April 2008      

In this issue of Home Base:

Major Housing Rescue Plan Emerging

Congress will soon consider a major new initiative to stem the decline in housing values.

Although key House and Senate leaders appear to be reaching a consensus on how to approach the problems and the Administration is showing some signs of flexibility, it will take time to work out all the details. At the same time several more targeted proposals have been offered which could help as well.

There is substantial agreement between House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Chris Dodd on the contents of the package. Both Democratic Presidential candidates have endorsed the package and have outlined their own comprehensive packages. Chairman Frank’s legislation would (1) provide at least $10 billion in loans to states to address the foreclosure crisis; and (2) expand the FHA loan program to offer guarantees to refinance at-risk borrowers into viable mortgages. In exchange for accepting a substantial write-down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay. Chairman Frank will be holding hearings on the proposal on April 9th and 10th.

The House of Representatives has already passed a number of other bills to address the housing crisis:

The Dodd/Frank proposal could be attached to the bankruptcy/mortgage revenue bond measure. The bankruptcy proposal is opposed by many Republicans, even though bankruptcy judges had the power to alter mortgage terms until a few years ago, and they have always had the power to alter the terms of commercial loans. Senate Republicans are supporting a number of plans on their own, including a proposal that would create a $15,000 tax credit to be applied to the purchase homes in or approaching foreclosure.

Many Republicans remain opposed to interfering with the marketplace. Although almost certain to oppose large scale homeowner bailouts, Treasury Secretary Henry M. Paulson Jr. and other senior Administration officials recognize the need for additional action to address the immediate crisis. Federal Reserve Chairman Ben S. Bernanke has also asked mortgage lenders to face reality and reduce the amount of mortgage principal that troubled homeowners owe on loans that exceed the value of the home. The Administration has sent mixed signals on whether they would support any additional legislation that would provide additional immediate financial assistance to beleaguered homeowners, and is also proposing mortgage lending regulatory reform legislation that could reduce the risk of similar housing meltdowns in the future. Republican Presidential candidate Senator John McCain is generally opposed to interfering in the marketplace unless our financial system deteriorates further and appears at a significant risk of a meltdown.  

In March federal regulators gave Fannie Mae and Freddie Mac the ability to increase their mortgage investments by $200 billion. This move will almost certainly add liquidity to the mortgage market. The limit on mortgages that Fannie and Freddie can buy and guarantee has been increased from $417,000 to up to as much as $729,750 in expensive areas.

The FHA provision in the Frank/Dodd package would provide insurance for an additional $300 billion in new mortgages on top of the $200 billion in new Fannie and Freddie mortgages. The latter targets solvent but threatened homeowners. An FHA-approved lender would determine the home's value and the existing mortgage holder would be offered 85% of that amount as full payment for the loan, although the amount would be less than the mortgage balance. Although lenders would lose money under the program, their losses would probably be less than if the homes were sold at foreclosure auctions. The homeowner would be issued a new mortgage based on the home’s lower current market value and the loan would be insured by the FHA.

The House and Senate-passed FHA reform bills would lower down payment requirements (from 3 percent to 1.5 percent in the Senate version), or eliminate them (in the House bill). Both would require that lenders give homeowners earlier notification before raising their rates or initiating foreclosure actions. The House bill would require better oversight of mortgage brokers and allow the Department of Housing and Urban Development to take over if they didn’t. The President's Working Group on Financial Markets, an advisory group of top financial-market regulators, also recommended that mortgage brokers face more stringent licensing standards, and that mortgage fraud regulations be strengthened. The American Homeowners Grassroots Alliance would like to extend the more stringent licensing standards to all other mortgage lending entities as well as real estate brokers.

Let’s Save Some Lives and Some Money

Representatives of the American Homeowners Grassroots Alliance (AHGA) and other members of the Health IT Now! Coalition will spend Wednesday, April 2 on Capitol Hill to personally appeal to Members of Congress to pass a health information technology (Health IT) bill this session.

