Making Sense of the 2008 Housing and Economic Recovery Act
Last Updated: September 2008
H.R. 3221, the ìHousing and Economic Recovery Act of 2008î passed the House of Representatives on July 23, 2008, by a vote of 272-152. On July 26, 2008, the Senate passed the bill by a vote of 72-13. The President signed the 600+ page bill into law on July 30, 2008. The legislation, with multiple references such as "The American Housing Rescue and Foreclosure Prevention Act of 2008", the "Housing Stimulus Bill", and others, has been hyped as the most important piece of housing related legislation in more than a generation. It makes promises covering a hodge-podge of changes designed to help reform and stabilize the housing industry, but the jury is still out as far as whether it's effectiveness will meet expectations.
The bill consists of a number of key components. We'll look at a summary of each individually to help clarify the contents to readers.
FHA Reform and Modernization
On January 1, 2009, FHA loan limits will change to the lesser of 115% of the local median home price OR $625,500; with a "minimum" floor of $271,050. The bill also promises streamlined processing for FHA condos, reforms to the HECM program, and reforms to the FHA manufactured housing program. Effective October 1, 2008, the down payment required for FHA loans will increase from 3.0 to 3.5%, and the use of seller-funded down payment assistance will be prohibited. A $25 million dollar appropriation is also provided to improve technology, streamline program performance, eliminate fraud and address staffing needs for FHA programs. The "Energy Efficient Mortgage" cap of $8000 for improvements was replaced with a new ceiling equal to 5% of home value.
First Time Homebuyer Tax Credit of $7,500
A "first time homebuyer" as defined by those in charge is any individual who has not had ownership in a principal residence during the three years prior to the close of escrow date. If the purchaser is a married couple, both must meet this criteria. Additionally:
- First time buyers are eligible for a $7,500 tax credit (or, if the home costs less than $75,000, a credit equal to 10% of the purchase price).
- The eligibility period for the tax credit is between April 9, 2008, and July 1, 2009.
- Income restrictions exist: In general, the credit is available in full only if your adjusted gross income doesn't exceed $75,000 ($150,000 if you file a joint return). The credit phases out over the $150,000 to $170,000 adjusted gross income range for joint filers ($75,000 to $95,000 for individual filers).
- The $7500 "tax credit" is really a loan; the catch is, it must be paid back to the government over a 15 year period, beginning with the tax return for the second year after you buy the new home; that equates to 6.67% a year ($502.50/year if you took the full amount allowable). Still a sweet deal, where else can you get a 15 year interest free loan??
Reform of GSE's (Government Sponsored Enterprises): Fannie Mae & Freddie Mac
This provision created a new regulator similar to other bank regulators, and additionally established an affordable housing and capital magnet fund created through increased fees on all new loans. It created permanent conforming loan limits up to the greater of $417,000 or 115% local area median home price, capped at $625,500. The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).
Establishes a National Mortgage Licensing and Registration System
Strengthens the existing state-run nationwide mortgage originator licensing and registration system (and requires a parallel HUD system for states that fail to participate). Federal bank regulators will establish a parallel registration system for FDIC-insured banks. The purpose is to prevent fraud and require minimum licensing and education requirements. The bill exempts those who only perform real estate brokerage activities and are licensed or registered by a state, unless they are compensated by a lender, mortgage broker, or other loan originator.
FHA Foreclosure Rescue
A refinance program for homebuyers with problematic subprime loans. Lenders would (voluntarily) write down qualified mortgages to 85% of the current appraised value and qualified borrowers would get a new FHA 30-year fixed mortgage at 90% of appraised value. Herein lies the "clincher", borrowers would have to share 50% of all future appreciation with FHA. The loan limit for this program is $550,440 nationwide. Some other facts:
- To be eligible borrower must demonstrate a lack of capacity to repay the existing mortgage, have not intentionally defaulted on it or any other debt, be able to document income and assets, and did not falsify information to obtain any mortgage.
- The borrower, as of March 31 2008, must have had a current monthly income to housing debt ratio of at least 31% on the current mortgage.
- All lenders (if there are multiple on the loan) must be willing to accept the new FHA loan amount as payment in full, and must waive all prepayment penalties and fees.
- The property must be the borrower's primary residence, and they can not have any other real property interest.
Seller-Funded Downpayment Assistance Programs
Codifies existing FHA proposal to prohibit the use of downpayment assistance programs funded by those who have a financial interest in the sale; does not prohibit other assistance programs provided by nonprofits funded by other sources, churches, employers, or family members. This prohibition does not go into effect until October 1, 2008.
VA Loan Limits Modified
Temporarily increases the VA home loan guarantee loan limits to the same level as the Economic Stimulus limits through December 31, 2008.
Provides $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes. The goal of the program is to allow states and localities to purchase bulk tracks of homes which have been foreclosed or abandoned and avoid the problems that can be created when entire neighborhoods are decimated by foreclosures.
Mortgage Revenue Bond Authority
Authorizes $10 billion in mortgage revenue bonds for refinancing subprime mortgages.
National Affordable Housing Trust Fund
Develops a Trust Fund funded by a percentage of profits from the GSEs, which initially would cover costs of any defaulted loans in FHA foreclosure program. Moving into the future, the Trust Fund would be used for the development of affordable housing.
Low Income Housing Tax Credit
Modernizes the Low Income Housing Tax Credit program to make it more efficient.
Links to Information Regarding the Housing and Economic Recovery Act of 2008
- Frequently Asked Questions Page from HUD: click here
- Summary of the Bill (from the senate banking committee): click here
- Facts about the Seller-Funded Downpayment Assistance Program: click here
- FHA Foreclosure Rescue Chart: click here
- Everything You Need to Know About the Homebuyer's Tax Credit: click here
In summary, the legislation does contain provisions designed to stabilize the currently volatile housing market from a global long-term perspective. Although many industry counterparts, individuals and others are skeptical about negative ramifications of the legislation, only time will allow us to assess the full affect of the law and whether it will help or hinder the housing market.