The Deal, the Catch, and the Plain Ugly

HR 3221 – The New Housing Bill

The Deal:

• All homeowners who do not itemize their income taxes can deduct between $500 and $1,000 from their 2008 federal taxes.
• Anyone buying a first home between April 9, 2008, and July 1, 2009, will receive up to $7,500 in federal income tax credits. A tax credit is much better than a tax deduction as it is subtracted dollar-for-dollar from your tax bill. And the bill’s definition of ‘first time home buyer’ includes anyone who has not owned a home in the last 3 years.
• Homeowners facing possible foreclosure or struggling to make payments on high-interest mortgages can contact their mortgage company and transform their loans into government-backed, 30-year fixed-rate mortgages.
• A permanent increase of conforming loan limits from $417K to $625 depending on your market is definitely some good news.
• Homeowners living in neighborhoods stricken by foreclosures, where vacant properties were left run down with overgrown yards, may see improvements.

The Catch:

• The new non-itemized income tax deduction is of course limited to the few homeowners who do not already itemize and it is only applicable for the 2008 tax year. Nevertheless, if you qualify don’t forget to take the deduction.
• The tax credit is also applicable for a limited time period, so to take advantage of it you must purchase your home prior to July 1, 2009. The big rub though is that this is in reality an interest free loan that must be paid back over 15 years. It is also phased out as a function of income up to $75,000 for single taxpayers $150,000 for joint filers.
• To qualify for refinancing into a fixed rate government-backed mortgage, borrowers must live in an owner-occupied home and have a high mortgage-to-income ratio of 31% or greater. The new loan cannot exceed 90% of the home’s current value and borrowers must prove they can repay the loan. Furthermore, the lenders must agree to write down the loan principle to 90% of its current value and this may discourage some lender participation.
• The end of any seller provided “down payment assistance” programs like Nehemia and Genesis are going to be banned effective in October 2008. This of course will affect builders who have used such programs to get buyers into their homes.
• The bill also places a moratorium on the use of risk-based pricing at the FHA for one year beginning October 1, 2008 – September 30, 2009. Thus FHA loans during this period will not be able to lower interest rates for good credit applicants, thus likely raising the cost of mortgage financing for everyone during this period.

The Ugly:

• The most controversial proposal of the new housing bill is related to the public propping-up of Fannie Mae and Freddie Mac both private companies. The new bill will allow the Government Treasury to take an equity stake in Fannie and Freddie by using tax payer funds to buy stock in the companies; historic no matter how you view it.
• The taxpayers will of course incur the cost of this program expected to exceed $50 billion dollars along with $300 billion in loan guarantees. Of course our Government doesn’t have this cash just sitting around so it must be borrowed (i.e., added to the national debt and the interest to the national debt will add to the overall taxpayer cost of this bill).

Just a note: Both Alabama Senators (R) and two Representatives (D) voted for the bill, the other five Alabama Representatives (R) voted against the measure.