Health IT takes the networking and computer technology now used in business and applies it to the practice of medicine. The same systems that support the banking ATM network and that monitor retail inventories can give doctors, health care providers and patients instant access to complete and up-to-date information on health history, test results, and the latest and best medical research and procedures.

Health IT will save lives. Nearly 100,000 people die each year due to medical errors. Many of these deaths come not from a lack of medical know-how but from a lack of communication. With immediate access to vital information on a patient’s history, test results, current treatments and prescriptions, doctors can make better-informed decisions.

Health IT increases convenience. Adult children of aging parents can participate in decision-making and care-giving from far away. Using two way broadband video connections patients who live far from their doctors can often receive medical consultations and some types of medical examinations without leaving home. Currently under development are new wearable medical monitoring devices which will allow chronically ill patients to stay in their homes while their conditions are monitored remotely 24/7. For parents, health IT means the end of visiting a doctor’s office to get vaccination and other records for routine applications for summer school, field trips and sports teams—such records may be obtained securely by remote access.

The Health IT legislation will incorporate new levels of privacy and confidentiality. Under the current paper-based systems, anyone who can open a filing cabinet can view sensitive patient information (and even copy and distribute it), then return the papers without detection. The Health IT bill establishes a firewall around patient data, requiring passwords and permission to gain access, and leaving an audit trail of who accessed the data, when and why. Privacy violations now go unreported because there is no way to know who picks up a paper file. Health IT will end that.

Finally, health IT will help bring spiraling medical costs under control. The Rand Corporation reports that health IT could produce $81 billion annually in savings in the form of fewer duplicate and unnecessary tests, more efficient use of providers’ time, reduced spending on unnecessary and in some cases incompatible medications, and more. All of those savings will translate into lower healthcare costs for American homeowners and other consumers, either directly or indirectly.

For this to become a part of American health care, Congress must establish a legislative foundation for standards and federal support. This will create “ground rules” to allow participants in the health care industry to invest safely, knowing that they are not buying equipment and software that can be invalidated or made obsolete with the stroke of a pen.

AHGA joins with other members of HIT Now! In urging Congress to pass health IT legislation this year. “Information technology is a basic part of transactions and activities affecting home ownership, retail transactions, education and entertainment,” observed AHGA President Bruce Hahn. “We should extend its benefits to the practice of medicine and the homeowners who pay for it, too.”

The obvious benefits of the legislation have attracted a wide and diverse group of supporters. Coalition members include a diverse group of approximately 40 major organizations from across the political and economic spectrum working together to bring networked information systems to America’s health care system. In addition to other consumer groups, members of HIT Now! Coalition include labor organizations such as the International Brotherhood of Electrical Workers (IBEW); disease prevention advocacy organizations including The American Heart Association; professional associations such as the American Academy of Nursing; hospitals and clinics, and major corporations such as Boeing and Dow. The issue is uniting middle class homeowners and major corporate leaders. AHGA representatives and Verizon CEO Ivan Seidenberg will personally participate in the April 2 event to encourage Members of Congress to pass a health information technology (Health IT) bill this session.

You can help as well. Contact both of your U.S. senators and your U.S. representative and urge them to support Health IT legislation this year! You can look up their phone numbers and email addresses using the Congressional Look Up Tool on AHGA’s home page.

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Signs of Early Spring in a Housing Market Recovery

Like the crocus that pushes the year’s first flowers up through the late winter snow, there are glimmers of light for a housing market recovery.

It’s way too early for a celebration, but a few bright signs are just beginning to appear in a housing market where all the news has been consistently bad, terrible or worse. Could a recovery be on the horizon?

The American Homeowners Foundation thinks so. While the predominance of bad news clearly proves that a recovery still hasn’t begun, the recent positive signs show that the foundation for recovery is already being laid. Even more encouraging is that a number of recent policy actions that will be helpful have either yet to be implemented or haven’t yet had time to reach their full potential. Queuing up behind them are additional legislative or regulatory proposals that could further strengthen the housing market (see Major Housing Rescue Plan Emerging in this issue for a summary).

