New Housing Law - 7/25/08

Jeff:   Foreclosures, unsold houses, falling housing prices.  These are the headlines we see every day. But Congress is trying to help.   The House just passed legislation in an effort to provide relief, and the Senate is likely to follow suit.  Here to explain how this law may help you is attorney Michael Solomon.

Jeff:  What will this new law do for the little guy?

Mike:  This new legislation gives the two big billion dollar mortgage corporations, Fannie Mae and Freddie Mac, a blank check to borrow money from the United States Treasury. This will allow these mortgage corporations to continue to buy mortgages, which means the banks can continue to loan money to home buyers.  Right now these mortgage corporations help finance 75-80% of new mortgages. Without this guarantee, the mortgage market could dry up and nobody would be able to buy or sell homes. This does help the little guy.

Jeff:  Does the bill help new homebuyers?

Mike: 1.  Yes.  The bill gives first-time homebuyers a refundable tax credit that works like an interest-free loan of up to $7,500.  Basically, the credit reduces your taxes dollar for dollar or is refunded to you if you do not owe any taxes. This benefit is limited to folks with incomes below $75,000 ($150,000 in the case of a joint return)

Jeff:  Does the law provide any other tax breaks?

Mike:  Yes, the law allows taxpayers who do not itemize to increase their standard deduction up to an additional $500 ($1,000 for a joint return) for a property tax deduction  in 2008. Under the prior law, you were only entitled to a property tax deduction if you itemized.  If you didn’t itemize, you lost the deduction.

Jeff:   For the millions of homeowners who have a mortgage but are not facing foreclosure, can this law help?

Mike:  Yes.  The new law actually lets homeowners refinance and reduce the balance of the debt.  Here is how it works.

• The bank has to agree to take a hit on the amount it is owed, the debt has to be reduced to 85% of the value of the home.
• The FHA will insure a new debt that must be a fixed rate of interest for at least 30 years. The idea behind the program is to let people write off some of their debt and get them into a fixed rate long term mortgage that they can afford to pay and keep their home.
• Now here’s the hitch.  The government will receive between 50- 100% of any appreciation on the house if it is later resold or refinanced. So in other words, you cut your debt now, but you pay the government later if your home appreciates.

The government has agreed to insure up to 300 billion dollars of mortgages which they estimate is around 400,000 homes.  Strangely, this program only is available to people who have not defaulted on their mortgage. It seems the very people who need the program the most, the ones who maybe took a pay cut and missed a payment, will not be able to use the program.

Jeff:  Some say this new law is the biggest change in the financing of housing since the Great Depression. Whether this new law will help solve the housing crisis or be a waste of billions of tax payers dollars, we will have to wait and see.