A Look At The Housing Bill

Briefing.com broke down the details of the upcoming housing bill. Here are their comments:

Looking at the upcoming Housing Bill, which is due to be debated in the Senate today before a formal vote expected sometime around Saturday, subsequently to be presented to President Bush, we looked at its strongest measures.

The Bill seeks to backstop the GSEs with unlimited financing, create and give considerable strength to an oversight office of the GSEs, provide quasi recoupable homeowner assistance via a $300 bln in mortgage refinancing plan and federal tax credits, both largely aimed at reducing foreclosures.

This bill has large implications on the GSEs (FRE and FNM). Specifically, the bill will un-cap the current line of credit to allow virtually unlimited short term borrowing from the current $2.25 bln. The removal of the cap would expire on 1/09. The bill also will allow the Treasury to take an equity stake in either co if their financial conditions become critical.

Additionally, caps on mortgages available for purchase will be lifted to $625.5K, and restrictions on the size of loans will be modified. Specifically, the size of loans available for purchase by the GSEs will be adjustable according to the asset's location, or bigger loans in areas with higher housing costs. Explicitly they will be able to buy loans up to 115% of the local median house price.

On homeowner assistance: The bill will allow some homeowners to cancel their old mortgage obligations in exchange for a 30yr fixed, with the amount of the new loans no more than 90% of current property value. Cut-off for inclusion is for loan generation on or before 1/08 on primary residences, and current payments must be deemed less-than-affordable (> 31% of current monthly income). This is mainly designed to assist distressed sellers (on the cusp of foreclosure).

However, this will create a payable to the US government, because once homes are sold, owners that had received the revised mortgages will have to pay back anywhere from 50-100% of the price appreciation above the new principal. The FHA is provided a $300 bln limit on these restructured loans. However, the option to offer the refinancing is still up to lenders, who will have to subsequently write down the value of their loans by the principal and foregone interest rate difference.

On tax credits, first time home buyers are eligible for a maximum of a $7,500 federal tax credit, net of any income taxes that the owner may owe the IRS. Phase out of this credit starts to phase out at +$75,000 annual income ($150,000 if file jointly with a spouse). The credit is then paid back interest free over 15 years. Annual payments are to be netted against income tax filings. There are also benefits when it comes time to pay for taxes. The bill offers an additional deduction for homeowners who only take the standard deduction (do not itemize) in the amount of $500 (single); $1,000 (jointly).