Some of the good signs:

Unfortunately there is still a lot of recent bad news. Here’s some of it:

Taken with the recent policy actions that will be helpful if they are approved, and combined with recent completed policy actions that have either yet to be implemented or haven’t yet had time to reach their full potential, there is a good chance that we’ll start to see even more good news in the coming months. Some of the indicators of a housing recovery underway, or soon to be underway will be:

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Anti-homeowner Legislation Beaten Back

Consumer groups, U.S. Justice Department, and Realtors all fight the protectionist initiative.

In late March, the Illinois State Legislature blocked legislation that would have prohibited real estate agents from contributing part of their sales commission towards a home buyer’s down payment. Most mortgage lenders now require at least a 5% down payment, even from buyers with excellent credit histories. Many first time, low and moderate income buyers haven’t saved that much. Generous real estate agents have been helping many of those buyers by contributing part of their commission towards the buyer’s down payment in order to help make the sales possible.

A March 16, 2008, Google search for “Illinois real estate commission rebates” returned 94,200 results, including thousands of real estate brokers offering Illinois home buyers rebates of as much as 2% of the home’s purchase price. For a 5% down payment on a typical $200,000 Illinois home ($10,000), a 2% rebate ($4,000) means the buyer needs only another $6,000.  “By substantially reducing the number of home buyers entering the market, this legislation could have had a devastating effect on Illinois home values, which have been dropping even despite the increased availability of buyer rebates,” said Bruce Hahn, President of the American Homeowners Grassroots Alliance (AHGA). “Commission rebates are also having a positive ripple effect. Many of the sellers of those homes are then able to buy a move-up home, which also helps maintain Illinois home values. In some cases the rebate-enabled sale also prevents a foreclosure, and foreclosures drive down the values of all the other homes in the neighborhood.”

According to the Illinois Association of Realtors (IAR), the bill is an initiative of a group called the Homeowners Club of America (HCA). “We are not familiar with that group,” said American Homeowners Grassroots Alliance President. “It’s hard to understand why a homeowners club would want to stop its members from receiving rebates that could enable them to buy a home, so we have to wonder who is providing HCA’s funding. We very much doubt that it is coming from individual real estate agents or independent real estate brokers. Very few experienced real estate agents or independent brokers have any fear of competition from different business models, and very few of them have the money to fund such lobbying campaigns anyway. However, given HCA’s opposition to rebates to home buyers, it’s possible that on this issue HCA may be acting as a front group for one or more large real estate brokerage companies trying secretively and independently to get state legislators to save them from losing business to their competitors who are willing to help homeowners.”

Both AHGA and the Consumer Federation of America (CFA) urged the Illinois House Judiciary 1 Committee to oppose the measure. In a letter to the Committee’s Chairman, the U.S. Department of Justice (DoJ) observed that the legislation “… would undermine competition and reduce choice.” DoJ added that “…we have seen no evidence demonstrating that the harm caused by banning rebates is offset by any benefits to consumers... proponents of such bills have never provided any convincing rationale that the bill will benefit consumers.”

The Illinois Association of Realtors also opposed House Bill 4313, sponsored by State Representative Robert Molaro (D-21, Chicago). Among the reasons IAR cited for it’s opposition to Molaro’s bill were that “the bill seeks to prohibit a legitimate marketing tool that Realtors may wish to use as part of their business plan; the bill gives the appearance that this is an attempt to stifle competition in the marketplace, to the detriment of the consumer; and the bill will invite claims by the U.S. Department of Justice and others that Illinois is attempting to fix the cooperating broker’s commission and to create a non-competitive environment.”

The state legislature requires that all bills be passed by committee by March 14 in order to be considered by the full legislature. This extremely anticompetitive bill died when the Illinois House Judiciary 1 Committee failed to pass it by then.

Illinois homeowners should be grateful that their state legislators declined to pass this ill-conceived legislation. They should be especially grateful to IAR, whose lobbying power was undoubtedly key to killing the bill. IAR’s opposition is particularly noteworthy because in other states in the past it has typically been state real estate associations that have lead the charge to pass anti-rebate legislation and other measures that seek to limit competition in real estate services. IAR can take comfort from the knowledge that their opposition to this bill is helping Illinois homeowners, and will help restore their industry’s reputation. 

