Fresh from hoisting up the banking and automobile sectors, a newly muscular Uncle Sam is now turning his attention to putting the skids on the real estate meltdown. The Obama Administration earlier this year rolled out two major housing initiatives that combine one part stimulation with one part bailout. The stimulus portion awards an $8,000 tax credit to first-time home-buyers, aimed at creating demand that will stabilize the housing market. This is especially beneficial to condominiums, which have become default starter homes for many buyers.
The bailout portion allows some homeowners with mortgages the option of either refinancing at a much better interest rate, or having their mortgage payment modified down to 31 percent of their gross income. The move will help condominiums that are struggling to replace lost income when homeowners in financial troublestop paying their condo fees.
$8,000 in Real Money
The $8,000 tax credit is available to U.S. residents making less than $75,000 a year ($150,000 for couples) who purchase a house, condominium or co-op between January 1 and December 1, 2009.
The home must be a primary residence, be located in the U.S., and can’t be a inheritance, gift or sale from a “related person.” The credit is also limited to $8,000 or 10 percent of thehome’s purchase price, whichever is less. For example, a house purchased for $65,000 would only generate a $6,500 credit.
For 2009 homebuyers, the credit is much more valuable that a mere tax deduction. Unlike a deduction, a credit reduces federal tax liability at a 100 percent rate and will return cold, hard cash to anyone owing less than $8,000.
For example, a taxpayer who owed $4,000 in federal taxes and qualified for the credit would get a check from Uncle Sam for $4,000; a taxpayer whoowed nothing and qualified would get a check for $8,000.
Additionally for those purchasing in 2009, the credit can be claimed on either their 2008 or 2009 tax return, depending on which is more advantageous to the filer. Those who bought a house in 2009 but filed their 2008 return without the credit, can file an amended 2008 return (Form 1040X), using form 5405 and get a refund check within a matter of weeks or months, says IRS spokesperson Kevin McKeon. “You get the money right nowinstead of waiting until next January.”
McKeon foresees new buyers using cash from the credit to either furnish their new home or replenish bank accounts depleted from the down payment. There is also a tax credit for those who bought from January 1, 2008 until December 31, 2008. But it generally drops to $7,500 and takes the form of an interest-free loan that is repaid in 15 years in 15 equal payments.
Renters Becoming Owners
Realtors across New England are looking to the credit to help jump-start a real estate market that has been hard hit by the downturn. In Rhode Island, the $8,000 tax credit is part of a trio of factors that are leading to more potential buyers making the rounds and better turnouts for open houses, says Paul Leys, president of theRhode Island Association of Realtors.
“It’s almost a perfect storm for buyers right now. You’ve got the $8,000 tax credit, 4.5 or 4.7 percent interest rates, and the [house] price levels have gone down to affordable levels,” says Leys.
Price levels in the state have drawn down so much — the median price of a Rhode Island condo fell from $205,950 in the first quarter of 2009 to $174,950 in the first quarter of 2009, according to MLS –that longtime renters are now considering buying, says Leys. “There were several years where prices were so high that people were holding onto renting. Right now, buyers are seeing that if they can get the financing, it makes more sense to buy then rent,” he says.
Some buyers, however, are finding that because of its income limits ($75,000 for individuals, $150,000 for couples), the tax credit doesn’t apply to them. “In Newport, it [the tax credit] is not part of the conversation. If they’re buying a million dollar house, it’s not something that’s going to affectthem. It’s for that young couple or the individual buying that $250,000 to $300,000 house,” says Leys.
Although Leys says knowledge of the tax credit is widespread, he says not enough people know that you can still get the credit as long as you haven’t owned for three years. “When you see the headline, it’s the ‘First-time homebuyer tax credit,’ but it’s not just for first-time buyers. If you haven’t owned in three years or more, you’re eligible.”
In Massachusetts, realtors are also seeing increased traffic, says Eric Berman, communications director of the Massachusetts Association of Realtors (MAR). “What I’m hearing from the members [realtors] is there’s a lot of activity, a lot of people are out looking,” he says.
Spurring on the buyers are median condo prices that dipped 14.9 percent from March 2008 to March 2009 across Massachusetts, and a slide in the median selling price of a condominium from $263,750 in March 2008 to $224,500 in March 2009, according to MAR figures.
Despite the relative bargains, historically low interest rates and the $8,000 rebate, Berman says potential buyers are moving very carefully. “We’re getting people out there looking. We’re hoping to see some sales come from it. My guess is we will, but in this economy, it’s still pretty tenuous. People who arefearful about losing their jobs won’t buy a house,” says Berman.
In Connecticut, Fifth District U.S. Congressman Chris Murphy says the tax credit will give a much-needed boostto his district, which encompasses all of Northwestern Connecticut and includes New Britain and Waterbury. “For people who are on the fence about buying their first home, this tax credit could be the nudge they need to act,” he says.
Early spring figures from the National Association of Realtors' Pending Home Sales Index (PHSI) indicate that the tax credit and lower prices were indeed getting potential buyers off the fence and inking purchase and sale agreements. The PHSI, which measures housing contract activity, showed modest gains in both February and March 2009 – this following a record low in January.
Seven to Nine Million Home-owners Could be Helped
The second major initiative of the Obama Administration is the Making Home Affordable Program. A joint effort between the U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD), the program will offer help to homeowners struggling to meet their mortgage payments or in danger of default –just the kind who are skipping their monthly condo fees around New England.
