Wednesday, 13 August 2008 00:00
Originally published in the Eastern Pocono Community News, August 8, 2008
On July 30, President George W. Bush signed into law the much debated and long awaited American Housing Rescue and Foreclosure Prevention Act of 2008.
There was no fanfare or celebration; just an acceptance that there are no easy answers for our housing crisis, but something had to be done. How much was enough? How much was too much? Would the bailout cause a “moral hazard” by rewarding bad behavior or bring desperately needed relief — not only for troubled homeowners but the housing market in general?
In the end, this sweeping reform of the FHA combined with housing rescue is estimated to help more than 325,000 homeowners facing foreclosure at a cost to taxpayers of $25 billion. Here’s some of what your $25 billion is buying.
Immediate relief and assistance credit for first -time homebuyers: The bill established a credit for first-time homebuyers, defined as someone who has not owned a home for three years. The credit is for homes purchased on or after April 9, 2008 and before July 1, 2009, and is equal to the lesser of $7,500 or 10 percent of the purchase price.
Like the economic stimulus rebate, it is for single taxpayers with modified adjusted gross income up to $75,000 and married couples up to $150,000. It is refundable, meaning even if the credit brings the tax on your return to below zero you will still get the entire amount. The catch is it has to be paid back, or recaptured, over the next 15 years of ownership (or when the house is sold if sooner), beginning with the return filed two years after the credit is claimed. Look for homebuilders to piggy-back onto the deal; Pulte Homes has already announced a matching credit, and the National Association of Home Builders has set up a Web site for consumers at www.federalhousingtaxcredit.com.
Property tax deduction: Beginning this year, taxpayers who do not itemize on their federal tax returns can deduct a portion of their property taxes, up to $500 for individuals and $1,000 for married filing jointly. This will help those taxpayers whose homes are mortgage free and therefore have limited deductions to itemize.
FHA rescue: This provision creates a voluntary program beginning Oct. 1, allowing lenders to reduce a loan balance in exchange for an FHA guaranteed loan. To be eligible, homeowners must live in their homes, have a mortgage issued between January 2005 and June 2007, and the original mortgage payment must be more than 31 percent of their income. Homeowners do not need to be in default, but must prove that they legitimately cannot continue to make payments.
Because homeowners must pay off any other existing home equity debt before they can participate in this program, it does not help those who owe more than their house is worth because of multiple loans on the home. To participate in the program, homeowners must contact their lender or an FHA approved lender.
On the lender’s end, after agreeing to work with the homeowner (presumably only in cases where there is more to lose by foreclosing), the balance is written down to 90 percent of the newly appraised value of the home, and the new lender has a guarantee from the FHA that the loan will be paid. In exchange, the lender pays a 3 percent origination fee to the FHA.
Because the government is taking on the risk of guaranteeing the loan, the FHA will do full underwriting and verify employment, income, bank accounts, credit scores, and job history. There is a $300 billion cap on the program.
Once in the program, there are some costs and requirements for the borrower. The FHA requires insurance to guarantee the loan, which costs the borrower 1.5 percent of the principal annually. The borrower cannot take out a new home equity loan in at least the first five years, unless it is for necessary upkeep, and the total indebtedness cannot exceed 95 percent of the home’s value.
The borrower must also pay the FHA 3 percent of the mortgage principal if they sell the home or refinance, and they must pay the agency 100 percent of the net profits if they sell within a year, 90 percent within two years, 80 percent within three years, 70 percent within for years, 60 percent within five years and 50 percent for the remainder of the life of the 30-year loan. The costs are high, but fair considering the benefits.
Long term reform: The legislation did include reform as well as assistance, and created a new regulator to oversee Fannie Mae and Freddie Mac. The extension of an unlimited line of credit to bail out Fannie and Freddie is the most controversial provision of this bill, because they are shareholder-owned, profit driven companies that also enjoy federal backing and are exempt from most taxes. This infusion of cash to the mortgage giants has been argued to be necessary to stabilize the housing industry. The addition of a regulator hopefully will prevent the pair from getting into similar trouble in the future.
Additionally, the law increases FHA loan limits Jan. 1, 2009, instituted a ban on down-payment assistance from sellers for FHA loans, increased the FHA down payment requirement from 3 percent to 3.5 percent, and now requires truth-in-lending disclosures be delivered seven days prior to loan origination.
Vacation home changes: Buried within the law, and not getting much press, is a change to the capital gains exclusion for home sales. Up until now, homeowners could exclude $250,000 ($500,000 for joint owners) of profit from selling a home if they lived in the home any two of the previous five years.
In order to crack down on people using the rule to their advantage with vacation homes, if you make your vacation home your primary residence for the final two years of ownership, instead of excluding the entire gain up to the limits as before, as of Jan. 1, 2009 you will only be able to exclude a ratio of years of primary use to years of total ownership. There are exceptions and technicalities to this rule, so if you think it may apply to you, check with a tax professional.
