Mortgage Provisions in New Financial Overhaul Bill

The Financial Overhaul Bill which will be signed into law soon when President Obama pens his name on the legislation.  The bill is over 2,300 page long and includes new rules for nearly all facets of the financial economy.  Although much of the attention thus far has been on provisions focused on limiting large bank’s proprietary trading activities there are substantial new rules created for the mortgage industry.  The Mortgage Banker’s Association released THIS SUMMARY last week which does a good job of touching on the highlights.

The chatter in the mortgage industry thus far is that it remains to be seen how regulators will enforce the new laws.  Therefore, it could be quite some time before we can measure the bill’s impact.  For now, here are a few highlights that drew my attention:


a) One of the duties of the newly created Consumer Financial Protection Bureau (CFPB) is to “conduct financial education programs out of special office of financial literacy.”

b) Prohibits loan originators from steering borrowers into loans with more adverse terms than they qualify for.  If the loan originator is found to have violated this rule they will be liable for additional costs.

c) Prohibits long-term prepayment penalties.  Lenders must always offer a loan option with no prepayment penalty.

d) Requires lenders who securitize mortgages to keep a least 5% of risk on their own books.

Bad & Ugly

a) The new 5% risk retention requirement above will likely improve underwriting quality but it will also cause costs to increase which will be reflected in higher interest rates.

b) Prohibits from making loans without having documentation of income that supports the ability to repay the loan.  In many cases this is good but unfortunately this provision will hurt self-employed borrowers and applicant’s who have significant assets but not much in the way of “documentable” income.  Stated income loans are officially dead.

c) Adds several new Truth-in-Lending disclosures many of which already are covered on the new Good Faith Estimate which came out January 1st.

d) Imposes more regulations and requirements on appraisals.

In reading through the summary it looks as though Congress wrote into law many provisions that the free market had already taken care of (i.e. “stated income” loans are no longer offered).

Future of Fannie and Freddie could be wrapped up in amendment

The WSJ is reporting in this post that an amendment to the financial overhaul is bill is expected that would end the government’s subsidy of Fannie Mae & Freddie Mac in the future.  If you’ll recall the two quasi-governmental agencies that secure somewhere around 70% of all conventional mortgages in the US were taken into conservatorship by the Federal Government back in 2008.  The new bill would eliminate federal subsidies of the two agencies.  Given the financial conditions of each we can safely assume that should this bill pass they’d need to be dissolved or reorganized in order to survive.  From a free market perspective I don’t think this is such a bad plan.  However, Fannie & Freddie play a crucial role in keeping borrowing costs relatively low in the US.  The elimination of these two giants would certainly make borrowing more expensive on the part of consumers AND make mortgages harder to qualify for.  For a detailed explanation of the crucial role that Fannie & Freddie play in our mortgage market read THIS POST which I wrote back in July of 2008.

Here is a summary of the bullet points in the amendment:

1) The conservatorships for both companies would end two years after the bill becomes law, though the government would be able to extend it for another six months if necessary.

2) Three years after the conservatorship ends, their government charter would expire. Then the companies would have 10 years to operate under a special holding company so that they can dissolve remaining mortgages or debt obligations they held as government-sponsored enterprises.

3) After the companies leave conservatorship, their mortgage assets would have to steadily decline, capital standards would have to go up, and the size of loans they would be able to purchase would shrink.

4) The companies would have to pay state and local taxes.

5) Fannie Mae and Freddie Mac would have to pay a fee “to recoup full value” of the government guarantee they enjoy.

6) It would reestablish the $200 billion funding limit the government set up for both companies in 2008. On Christmas Eve 2009, the Obama administration lifted that cap to an unspecified level.

Tax laws: Emergency Economic Stabilization Act of ’08

Much of the attention regarding the new “bailout bill” has focused on the $700 billion that the Federal Government will allow the US Treasury to use in order to stabilizing the financial system.

However, there were a lot of new tax laws that also found their way into the bill.  2008-emergency-economic-stabilization-act.pdf.

Here are some highlights:

The rescue plan extends a temporary rule for cancellation of indebtedness income. When a lender forecloses on property, sells the home for less than the borrower’s outstanding mortgage and forgives all or part of the excess mortgage debt, the tax code treats the canceled debt as taxable income to the homeowner. The Mortgage Forgiveness Debt Relief Act, enacted in late 2007, excludes from federal tax those discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principal residence and incurred in the acquisition, construction or substantial improvement of the residence. The new law extends this treatment from the end of 2009 through 2012.

* Congress included an alternative minimum tax (AMT) patch in the new law.  Under the new law’s patch for the 2008 tax year, the AMT exemption amounts are $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household, and $34,975 for married couples filing separately for 2008.

* The new law extends through December 31, 2009, the above-the-line higher education tuition deduction. The deduction allows eligible taxpayers to deduct the costs of qualified higher education expenses paid during the year for themselves, a spouse, or a dependent.

* The new law extends several energy efficiency and energy property tax incentives.  The Code Sec. 179D deduction for energy efficient commercial buildings is extended through December 31, 2013.  The Code Sec. 25D residential energy efficient property credit is extended through December 31, 2016, along with adding incentives for residential small wind investment and geothermal heat pumps and authorizing taxpayers to use the credit to offset AMT. Congress also reinstated the Code Sec. 25C residential energy property credit for property placed in service in 2009. Additionally, Congress modified the energy efficient appliance credit for manufacturers of qualifying dishwashers, clothes washers, and refrigerators.

