THE YEAR OF THE HOMEOWNER
By Steven E. Scheinberg
While it may be too early to identify the slate of presidential candidates for each party, this much we know for sure: Democrats and Republicans generally disagree on how best to manage the economy, which recent polls show is the No. 1 issue for voters. Those same voters believe that the No. 1 economic problem is the real estate market meltdown. This should come as no surprise since most families’ primary source of wealth is their home.
Why shouldn’t they be worried? For the first time since 1933, home prices are expected to fall nationwide, home foreclosures have reached an all-time high and the capital markets and financial institutions are struggling, making 2008 the most difficult year since the Great Depression to get a mortgage.
Therefore, it comes as no surprise that Republicans and Democrats alike are churning out homeowner relief legislation faster than a speeding bullet. And with this being an election year, the number of bills will continue to grow.
The most significant legislation to date for homeowners is the Economic Stimulus Act of 2008, which provides a $170 billion stimulus package to keep the economy expanding. The plan offers a combination of cash rebates and investment incentives, while liberalizing the criteria for government agency involvement in the mortgage market.
The centerpiece of the act is cash rebates being sent to approximately 117 million low- and middle-income households, 20 million senior citizens who receive Social Security and 250,000 disabled veterans. Another important part of the package is the increase in the maximum size of mortgages that can be purchased by one of the quasi-governmental mortgage agencies. This is designed to provide assistance to middle-class homeowners who need to refinance their existing mortgage, but no longer qualify for a mortgage that can be bought by Fannie Mae or Freddie Mac.
To make these homeowners eligible, the bill authorizes Fannie Mae and Freddie Mac, for one year, to buy mortgages of up to $729,750, a significant increase over the current limit of $417,000. The rationale is that the dramatic increase in real estate values for middle-class families has created a need for larger mortgages. The higher limits will enable more families to refinance their current mortgage and avoid foreclosure, as well as help new buyers get reasonable financing in the midst of the mortgage crisis.
The bill also helps moderate-price property owners by making it easier to qualify for a government-guaranteed mortgage and increasing the dollar limit on loans insured by the Federal Housing Administration to $362,790. Again the goal is to assist lower-middle-income families to either refinance their existing home or buy a new one.
The Economic Stimulus Act of 2008 is not the only legislation out there to help homeowners navigate these difficult times. The little-known Mortgage Forgiveness Debt Relief Act is a $600 million plan from 2007 to help those who are still in homes they are struggling to keep, as well as families who have lost their home to foreclosure. The mortgage forgiveness bill, which is effective from Jan. 1, 2007 through Dec. 31, 2009, extends a provision in the 2006 Tax Relief Act that permitted homeowners to deduct the cost of mortgage insurance when computing their income tax liability. This aims to help young homebuyers who put little or no money down when they bought their house and are now facing higher payments on their adjustable mortgage. However, if you make over $100,000 per year, the deduction is not available.
The relief act also eliminates the tax liability that results if you are foreclosed and the bank sells your home for less than your mortgage. For example, if your bank lost $40,000 on the sale of your home, and forgave the borrower that debt, the $40,000 is considered taxable income; talk about adding insult to injury. Under the act, however, the $40,000 is no longer taxable income.
In addition to new legislations being passed by the federal government, individual states are also finding ways to protect homeowners. The most aggressive state legislation to be passed to date is in Florida, where both property taxes and adjustable mortgages are causing problems.
The Florida legislation, which was an amendment to the state’s constitution, reduces property taxes by about $9.5 billion over the next five years. Another important component of the legislation is the portability provision, which enables long-time homeowners to buy a new home and take accrued tax benefits with them.
At this point, the effectiveness of these acts is still to be determined. Nonetheless, once the presidential candidates are selected, it’s likely that you will see more proposals to help homeowners deal with the current crisis.
You should also see the bipartisan atmosphere disintegrate into petty squabbling over whose proposals are better. Regardless of how much fighting the candidates engage in, they both want the homeowner’s vote, which will ensure homeownership issues stay at the top of each candidate’s list of favorite causes. It sounds scary, but another boom might just be around the corner.
STEVEN E. SCHEINBERG SPENT 12 YEARS ON WALL STREET, WHERE HE MANAGED TWO RESEARCH DEPARTMENTS AND SPECIALIZED IN PROVIDING CORPORATE AND REAL ESTATE INVESTMENT BANKING. CURRENTLY, SCHEINBERG IS A PRINCIPAL IN NORTH AMERICAN CAPITAL ADVISORS LLC, A BOUTIQUE INVESTMENT BANKING FIRM THAT PROVIDES CORPORATE AND REAL ESTATE FINANCE AND RELATED SERVICES. HE CAN BE REACHED AT [email protected].
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