Homeowners Call on Congress to Encourage Home Ownership

Comprehensive changes in tax and other laws will reinforce the trend towards home-centric lifestyles and will benefit the middle class.

On January 31 the American Homeowners Grassroots Alliance (AHGA) called on the House Ways and Means Committee to make changes in tax and other laws that will accelerate the trend towards home-centric lifestyles that are benefiting homeowners and the economy. The Committee, which has oversight of federal tax, healthcare and other laws, was holding a hearing on challenges facing middle class families.
 
The American home is becoming more important to our society, AHGA told the panel. Increasingly homes are playing the much more encompassing and important role they provided our forefathers. At that time life centered around the home. Ours was an agrarian nation, and the workplace of homeowners was on their own property. Health care was provided by doctors at the patient’s home and nursing was provided by the patient’s family in the home. Most elder care was provided in the home by family members.

In many ways American homeowners are returning to this home-centric lifestyle, according to AHGA. The number of home-based businesses is growing rapidly – some 10 million individuals earn a part time income or make a full time living as eBay sellers. Teleworking is also rapidly growing in popularity as more employers, including the federal government, are facilitating the ability of employees to work from their homes either part or full time.

The trend towards a home-centric lifestyle is increasingly reflected in new home design and the remodeling of existing homes. More new homes are being built and existing homes remodeled with two home offices as well as floor plans and features that enable seniors with mobility challenges to age in place in their own home, rather than being forced to move to health care facilities. Inside the home new wearable wireless medical monitoring devices now under development will also allow many of the nation’s 7 million chronically ill and many seniors with medical challenges to remain in their homes while their health can be monitored remotely 24/7 via computer modems.

These are important trends from many perspectives. Not only does a home-centric lifestyle improve the quality of life and allow homeowners to better connect to their community, it also has other tangible benefits. A person who works from home does not need to commute to another workplace, which reduces demand for gasoline and global warming. By reducing the number of commuters, rush hour traffic jams and traffic slowdowns will also be lessened. This reduces the gasoline consumption and air pollution from the vehicles of those who continue to commute to work. It also reduces pressure on our transportation infrastructure. Federal and state government health care subsidies and private insurer medical costs will also be reduced by homeowners who will be able to remain in their own homes rather than forced to move to the much more expensive alternatives of long term care facilities, hospitals, or other medical facilities.

AHGA thanked the House Ways and Means Committee for steps it has already taken that facilitate home based businesses and teleworking and the reduction of home energy consumption. Recently enacted tax credits that encourage home energy efficiency and the construction of energy efficient new homes are helping the environment and saving homeowners money. The deductibility of private mortgage insurance will help more low and moderate income homeowners to afford to buy a home. AHGA urged the committee to permanently extend these current laws, all of which sunset in 2007 or 2008.

Other legislation already under consideration in this new Congress will also help most homeowners. AHGA supports the Ways and Means Committee’s commitment to adjust and index the alternative minimum tax to exempt middle class homeowners. And, the budget prudence reflected in Congressional “paygo” rules is also appreciated by American homeowners, who typically have no other choice but to pay as they go for everything else with the money left over after their monthly mortgage payment. The amount left over is often insufficient to cover other substantial costs facing most homeowners, such as healthcare and college education for the homeowners’ children. In that regard AHGA thanked the Committee for its support for reducing the cost of prescription drugs and expanding student loan programs.

More needs to be done according to AHGA. The appreciation of homes in recent years has placed home ownership out of the reach of growing numbers of our citizens. We need to do more to get those at the lower end of the economic scale on the road to home ownership sooner. To expand home ownership AHGA recommended that first time home buyers be allowed a tax credit of 10% of the home’s price, capped at $6,000. An affordable housing tax credit should also be enacted to create more homes for low income taxpayers and a national housing trust fund should be established to build rental housing for the lowest income families.

AHGA also urged the Committee to consider other steps to foster home ownership and/or increase savings, such as modifying ERISA to permit investments by retirement plans in principal residences of children and grandchildren who are buying their first home, increasing IRA, 401K and other retirement savings plan contribution limits, and taxing annuity payments at the same rate as dividends.
                                                                                                                         
Additional steps are needed to encourage the healthy migration back to a home-centric lifestyle. Health insurance is very expensive and its cost is rising rapidly. AHGA urged the committee to consider tax incentives to make health insurance less expensive for home based businesses and other homeowners who lack employer sponsored health care plans. Homeowners and/or their employers should be encouraged through additional tax incentives to invest in the technology used for the purpose of telecommuting. Telecommunications technology is also critical to teleworking and home based businesses. It is also a powerful research tool for students and a critical element for the implementation of future home-friendly medical technologies. AHGA asked the Committee to consider tax incentives that will facilitate faster and wider deployment of the ultra high speed broadband required to support many these applications, particularly in deploying broadband access to more rural communities and to the economically disadvantaged. 
 
