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Housing Stimulus Bill Explained

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Foreclosure! Housing Stimulus BillThis week, the Senate passed a housing bill a little over a week ago (the House joined last Wednesday) that seeks to give the housing market a shot in the arm. With 1 in every 171 homes going into foreclosure, the cries for help are getting loud and loud and, with the next year’s deficit nearing half a trillion dollars, we might as well pile it on. What’s another few hundred billion? Personally, I don’t like the idea but economic turmoil doesn’t help anyone. It doesn’t help the people who erroneously got themselves into bad loans, it doesn’t help the people who intelligently avoided them, and it doesn’t help everyone else standing on the sidelines. Considering we can’t pass energy legislation and likely won’t before Congress recesses in a week, we might as well take what we can get.

So, what’s going on? Here are the bits that are likely to affect you.

The Main Bailout

The FHA will be allowed to insure up to $300 billion in 30-year fixed mortgages for those at risk and who are living in owner occupied homes. The net result of this is that some loans will be restructured from their current state to an FHA insured loan. It’s help but it’s not a get out of jail free card, you’ll see why in the second paragraph of the gotchas section.

Who is qualified? You qualify if you have a loan that was issued between January 2005 and June 2007, must be spending at least 31% of your gross monthly income on mortgage debt, the total debt cannot exceed 95% of the home’s appraised value, and prove that they will not be able to continue to pay their mortgage. They can be defaulting or current, that won’t matter, but they have to retire all other debt on the home.

What happens? If you think you qualify, go to an FHA-approved lender and they will take it from there.
Any gotchas, catches, or tricks?There are two types of gotchas. First, in order for this go through, the lender will have to write down the value of the existing loan to 90% of the home’s current value and take the hit. Lenders won’t do this unless they think they’ll lose more than that, so you will probably really have to be in trouble to qualify.

The second type of gotcha is the restrictions and extra payments the borrower will have to bear. You can’t get a home equity loan for at least five years, you’ll have to pay the 1.5% annual insurance premium to the FHA for the guarantee, you’ll have to pay a 3% exit fee on the principal to the FHA if you sell or refinance, and finally you’ll have to give up all profits to the FHA if you sell or refinance within a year. After a year, you’ll only be on the hook for 90% of the profits and drops by 10% each year until it gets to 50%, where it will be forever. That’s a long time.

The Supporting Cast Measures

There are a few other additions to the bill that may be of interest.

Conforming Loans ceiling set to $625,500. A temporary measure increasing the maximum value of a “conforming loan,” or loans that would be guaranteed by Fannie Mae or Freddie Mac, was increased and pegged to home prices in a geographic region. I mentioned it as the Little Footnote on the 2008 Tax Stimulus Package and it really was a boon for the higher end housing market. Well, it’s permanent now.

10% home-buyer “credit,” up to $7,500. It’s not really a credit, it’s a 15 year no-interest loan of up to 10% of a home’s purchase price, no greater than $7,500. I don’t know if this will induce many folks into buying, there’s no sense rushing to buy something if you think it’ll still go down in value. No one loses money by sitting on the sidelines in this market.

My Thoughts

Overall, I think the way the “bail out” was structured was reasonable. Borrowers might be bailed out, only if the lenders accept the writing on the walls, but they don’t get to reap any rewards on the back end. I like the idea that the government gets at least 50% of a bailed out home’s appreciated value if it’s sold or refinanced. That’s a hit and the cost of doing business. Qualified borrowers get to keep their homes, lenders don’t lose as much, both sides seem to win.

It appears that the only losers are those excluded from the deal (taxpayers included). Lenders may be stubborn and refuse to take the hit, borrowers may find themselves close but not quite over the 31% gross income rule, and others may be left out because of the date of issue on their loan.

You can’t save everyone.

(Photo: respres)

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20 Responses to “Housing Stimulus Bill Explained”

  1. Adam says:

    I really do not like this bill either. I have such a hard time thinking that my tax dollars are going to help out people who in my mind, don’t deserve to be helped. I know there are some people out there that this will offend, but it’s just how I feel. What will I get for being responsible and not getting myself into a bad loan, NOTHING.

