The Washingtonian’s View

In a rare Saturday session, the Senate voted 72-13 to send the bill to the president; the House passed it Wednesday.

The United States Congress finally did something that many Americans can feel good about. In a very rare Saturday session, the Senate voted 72-13 to send the bill to the president.  This weekend session, for the U.S. Senate, made sure the bill would be passed. The same bill swept the U.S. House last Wednesday. Mortgage relief for 400,000 struggling homeowners is heading to the U.S. public.  In this election-year housing plan some previously jittery financial markets say they can see the calm coming.  They also see the sagging economy getting a shot in the arm; something the stimulus checks haven’t done.

If you didn’t hear about the bill’s passage, that’s OK, expect to hear more about it for a while now.  One thing that needs to be understood, is the housing bill is considered the biggest piece of housing legislation the industry has seen in over four or five decades.

It’s funny because the whole thing took shape as a showdown between the White House and the Democratic-led Congress.  The issue at hand was over how far the government should go in rescuing homeowners.  This quickly evolved into a bipartisan effort that could be the last such compromise before Bush leaves office in January.

Supporters of the White House’s position have often said the bill only affect troubled homeowners and stretches the financial obligations of the federal government.  For those of you who believe this – you might miss out on something big.

The bill is set to be signed into law by President Bush soon.  President Bush has assured Congress that he would sign the bill, but he’s not exactly thrilled about it. He was concerned about the $3.9 billion in neighborhood grants floating in the bill.  The president contended the money would benefit lenders who helped cause the mortgage meltdown.  He said this would encourage people to foreclose rather than work with borrowers.

“Because of the Democratic Congress’ delays and the need for action now, President Bush will sign this bill when he receives it, despite our concerns with some provisions, including nearly $4 billion to help lenders, not the homeowners this legislation is intended to serve,” said Tony Fratto, deputy White House press secretary.

The bill does offer incentives to certain overextended borrowers and their mortgage lenders.  These two particular groups [the borrowers and mortgage lenders] are looking at the legislation as an opportunity for people to make a big jump at moving forward.

First-time homebuyers are especially being touted with this bill.  A big focus is also being applied towards longtime homeowners, returning veterans and senior citizens seeking to tap their home equity.  Thousands of people have wanted to do this, but they were afraid of being hit with big fees.  Millions of Americans have the potential to benefit in some way or another.

That huge numbers of people who are buying homes for the first time, for instance, will be eligible for what amounts to an interest-free loan from the government.  Sounds pretty good huh?!  Older Americans will now be able to borrow more and possibly pay less for reverse mortgages that allow them tap the equity in their homes.  This is a win-win for them because they have put their adult life into paying taxes, following the rules, and doing the things needed to survive – legally.  And as mentioned before, baby-boomers are aging.  In a few years there will be a growing number of senior citizens, many have believed there should be something out there to meet the ever-changing society.

No one is completely sure yet if loading the bill with all these benefits are good for taxpayers.  It’s definitely one of the more controversial parts of the bill.  One supporter of the bill says Congress is, “…just looking out for everyone.”

That maybe so; let’s take a look at it.

First-time homeowners will see the biggest benefit with the new legislation.  So if you are buying a home for the first time (and it is your primary residence) you is eligible for a federal tax credit of $7,500 or 10 percent of the purchase price.  Everything will side with whichever is smaller.  With a tax credit, you subtract the credit amount from the total you would otherwise pay to the Internal Revenue Service. So if you owe $1,500 and you qualify for the credit, you would end up getting a $6,000 refund.

There are still two a couple of sinkholes in the bill, so beware.  First, if you earn a modified adjusted gross income of more than $75,000, or $150,000 if you are married and filing your tax return jointly, the credit starts to phase out. For single people, it phases out completely at $95,000 of annual income, while for married people filing jointly, it phases out at $170,000.

Second, if you are wondering about paying the loan back…you have to do it over the following 15 years.  You have to do this in equal amounts every year when you pay your federal taxes. That makes this more like an interest-free loan than a true credit. According to the National Association of Realtors (NAR), there were about 2.5 million first-time homebuyers in 2007. A large proportion of them would have qualified for this credit, but whether it is enough to push would-be buyers over the edge this year remains to be seen.

The tax credit is retroactive to home purchases on April 9, 2008, and expires on July 1, 2009. If you purchase a home from Jan. 1, 2009 to June 30, 2009, you can claim the tax credit on your 2008 tax return.

Another major component of the bill will giver everyone the opportunity to renegotiate their mortgages.  Part of the bill is devoted to the creation of a program that may allow some people to cancel their old mortgage loans.  They will then be able to replace them with new fixed-rate loans lasting at least 30 years. The amount of the new loans would be no more than 90 percent of what their property is actually worth now.

It sounds wonderful but the real question here is, “Who’s eligible?”  You need to have originated your troubled loan or loans on or before Jan. 1, 2008. Those of you who saw this as time as a great opportunity to get a great house for a fraction of the cost and then found yourself way over your head…well sadly, you won’t qualify.  If you own more than one property, the loans must be on your primary residence.  That means your vacation home or investment property is ineligible. You will also need to verify your income, which many borrowers did not have to do in recent years.

Also, as of March 1, 2008, your monthly housing payment (including the principal on all your various mortgage payments, interest, taxes and insurance) has to have been at least 31 percent of your monthly household income. So if you were earning $5,000 a month and had housing payments of $3,000, you are eligible. But if you had payments of just $1,400, you would not be, presumably because that loan is affordable given the size of your income.

If you manage to get a new loan, you cannot take out a home equity loan for at least five years after you get the new mortgage. You will also have to pay a 1.5 percent fee each year on the remaining balance. Finally, you have to hand over no less than 50 percent of any appreciation on the home to the government once you sell. Sell the house in less than five years, and you will have to turn over as much as all of the gain.

This program ends on Sept. 30, 2011. While it does not officially take effect until Oct. 1, lenders may be willing to start their negotiations with borrowers now.

There are benefits for those who take the standard deduction on their federal income taxes and does not itemize.  With this bill the taxpayer will be able to take an additional federal tax deduction of $500, or $1,000 if you are married and filing your tax returns jointly. Again, this one is amazing; you get it in addition to the standard deduction.

Those of you who deal with reverse mortgage, there is something for you.  Read carefully:  this allows older Americans, generally 62 and older, to get a lump sum or a monthly check that comes out of their home equity.  Yes, you heard me correctly.  And get this:  they do not have to pay the money back until they stop living there permanently or their heirs sell the house.

There is a downside though; these loans often come with high fees. Moreover, some salespeople pressure borrowers who are applying for the loan to purchase annuities, long-term care insurance or other financial products that are not necessarily in the borrower’s best interest.

The bill tries to address both issues. It limits origination fees on reverse mortgages at 2 percent of any loan up to $200,000 and 1 percent beyond that, up to a maximum of $6,000.

The bill also states explicitly that borrowers cannot be forced to purchase an annuity or other financial or insurance product as a condition of qualifying for a reverse mortgage.

Finally, the bill raises the maximum amount that people can borrow. Before, the limits were set on a county-by-county basis, according to AARP’s legislative policy director, David Certner. The biggest allowable mortgage available anywhere was just over $400,000. Now, there is a nationwide cap of $625,500.

The bill has something for people who are looking for a redefinition of jumbo loans (this aids companies like Fannie Mae & Freddie Mac), offers breaks for veterans (lenders will have to wait nine months, instead of 90 days, before beginning foreclosure proceedings on homes owned by someone returning from the military).

Also in siding with military personnel and family, lenders must also wait a year before raising interest rates on a mortgage held by someone returning from military service.  These provisions expire on Dec. 31, 2010.