2008 Housing Bill= Market Netural

I’ve described the 2008 Housing Bill to many associates and colleagues as “market neutral”.  Although the politicians in Washington have touted themselves as real estate market heroes with the passage of the new law the bottom line is that many of the provisions in the bill won’t do much to spur a recovery anytime soon.

Marcie Geffner wrote a great article on Inman news supporting my view.  Here is a link to her article, “Housing bill no panacea“.

Housing bill alters capital gains exclusion…..

I came across this article in the WSJ today and was surprised to see it.  Embedded in the 700-page housing bill that President Bush signed into law was a change to the way the IRS will allow homeowners to exclude capital gains tax for the sale of a primary residence.

Under the previous rules a homeowner could exclude up to $500,000 ($250,000 for an individual) of a capital gain on the sale of their primary residence so long as they lived in the home for 2 of the previous 5 years from the date of sale.

For example, a couple buys a home in Portland for $375,000 on January 1, 2005.  They live in the property for 3 years as their primary residence.  During their time in this home they also buy a vacation property in Bend for $300,000 on January 1, 2007.    On January 1, 2008 they sell their primary residence in Portland for $500,000 ($125,000 gain) and move into their vacation home in Bend and occupy it as their primary residence.  On January 1, 2009 they sell their home in Bend for $500,000 ($200,000 gain).

Under this scenario the couple would be able to exclude the $125,000 capital gain they incurred on January 1, 2008 when sold their home in Portland as well as the $200,000 capital gain which they incurred when they sold their property in Bend on January 1, 2009.  This is known as “house-hopping”.

Under the new law this will no longer be the case.  Because the home in Bend was allocated for 1 year of “non-qualified use” out of 3 they would only be able to exclude 2/3rds of the $200,000 capital gain from tax.  The remaining 1/3rd would be subject to capital gains tax.

For most Americans this change to the capital gains tax exclusion will not have an impact.  However, for many others this is bad news.

Here is another article from Kiplinger’s that is applicable to this subject.

Details on Tax credit for 1st time home-buyers

Last week President Bush signed the new housing bill into law.  One of the provisions which was included in this bill to help the ailing housing industry is a tax credit for first time home-buyers.  I wanted to take a quick moment to highlight the details for those of you who will qualify for this credit:

*Who qualifies for this credit? Anyone who buys a home from April 9, 2008-June 30, 2009 who is buying their first home or who had not owned a new home in the previous 3 years from the date of purchase.

*What are the terms of the credit? The credit is actually an interest-free loan worth up to $7,500 for couples filing jointly or $3,750 for those who file individually.  A tax credit is different from a tax deduction in that it actaully reduces your tax liability dollar for dollar (whereas a tax deduction reduces your taxable income which means your tax liability is only reduced by the amount of the deduction times your marginal tax rate).  As an example, if you were expecting a tax refund for $2,500 you’d actually get $10,000 ($7,500 more) with the tax credit.

However, you don’t get to keep this tax credit money for ever.  The IRS will then collect $500 per year ($250 for individuals) for 15 years from your tax refund (or added to your tax bill) to repay the credit.  Although this is kind of drag this is still a great deal.

*How much will this help? It’s difficult to say for sure how much of an impact this will have.  However, if I were a first time home-buyer and didn’t have a down-payment saved up one possibility for me would be for me to borrow $7,500 from a family member or close friend to use towards a down payment (FHA loans only require 3% down so I could buy a $250,000 home and put 3% down with this tax credit) and then pay back the loan when my tax refund became available.

I referenced this article as well as other resources for my information.  See also- &

Summary of the housing bill expected to be signed into law…..

On Saturday the Senate passed the Housing Bill. This 700-page law brings a variety of new rules and provisions that will impact the housing industry in a variety of ways.  The President is expected to sign the bill into law early this week.  Here are some summary points that any real estate professional should be aware of:
*Elimination of Down Payment Assistance (effective Oct. 1, 2008): The bill will eliminate the use of seller-financed down payment assistance programs (DPA) in conjunction with FHA loans.  This loophole which effectively allowed the seller to give a buyer a 3% down payment so they could buy a home with a FHA loan putting $0 down grew in popularity over the past 6 months with the collapse of 0% down mortgage options.
*First Time Home Buyer Tax Credit: The bill calls for a tax refund for first time home buyers worth up to 10% of the sales price not to exceed $7,500.  However, according to the artilce, “The refund…serves more as an interest-free loan, since it would have to be paid back over 15 years in equal installments.”
*Support for Fannie Mae & Freddie Mac:  For follower’s of this blog you may remember the posting I wrote back on July 15th.  This article explained the concern over the two mortgage giants’ capital structure and what their failure could mean for the real estate market in the US (here is a link to that article). 

This bill moves to address the worries over the two mortgage companies by allowing the Federal Government to support the stock price as well as share the risk on a portion of their loan portfolios. 

*Permanent increase to “conforming” loan limits:  The bill would permanently increase the loan limits for Fannie Mae & Freddie Mac to buy and securitize from $417,000 up to $625,500.  However, these new loan limits will only impact high-cost areas and will have little to no impact on the Portland-Metro Area. 

*Greater Regulation?:  In exchange for the government’s support the bill will create greater oversight of Fannie Mae & Freddie Mac by Federal regulators.

*FHA down payment increase?: According to the article the bill will also increase the minimum down-payment for FHA loans to 3.5% from the current level of 3.0%. 

*FHA loans for struggling homeowners: The bill also allows the FHA to insure up to $300 billion in new mortgages to refinance existing loans for homeowners who are “trapped”.  There are a variety of provisions that a homeowner and lender must agree to in order to qualify for one of these mortgages.  For a complete summary of the provisions of this section of the bill check this article.