There are other important issues affecting homeowners and home ownership outside the scope of the Ways and Means Committee’s oversight, and AHGA hopes that Committee members will support legislation in those areas as well. There is a need for Congress to step in to address serious barriers to competition and other problems in the real estate services sector, including real estate brokerage services, mortgage lending, and title and other insurance. There is a need to improve the protection of consumer privacy, particularly as it relates to technology, and to assure that homeowners and other consumers can fully benefit from technology’s increasingly important role in facilitating our nation’s return to a home-centric society. A greater commitment to energy research and tax incentives for clean energy will also benefit future generations of homeowners.

AHGA’s complete testimony is at AHGA Urges Congress to Strengthen Home Ownership.
 

Congress Wants More Strict Loan Guidelines

Key Senate leaders have called for expanded mortgage disclosure guidelines.

Senators Sarbanes, Dodd, Reed, Allard, Bunning and Schumer, all members of the Senate Banking, Housing and Urban Affairs Committee, have asked regulators to apply to hybrid ARMs the same underwriting and disclosure guidelines that recently were required for other "exotic" mortgages. Those guidelines require federally chartered banks to “credibly analyze” the borrower's ability to make payments at the fully indexed rate on all payment-option ARMs and interest-only home loans, and disclose the risk of substantially bigger mortgage payments to prospective home buyers. The exotic mortgage underwriting and disclosure rules have already been adopted by 20 states since last September. The Senators are asking the Federal Reserve System, the Comptroller of the Currency, the FDIC, the National Credit Union Administration, the Conference of State Bank Supervisors, and the Office of Thrift Supervision to apply those standards to subprime hybrid adjustable loans, such as “2-28” loans.

In opposing the proposal, the Mortgage Bankers Association countered that hybrid ARMs have generally had modest (2-3 percent) rate increases, that they are typically soon refinanced, that many home buyers wouldn't otherwise qualify for a mortgage without flexible guidelines and that the rules would help drive down home prices. In addition, and a substantial share of the recent growth in home ownership is attributable to hybrid ARMs.

Mortgages have become much more complicated, and AHGA fully supports the disclosure component of the new proposal. However, the borrower assessment standards, if adopted, will mean that many prospective home buyers who would be able to handle hybrid ARMs will be unable to qualify for a mortgage. “Home equity is the largest form of savings for most homeowners and it contributes to social stability, so we don’t want to discourage it,” noted AHGA President Bruce Hahn. On the other hand AHGA also believes that changing market conditions are increasing the default rate and will lead growing numbers of homeowners into default and potential bankruptcy.

The most obvious change in the marketplace is that home prices have stagnated, and in some areas, have declined. Until last year we were blessed with a string of years of double digit annual home appreciation in many areas combined with consistently low mortgage interest rates. Under those conditions few homeowners got into problems with their mortgage. Most quickly built substantial home equity and were able to refinance their mortgage. The relatively few homeowners that got into trouble because of cash flow problems got an enviable consolation prize – thousands of dollars of profit still remaining after paying off the mortgage and paying selling expenses.

Unfortunately the flat real estate market isn’t creating consolation prizes anymore. Today growing numbers of recent home buyers are finding themselves “under water” – the value of their home is less that the amount they owe on their mortgage. They, as well as those with insufficient equity to pay for selling costs (which increasingly include mortgage prepayment penalties), have no way out of substantial increases in monthly mortgage payments when their ARMs adjust. A 2-3% increase in the mortgage rate will be unaffordable to many, and those that are marginally able to pay that amount may face additional 100 to 200 basis point increases at 6 month intervals thereafter. This may explain in part why the third quarter of 2006 delinquency rate in the for subprime borrowers with fixed-rate loans was 9.5 % while subprime borrowers with ARMs had a 13.2% delinquency rate. And some analysts expect delinquencies to increase substantially this year, even if mortgage interest rates remain stable, which of course is not guaranteed.

