Real Rescue or Only Bandage?
Can the 2008 Housing Act Stabilize and Turn the Real Estate Cycle Around?
Who would have only 5 years ago expected that we would be staring down such complex and turbulent times in real estate?
Last week, President George Bush signed The American Housing Rescue and Foreclosure Prevention Act of 2008 (the Housing Act) into law. It is the most sweeping housing legislation since the Great Depression. The new Act authorizes the Department of the Treasury to stem the tide of home foreclosures and provide a lifeline to mortgage lenders. With inventory in many large cities sitting at almost a one year level, and foreclosures expected to surpass 6 million by 2012, they have a huge task ahead.
1. $300 billion in FHA loans for Homeowners to Refinance
CLIFF NOTES:
The Act could avoid foreclosure through refinancing into lower-cost mortgages insured by the Federal Housing Administration (FHA).
THE GOOD NEWS: It will help an anticipated 400,000 people whose loan servicers are willing to accept a write-down on principal.
REALITY: To qualify, borrowers must have a relatively high level of debt to income, use their homes as primary residences and agree to share any profits from any eventual resale with the government.
2. $4 billion to Buy and Rehab Foreclosed Homes
CLIFF NOTES: The Act offers $4 billion for local communities to buy homes at a discount, rehabilitate them, sell them and use profits for neighborhood development.
THE GOOD NEWS: This could help many low- and moderate-income families in holding on to the American Dream.
REALITY: Should reduce crime, especially in the inner city and low income areas.
3. New Home Buyer Tax Credit of up to $7,500 for Qualified Buyers
CLIFF NOTES: It’s not really a credit but really a loan.
THE GOOD NEWS: It’s refundable credit and it’s a zero-percent loan. An estimated 3 million buyers could be eligible for the tax credit.
REALITY: You got to pay it back.
4. New Deductions for Real Property Taxes
CLIFF NOTES: New deductions, in addition to the existing standard deductions.
THE GOOD NEWS: It’s effective immediately.
REALITY: These are “above the line” deductions.
5. Change in Vacation-home Status
CLIFF NOTES: The personal resident exclusion is still good on your personal home but not on your vacation home or rental property converted to a home.
THE GOOD NEWS: It’s effective until Jan. 1, 2009 so you still have time.
REALITY: The decade-long free ride is over.
So is this a real rescue of the real estate and mortgage markets or only a bandage to help us through till we have a new President next year? What do you think?
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The short answer to your question, “Can the 2008 Housing Act Stabilize and Turn the Real Estate Cycle Around?”
NO
However, this entire debacle will rise and fall on adjusted property values due to foreclosures. Until the foreclosures are totally clear from the deck there will only be bandaid recovery schemes.
This is only a bandage - most of the real changes are in the small details (like the down payment on FHA loans increasing to 3.5%!! Now where’s that being reported?). The supposed 400,000 homeowners that will be saved from foreclosure is a crock. The ENTIRE plan hinges on voluntary loan principal reductions by the lenders and I’ve not heard of that happening anywhere. I’ve heard of great rate deals being offered, and payment forbearance plans - but nary a principal reduction.
Our representatives don’t have the courage to shout out “Sorry! It’s too late to save you from your bad choices this time, but we’ve got you covered in the future!”
I wonder what kind of plan they’ll dream up next?
REALonomics has reviewed the salient features of the legislation and although we do not wish to be skeptical the truth of the matter is this piece of legislation will do almost nothing for the real estate markets.
A step further; this legislation is clearly a political move, not an economic correction. It may, indeed, actually make matters worse, since it appears to be filled with large amounts of ambiguity.
Lastly, Swanepoel’s image of the man wrapped in tape is appropriate…Washington continues to think duct tape is a solution to many economic problems faced by the American people and at the end of the day the image of the duct-taped man will be you and me. - REALonomics
This bailout will likely need a bailout. It appears that the primary objective of this legislation was to provide a safety net for Fannie Mae & Freddie Mac, (which will only be the beginning). The rest was whitewash to make it sound like a step in the right direction. In reality, the estimated “400,000″ that are supposed to be helped by this plan, are only a small portion of the estimated 6 million forclosures expected by 2012. I don’t think that we will see any significant numbers of re-financed mortgages that involve “loan servicers” reducing the principal of the original loans. Let’s all remember that a great majority of these loans were sold as pooled mortgage-backed securities, and are not owned by the banks.
Additionally, by eliminating the “Seller funded” down payment assistance loop-hole in the FHA guidelines, and increasing the minimum down payment for FHA loans to 3 1/2%, we are eliminating a tremendous number of first-time buyers from the buyer’s pool, at the only time that they might be able to purchase a home. This will only slow the recovery, as the inventory of homes for sale will increase even further.
I am not bashing our Legislators for their efforts, however we seem to settle for whatever can be accomplished in time for their next break, and never really get a comprehensive plan for the future.
Prior to this “bailout” being passed, we have seen a tremendous reversal in the real estate market, however what is reported is generally a lot of statistics related to “Median Home Price”, and “months of inventory”. The Good News is that we (Southwest Riverside County, California) have seen the number of SALES surpass every year since 2002, with the exception of 2005. Yes, that’s right the area that has been declared to be the worst housing market in the country, by almost every report you read, is seeing a tremendous number of individuals and investors take advantage of the opportunities that currently exist in our area. NOW is the time to buy a home.