In siding with American homeowners on this important issue, IAR is also setting an excellent example for other state real estate associations, multiple listing services, state real estate commissions, and their national organization. The anticompetitive and protectionist regulatory and legislative initiatives of many other real estate organizations have lead to an ongoing string of exposes’ by 60 Minutes and many other media sources. The result has been that the reputation of real estate agents and brokers has reached all time lows. The large companies that appear to be driving many of those efforts in other real estate organizations apparently don’t care about homeowners or about the damage such obvious and blatant protectionist efforts are doing to the real estate industry’s reputation. IAR’s action will hopefully be the first step in reversing that trend.

“Efforts to limit consumer choice by other real estate organizations are very unfair to homeowners and the many experienced real estate agents and independent brokers,” according to the Grassroots Alliance’s president. “No matter what business model they choose, the vast majority provide valuable services that are both appreciated and needed by American homeowners. If other real estate organizations will follow IAR’s example and refrain from supporting protectionist efforts in the future, public faith in the profession will soon be restored.”

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Last Minute Homeowner Tax Tips

Check this list to make sure you’re getting the deductions you’re entitled to, making smart decisions tax-wise, and avoiding the kinds of mistakes that invite IRS audits.

Here’s a checklist of the American Homeowners Foundation’s Top Ten Tax Tips. (It doesn’t include information about the special one-time tax rebate recently authorized by Congress's economic stimulus package. The 2007 tax forms had already been printed by that time, so IRS is going to do those calculations for you and send any rebate due you automatically.) If you haven’t already submitted your 2007 tax forms, review this list before you do.

1. Deduct your mortgage interest, real estate taxes, points, and mortgage insurance premiums (also known as PMI/MI or private mortgage insurance/mortgage insurance). There are income eligibility limits ($100,000-109,000) on the PMI/MI deduction. You must itemize deductions on Schedule A. There is a $100,000 cap on home-equity debt exceeding the balance you owe on your current (or previous) mortgage. However any home-equity money used for home improvements counts against a $1 million acquisition debt limit, rather than the $100,000 home-equity interest cap. The total deductible debt on which interest is figured can’t exceed the value of your home, a potential problem for homeowners who’s mortgage debt exceeds the current value of their home. Points paid by you or on your behalf by the seller of a home you bought in 2007 are deductible but if you refinanced a mortgage in 2007 any points you paid on the refi must be deducted on a proportional basis over the life of the loan. If you sell or refinance again in the future, any remaining points on the current loan that haven’t been deducted may be deducted as a lump sum in that year.

2. The first $250,000 of profit on the sale of a home ($500,000 for married couples filing jointly) is tax-free if you owned and lived in the house for two of the five years leading up to the sale and you didn’t sell another house and use the tax-free exemption in the two years prior to the time you sold this house. Profits beyond those limits (less the cost of any home improvements made during your ownership) should be reported on Schedule D, the same form you use to report the sale of stocks, bonds and mutual funds. There are a set of rules that will also allow you the same or a partial exclusion if you didn't live in the house for two of the five years leading up to the time of the sale. If you had to sell your home to move to new job more than 50 miles away after only one year then you are entitled to half of the exclusion (half of the first $250,000 or $500,000 of profit). Other "unforeseen circumstances" that can also lead to a qualifying sale include death, divorce or legal separation, becoming eligible for unemployment compensation, some changes in employment that leaves the taxpayer unable to pay the mortgage or reasonable basic living expenses, multiple births resulting from the same pregnancy, damage to the residence resulting from a natural or man-made disaster, or an act of war or terrorism, and condemnation, seizure or other involuntary conversion of the property. Check IRS Publication 523 to help figure the exact size of your exclusion based on how long you owned and lived in the house.

3. There are a number of deductions if you used part of the house for business purposes such as a home office or renting out a room. You are can write off expenses that are associated with the portion of your home where you exclusively conduct business or rent to a tenant (such as utilities, insurance, depreciation and maintenance). The percentage of these costs that is deductible is based on the ratio of the square footage of the office or rental space to the total areas of the house.

