During the past couple of weeks, Congress has been busy grinding out the sausage of a nearly $800 billion dollar stimulus plan. In that plan, there was some legislation specifically designed to help homebuyers. On Wednesday, President Obama added some seasoning to the mix with another $75 billion designed to help stem the tide of foreclosures.
In the stimulus plan, changes were made to a First Time Homebuyer Tax Credit, which was first established in July of 2008.
Here's how this new tax credit works: For homes purchased by a first time buyer (meaning you haven't owned a principal residence in the three years previous to purchase), you can get a tax credit of $8,000. If you can't use all of the $8,000 credit in offsetting your taxes, the difference will be refunded to you. So, if your tax liability in 2009 is only $7,000, you'll get a refund of $1,000. The $8,000 credit is effective only on home purchases made after Jan. 1 and before December 1, 2009.
There are income limits on those who can qualify for the credit. Your adjusted gross income can't be more than $75,000 for an individual or $150,000 for those who file a joint tax return. If you make more than this, you may qualify for a smaller credit. Finally, you must stay in the home for at least three years to keep the credit. Don't sell the place before that, or you'll have to give the $8,000 back to the government. There was an effort to increase this credit to $15,000 and make it available to all buyers (not just first time buyers), but that proposal got shot down in the Senate.
As for the president's plan announced on Wednesday, the goal of this is not to create incentives for a home purchase but to provide assistance for current homeowners facing foreclosure. There are a number of aspects to this plan, and space doesn't permit us to go into all of it here. But, we'll provide a link atwww.BobDonna.com to direct you toward more information.
Plus, some of the thorny details, regarding exactly how this plan will be implemented have yet to be released. In the president's speech, he said we'd have those details in a couple of weeks, so we'll do a follow-up column on the topic.
Nevertheless, the president's plan is primarily focused on using the government sponsored enterprises known as Fannie Mae and Freddie Mac to ease restrictions on the terms by which homeowners are allowed to refinance. It also encourages lenders to modify existing loans in ways that will reduce mortgage payments.
Currently, it's difficult to refinance, if the amount you want to borrow is more than 80 percent of the home's value. With declining home prices many people have found themselves in a situation where they have little or no equity in their home. The president's plan will give federal money to Fannie and Freddie to help secure refinancing for people who would not previously qualify for a new loan at lower rates.
The other aspect of this effort pertains to what mortgage banker's call "loan mods," or loan modification.
Here, you don't refinance into an entirely new loan, rather your lender makes changes to your existing loan, to help reduce your monthly payments. There are also changes to the bankruptcy rules which would allow judges to reduce the outstanding mortgage to whatever these judges consider is the fair market value of a primary residence.
This part of the plan would require approval from Congress.
The rest of the president's plan can be implemented and funded through the TARP (Troubled Assets Relief Program) that Congress created back in 2008. There are a number of other components to the plan. You can see a full text of his speech at our web site, which also includes an executive summary of his Homeowner Affordability and Stability Plan.
So, is any of this going to work? As with the $800 billion dollar stimulus plan, we may never know. Things may get better because of it; they may get better in spite of it, or we might not see any improvement at all. As the president stated in his speech, foreclosures have a detrimental effect on everyone.
The dumping of foreclosed homes can depress the market value of properties for all homeowners. We talked about this problem in a column two weeks ago ("How short sales affect the housing market"), so we're very much in agreement that something probably needs to be done in an effort to halt this artificially created downward spiral.
But, we do see some potential problems in the president's plan. First, the government is once again turning to Fannie Mae and Freddie Mac to underwrite risky loans. In large part, it was Freddie and Fannie doing the exactly same thing that generated the problem we are now experiencing.
If you talk to mortgage bankers, who have modified loans for people in trouble, they will tell you that many, if not most, of these loans still end up in default. Many of the loan modifications or "second chances" given to borrowers accomplished nothing other than to delay the inevitable.
Second, we expect there will be some blowback from the over 90 percent of people who pay their mortgages without any expectation of help from the government. Although we are a compassionate society that is always willing to help those truly in need, this could be seen as a bailout of folks who were trying to game the system or finance a lifestyle beyond their means.
Obama has assured us that help will not go to such individuals, but we don't know how the heavy hand of government will efficiently or effectively make such a subjective call.
Third, there is always the law of unforeseen circumstances. Frequently, any government program, no matter how well intended, creates a new problem that, in many cases, is worse than the issue it was intended to resolve.
In years past, the lax requirements for a home loan was driven by a noble desire to increase home ownership. Unfortunately, the result was a level of defaults that crashed the system.
We can only hope this reboot of the economy, as well as the real estate markets, will do more than just restart the same flawed program.
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Bob and Donna McWilliams have more than 20 years of combined real estate experience in the Annapolis area. E-mail your questions to McWilliams@BobDonna.com. If they don't answer your questions in this column, they will respond via e-mail.
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