    • d says:

      I am responding to Adam. Your are correct you did offend me. I am a very responsible single mother & woman. I pay my mortgage every month and all my bills on time or two weeks before they are due. I was engage to be married and purchased my first home before my engagement. I had a nice normal mortgage, then I added my fiance on it and that is where my nightmare begins, this person tried to take my house after two months of being added onto the mortgage and deed. Due to this and the fact I took a lesser paying job after 9/11.(I live in NYC) I was sold a horrible mortgage an adjustable rate which turned out to put me into a negative amortization and to get out that mortgage I had no choice but to take a interest only per the mortgage lender. I was taken advantage of not once but twice. Dispite the fact more then 33% of my salary is going to my mortgage, still I have taken every last penny to make sure it is paid in full and on time. Because it is my responsibility to myself and the people of this country. I hold down three jobs and go to school and a parent. So next time you want to put down people like myself you should think twice. Not all of us are taking advantage or being irresponsible. For the record, I do believe the people who did this to me should be in jail. If you only knew the stress I feel everyday and how it bothers me because the mortgage brokers (criminals) are free while I kill myself to do the correct thing. Again, I may not have the knowledge you do about mortgages but let me assure you, no one will ever do this to me again. I also believe to what happened to me is predetory lending (single mother). One more thing I thought I would share with you. I tried for the HOPE program guess what I did not qualify so, guess what I am still going to keep on doing what ever I need to do and you can mark my word you will never see a foreclosure outside my door. Even if I never get any equity in my home. So sometimes good people like myself finish last.

      • paul says:

        Unless I read the bill wrong it doesn’t sound like you qualify for any help because you bought the house before 2005

  2. jim says:

    I agree with what you’re saying Adam but I believe these are only for 30 year fixed loans. These aren’t ARMs and these aren’t negative amortization loans, so it’s not the most egregious of the offenders.

  3. Master Allan says:

    Call me sinister but a flood of struggling home owners puts me as a buyer in a much better position. I’ve been diligently saving for years and have put summer 2009 as the time to move into my first home. I do not understand how housing prices are still where they are here in Denver. A fair home in an average neighborhood still has asking prices in the mid $200k. These home sellers are a bunch of nuts with every tenth home on the street with a for sale sign and the same inflated prices. The economy status concerns me but also waiting for this housing market to crumble is what I dream about every night.

    While they’re at it with their homes I am selling my 1997 Honda Accord, a steal at $250,000.

  4. Kevin says:

    What happened to letting the market take care of itself? Adam Smith would not be happy with this.

    As a homeowner that did research and budgeted on how much I could afford, the fact that I am helping bail out people who were not as smart with their money is unsettling.

    But on the positive side, I’m glad they are not allowing the ARMs to be insured as that would open up a huge can of worms. I’m guessing most people that have those loans had no business buying a home in the first place so giving them another shot is just delaying the inevitable. It seems like the date range is pretty limited too which surprised me.

  5. jim says:

    Kevin, funny you should mention Adam Smith. We stopped using Smith’s ideas long ago (if we are to boil down economic policy down to the ideas of a single man) as they permit things like The Great Depression, we’ve been following more Keynes than Smith. If you read a little about Keynes (even just Wikipedia), and you may already know this, but he advocated government intervention to prevent major economic catastrophes. I think we can all agree that we don’t want a depression, even if a few people get relief they probably wouldn’t need if they were more prudent.

    The fact that only 30 year fixed mortgages are getting relief makes this bailout palatable.

  6. Rick Morley says:

    I can understand both sides of that argument. But it still feels like the primary benefactors of this lastest bill are the wealthy and the stupid. The stupid benefit by not having to face the consequences of buying houses they could not afford. The wealthy benefit by having the government bail out their companies. Just look at what Fannie Mae’s stock price did since the government announced they would inject money into the company. I agree that our economy would be in a bad place if Fannie Mae failed, but by bailing the company out, the government most directly benefited the rich.

  7. chanelle says:

    So this bill will not help people who are backwards in their homes? We live in Riverside County, CA, and the home values have dropped drastically since we bought. At one point our home appraised for over $500,000, now we’d be lucky if it appraised at $350,000. From this article it sounds like this bill will not help people who are backwards because of the market like we are. Is that correct? Is anything else in the works to help people in this kind of situation?

  8. saladdin says:

    Kevin,
    Our economy/society has not been a “free market” in many many years. The government regulates how fast we drive, who we can marry, what we pay for milk, what our electricity rates are blah blah blah.

    I know you know this (whether we agree on if this is good or not is not the issue) but government regulation/reach into markets are the rule not the exception. Anyone who thinks we have a “free market system” is just wrong.

    saladdin

  9. jim says:

    Saladdin: I agree, while it’s not a centrally planned economy a la the USSR, it’s certainly more Maynard Keynes than Adam Smith.

  10. Patrick Brennan says:

    HI

    FYI – you omit discussion of the key provisions which is the allocation of second home gain/loss. This will prevent second home (and vacation) home owners from foregoing gain on a portion of their second homes.

