Tax Credits Extended and Expanded

Great news for home buyers, and for sellers, in a struggling residential real estate market in Warren County and elsewhere.

After several weeks of discussion, Congress has today passed bill HR3548, which extends the existing $8,000 First Time Buyer Tax Credit through to next April, and adds a $6,500 Tax Credit for some existing owners buying another home. The White House has confirmed that the President will sign it into law tomorrow (Friday, November 6).

In both cases, the credit is only available for purchase of a primary residence. Qualifying income levels have also been increased.

Here are the details:

First Time Buyer Tax Credit
- tax credit is 10% of purchase price, maximum $8,000
- applies to buyers who have not owned a home in the previous 3 years

Current Home Owners
- tax credit is 10% of purchase price, maximum $6,500
- applies to buyers who currently own a home, and have lived in it for at least 5 of the previous 8 years as a principal residence
- existing home does not have to be sold, but the new purchase must be for the primary residence

For Both Credits
- maximum qualifying income levels are $125,000 for single tax filers, and $225,000 for joint filers
- for purchase of primary residence only (not a second home or investment property)
- maximum purchase price $800,000
- must have a ratified contract for purchase by April 30, 2010
- must settle on the purchase by June 30, 2010
- for members of the military serving outside the US for at least 90 days, the tax credits will extend a further 12 months to June 30, 2011
- improved powers to the IRS for investigating possible fraudulent claims

While I see a big incentive here for first time buyers (and relief for those who were under pressure to close their purchases by November 30 under the existing deadline), I'm not convinced of the need for the limited credit for some existing homeowners, who don't need an incentive to buy, but rather need to get their current home sold in order to be able to move on and buy again.

Still, we need every bit of help we can get to bring buyers off the fence and stimulate the current market, and this new legislation is excellent news.

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 . . .