Inside the Housing Rescue Bill
In case you missed it, Congress has passed the so-called Housing Rescue bill, and President Bush is poised to sign it into law despite his opposition to certain components of the bill. So what’s the Housing Rescue bill all about?
What follows is a rundown of the benefits included in the bill…
Homeowner benefits
Up to 400,000 homeowners at risk of foreclosure will be allowed to refinance into lower-cost mortgages insured by the Federal Housing Administration. To qualify, borrowers must live in an owner-occupied home, have a relatively high level of debt to income, and agree to share the profits on an eventual resale with the government. Moreover, the lenders must agree to write down the loan principals, meaning that lenders could use this an opportunity to shed bad loans and hang onto better loans.
Homebuyer benefits
Once this bill becomes law, first-time homebuyers can qualify for a tax credit of 10% of their new home’s purchase price, up to $7,500. The income caps for the full benefit are an adjusted gross income (AGI) of $75,000 for single people and $150,000 for couples who file taxes jointly. The thinking here is that the tax credit will help to stimulate a sagging real estate market. The catch is that this “credit” is essentially an interest-free loan that has to be repaid over the following 15 years.
Community benefits
The Housing Rescue bill offers nearly $4 billion to communities to purchase and rehabilitate distressed homes. The homes will then be sold to low- or moderate-income individuals with the profits being use to fund neighborhood development. The thinking here is that foreclosures have downstream effects on neighboring property values. By attempting to stem the tide of foreclosures, the bill seeks to stabilize neighborhoods and reduce this negative impact.
Fannie Mae and Freddie Mac benefits
In hopes of stabilizing the financial markets, the bill also makes explicit the government’s backing of the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac). Fannie Mae and Freddie Mac own a combined total of $5 trillion in U.S. mortgages, nearly half the nation’s total.
The Treasury now has the power to rescue both companies through loans or cash infusions. The bill also makes permanent an increase in the ceiling of “conforming” loans to $625,500. This measure, which is intended to boost to the high end of the real estate market, was introduced in the original economic stimulus package.
Photo Credit: wonderal
Published on July 29th, 2008 - 14 Comments
Filed under: Economy, Mortgages, Real Estate
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Actually that ‘tax credit’ is an interest-free loan. The amount given as a ‘credit’ has to be repaid over fifteen years by the buyer. For example, if you receive the maximum $7500 ‘credit’, you will have to repay $500/year for fifteen years.
Comment by savvy — Jul 29th 2008 @ 10:12 amI like the idea of the government sharing the profits at the eventual sale of the property. Hope they can enforce that part of the bill. I don’t like the idea of the bill bailing out those who might have gotten envolved in a bad mortgage arrangement.
Comment by "Mo" Money — Jul 29th 2008 @ 10:32 amSo this gets me, the reasonable person, nowhere. Still unable to afford a home for 5+ years. Most likely longer given the stricter lending requirements coming up. And the probable demise of low 5% downpayments. But everyone who just went ahead and bought a house on a whim when they couldn’t afford it get bailed out and get to keep their house.
All on my taxes. And I can’t even get the interest free loan benefit because I make 1k over the limit.
Wouldn’t a better saving bill be to kick everyone out of their house and use the money instead to send everyone in america to Economics 101 and Home Budgeting classes?
Comment by Angie — Jul 29th 2008 @ 10:40 amSo you know what. Years ago I really wanted a first generation ipod. But being a college student and a $500 price tage I couldn’t afford it. But guess what?! I went to the apple store and they said they would sell it to me on an interest free loan! Only catch is after 12 months the interest rate would jump. But initial monthly payments would only be $25 bucks a month. I thought to myself… “I really….really want it. And I can afford $25 bucks.” And it was bought.
Jump forward 12 months. I had only paid the minimum payments on it. My balance was ~$400. But the second, generation came out and the value of my ipod was only $200. I was upside down in my loan ):
Two years later. Another generation has come out. My original ipod which I still owed $200 on was now only worth $50. What a bummer. Worst part is with the jump in interest rates, my $25 payments are only lowering the principal by $5/month. This just doesn’t seem fair or worth the payments. I think the store clerk was a crook for letting me do that.
