How the Housing and Economic Recovery Act of 2008 will impact the market

The good news is that under the Housing and Economic Recovery Act of 2008 will create a tax credit for first time buyers of $7,500.  This tax credit is repayable over 15 years.  ( thus making it an interest free loan) A first time buyer is defined as someone who has not bought a home in the last 3 years.  This is good.

The act prohibits sellers or anyone with a financial stake in the transaction from participating in buyer down payment assistance programs.  I understand why.  It was routine practice that when a buyer needed down payment assistance the seller would inflate the price by 3% so that they could pay the down payment assistance for the buyer.  This artificially inflated the price.  The buyers had no skin in the game.  And the lenders were left holding the bag when buyers skipped out on mortgages like bad tenants skip out on rent.

FHA foreclosure rescue– this provides for the development of a refinance program for homebuyers with subprime loans.  Lenders would write down up to 85% of current appraised value and qualified buyers would get a new mortgage of 90% of appraised value.  The buyers would then have to share with the FHA 50% of all future appreciation.    At least they are requiring some sort of payback.  This is estimated to help over 400,000 home owners.

For a full list of HR 3221 provisions go to

http://www.realtor.org/gapublic.nsf/pages/hr_3221_key_provisions?OpenDocument

The issue here is that power players in Washington are very anti- regulation.  As an entrepreneur, I don’t want to be overly regulated.  A government is supposed to provide safeguards for the people.  The heads of the lending institutions were making money hand over fist by making these loans.  They were making money off the bundling of these loans and the securitization of mortgage instruments.  They were left unchecked by appropriate regulation. We need regulation.  The problem is that this is a little too little and a little too late.

$7,000 Tax credit to encourage buyers to buy foreclosures

Apparently, there is a bill before the senate (substitute amendment to H.R. 3221)    that would issue a $7,000 tax credit to those who purchase a home in foreclosure.  This is a $15 to $20 Billion Dollar package is more or less a down payment on what would become a housing bill costing hundreds of billions of dollars. 

The theory here is that the volume of foreclosure homes on the market is hurting the overall market.  As I mentioned in another post, it is estimated that for every foreclosure home in a neighborhood, neighborhood property values decline by 1.5%.

This is an effort to spur on the citizenry to take risks and absorb those units.  This sounds like a prime opportunity for investors. In a market like Austin, where there are relatively few foreclosures – one can hardly claim this is for the public good.  I can see where the tax credit could create an unfair advantage for the foreclosure home vs. the homeowner down the street just trying to sell his home. 

This bill also includes a bailout to builders to allow them to write off their 2008 and 2009 losses against the more profitable past 4 years.  How this helps the general public, I am not sure.  It sounds more like government taking care of big business.  Then of course, Cesar is going to throw the 600.00 tax rebate down to the peasants. That should keep them quiet.

I am wondering how this bill helps homeowners facing foreclosure at all. To read more about the bill http://www.opencongress.org/bill/upcoming/2-Housing-Stimulus-Package 

The purpose of this blog is to report on opportunities for investors interested in the Austin Market.  So whether or not this bail out is fair or not really isn’t the point.  There is clearly an opportunity for the Austin real estate investor to benefit from this bill — if it passes.