July 25, 2008
What Does the Housing Bill Do?
Posted by Christine Hurt

The news has been abuzz this week after President Bush signalled he would not veto the housing bill, H.R. 3221, which was passed soon after by the House of Representatives.  The Senate is also expected to pass the bill today or tomorrow.  The bill is characterized as the bailout bill, bailing out not only Freddie Mac and Fannie Mae, but also homeowners with mortgages on the brink of foreclosure.  I want to talk about only two aspects of the very large bill, described today in a NYT article Housing Bill Has Nearly Something for Everyone.

The "bailout" part of the housing bill comes from the section allowing homeowners to rewrite their existing mortgages into 30-year fixed mortgages for an amount equal to 90% of the market value of their homes.  Obviously, this provision helps those with mortgages for over 90% of the market value of their homes.  However, 10% is not all that's at stake here, given that many homeowners at 100% mortgages based on much higher market values.  So, someone with a $300,000 mortgage on a $300,000 house whose value has slipped to $250,000 can swap for a mortgage for $225,000.  Sweet, huh?  Except that your lender has to agree.  So of course I'm interested in knowing whether lenders will take the bird in the hand of the $225,000 mortgage (which must be qualified for and will be guaranteed) rather than take their chances in the foreclosure process that they will get a better deal.  It may be that bill saves all parties these transaction costs and creates a win-win situation, but if that's the case, wouldn't the parties have negotiated a settlement on their own?  Is the federal guarantee really the deal-maker?  For homeowners to take advantage of this renegotiation, their mortgage payments must be 30% or more of their monthly income, but they must be able to qualify for the new loan.  I have seen figures that this provision would help maybe 300,000 out of the 3 million facing foreclosure.  (Borrowers also must be residents of the house, not "flippers" or other investors.)

Of course, one of the problems of having a mortgage that is too high is that one way to escape is to sell your house.  But, we need buyers for that, and most buyers have their own houses that someone will buy.  So, if fewer people are buying houses, it sort of ruins the whole circle of real estate life.  So, another provision of the bill is that first-time homebuyers can get a $7500 tax credit.  In theory, this will give homebuyers $7500 more for a down payment.  So, if I'm deciding whether to buy a house in August, will the ability to get $7500 in a tax refund (or less, depending on my tax situation), spur me into the purchase?  Perhaps if I am perfectly liquid.  If I have the $7500 in savings but don't want to touch it, then I might be willing to deplete my savings knowing that I can refill it in April.  But are we really talking about truly liquid homebuyers?  Or are we talking about the stereotypical first-time homebuyer scraping together a downpayment?  Will we see "first-time home buyers tax credit anticipation loans"?  Oh, and the $7500 is really an interest-free loan, which must be repaid.

BTW, I received a letter yesterday from my mortgage lender saying that I was pre-approved for a very large home equity loan.  In the words of Robert Earl Keen, "the road goes on forever and the party never ends."

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