Q: It seems like every month the federal government passes a new housing bill that's supposed to help the real estate market crisis. I'm a homeowner, and nothing has gotten easier for me -- my mortgage payment is still about to adjust, the interest on my adjustable-rate line of credit is still going up, and I'm still upside down on my home by about $25,000! Are there any of these laws that I should really know about or that can really help me out?
A: Late last year, the federal government started responding legislatively to the upheaval in the housing market. Some argue that the resulting laws have been too little; others feel they are too late. My guess is that with the upcoming election, we have only just begun to see how the federal government will intervene in this thing before it's all over. Whether or not you agree with direction of the various measures, it makes sense as a smart homeowner to understand how they may impact your situation.
Know this: These federal housing bills go through a vast number of revisions between their proposal and their adoption, so from the time you first hear of a bill to the time it is passed, it is liable to undergo significant changes. Don't write off a bill as irrelevant to your situation just because you couldn't see how it might impact you the first time you read about it.
Also, even after they are signed into law, these bills can take months to implement. For example, from the time the president signed the bill increasing the Federal Housing Administration's (FHA's) loan limits to the time a mortgage broker could actually obtain a FHA loan for you at the higher limits was probably six weeks or so. The more extreme change a particular law represents from the status quo operations of the federal housing machinery and the mortgage industry, the longer it will take for the infrastructure to catch up to the law, so that you can actually take advantage of the new law.
Finally, real estate is a dichotomous market, so usually we think of something that is good for buyers as bad for sellers and current homeowners, and vice versa. Many of the recently passed federal housing laws have provisions that incent people to buy, with the idea that stimulating home buying will help homeowners sell their homes and reduce the backlogged inventory of homes for sale that are sitting on the market in many areas. The end result? Boosting the demand for homes will bolster the value of homes. That is, laws that help buyers buy may have an indirect effect of maintaining and, eventually, increasing the value of your home, but it will take awhile to see any such impact.
From my point of view, there are three recent real estate laws every home buyer, home seller and homeowner should be aware of:
1. The Economic Stimulus Act of 2008. Why do you care about this one? Because it temporarily increased FHA and conforming loan limits to $729,250 in high-cost-of-living areas -- in some areas, this was an increase of several hundred thousand dollars. This means that if you live in a place such as the San Francisco Bay Area, you ordinarily would have had to pay a couple of percentage points more in interest on a jumbo loan to finance a loan amount of $700,000 on a loan that you can now get for the lower interest rate of a conforming loan. If you are a buyer, this obviously could save you tens or even hundreds of thousands of dollars of interest over the life of your mortgage loan, and may also make it more feasible for you to buy a home in this price range, because the jumbo loan qualification standards are tougher than those for a conforming or FHA loan.
If you are a homeowner not looking to sell your home, though, this law may still be important for you in that it would allow you to refinance up to $729,250 worth of mortgage debt on a higher-interest mortgage or a mortgage with payments and interest that are about to adjust upwards into a 30-year fixed-rate loan amounting to as much as 97 percent of the current value of your home.
This law was passed in March 2008 -- this increase in loan limits will expire at the end of 2008, and will be replaced by a permanent loan limit of $625,500. If you are in a high-cost-of-living area and want to buy, sell or refinance on a mortgage loan amount between $625,500 and $729,250, you've got until Dec. 31 of this year to make it happen.
2. The Mortgage Debt Forgiveness Tax Act. In a short sale, a homeowner sells their home for less than they owe, and the mortgage holders agree to forgive some or all of the debt secured by the property. Until 2007, a homeowner who liquidated their home through a short sale was charged income tax on the forgiven debt. Talk about kicking you while you're down -- you're so broke you can't stay in your home; you are so upside down that you have to sell it at a loss; and then you'd have to pay taxes on the loss, too?! I've actually seen sellers choose to allow their home to be foreclosed on rather than incur the tax obligations that used to be incurred as a result of a short sale.
This law temporarily eliminates the income tax obligation on short sale-related mortgage debt that was forgiven by a mortgage lender, making it less burdensome for a seller to get rid of their home through a short sale. For a homeowner who owes more than their home is worth and needs to try to sell it short, this law makes it worth your while to try to avoid foreclosure through a short sale, without fearing any tax penalty.
Note -- this act is also temporary, providing an exemption from the income tax on mortgage debt that is forgiven only through the end of 2009.
3. The Housing and Economic Recovery Act of 2008. Passed in early August, this housing bill promises to impact the real estate market in several different ways.
First, it will allow about 400,000 homeowners who owe more than their homes are currently worth to refinance into federally backed loans, and provides incentive for these homeowners' current mortgage lenders to simply erase the loan balance down to 90 percent of the current value of the home. In exchange, those who refinance under this law will agree to give the feds some portion of the future appreciation of their homes.
Second, low- and moderate-income buyers purchasing their first homes will be given an interest-free loan from the federal government toward their purchase up to 10 percent of the value of their homes, or a maximum of $7,500. Again, the hope is that this will stimulate people to buy, increasing demand for homes and, thus, the recovery of the value of homes.
Third, buyers will no longer be able to use seller-assisted down-payment assistance programs like Nehemiah or AmeriDream after Sept. 30, 2008, so that there will be effectively no 100 percent financing available except for buyers participating in certain governmental or nonprofit down-payment grants and programs.
Consult your REALTOR(R), mortgage broker and/or CPA to determine whether any of these recent laws apply to your state and may help you. Make sure to keep your team of advisors updated on your personal situation and concerns, so that they can notify you if new laws are passed that may help your situation.
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