I’m in luck though, the govt saw how my outstanding balance was greater than the market value. Listen to this deal they gave me. They would lower the balance to 90% market value! I did it and my balance got lowered by almost 30%! They saved me from paying that absurd amount I agreed to pay in the first place. Thinking back, I shouldn’t have agreed to it knowing what I know now. But I wasn too busy drooling over it in the first place I would have realized I couldn’t afford it. But good ‘ol govt. bailed me out.
10 Years Later: I found my original ipod in the attic! I looked on ebay and it is now a collectors item. It is selling for $400. Not as much as I originally bought it for, uncle sam ended up subsidizing most of the loan. So if I sell it, I’ve actually MADE money.
What a deal.
Comment by Katrina — Jul 29th 2008 @ 11:26 amI think that people need to learn from their mistakes. If we remove the pain of making the mistake, it encourages further similar behavior, which is NOT good for people, because Uncle Sam won’t always bail them out.
Comment by James@capitalcouplesfinance.com — Jul 29th 2008 @ 12:08 pmI’m with Angie - this gets me, the guy who took his time, didn’t bite off more than he could chew, didn’t buy a mansion on my non-mansion salary, absolutely nowhere. This is a huge mistake, bailing out people who got themselves into the situation. How is anyone supposed to learn from this? Make a big mistake, big bad government will come save you. No sense at all.
Comment by David — Jul 29th 2008 @ 12:14 pmTotally think adults should understand the idea of there being consequences; the only upside of this bill, and the real downside of this fiasco has been the damage to the communities involved. The domino effect has been sad to see, so I hope some good will come from this aspect of the bailout.
Comment by jay — Jul 29th 2008 @ 1:12 pmBums me out, though, as a long time homeowner and taxpayer. No rewards for us being responsible grownups.
#4 - Katrina - I love the analogy
I bought a house 3 years ago, a modest one I knew I could afford, with the plan to buy another house in 5 years as an investment property. The second house is going to be harder to do since prices will stay inflated, plus I should have bought a bigger house I couldn’t afford so I could get bailed out.
I’m not a fan of this bill. Even as a home owner, I’d rather see prices fall and correct themselves, rather than have tax money prop them up unnaturally high.
Comment by FlatGreg — Jul 29th 2008 @ 4:34 pmI agree with many of the other comments. In a capitalist economy, businesses and individuals who make poor decisions need to fail. Unfortunately, in this case, those who made bad decisions are getting bailed out, while those who made intelligent decisions or, like me*, got lucky will pay with our taxes.
*I had purchased a 100% (80+20) financed home with a 30-yr mortgage, but then re-fi’d to drop the 20% mortgage once the value went up. Note, however, that I did not pull out any equity in the process to buy a boat.
Comment by Nehal — Jul 29th 2008 @ 5:54 pmOnce again, Uncle Sam manipulates the market! First, they create ridiculously low interest rates and overstimulate the housing market, then they try to stop the inflation they created (by raising rates) - and now their using gov’t money (which they don’t really have) to try to bail themselves and others out…
Comment by NCN — Jul 29th 2008 @ 6:22 pmOne of these days, and I’m thinking it’s gonna be sooner than later, this house of cards is going to fall… and when it does… wow..
NCN
Didn’t this bill also make property taxes deductible for those that don’t itemize?
Comment by justin — Jul 29th 2008 @ 8:44 pmI don’t think this bill is going to help anyone. I feel the government is trying to do anything that makes them look good. They still are not helping with the real problem that they helped to create.
Comment by Mark Nelson — Jul 30th 2008 @ 8:29 amHow does our gov’t plan on recouping the $300 billion they are pumping into it? Future sales?
Comment by Chris — Jul 30th 2008 @ 2:29 pmAs for the 90% refi, the lender has to agree to the loan write-off which is not likely to happen in my opinion since the 90% loan requires that you are up to date on your payments. From the bank’s perspective why would they write down a loan that is being paid on time?
Comment by Joefnblow — Aug 1st 2008 @ 1:06 pm