The $150 billion fiscal stimulus package that's winding its way through the U.S. Congress will not represent a panacea for the U.S.'s economic ills, an economist argued, but it will represent modest good news for one segment -- the beleaguered housing sector. The fiscal stimulus bill currently under discussion in the U.S. Senate calls for raising Fannie Mae and Freddie Mac's conforming loan limit to $729,750 through 2008 from the current $417,000.
Conforming loans are conventional, fixed-rate mortgages for good credit borrowers that banks make that are eligible for purchase by Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). When Freddie and Fannie purchase these loans from banks, it "frees-up" money that the banks can use to grant mortgages to future borrowers, thus expanding the pool of funds available for mortgages.
Economist Steve Affinito told BloggingStocks Thursday that while it's important to underscore that the higher conforming loan ceiling will not eliminate the U.S. housing sector's recession, it is "a critical, essential step in the right direction," in his interpretation.
Two issues
"There are two housing problems. One is homes at the higher end for which banks are not making loans, because they are considered 'jumbo loans' or non-conforming. Raising the conforming cap will encourage banks to make these loans, stimulating housing activity. That's good," Affinito said. "Some argue that raising the cap helps only luxury home buyers, but that is not the case, given the high price of middle-income housing in many U.S. markets. Also, after Fannie and Freddie purchase these loans, the banks can then use the reimbursed money to make loans to non-high-end home buyers, so it's easy to see how a higher ceiling will increase mortgage availability."
Fannie Mae stock gained 89 cents to $32.02 and Freddie Mac rose 61 cents to $28.51 in midday Thursday trading.
Further, Affinito said he favored raising the conforming loan limit "though at least 2009," but "it remains to be seen if the U.S. Senate and President Bush will go along with it." The Bush Administration's original bill, which was approved by the U.S. House earlier this week, calls for raising the conforming loan limit only through 2008.
The second housing problem concerns credit-impaired borrowers and people falling behind on their mortgage payments, Affinito said. A program more comprehensive than the U.S. Treasury's alliance of mortgage counselors, lenders and servicing companies, called HOPE NOW, is needed to assist those homeowners, he said. Affinito said early data indicates that "only about one half of potential borrowers in danger of foreclosure are being helped." Further, with an estimated $360-400 billion in adjustable rate subprime loans scheduled to reset in 2008, "we're going need another program to lower the percentage of foreclosures more," he said.
Admittedly, Affinito said no assistance can help borrowers who see no economic future with their homes and choose to go into foreclosure. "But many homeowners want to keep their homes, and that's what should be the public policy's focus."
"Clearly, the higher conforming loan limit is not a 100% solution for the housing sector, but it is a step in the right direction," Affinito said. "And given the many bad steps taken previously, this is a step we want to take."
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Reader Comments (Page 1 of 1)
2-02-2008 @ 3:08AM
MRCANDU10 said...
Here is an Economic Stimulus Program specifically addressing the housing and mortgage crisis
It is an excerpt from my blog WWW. THECANDUMEMO.blogspot.com
Because of its length it will be presented in these comments as CANDUMEMO 2of 2
B. FORECLOSURE AVOIDANCE ASSISTANCE PROGRAM
In order to avoid foreclosure of a family residence, the borrowers or their parents, would be allowed a taxfree withdrawal of funds from an IRA-SEP account, a 401K, a Corporate Pension account, or a Keo account, to reduce an existing mortgage on the property to a maximum of 50% of existing federal tax law exemptions for family primary residence sales (described above). This withdrawal would become a combined junior mortgage lien in favor of the borrower(s) or their parents respective retirement account. The same rules described above would be used under this plan.
A second plan to avoid foreclosure ,in conjuction with raising FANNY and FREDDY MAC LOAN LIMITS TO $725,000.00 on family primary owner occupied residences ,would be that the borrower(s) would become eligible for A FIXED RATE LOAN not to exceed 1.0 % below the current prime rate from the existing lender orr a replacement lender.
The lenders would be eligible for an FHA guarantee (with FHA premium insurance on theguarantee portion) on 25% of their original mortgage, IF they give the borrower(s) a "Rate-Term" refi at a fixed rate not to exceed 1.0% below the current prime rate.
The borrowers, would NOT have to prove their income or qualify by credit or appraised home value.