4. Homeowners do not have to pay taxes on any mortgage debt on their principal residence (not vacation home or investment properties) that was forgiven or canceled by a lender, thanks to legislation passed last December. It applies to debt forgiveness related to refinancing mortgage debt, foreclosures or short sales, where the lender allows the homeowner to sell the home for less than the mortgage amount owed. Use Form 1099-C-Cancellation of Debt from your lender to avoid the liability.

5. Uninsured property losses are often deductible, but you need to document them (a good reason to store an inventory, photos, and receipts of all valuable things inside your home in a separate place, such as a bank safe deposit box). A casualty loss occurring in a disaster area declared by the President gives you the option of a retroactive deduction for the prior year’s taxes if that gives a more favorable outcome. You must first reduce each loss by $100 and then subtract 10% of your adjusted gross income before deducting the balance.

6. Check the IRS web site for answers to questions and to get forms. Their website is getting better and more user friendly every year. If you get bogged down there’s information on how to file an Extension Request (but it won’t protect you from interest payments on unpaid tax balances after April 15).

7. Consider using the Free File program. Taxpayers with adjusted gross incomes of $54,000 or less qualify for free electronic tax filing, and you can’t beat the price (plus it will expedite your refund if you are due one). Refunds can automatically be deposited in your bank or IRA accounts if you prefer. Check the IRS web site for more information. If you don’t qualify, tax preparation software may also save you time and money. Most tax prep software reviewers give the best rating to TurboTax, long the nation's top-selling brand. It has an import function that allows you to download or copy many electronic wage and investment-income reports directly into the program, saving the entering of W-2 and many other figures by hand. A plus is that tax software programs reduce the chance of errors. There are also a variety of free consumer assistance programs available. If you are a low-income tax filer, there are independent Low Income Tax Clinics that will provide representation for free or for a nominal charge. IRS Publication 4134, entitled "Low Income Taxpayer Clinic List," provides information on clinics in your area. (Go to www.irs.gov and click on Publications.) In addition the IRS Taxpayer Advocate Service will "assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe than an IRS system or procedure is not working as it should." You can contact the Taxpayer Advocate Service by calling them toll-free at 1-877-777-4778 or filing Form 911, entitled "Application for Taxpayer Assistance Order" with the IRS. Some local governments provide tax preparation assistance as do consumer groups such as local chapters of the AARP. If you have high income and complicated tax liabilities it is probably worth the extra money to hire an enrolled agent, accountant, CPA, or lawyer. Although considerably more expensive, an advantage they offer over tax preparation software is that they can also offer tax planning suggestions for the future.

8. Check your math. Errors, including such things as entering the wrong social security number or failing to include dependants’ social security numbers are the top reason for refund slowdowns and tax audits. Be sure to include all required supporting paperwork and sign your return (unless filing electronically). Don’t take deductions you’re not entitled to. Realize that deductions that you can’t substantiate will not be allowed if you’re audited, even though the they may be legitimate if you had the evidence (note to self: obtain and save receipts for all deductible expenses in the future).

9. If you haven’t already fully funded your IRA for 2007, do so by April 15, 2008 and you can take the deduction against your 2007 taxes. If you have a Keogh or SEP you can get a filing extension to October 15, 2008. For 2007, the maximum IRA contribution you can make is $4,000 ($5,000 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs is $45,000 for 2007. Both are subject to income limitations. Check the IRS website for details.

10. If it looks like you’ll owe more money to IRS make an estimated payment even if you plan to file for an extension, so you won’t get hit with additional penalties and interest payments. Use form 4868 to get a six-month extension of the filing deadline to October 15, 2008. You may need to increase your tax withholding to avoid the problem in the future. Conversely, if you have a substantial refund due, consider reducing your ongoing tax withholdings in the future unless there were some unique circumstances affecting your tax liability in 2007. Big refunds, while always welcome, simply mean that you have been lending the IRS your money interest free during the year. You are better off getting the difference in your paycheck and investing it to earn interest or dividends instead.

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