Sweeping legislation offers some relief for home, mortgage markets
Aims to stem tide of foreclosures
July 31, 2008 4:00 AM
By Patricia Sabatini Pittsburgh Post-Gazette
The housing bill signed into law by President Bush yesterday aims to prop up the hobbled home and mortgage markets and stanch a flood of foreclosures.
But provisions targeting consumers aren't just for people on the cusp of losing their homes.
Tax and other breaks cut a wide swath extending to first-time home buyers, military personnel and to senior citizens planning on a reverse mortgage. There's even something for homeowners who have managed to pay off their mortgages.
For those who don't want to miss out, here's a look at some of the key measures of the act and a rundown of which taxpayers are likely to benefit:
• Rescue plan for home-owners on the brink.
Called the Hope for Homeowners Program, it gives people who are struggling to keep their homes a chance to refinance at better terms under a government-backed loan if the lender agrees to forgive a portion of the debt (the amount of the mortgage balance that exceeds 90 percent of the home's current value).
This cornerstone of the housing legislation is intended to ease a shock wave of foreclosures. Many homeowners are in crisis because of rising rates on adjustable-rate loans. They can't meet payments, but can't sell or refinance because of falling home prices, which put them in the position of owing more money than their homes are worth.
Under the rescue plan, to be administered by the Federal Housing Administration, new mortgages must have a fixed rate for a term of at least 30 years and be no more than 90 percent of the home's value. Home equity loans will be prohibited during the first five years. In addition, the borrower will pay an annual fee of 1.5 percent on the remaining loan balance.
The program, which takes effect Oct. 1 and ends Sept. 30, 2011, is expected to help at least 400,000 distressed homeowners, but lenders are not required to participate. Financial institutions won't want to forgive any debt unless they are pretty sure the property is headed for foreclosure, a situation in which they could lose even more.
To be eligible, participants' monthly mortgage debt must have consumed at least 31 percent of monthly income as of March 31, 2008. For example, households earning $4,000 a month would qualify if their mortgage payment -- including principal, interest, taxes and insurance -- was at least $1,240 a month. ($4,000 x 31 percent = $1,240).
In addition, the mortgage must have been originated on or before Jan. 1, 2008, and be on the borrower's principal residence.
If the property is sold within five years, up to 100 percent of the gain -- in other words, any equity in the home -- goes to the government. If the homeowner sells after five years, 50 percent of the proceeds go to the government.
• First-time home buyer tax credit.
This provision gives first-time home buyers a tax credit of up to $7,500 for singles and married couples filing jointly ($3,750 for married people filing separately), which they can claim on their 2008 or 2009 federal tax returns. The credit is equal to 10 percent of the purchase price of the home, or $7,500, whichever is lower.
The credit comes directly off the home buyer's federal income tax liability. Taxpayers who owe less than the credit is worth, get a check for the balance. If, for example, the home buyer receives the maximum $7,500 credit but owes just $3,000 in income taxes for the year, he or she would receive a refund of $4,500.
The program covers homes purchased after April 9, 2008, and before July 2009.
Intended to goose home sales, this is the biggest tax credit in the new law. Unlike other individual tax credits, however, this one must be repaid in equal installments over 15 years, making it more of an interest-free loan than an actual credit. The way it works, someone receiving the full $7,500 credit would owe an additional $500 in taxes a year until the money is paid back in 15 years.
Repayment begins two years after the home is purchased. If the house is sold before 15 years, then the entire balance comes due. The credit does not have to be repaid if the taxpayer dies.
The credit is for first-time buyers only, which is defined as someone who did not own a residence in the prior three years.
The credit starts to phase out for couples with modified adjusted gross income above $150,000 and phases out completely at more than $170,000. For singles, the phaseout starts at $75,000 and the credit drops to zero above $95,000.
• Property tax deduction for nonitemizers.
Taxpayers who take the standard deduction instead of itemizing will be able to deduct an additional $500 ($1,000 for married people filing jointly) from their taxes. This break is available for only 2008, although legislators could extend it.
People who pay less than those amounts in property taxes will be limited to deducting their actual property taxes.
This measure will benefit many homeowners who have paid off their mortgages, since they are the ones who typically do not have enough deductions to make itemizing work.
In 2008, the standard deduction for joint filers is $10,900. People taking advantage of the special property tax break would deduct $11,900.
• Special breaks for seniors and veterans.
The new law puts restrictions on reverse mortgages to help people 62 and older who are looking to tap the equity in their home.
The measure limits origination fees for federally insured reverse mortgages to 2 percent of a loan up to $200,000, and 1 percent above that, up to a maximum of $6,000.
The legislation also bars lenders from forcing borrowers to buy an annuity or other financial or insurance product to qualify for the loan.
In addition, it raises the maximum homeowners can borrow, aiding people in high-cost areas.
In the case of veterans, mortgage lenders must wait at least nine months, up from 90 days, to start foreclosure proceedings on someone returning from military service and a year before raising the interest rate on a loan. These special provisions expire at the end of 2010.
The nonprofit Homeownership Preservation Foundation operates a national hot line offering free counseling to help people avoid foreclosure. It's available 24 hours at 1-888-995-4673. Patricia Sabatini can be reached at