Under this plan, the lender (to qualify for this 25% FHA Loan guarantee), would have to agree that
1. All delinquent payments at the original payment amount under the original loan agreement and its inception interest rate (without any late charges or fees which the lenders would have to agree to waive), would be added to the back end of the indebtedness without additional interest cost, but the total revised mortgage can not exceed the original mortgage amount for which they have a mortgage lien.
2. Additionally to keep the payments from rising the existing loan term would be extended to a term of 35 (or upto a maximum of 40) years to lower the payments.The new loan payments, including the FHA Insurance premium payments can not exceed the original loan payment amounts.
3. The lender would be required to notify all three credit bureaus to remove all derogatory credit with respect to the mortgage account.
4. To expedite the process, the lender would be allowed to charge a maximum fee of $1,000.00. However, this fee must be rolled into the new loan and be added to the back of the loan, and can not cause the new loan amount to exceed the original loan amount.
5. In order to induce the lenders to use this program, the lenders would be entitled to change the existing mortgage bond into a 50% tax free bond (not subject to AMT). This would mean that the holder of this mortgage would receive interest income on this revised mortgage bond on s 50% tax free basis (not subject to AMT).
This plan might sound complicated, but it could be made to work. The reason is that for the lenders and the borrowers, by avoiding foreclosures they will have a substantial savings in cost and they keep the family in the home. . This program would be very workable for the borrower(s) who are easily caught up in a quagmire. It might be complicated for the lenders, but it would be a simple workable solution for the family home owner borrower(s).
They would be getting a fresh start and they would be able to stay in their family homes.
The lenders would have an stable asset in their balance sheet, and not a non-productive REO (bank Real Estate Owned), which is a fallow asset in their balance sheet, which is sold after foreclosure at a substantial loss.
These revised mortgage bonds would become an attractive mortgage investment because of the 25% FHA Guarantee and the 50% Tax Free basis for the interest income earned on these mortgage bonds.
The above program combines liquidity to the mortgage and housing markets, with surgically designed economic tax incentives. It could bring stability to both the credit market and the housing market, because as you remove homes from being foreclosed you are reducing the over-supply of homes for sale. This oversupply is destroying consumer confidence in home values.
2-02-2008 @ 3:09AM
MRCANDU10 said...
Here is an Economic Stimulus Program specifically addressing the housing and mortgage crisis
It is an excerpt from my blog WWW. THECANDUMEMO.blogspot.com
Because of its length it will be presented in these comments as CANDUMEMO 1of 2
The American - US Home Buyer's Consumer Investment Tax Credit Program with a Foreclosure Assistance Program.
History again has an excellent example if we look at
the current tax credits started in 2005 available for new energy efficient homes for contractors, for new energy efficient equipment purchases for existing homes, and commercial properties.
A previous federal tax credit (maximum of $2,000) that was given over 25 years ago (but not available today) to home purchasers. The credit at that time was given to stimulate new residential home purchases. It was well received by home buyers at that time and was a major stimulus to home purchasers at that time.
As with the domestic auto industry, the American Consumer Home Buyer, is a major driving force in our economy. The purchase of a family home for your residence is a major part of the American dream, and is probably the major investment during a life time, that a family home-owner will make.
Real Estate has always been a major investment vehicle for the American Consumer, because the family home buyer is both a user and an investor in the transaction to purchase a home. The family home purchased for personal residential use, has also been a major source of retirement funds for many seniors who have sold them and downsized to smaller residences or rental units, so they will have funds for their retirement. Also they now have the availability of Reverse Mortgages for additional income.
At present we have a total lack of confidence by potential family home-buyers and sellers in the future value of the home as an investment. This has caused a major decrease in home values during the past year. The residential real estate market may have been overpriced by the prior ease of obtain residential mortgage financing. In addition, certain mortgage products were developed by the lenders, that induced many home buyers to over extend themselves in the purchase of their homes.
However, we are now faced with a consumer confidence in home purchases. Every time a home buyer now looks to buy a home, there is a fear that their investment my be worth less a year or two from now.
They expect the prices will come down, even though there is an ample supply of low rate fixed mortgages available to "qualified" home buyers. It has placed a major downturn in our economy, particularly in the residential real estate industry (Construction of New Homes) and related supporting industries (home repairs and improvement industry).
Consequently, with the Sub-Prime Mortgage Market having major devastation, related mortgage lenders and investors are facing a severe credit crisis throughout the entire residential mortgage finance industry.
