There's a phrase that has grown in popularity and use over the last year or so, "privatize profits and socialize losses." It's not used in a positive manner. The thinking is something like this. Everyone is happy to let markets roam free when they are going up and many are making a killing, but when prices drop and losses mount, government intervention appears. Recently, the phrase has been applied to Bear Stearns, Fannie Mae, Freddie Mac, and now Homeowners facing foreclosure.
After reversing course on his promise to veto earlier proposed housing bailout bills, President Bush made good on his vow made last week to sign the latest version passed by Congress. With unusual expediency, the bill flew through both the House and Senate and was signed into law today.
Americans seem split on their support for a government sponsored housing bailout. According to a Gallup Poll in March, as reported in the USA Today, 56% supported government aid to borrowers; 42% opposed it. In another poll, 53% oppose government intervention, 29% favor federal aid, and 17% were not sure. Either way, it appears to be a hot button issue for many. The media remain focused on the sad stories of people losing their houses, while those opposing a bailout have been highly vocal, even starting a web site specifically for this issue.
My personal belief is that markets will run their course in a more efficient manner than government intervention. But if price volatility is a concern, then upside volatility is just as concerning as downside volatility.
One of the rules of business is that you shouldn't talk politics in the office. Since this is a company blog, it's pretty much the same thing. So, I'll refrain from further politicizing. Actually, the reason for this post is to bring to everyone's attention what is actually in this bill and how it may affect our clients and other interested parties.
The major provisions of the new Act, which will garner the most media attention are:
FHA insurance of loans
The primary aim of this new law is to help as many as 400,000 distressed homeowners pay off their mortgages and replace them with more affordable, government insured loans. The loans would be insured by the Federal Housing Authority, who has authority to insure up to $300 billion of such loans. The program is voluntary for the lenders, and no picnic for them. The must agree to take a loss and reduce the principal of the loan that gets refinanced. The lender then pays upfront fees to an insurance fund, and the borrowers pay yearly insurance premiums of 1.5%.
Here's the kicker. The Congressional Budget Office estimates that 35% of the refinanced loans will end up in trouble again!
Fannie and Freddie Funds
Government sponsored entities, Fannie Mae and Freddie Mac will be granted a lifeline (they have opted to use "phone a friend"). The Department of the Treasury is given the authority to extend a temporary lifeline to the GSEs and to purchase equity in the firms.
Yep, the federal government is going to buy equity in publicly traded companies.
Flip That House, Government Edition
$3.9 billion has been made available to state and municipalities to buy and repair foreclosed properties. This was the issue over which Bush had threatened to veto the bill. So, when your new neighbor turns out to be City Hall, I hope you have a really big basket of muffins to welcome them with!
Then there are the provisions that may or may not get the big headlines, but are more likely to have an impact on individuals and their financial planning and decision making going forward:
First-time home buyer credit
First-time home buyers will get a credit (not a deduction, but a credit) of up to 10% of the purchase price of a residence between April 9, 2008 and July 1, 2009. The maximum credit is $7,500 (kind of making that whole 10% thing a non-issue), and individuals earning more than $95,000 or couples earning more than $170,000 do not qualify.
Standard Property Tax Deduction
Due to the deductibility of mortgage interest and property taxes, most homeowners itemize their taxes. For the small minority who do not (likely those who do not have a mortgage), a standard deduction for property tax is now available for up to $500 for single filers, and $1,000 for married folks. This one is only good for the 2008 tax year.
Reduced Home Sale Exclusion
Remember when real estate values were increasing by double digits every year? Surely you knew somebody who deftly gamed the system by moving every two years before selling to make the gains on each property tax free for up to $250,000 for singles and $500,000 for marrieds. Well, the rules on that little game has changed. The old rule was that the property had to be your primary residence for two of the last five years in order to get the full exemption.
Under the new rules, you will receive the capital gains exclusion based on the percentage of time that you owned the property as your primary residence. So, if you own a property for ten years, renting it out for the first eight, and moving in for the last two before selling, you will receive 20% of the exclusion, or $50,000 for singles or $100,000.
The rule applies to home sales after December 31, 2008, and is based only on non-qualified use periods that begin on or after January 1, 2009.
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