For this reason AHGA believes that, along with the disclosure requirements, some level of tighter underwriting guidelines is justified by current market conditions. No one is predicting a return to double digit home appreciation anytime soon. Since significant appreciation in most areas is unlikely in the near future, few prospective home buyers will miss out on much appreciation if they have to wait another year or two to buy a home. In the current economic environment we should do more to help keep marginal home buyers from getting into mortgage problems, which can lead to bankruptcy and cloud their credit their credit for years.

At the same time we should always remember that home ownership is a good thing, and there are no underwriting guidelines that could totally eliminate some level of risk. The kinds of guidelines that are needed should take that into account as they strive to prevent home buyers from getting into loans that many will be unable to repay if the current market stagnation persists and/or mortgage interest rates rise significantly.


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Foreclosures - Opportunity for Some, Albatross for Many

The growing number of home foreclosures will likely hurt far more homeowners than it helps.

Foreclosures occur even in the best of times. They create opportunities for savvy home buyers and investors to get a little better deal on a home purchase. Because they are relatively infrequent and demand is good during good times they have little effect on home prices. Today several factors are converging which may lead to a glut of home foreclosures. If that happens foreclosures will put a substantial downward pressure on home values, and will likely delay the recovery of home values if not drive down home values.

Home values peaked in late 2005 or early 2006 in most areas. While a few areas have done well since, most of them stopped appreciating last year and in some areas home values have been dropping. Part of that reflects a return to sanity – after a number of years of double digit inflation home prices simply outstripped buyer’s affordability. For that reason a leveling off or even a modest drop should not be a matter of concern to most homeowners. If they have owned their home for 3-4 years or more they will still be well ahead of historical appreciation trends even if there’s a modest drop of home prices in their market.

Part of the reason for the run-up in prices was real estate “flippers” - short term investors, usually inexperienced, who found out that it was easy to make money in real estate in an era of double digit home appreciation. However, most have proved no better at market timing than the rest of us (and many are probably worse). The result is many got stuck with homes they bought at the top of the market. They can’t rent them for anywhere near the mortgage payment, and the banks will be foreclosing on many of them. Today the flippers are leaving the market in droves, and they won’t be around to bid up prices at foreclosure auctions.

The easy money that became available in real estate at the beginning of this century is also contributing to the problem. Many buyers that were marginally qualified at best opted for interest only mortgages or mortgages that allowed negative amortization. Many of those mortgages are adjustable, and the borrowers aren’t going to be able to refinance them because the mortgage balance exceeds the home’s value. Many of those too will go into foreclosure. If foreclosures increase to the point that they start driving home prices down, our country have a problem. Only the bravest home buyers and well heeled real estate investors will buy in a declining market because they don’t know how far down the bottom is. That will only aggravate the challenge.
Nonperforming mortgages don’t generate real estate taxes and condo fees. Other taxpayers inevitably must take of the slack one way or another. Especially in condos, where there is usually a greater concentration of investors, others must pay for the HVAC, roads, landscaping and pool maintenance. One Fort Lauderdale law firm that represents condo homeowner associations has reported that the number of condos seriously in arrears in the payment of their association fees has doubled over the last year.

Is this scenario inevitable? Not necessarily. Some mortgage lenders are trying to head off the problems by employing a number of strategies. Among the tools are allowing ARM borrowers to switch to more conventional loans at no cost. In some cases, such as when the homeowner was unable to work due to illness, banks have been willing to add the mortgage payment shortfall to the loan balance to give them some room to catch back up. Some lenders are allowing “short sales” which happens when the lender allows the property to sell for less than the mortgage balance and either forgives or restructures the remaining debt. This can be less expensive than foreclosing and quicker as well, which is a good thing in a declining market. Although the amount the loan ends up short may be taxable to the homeowner, it helps homeowners to avoid the more serious damage of a foreclosure to their credit standing. Working against this trend however, are often inflexible rules that apply to mortgages that are combined to create mortgage-backed securities and sold to investors (about 2/3 of new mortgages are currently packaged this way).

The problem is not yet out of hand – about 2.5% of all mortgages were delinquent in the fourth quarter of 2006 (2% is the historical average). Although that’s the highest rate since a recent peak of 2.53% in the first quarter of 2002, it’s still not critical. More worrisome is the recent higher spike in delinquencies of exotic loans, which is where the problems are expected to be concentrated. This is occurring in the face of a healthy economy and job growth, as well as low interest rates.

If long term interest rates rise, the first decade of the 21st century could be a long one indeed for American homeowners. However, if the economy continues strong and the efforts of mortgage lenders to mitigate the looming foreclosure problem are successful, we could see the beginning of the return to a healthy real estate market before the year is done. Lets all hope for the best.



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