puts a moratorium on FHA using risk-based pricing for one year. This provision is effective from October 1, 2008 through September 30, 2009.
GSE Stabilization – includes language proposed by the Treasury Department to authorize Treasury to make loans to and buy stock from the GSEs to make sure that Freddie Mac and Fannie Mae could not fail.
Mortgage Revenue Bond Authority – authorizes $10 billion in mortgage revenue bonds for refinancing subprime mortgages.
National Affordable Housing Trust Fund – Develops a Trust Fund funded by a percentage of profits from the GSEs. In its first years, the Trust Fund would cover costs of any defaulted loans in FHA foreclosure program. In out years, the Trust Fund would be used for the development of affordable housing.
CDBG Funding – Provides $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.
LIHTC – Modernizes the Low Income Housing Tax Credit program to make it more efficient.
Loan Originator Requirements – Strengthens the existing state-run nationwide mortgage originator licensing and registration system (and requires a parallel HUD system for states that fail to participate). Federal bank regulators will establish a parallel registration system for FDIC-insured banks. The purpose is to prevent fraud and require minimum licensing and education requirements. The bill exempts those who only perform real estate brokerage activities and are licensed or registered by a state, unless they are compensated by a lender, mortgage broker, or other loan originator.
For more information, visit: