New Housing Bill Has Benefits For Many Borrowers

You probably have heard that a housing bail-out bill has been passed by the House of Representative. The Senate is expected to pass it as well, and President Bush has already said he will sign it. It's a complicated bill, but today's New York Times has an excellent article explaining some of the provisions in the bill that may help homeowners, even those who are not worried about losing their homes to foreclosure.

Housing Bill Has Something for Nearly Everyone
By RON LIEBER
Published: July 25, 2008

If you are ignoring the housing bailout bill because you think it benefits only troubled homeowners, you may miss out on a windfall.

The bill, expected to be passed by the Senate in the next few days and then signed by President Bush, does offer incentives to certain overextended borrowers and their mortgage lenders.
But it also includes many handouts to first-time homebuyers, longtime homeowners, returning veterans and senior citizens seeking to tap their home equity without getting hit with big fees. Millions of people have the potential to benefit in some way.

Huge numbers of people buying homes for the first time, for instance, will be eligible for what amounts to an interest-free loan from the government. Meanwhile, 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.

Whether larding up the bill with all these benefits is good for taxpayers is a debate for another part of the newspaper. But there is no shame in taking advantage of what is offered. In fact, you would be foolish not to.

Here are some of the new benefits:

RENEGOTIATING MORTGAGES Part of the bill is devoted to the creation of a program that may allow some people to cancel their old mortgage loans and 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.

So who is eligible? You need to have originated your troubled loan or loans on or before Jan. 1, 2008. The loans in question must be on your primary residence. Vacation homes and investment properties are 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.

Lenders, however, are not required to give you a better deal under the new law, even if you do meet the qualifications. They may not be willing to negotiate unless they think you are truly on the cusp of foreclosure.

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.

BREAK FOR FIRST-TIME BUYERS If you are buying a home for the first time, and it is your primary residence, you are eligible for a federal tax credit of $7,500 or 10 percent of the purchase price, 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 two big catches, though. 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.

But you have to pay back the credit over the next 15 years, in equal amounts each 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, there were about 2.5 million first-time home buyers 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.

ADDITIONAL DEDUCTION If you are a homeowner who takes the standard deduction on your federal income taxes and does not itemize, this one is for you. You can now 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 gravy; you get it in addition to the standard deduction.

Since itemizers are often people who pay a lot of mortgage interest, this deduction will generally benefit people who pay little or none, like those who have paid off their mortgages entirely or close to it. There is one hitch here: you will need to report the property taxes you paid on your tax form. If they are less than $500 (or $1,000 if you are married and filing a joint return), your deduction will be limited to the amount of the property tax you paid.

REVERSE MORTGAGE CHANGES Reverse mortgages allow older Americans, generally 62 and older, to get a lump sum or a monthly check that comes out of their home equity. They do not have to pay the money back until they stop living there permanently or their heirs sell the house.

The problem with these loans, however, is that they 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. First, 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.

REDEFINITION OF JUMBO LOANS Often, if you want the mortgage loan with the lowest possible interest rate, it has to be small enough to be purchased by Fannie Mae or Freddie Mac from whatever bank or other institution originated it.

Under the new bill, Fannie and Freddie have permanent authority to buy bigger loans in areas with high housing costs. (Temporary measures allow them to buy bigger loans, but those expire on Dec. 31.) They can buy loans up to 115 percent of the local median home price, though they cannot buy any loans larger than $625,500. Any larger loan will generally be a jumbo loan, which will cost more in interest.

A BREAK 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. 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.

Federal Reserve Adopts New Lending Rules

At today's meeting on mortgage rules, Federal Reserve Chairman, Ben Bernanke, said "it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high cost loans that were inappropriate for or misled borrowers".

In an effort to stop lenders from making loans to people who really can not afford them, the following rules have been adopted:

Lenders must prove a borrower's income;

High-risk borrowers must set up a savings fund (impound account) for taxes and insurance;

Lenders are restricted from penalizing risky borrowers who pay loans off early; and

Lenders are required to considering a borrower's ability to repay the loan from sources other than the home's value.

Predictably, consumer advocates believe that the new rules do not go far enough to protect borrowers, while the lending industry insist these restrictions will limit the loans they generate, thereby further deepening the housing crisis.

Harvard Releases 2008 Housing Report

Harvard University's Joint Center for Housing Studies has released it's 2008 report on the State of the Nation's Housing. You can see the entire report at: http://www.jchs.harvard.edu/publications/markets/son2008/index.htm.

Here is the press release sent out with the report:

New York, NY - The nation is in the throes of a housing downturn that is shaping up to be the worst in a generation, finds The State of the Nation’s Housing report issued today by the Joint Center for Housing Studies of Harvard University. While the falloff in housing starts, new home sales, and existing home sales already rivals the worst downturns in the post World War II era, home price declines and mortgage defaults are the worst on records that date back to the 1960s and 1970s.

“The slump in housing markets has not yet run its full course,” concludes Nicolas P. Retsinas, the director of the Joint Center for Housing Studies. “Mortgage rates have barely responded to the aggressive easing of the Federal Reserve, the supply of for-sale vacant units continues to grow, and much tighter underwriting is locking many would-be homebuyers out of the market. With home prices falling in most metropolitan areas, homeowners are tightening their belts, remodeling less, and staying on the sidelines.”

The report observes that the number of homeowners paying more than half their income on housing rocketed from 6.5 million in 2001 to 8.8 million in 2006. This reflects looser lender enforcement of debt-to-income caps and the widespread use of mortgages that have been resetting to higher payments. With so many stretched thin and home prices falling in many areas, foreclosures are skyrocketing. The number of homes entering foreclosure nearly doubled to 1.3 million in 2007 from about 660,000 in 2005. The report concludes that these high levels of foreclosures will continue to exert extreme downward pressure on prices, especially in low-income and minority areas, where riskier subprime loans are most heavily concentrated.
The problems created by overheated housing markets going bust are not confined just to housing, the report finds. “As losses on securities backed by subprime mortgages escalated, few investors wanted to purchase them, the market value of these securities plummeted, and the Federal Reserve had to take unprecedented steps to prevent the failure of major financial institutions,” explains Eric S. Belsky, the Center’s executive director. “This has tightened the availability of credit well beyond the confines of just the mortgage market. On top of this, declines in residential construction shaved nearly a percentage point from national economic growth in 2007.”

The study presents a dispiriting picture of how severe and structurally ingrained housing affordability challenges have become. By 2006, 17.7 million households—about 15.8 percent of all households—were spending more than half their income on housing, an increase of 3.8 million just since 2001. Even 34 percent of households with incomes equivalent to 1-2 times the federal minimum wage, and 15 percent with incomes equivalent to 2-3 times this wage, spend more than half their incomes on housing. With the economy spinning out a growing proportion of full and part-time jobs with wages in these ranges, prospects for a meaningful reduction in affordability problems remain dim.

This year’s State of the Nation’s Housing report finds that demand for new homes has dropped well below projected long run demand. House price deflation, tight credit, and consumer concerns over the direction of the economy have kept buyers at bay and some households from forming. The somber conclusion is that if the economy slips into recession or job losses keep racking up, household growth and homeownership demand could fall even more.

On the other hand, the report sounds a more optimistic note about the medium to long-term. “At some point demand will bounce back,” notes Retsinas. “Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability. It is difficult to judge how far away from these conditions we may be. It will take longer this time to rebound given the unusually high levels of foreclosures and constrained credit markets.” Barring a prolonged period of serious economic decline, however, the report concludes that the outlook for household growth is about 14.5 million over the next ten years. The main risk to the long-run outlook, the report notes, is a dip in the level of immigration from its recent 1.2 million a year pace due to weaker labor markets.

2008 marks the 20th year that the Joint Center for Housing Studies has produced an annual report summarizing national housing trends for a wide audience of policymakers, practitioners, industry decision makers, academics, affordable housing advocates, and public sector leaders. The State of the Nation’s Housing is supported by a broad-based coalition of organizations that seek to address the nation’s housing challenges and opportunities, and each year the report’s presentation of critical data and analysis provides timely and relevant information to help meet these goals.

Harvard’s Joint Center for Housing Studies is the nation’s leading center for information and research on housing in the United States. Established in 1959, the Joint Center is a collaborative unit affiliated with the Harvard Graduate School of Design and the Harvard Kennedy School. The Director of the Joint Center for Housing Studies is Nicolas P. Retsinas. The Center’s research and additional information about its programs and activities are available at www.jchs.harvard.edu.

The Joint Center uses current data from the Census Bureau, the U.S. Department of Housing and Urban Development, the Bureau of Economic Analysis, the Bureau of Labor Statistics, the Federal Housing Finance Board, the Federal Reserve Board, First American CoreLogic, Freddie Mac, Inside Mortgage Finance, MPF Yieldstar, Moody’s Economy.com, the Mortgage Bankers Association of America, the National Association of Homebuilders, the National Council of Real Estate Investment Fiduciaries, the National Association of Realtors®, the Panel Study of Income Dynamics, and S&P/Case Shiller® US National Home Price Index to develop its findings.

Next Trouble Spot - Home Equity Loans

The latest area to feel the strain of the economic crisis is home equity loans. According to the American Bankers Association, late payments on home-equity lines of credit rose to an 11-year high in the first quarter of 2008.

This is particularly troubling, since this type of debt is usually kept current by most borrowers, even during economically difficult times. In an effort to preserve their homes, borrowers will stop making payments on car loans or credit card balances before they will allow equity lines to default.

"That people are now having trouble making payments on home-equity lines is a clear sign of the extent of the pressure on the household budgets," explains Joel Naroff, President, Naroff Economic Advisors.