    Currently it is possible to sell your main home – avoid $500k of gain, and then move into your second home and do it again 731 days later.

    The new law takes this away (and makes a HUGE administrative nightmare to allocate the days in and out).

    Patrick

  11. jim says:

    Patrick – I left it out because I felt it was out of scope and affects fewer people, I didn’t want to make things overly complicated.

  12. Walt says:

    J Dog – Concerning your husband’s buyout, your tax rate is based on “taxable income” not gross income. Your itemized deductions reported on Sch A should reduce your taxable income near or in the 15% bracket. You can find your state tax rates on their website.

  13. Cassers says:

    My husband and I took out a loan responsibly, however when ones job changes because of economic factors and the same income is just not there, I do not consider myself to be irresponsible or a bad debtor. I think the article is typically black or white, not much room for gray areas.

  14. EX Argent Wholesale Rep says:

    All of you have missed the reality of the issue…and there are many issues.
    1st: when a lender forecloses on a home, they are forced to sell it below market value many times 30% or more. If enough homes are foreclosed on in an neighborhood it has a tremendous impact on the value of all of the homes in the neighborhood. Imagine a homeowner who took out an 80/20 ARM, responsibly improved their credit and now wants to refinance to a more secure 30yr fixed, or take cash out to make improvements/put a kid in college/etc, or has been offered a promotion that requires a move and now needs to sell the home…In order to accomplish any of these scenarios an appraisal will be ordered and the value of the home will be based upon the homes currently “on the market”…that means the home has to be for sale….if enough of those homes are on the market due to foreclosure, the values will be substantially lower…which means that the responsible homeowner described earlier will almost assuredely be be upside down due to devaluations. This could be you! I bet that “bailout” sounds like a good better idea now, huh? Imagine the impact that would have on a scale of national proportions.

    If you still don’t get it….maybe you should get more comfortable with the reality of the borrower’s who will actually qualify for the program. I guarantee it’s a lot less people than the politicians would have you believe. While they are saying it’s available now….the lenders/banks have the final decision on whether they offer it or not. It’s completely up to their discrection and will be used.

  15. EX Argent Wholesale Rep says:

    sorry for the typos & misedits…was typing fast and it’s friggin cold in here….

  16. Jeff says:

    As a recent college graduate, I do not sympathize with the individuals who are caught in this mess. Ultimately this bill rescues the irresponsible/ignorant and the lendors who had to have known the major risk in all of this. There is little reason that a house should appreciate at anything higher than maybe 1% plus the inflation rate, with the exception of extremely developed areas that are in high demand. Price increases of 10% on average are obviously going to price nearly everyone out of the market when real wage growth is only at about 3%.

    Now we have a bill that attempts to bail out these individuals and establish a price floor for housing. So now I pay double because this tax will fall on me, as well as the difference between the true market value and the artificial price floor established when I go t purchase a home. To say that I’m outraged over this issue is an understatement.

    To the individual who said we operate under Keynes, that is true, however Keynesian economic policy has been just as big of a failure as pure supply-side. See the lost decade in Japan as a perfect example. You cann pay someone to dig a hole, and then fill it back up and expect that to add any economic value to an economy. That is what you have to accept in the purest principles of th Keynes theory. On top of that it assumes government runs surpluses in booms, which they generally do not, and then uses those reserves during the downside of the business cycle. In addition to this look at the reckless policies of the Federal reserve who cuts interest rates to loosen credit during overleveraged times. This only serves to create commodity bubbles since there is no return to be made in savings accounts. Due to the pressure of commodity inflation and the fact that savings accounts net a negative real return during federal funds rates that basically are 0%, it creates another imbalance that has to be created somwhere down the line.

  17. Victor says:

    Am I reading this correctly? Anyone who purchased a home under the stimulus plan for the $7,500.00 credit prior to January , 2009 will have to pay it back as a no interest loan over a fifteen year period. It is NOT a tax credit, but only a loan. Is that correct? Also, if two people purchased the home, not married, will the pay back be at $500.00 per year over the payback period or 7 1/2 years or will it be amortized out over 15 years at $250.00 per year?
    I will appreciate your response to my e-mail address. Thank you.

  18. Celso says:

    IRS has some of my money.
    I only need $8,000 to get out of red tape.
    half of that will pay off my home bills and other half will pay off cards. three things will happen.#1 I would keep my dream home. #2 Get out of the red tape.#3 And we would spen more money. Maybe Drop all house payments were we can breath and spin money.

    And what i don’t use I’ll donate the rest.


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