The "American Housing Rescue and Foreclosure Prevention Act of 2008" was passed by both houses and signed by the President on July 30, 2008. The measure provides mechanisms to help the troubled housing market as well as tighten lending practices and reform financial institutions. Though the 238 page law can be found online, I thought I’d hit a few of the highlights here.
One of the provisions garnering the most attention is the program to allow homeowners in danger of foreclosure to refinance into a new 30 year fixed loan. At a glance, the bill provides that the homeowner would be eligible to refinance into a FHA 30 year loan at 90% of the current appraised value of the home. This requires that the current lender agree to write down the loan, which is at their sole discretion. However, it is estimated that banks would lose an average of $25,000 to this program vs. $64,000 by letting the house go to foreclosure. As a trade off for this opportunity, any future appreciation realized in the home would be shared with the FHA.
The bill also creates an independent regulator to oversee both Fannie Mae and Freddie Mac, while increasing the dollar amount of loans they can buy or guarantee from $417,000 to a maximum of $625,000 (based on individual markets). FHA down payment requirements increase from 3% to 3.5% as well, and the bill provides an additional $4 billion for hard-hit communities to buy and rehabilitate foreclosed homes.
One bright spot in the legislation is the tax credit for first-time homebuyers. A taxpayer is considered a first-time homebuyer if they have had no ownership interest in a principal residence in the last 3 years. If your home purchase closes before June 30th 2009, you may be eligible for a tax credit for 10% of the purchase price, up to $7,500. This is a credit, not a deduction, so it can wipe out what you owe and get you a refund as well. It does phase out at certain income levels.
However, this is not a gift. The credit must be paid back over a 15 year period ($500 a year for a $7,500 credit). If you sell the house before that time, the remaining repayment will come from the gain. If there is not enough, or no gain at all, you will not be required to make up the difference. In essence, the tax credit is an interest-free loan with the government taking all the risk on house appreciation. Plus with the time value of money, you will be paying back less than you received. This is a great benefit to first-time homebuyers, and could give the market a little boost.
