Richard Barrington

While discussion of the Housing and Economic Recovery Act of 2008 has focused on how it will help home owners facing foreclosure, the fact is that the law will affect both existing and new home owners. The following are some highlights, as they concern each group separately and together.

Helping Existing Home Owners Avoid Foreclosure Perhaps the centerpiece of the bill is a program to provide government insurance for certain at-risk mortgages where the lender is willing to write off some of the existing loan's balance. The resulting loans must be 30-year, fixed-rate mortgages with a loan-to-value ratio not exceeding 90%.   This program is voluntary, but for lenders it means an opportunity to guarantee recouping at least a portion of loans that were in danger of defaulting. In the long run, this may be more profitable for the lenders than going through foreclosure and resale of the home. For home owners, it means the opportunity to refinance to a new 30-year, fixed-rate mortgage with a reduced balance. However, home owners who benefit from this program will be required to pay FHA mortgage insurance and share any home equity that results with the government, to help defray the costs of the program. Only homes used as a primary residence are eligible.   Effects on New Home Loans The law also affects new home loans, but not entirely in ways which make it easier to obtain a new home loan:

• First-time buyers who meet certain income guidelines will be helped by the creation of a $7,500 "refundable tax credit." This credit is given upfront and is paid back to the government over 15 years. A refundable tax credit, it will first offset tax liabilities and then any extra will be paid to the home buyer.
• New home loans insured by the FHA will not be allowed to have seller-funded down payments. While this practice was often used to help a seller secure a buyer, studies determined that mortgages with down payments provided by sellers were several times more likely to end up in default.

Assistance for Both Existing and New Home Loans Some provisions help with both existing and new home loans:

• Conforming loan limits in certain high-cost areas were raised to a maximum of 150% of the current standard limit, which at present means a ceiling of $625,500 in those areas. This will make more government-insured new home loans available in areas where real estate is most expensive, while allowing some home owners in those areas to refinance at a lower interest rate by switching from a non-conforming to a conforming loan.
• An addition to the standard deduction has been created to offset property taxes. This amounts to $500 for a single home owner, or $1,000 for a couple filing jointly.

The programs created by this new law go into effect on October 1, 2008, and are not designed to be permanent. The law's provisions will expire on September 30, 2011.

 

Sources:

U.S. Department of Housing and Urban Development

U.S. Senate Banking Committee

OpenCongress.org

 

About the Author:

Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.