The Housing and Economic Recovery Act of 2008, signed by President Bush July 30, contains a hodge-podge of new programs, protections and perks for homeowners, home buyers and housing-related companies. But considerable doubt remains as to whether the law will do much to change the current dynamics of the nation’s housing markets, which are still mired in misfired mortgages and depressed home sales. The bill may turn out to be not so much too little, too late, but rather misdirected, riddled with loopholes and subject to unintended consequences.
Let’s take some of the homeowner and home buyer items for a spin:
Hope for Homeowners. This new FHA loan program, which Inman News columnist Lou Barnes dubbed "HoHo," will allow homeowners who can’t afford their current mortgage to refinance with a 30-year fixed-rate home loan backed by the Federal Housing Administration (FHA). Setting aside the debate over who’s worthy of such assistance, the program is flawed since — like earlier incarnations — this one also allows lenders to make the call as to which loans they’ll take a loss on. That means lenders can transfer their riskiest loans to the FHA and dispose of others without regard to a homeowner’s needs. The program also contains a dicey rule that says homeowners who refinance and later sell their home at a profit must hand over half of their gain to the FHA. If the government gets a windfall, that’s supposed to compensate for the high number of loans that are likely to default, but some of the gain will be given back to home-equity lenders who took a loss on loans backed by those homes. It’s overly complicated and unlikely to be embraced by lenders or homeowners.
Market impact: Marginal reduction in supply of for-sale homes, though many may just come on the market later rather sooner.
First-Time Home Buyer Tax Credit. Despite its name, this program isn’t about first-time buyers nor is it truly a tax credit. Rather, it’s more like a 15-year interest-free loan from the federal government to any home buyer who hasn’t owned a home in the last three years. The so-called "credit" comes with a recapture rule that turns a one-time $7,500 tax break into a $500 annual tax liability for the next 15 years, which is not a happy thought. If the home is sold at a profit before the 15 years are up, the balance of the credit becomes payable in full. But if the home is later sold at a loss, the government writes off the balance. That hypothetically could create a probably insignificant, but nonetheless perverse incentive for the homeowner to sell the home at a loss if the gain would be less than the tax liability. And it again puts the federal government at risk.
Market impact: Marginal increase in demand for homes, though not all buyers will qualify and the recapture is a disincentive.
Ban on Seller-Financed Down-Payment Assistance. Technically, this ban applies only to the use of a seller-funded down payment in connection with an FHA-insured loan. But since these programs, which turn the seller’s equity into a "donation" that then becomes the buyer’s down payment, have long been disallowed outside of FHA-backed loans, the new ban is in effect a death knell. The ban may prove short-lived, however: A new bill has already been introduced, although without much fanfare, to force the FHA to allow seller-funded down payments. The programs would be brought back with an added wrinkle: risk-based mortgage insurance, another FHA program that was a casualty of the housing bill. For the FHA — and by extension the nation’s homeowners and taxpayers — it’s win one and lose one either way.
Market impact: Significant decrease in home-buyer demand in some areas, though critics may applaud the disappearance of these weirdly circular programs.
Permanently Higher Loan Limits. As expected, Congress has decided to increase the maximum size of FHA and Fannie Mae and Freddie Mac-backed loans. This change makes permanent this year’s temporarily higher limits in certain high-cost housing areas, though not to the full extent. The higher limits should make housing more affordable in those areas and create more stability in those markets, but full documentation and careful underwriting should be required for these larger loans. Secondary market acceptance is also needed for the higher limits to be effective.
Market impact: Marginal increase in home-buyer demand in limited areas and specific housing types.
Miscellaneous. The 694-page housing act also includes a new way for federal taxpayers who don’t itemize their deductions to write off their property tax expense, a new national registry for mortgage brokers, a much-needed new federal regulator to keep a more watchful eye on Fannie Mae and Freddie Mac, new restrictions on reverse mortgage loan origination fees, new housing protections and benefits for military servicepersons, and an assortment of other goodies. But whether any of those items will do much, if anything, to revive the nation’s moribund housing markets is a question that time alone will answer.
Marcie Geffner is a freelance real estate reporter and former managing editor of Inman News.
Copyright 2008. Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author. Reprinted by permission of the copyright holder.
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