The new legislation that passed is surely welcomed in a market crisis, but could it be the equivalent of the FEMA response to the New Orleans disaster applied to the real estate market? Why not in an election year? The bill is being praised by the real estate industry of course, and I can see why. However, we really won't know the full impact until later when it has had a chance to work its magic or look like a band aid on a festering wound, one that needs to heal itself over time.
There are two ways to look at this bill as is the case with most issues. Is it a bailout or a rescue? Let's consider the pros and cons. The bill seeks to slow down or stop the trend of home foreclosures and restore confidence in the mortgage section of the financial markets, mainly Fannie Mae and Freddie Mac, which in turn will benefit many lenders and borrowers/ homeowners, and maybe the economy.
Refinancing Existing Mortgages to Avoid Foreclosures: Homeowners who cannot make their mortgage payments and face foreclosure will be able to refinance into more affordable fixed rate loans insured by the federal government. The plan is set to guarantee up to $300 billion of these loans, enough to handle about 400,000 mortgages. Lenders will need to reduce the original loan balance, and take losses as a result (but new loan fees will apply). This does not phase the voice of the mortgage industry compared to more foreclosures. According to Kieran P. Quinn, CMB, Chairman of the Mortgage Bankers Association (MBA), the House of Representatives passage of the housing bill is praised.
“This legislation will do so much good for so many people,” said Quinn. “The FHA modernization and GSE oversight reform provisions will help stabilize the housing market. The FHA rescue plan will help thousands of families across the country refinance their mortgage and stay in their homes, while the tax incentives will encourage potential buyers to get off the sidelines and help stabilize home prices. And the GSE backstop provisions will help quell the turmoil in the credit markets.And not to be overlooked is an effort by Chairman Frank and Chairman Rangel to spur development of affordable housing by harmonizing the Low Income Housing Tax Credit and FHA multi-family insurance programs. This is a cost free way to make these two important programs work together to build more affordable housing across the country.Considering the current state of the real estate, mortgage and credit markets, I can confidently say this is the most important piece of housing-related legislation that we have seen in more than a generation. It will help stabilize the mortgage market, stop the downward spiral of home prices in parts of this country and provide additional tools for lenders to work with borrowers to avoid foreclosure whenever possible.” How's that for an endorsement?
In a contrary view, Mark Zandi, chief economist of Moody's Economy.com states "It's a help, but it's modest in comparison to the number of homeowners who are facing default and foreclosure. The nation could face nearly 3 million first-mortgage defaults this year. Of those, as many as 1.5 million mortgage holders could lose their homes. That 400,000 [of loans that will be modified under the law] is over the life of the program," Zandi says. "So I don't know if that provides much relief in 2008." - That is a very somber and realistic assessment, and keeps things in perspective.
The $7500 Tax Credit for First Time Home Buyers: Tax credits are so fun to deduct directly off of taxes owed that they carry a lot of weight. This is a landmark and sizzling part of the new legislation for new homeowners, but it has a catch. The credit is actually an interest free loan that must be paid back over 15 years. So it really isn't a tax credit in its purest form. The balance of this loan must be paid back if the property is sold and it hasn't been repaid.
Reverse Mortgages - Benefits for Seniors: Reverse mortgages allow a homeowner to receive monthly income from their home equity while still living in the home. The balance is paid off at death so it allows for seniors (age 62 and up)to stay in their homes and benefit from their accumulated equity. The new legislation increases the limit on the FHA program to $625,000.
Low-income Housing. The new legislation allocates additional funds to be distributed to the states to help the affordable housing programs.
Read more details on the National Low Income Housing Coalition web site. .
Although the new legislation is a major effort to slow down the real estate market price declines and foreclosures, it may only be a band aid that may work in the short term, but the longer term needs time to bring balance into a system that was out of balance. The worldwide financial markets are also hurting, and the issues are more far reaching than real estate.