Housing Bill Lemonade

If you listened to Saturday’s radio show or read last week’s article entitled “The Bitter Bill” (July 25, 2008), you know that I am not a fan of the housing bill. That said, although the legislation is filled with bitterness for financially responsible Americans across the country, it’s time to make some lemonade out of those lemons, even if you were a complete screw-up in the first place.

Let’s start with the best aspect of the miserable housing bill. At a time when people are preoccupied with their money, there is a refreshing reminder that we are at war and that there are soldiers who are risking their lives so that we can worry about our money. The housing bill requires lenders to wait 9 months, instead of the usual 90 days, before beginning foreclosure proceedings on homes owned by someone returning from the military. Lenders must also wait a year before raising interest rates on a mortgage held by someone returning from military service. That’s about the least we can do!

Let’s say you completely blew it on real estate—you bought near the top and assumed a variable rate mortgage. Well, Congress is rewarding your stupidity by creating a program that may allow you to cancel your old mortgage and replace it with a new fixed-rate loan lasting at least 30 years. Don’t get too excited—there are some hurdles for eligibility on this one. The new loan amount must be no more than 90% of what your property is actually worth now, so the upside-downers may not be able to do it. Also, you need to have originated your troubled loan on or before Jan. 1, 2008 and the loan must be on your primary residence. That means that the slew of people who bought vacation condos in Naples can’t refi and those who thought that they were going to become real estate barons with investment properties are out of luck. Unlike the first time around, you will actually have to verify your income and your monthly housing payment (including the principal on all your various mortgage payments, interest, taxes and insurance) has to have been at least 31% of your monthly household income.

If you do manage to obtain a new loan, you cannot establish a home equity loan for at least 5 years after you obtain the new mortgage, you will have to pay a 1.5% fee each year on the remaining balance and you have to hand over no less than 50% of any appreciation on the home to the government once you sell. Sell the house in less than 5 years, and you will have to turn over as much as all of the gain. This program ends on Sept. 30, 2011 and although it does not officially take effect until Oct. 1, lenders may be willing to start their negotiations with borrowers now.

If you are buying a primary residence for the first time, you are eligible for a federal tax credit of $7,500 or 10%, whichever is smaller. With a tax credit, you subtract the credit amount from the total you would otherwise pay the IRS. If you earn a modified adjusted gross income of more than $75,000, or $150,000 for those who are married filing jointly, the credit phases out. You have to pay back the credit over the next 15 years, in equal amounts each year when you pay your federal taxes. That makes this more like an interest-free loan than a true credit.


The absolute gimmee in the bill is for those homeowners who take the standard deduction on their federal income tax returns. With the bill, you can now take an additional federal tax deduction of $500, or $1,000 if you are married and filing your tax returns jointly. The deduction is limited to the amount of the property tax you paid.

The other major piece of the bill is the redefinition of a jumbo loan. Under the new legislation, Fannie and Freddie have permanent authority to buy bigger loans in areas with high housing costs. (Temporary measures allow them to buy bigger loans, but those expire on Dec. 31.) They can buy loans up to 115% of the local median home price, though they cannot buy any loans larger than $625,500. Any larger loan will generally be a jumbo loan, which will cost more in interest.

Oh well—the whole thing is ridiculous, but you really should take advantage of the perks that exist. Just make lemons out of lemonade, if you will.