The seven to nine million homeowners who are expected to qualify nationwide will be offered help refinancing or modifying their first mortgages. The refinance option is aimed at homeowners who are current on their mortgage but can’t take advantage of recent lower mortgage rates because of tightening lending standards or because their homes have decreased in value. For homeowners to be eligible the mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac and it must not exceed 105 percent of the property’s current value.
Those who will benefit from the program include many who were able to obtain loans under the subprime “almost anything goes” rules, but who are now shut out because of tightened loan requirements.
“Generally, they’re [banks] going back to the strict standards of more than 10 years ago,” says Sharon Price, director of policy at the National Housing Conference, a non-profit that promotes affordable housing policies. Among those who bought homes recently but now can’t get refinancing, says Price, are the self-employed, anyone with a credit score below 700 or homeowners who have adjustable rate mortgages (ARMs) thatare resetting to much higher rates.
Many others, Price says, are shut out of refinancing because they’re “under water” with their mortgage –meaning that they owe more than their co-op or condo is worth due to decreasing property values.
The program will be able to help those under water, but only to a certain degree, as eligibility requirements call for the condo to be assessed at a loan-to-value ratio of between 80 and 105 percent of what they owe, says Price. “If somebody’s really under water, they’re not going to be able to be helped by the program. I think they [HUD] needed to make the parameters narrow enough that they felt like they weren’t helping anyone who may have taken out more home than they could truly afford. So it seems like they pickeda rather narrow window.”
Those able to be helped, Price says, include “Working families, in places where values have dropped, where communities are somewhat strong – rather than in a place like Riverside, California, where values have dropped so dramatically. In communities that have fallen flat, it’s not going to fit thosecommunities. In areas where there is some ability to come back, it’s going to help.”
In New England, hard-hit communities like Bridgewater and Brockton, Massachusetts; Hartford, Bridgeport and Stamford, Connecticut; and Bangor, and Lewiston, Maine will probably not be helped much by the program.
Those looking to find out if they’re eligible for refinancing though the program can contact Fannie Mae or Freddie Mac directly, or go to the MakingHomeAffordable.gov website and use its “Loan Look up Tool,” in the section of the same name.
Loan Payments at 31% of Income
The loan modification option of theMaking Home Affordable program is the most aggressive of the new initiatives and it’s aimed at homeowners who have missed mortgage payments and are in danger of foreclosure on their first mortgage.
If they qualify for the initiative, homeowners can have their mortgage monthly payments reduced to 31 percent of their gross monthly income. (To accomplish the reduction, the loan can be extended to 40 years, the percentage rate reduced to as low as two percent for five years, or a portion of the loan may be deferred, or even forgiven.)
The initiative is especially important to the many New England condominiums that are under tremendous financial strain as financially distressed homeowners stop paying monthly fees, shorting community budgets. Even in states with superliens (priority liens for common fees), condos still lose money as they must spend money on legal fees to secure their rights and many state superliens have limits.
Those who qualify for the loan modification must be the owner/ occupant of their condo or co-op, have an unpaid balance of less than $729,750, have the loan originating before January 1, 2009 and must be at risk of imminent default because of significant changes in their income or expenses.
The program is mostly aimed for people who are struggling with changes endemic to today’s economy. “Sometimes people are losing second jobs, or they’ve been cut back on their overtime. A source of income that they’re depending on to pay their monthly mortgage payment has been reduced,” says HUD spokesperson Brian Sullivan. One limitation of the program is it’s voluntary on the part of loan providers, and not all loan providers have signed on yet.
A partial list of loan providers participating as of mid-April included GMAC Mortgage, Chase Financial, CitiMortgage and Wells Fargo Bank. Homeowners who want to find out if their loan provider is participating can log onto www.MakingHome-Affordable.gov and check the list there (which may not be complete), or calling the number listed on their mortgage payment.
400,000 Seek Loan Modifications
Homeowners seeking modifications to their mortgages swamped a Chase Financial website this spring, downloading 400,000 applications for mortgagerelief, according to company spokesman Michael Fusco.
“We encourage our customers, at the first sign they’re having any trouble paying their mortgage, they should contact their lender immediately,” says Fusco, who notes loan modification applications to his business are reviewed and approved within seven to 60 days.
Sullivan says that homeowners struggling with mortgage payments need to go against their tendency to isolate themselves. “You can’t imagine the people who feel a tremendous shame with the prospect of losing their home, so they don’t open their mail, they don’t make the phone call and things go from bad to worse, so there’s no avoiding the inevitable. So the best thing to do is confront this head on and speak to your loan service, your loan lender, and ask for the loss mitigation department,” he says.
Sullivan says that homeowners in trouble also need to be aware of variousscam artists promising to save their homes, for a fee.
“There’s an explosion of these pay-to-play operations – some of them are legitimate, some of them are going so far as to misrepresent themselves as government agencies, some of them are guaranteeing to modify the homeowner’s mortgage. Nobody can guarantee that except for your own lender.”
Sullivan says a distressed homeowner’s best counseling is a HUD-approved agency, available at no cost and listed by state and city on the MakingHome- Affordable.gov website. “The HUD-approved housing community, supportedby HUD, will not charge anybody.”
And in today’s tough environment, homeowners and the housing sector can use all the help they can get.
Jim Douglass is the managing editor of New England Condominium magazine.