Legislation Targets Recovery 
 

By Matthew Roberts

On July 30, 2008, President Bush signed into law H.R. 3221, the Housing and Economic Recovery Act (HERA). The passage of this landmark legislation will have major implications for California’s and the nation’s housing markets for years to come. It is hoped that HERA will not only ease the current down market, but take steps to ensure that many of the factors that caused the severity of this decline don’t repeat themselves.

While there is no single or simple fix to turn around the current housing market, Congress did take steps that should ease this downturn. The legislation will create an incentive for lenders to rework loans at risk of foreclosure by providing a Federal Housing Administration (FHA) guarantee on qualifying mortgages that lenders write down to 90 percent of the current appraised value. Until now, many lenders were hesitant to rework a loan for borrowers who have already defaulted. It’s estimated that 400,000 homeowners at risk of foreclosure will benefit from this program.

Most importantly, the legislation will ensure a permanent supply of capital and liquidity to the majority of homeowners across the country, including those in high-cost areas such as California. Under the new legislation, a metropolitan statistical area’s (MSA’s) new conforming loan limit will be the greater of either $417,000 or 115 percent of its median home price capped at $625,500, starting on Jan. 1, 2009. For example, if an MSA has a median home price of $400,000, then its conforming loan limit will be $460,000. The FHA loan limit, which has always been set by MSAs, will be the greater of either $271,050 or 115 percent of a MSA’s median home price, capped at $625,500. The hope is that with the new loan limits in place, California and other high-cost areas will avoid a repeat of the severe impact that the Aug. 2007 credit crisis had on our market, and that future home buyers will have access to safer and more affordable home-financing products.

The legislation also creates a tax credit for first-time homebuyers purchasing their principal residence. The tax credit is 10 percent of the purchase price, capped at $7,500. The tax credit does need to be repaid; therefore, it works more as an interest-free loan than a true tax credit.

The credit is repaid out of a home buyer’s taxes over 15 years. REALTORS® who believe clients may qualify for this program should recommend that these clients contact their tax advisors.

Prior to passage of the bill, there was great concern about the financial well-being of Fannie Mae and Freddie Mac. In order to protect Fannie and Freddie, and guarantee they are able to continue to supply capital to the market, the legislation will reform the regulatory oversight of the government-sponsored enterprises (GSEs) and create a financial backstop for them. The mission of GSEs is to act as counter-cyclical entities and supply capital to the housing market in times of need, such as now. This bill is intended to ensure they are able to meet their mission.

Other Provisions of the Legislation:

>> Temporary increase in mortgage revenue bonds to refinance subprime mortgages.

>> Minimum requirements for mortgage originators, including the creation of a nationwide registration for loan originators.

>> Adjustment to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), allowing sellers to provide the non-foreign affidavit to a qualified closing entity instead of the buyer.

>> FHA will no longer insure loans that utilize seller-funded down payment-assistance programs. Down payment-assistance from family, employers, and other nonprofits is still allowed.

>> Community Development Block Grant Programs will allot $4 billion to communities for the purchase and refurbishment of foreclosed homes.

Matthew Roberts is C.A.R.’s federal government affairs manager.