Government Assistance for Homeowners

The government yesterday announced their long-anticipated initiative called the Homeowner Affordability and Stability Plan. If you are interested, click the link to read the White House Fact Sheet. The plan aims to:
a) stem the flow of foreclosures with a loan modification plan
b) help those who owe more than their home is worth, to refinance
c) ensure low mortgage rates for the foreseeable future

The two main problems with the initiative are that it only addresses “conforming” mortgages, and while it will no doubt help many deserving families, it will also reward many others who have in the past borrowed unwisely or beyond their means. It is already causing a lot of resentment from among the majority of homeowners who bought wisely and within their means, and pay their mortgage every month.

As always, the devil will be in the detail, and we will learn much more when formal Guidelines to Lenders are issued March 4. Meantime, here are the main features of the initiative:

Mortgage Modification Plan (expected to cover 3 to 4 million borrowers)
- owner-occupiers only
- conforming loans only, where repayments are more than 31% of gross income
- mortgage may be up to date, or in arrears
- overall, repayments will be reduced to 31% of gross income by reducing interest rate (partially subsidized by the government)
- interest rate reduction for 5 years, after which it will be phased back to “regular rate”
- incentive to the borrower of $1,000 reduction in principal for each year that repayments are made on time, for up to 5 years
- also incentives to loan servicers
- debt counseling a condition, if current total debt servicing is 55% or more of monthly income
- participation by lenders is voluntary, but compulsory for those who receive TARP money
- lenders may also achieve the repayment reductions by reducing the amount owed, but this seems less likely to be done

Refinance Assistance (expected to cover 4 to 5 million borrowers)
- owner-occupiers only, with conforming loans
- first mortgage cannot exceed 105% of current value of the home
- there can be an existing second mortgage, but that lender will need to agree to remain “second in line”
- must have satisfactory payment record, and payments must be current for the 3 months prior to entering the scheme
- new mortgage must be a fixed rate over 15 or 30 years, with no prepayment penalties or balloon repayment
- the portion of the new mortgage in excess of the home’s current value must remain unsecured

Additional Support for Freddie Mac and Fannie Mae
- government doubling its stake from $200bn to $400bn
- designed to increase confidence and promote stability and liquidity
- should ensure sustained low mortgage rates for the foreseeable future

* * * * * * * *
There are a lot of questions unanswered, and I am sure the pundits will be picking everything apart over the coming days. But here are my initial thoughts:

- the concept that this "rewards bad behavior" has to be balanced with the overall benefits to be gained by reducing foreclosures - if that is achieved. Foreclosures devalue all homes in a neighborhood, so this will hopefully provide some benefits to everyone.

- a "conforming loan" was by definiton no more than 80% of the value of the home when it was bought (or when refinanced). The limitation that the loan must now be no more than 105% of the current value would work if house prices had only dropped by some 25%. But in Warren County, Virginia, we have seen sharper declines than that. There will be a lot of people who bought at the peak, who will not meet these criteria.

- we have seen a lot of inconsistency between lenders in how they handle short sales or potential foreclosures. Some won't talk until the mortgage is 3 months in arrears (encouraging owners to not pay!), others won't talk until the home has been on the market for at least 3 months. My hope is that the "Guidelines to Lenders" will provide a standard set of procedures which may encourage all lenders to behave more consistently even with loans that fall outside those guidelines. We'll see . . .

Tax Credit - Final Details (Apparently!)

After some confusion and mis-reporting, the final details of the new tax credit have been released. Note that although this is now the "agreed compromise" by all sides of Congress, it has yet to be finally voted on, and then signed off by the President.

If you want to read the full text of the official press release for the Stimulus Package, it is here (the part relating to the home buyer credit is on page 2): American Recovery & Reinvestment Act of 2009.

But in a nutshell, here are the basics - very different from the original broad-ranging $15k credit added to the bill by the Senate:

- a refundable tax credit of 10% of purchase price or $8,000, whichever is less (which I believe means that if the tax payer's tax liability is insufficient, then a refund will be issued for the balance)
- for first time home buyers only (defined as those who have not owned a home during the previous 3 years)
- purchases between January 1, 2009, and November 30, 2009
- NOT repayable unless home is sold within 3 years
- credit reduced for couples earning over $150k and single filers earning over $75k

Effectively, the existing $7,500 first time buyer credit (due to expire June 30) has been increased to $8,000, extended to November 30, and converted from a 15 year interst-free loan, into a genuine non-repayable credit (unless you sell within 3 years).

Personally, I don't think this is enough to provide the stimulus we were looking for in the housing market. But at least if a first time buyer wishes to take advantage, they now need to get off the fence. We will see . . .

New homebuyer tax credit cut in half

There is good news and bad news from the "compromise agreement" for the stimulus package finalized yesterday in Congress.

The good news - a tax credit for home buyers at 10% of purchase price is part of the package. The bad news - the $15,000 maximum proposed by the Senate has been reduced to $7,500. Better than a kick in the pants, but maybe not the jump start that we were hoping for.

This is NOT the $7,500 credit already in place from last year, due to expire this coming July 1. That was only for first time buyers, and was effectively a 15 year interest-free loan. This new credit will be available to all buyers of a primary residence, and will not be repayable unless the property is sold within 2 years. Full details should be available soon.

$15,000 tax credit proposed

Could this be what we've been waiting for? Proposals added to the stimulus package currently going through Congress are for a tax credit for ALL buyers of a primary residence, equal to the lower of $15,000 or 10% of the purchase price.

This would be great news for both buyers and sellers, and may be just what we need, on top of the record low mortgage rates, to put a bit of zip back into the very slow real estate market in Warren County. Details could still undergo changes as part of the politics of the process, but here are the bare bones of the proposal as I understand it:

- direct tax credit of 10% of purchase price or $15,000, whichever is less
- for purchase of primary residence only
- must be purchased within 12 months of the legislation's enactment
- NOT restricted to income levels - all buyers qualify
- NOT repayable unless home is sold within 2 years
- can be claimed on 2008 tax return
- if tax liability is insufficient to absorb the full credit, the credit can be split in two and taken over two tax years

According to Bloomberg, the credit would effectively wipe out the annual tax bill for a "typical" family of four with household income of $122,000.

This legislation will replace last year's $7,500 credit (still good for purchases before July 1, 2009), which was only for first time buyers with income below $150,000, and was effectively a 15 year interest-free loan rather than an out and out credit.

We'll hopefully have this all confirmed and know fuller details over the next week or so. Meantime, I don't believe it will be the answer to all of our problems, but I do see it as a very positive step which has every prospect of helping to stimulate the housing market.