Devastated mortgage banks (that over indulged) have been forced out of business or into bankruptcy.
Many residential home-owners, particularly those that used sub-prime mortgages to purchase their homes and investment homes, are facing foreclosure.
Additionally, under present tax laws, if home-owner sells his primary residence he can not deduct the loss on its sale, if the home is sold for a price less than its original cost plus improvements.
Further, if the homeowner borrower is forced to do a "short sale" (bank agrees to the sale of the property and agrees to"forgive" the borrower(s) the deficiency from the short sale in the payoff of the mortgage. is considered , under present taxl law as "forgiveness of debt" , which is a taxable event and can have severe tax consequences to the home owner(s) involved in the "short sales."
Foreclosures, depress the market value of surrounding homes and materially effect home owner consumer confidence. The far reaching effects of this crisis, many economists have said may cause a severe recession if not dealt with expeditiously and surgically.
Many government officials and politicians have stated that we want direct assistance to credit worthy home mortgage borrowers, so that they will not lose their family homes (the President recently stated that he would like to develop a plan for lenders to help "credit worthy" borrowers from foreclosure).
Well we have stated the current problems (and there certainly are many interelated problems here). Now lets look at different solutions and specific comprehensive plans to reverse this problem using my THEORY of Tax-ENOMICS.
A. THE RETIREMENT ACCOUNT HOME FREEDOM PROGRAM
Free the IRAs, Pension Plans, Keo Plans to assist home buyers and borrowers to purchase homes and avoid foreclosures. Specifically, we need to change the tax laws to do the following (using the tools from the Theory of Tax-Enomics) as follows:
Present tax law applies a severe penalty on withdrawal of funds from an IRA or a Keo plan, before IRS specified retirement ages. Additionally, the withdrawal is taxable income to the taxpayer.
SOLUTION:
Allow a non-PENALTY and TAX DEFERRED withdrawal of funds from an IRA-SEP, Pension Plan, 401K Plan, or Keo Plan on a tax free basis in amount equal upto 1/2 of the present tax law exemptions for family primary home residence sales (up to $250,00 for the purchase (new or replacement). by joint owners of a family residence and $125,000 of an individual owner of a family residence).
The amount withdrawn will become a down payment that will be recorded as a junior mortgage lien (belonging to the "Retirement Account") against the property (without the payment of any state mortgage tax).
Special rules could be set up that would allow parents of a new family home-owner purchaser to also withdraw funds from their retirement accounts on the same tax provisions.
The mortgage lien will thus become an asset held in the retirement account (IRA-SEP, Pension Plan, or KEO). It will be a lien only, not requiring any payment of interest or principal, EXCEPT upon sale of the home.
It will only become taxable, without any early distribution penalty, WHEN THE HOME IS SOLD AND NOT REPLACED IF UNDER THE AGE OF 60, but it can be sheltered taxwise AS PART OF the existing tax free gain exemption now allowed under federal tax law ($500,000 for joint returns and $250,000 for individuals). The taxable lien would become a reduction in the cost basis of the home sold.
Upon sale, a form will be required to be filed with the IRS disclosing the transaction of sale for the release of the mortgage lien as the IRS will also be named in the mortgage lien.
By filing the information form (similar to or part of the 1099B that is also required to be filed upon a sale of a family residence), the IRS and the borrower's retirement account lien will automatically be released without the payment of any funds to the IRS.
The taxpayer would be allowed to avoid any tax on the transaction or a part thereof, if he does a "rollover" of his retirement account mortgage lien back into the exisiting retirement account or an IRA Rollover account..
In the case when there is not a replacement home purchased, where parents have withdrawn funds, the children upon sale without reinvestment in a new home, to avoid tax could put the money into a "rollover" IRA retirement account belonging to them, or if setup that way, in a "rollover" IRA retirement account of the parents. If they reinvest funds in a new home, they would be allowed to transfer the mortgage lien to the new home without tax consequence.
The asset mortgage lien when withdrawn from the retirement - Rollover IRA account reduces the tax free capital gain exemptions for the property sold in the amount of the liens withdrawn by reducing the cost basis of the home sold in computing any taxable gain from the sale.
This program will not be a loss in tax revenue because ultimately the income becomes taxable when it can be afforded by the taxpayer, as the retirement account programs were intended to do.