On February 28 the House of Representatives passed an $819 billion tax-and-spending economic stimulus bill on a party line vote. A similar package is moving through the Senate, but passage many not be as easy. The House legislation has numerous provisions that will help homeowners and the economy.

President Obama claims that “This recovery plan will save or create more than 3 million new jobs over the next few years...,” but opponents have said that it will have little impact. While economic projections always involve a substantial amount of conjecture, the independent Congressional Budget Office estimates that it will have a “noticeable [positive] impact on the economic growth and employment.”

Some of the provisions of the American Recovery and Reinvestment Act of 2009 (HR 1) that will have significant effect on homeowners are:

Senate debate is already underway. Some improvements have already been incorporated. The Senate added a $70 billion fix to the alternative-minimum tax and tax incentives to expand broadband distribution to unserved rural areas. AHGA’s efforts to raise the cap on the first time buyers 10% tax credit to $22,000 and provide $10 billion for a trust fund to build affordable housing have not yet been successful.

President Obama has asked Congress to pass the bill by February 13, which will be a challenge. Congressional partisanship, especially in the House of Representatives, remains a challenge, as will provisions which could hurt the economy in the long run or which have more to do with ideology than economic recovery. Buy American provisions in the House bill are probably in violation of existing international trade agreements, and would likely bring retaliatory actions against American goods by our trading partners. There are other better ways to help American workers and American companies. Other components, like funding for a family-planning program, a program to prevent sexually transmitted disease and funding for the National Endowment for the Arts don’t provide much economic stimulus. They do raise large red flags for social conservatives, and may explain in part why no House Republicans voted for the bill.

Staying put and remodeling may be the best bet.

According to Remodeling Magazine's 2008-09 Cost vs. Value Report, many remodeling improvements held their value better than home prices in 2008. According to the report home prices dropped 7% in 2008, while the value of remodeling investments dropped only 2.8% last year. It should be noted that national data sources showed substantially larger home price declines in 2008.

Remodeling can make sense for several reasons. Between the oversupply of homes on the market, the small number of buyers, and tighter lending standards, its much harder and takes much longer to sell a home today. Nobody enjoys the tension of having their home on the market for many months. If you first find another home you would like to buy, that seller may be unwilling to take his home off the market while waiting for you to sell yours...

In the meantime, you could be enjoying the results of your remodeling projects. They will make your home easier to sell when the market improves, and the data suggests it’s a good alternatively financially.

There are several caveats however. You don’t want to over improve your home relative to your neighborhood. You also don’t want to gold plate specific improvements if you’re concerned about maximizing the return when you do sell. In addition, some types of improvements will give you a far better return on your investment than others. The rate of return also varies from one location to another. The Cost Value Report identifies the most cost effective improvements, which include kitchen and bath makeovers, among others.

Homeowners have much more negotiating leverage with contractors today because of the economy. However, the flipside is that many contractors are in a tight financial condition. If they go out of business in the middle of your project, it could be a real problem, especially if they hadn’t yet paid for your cabinets or paid their workers or subcontractors for work they did on your home.

Three steps are critical:

The American Homeowners Grassroots Alliance offers support and policy suggestions to our new President.

On his first full day in office, the American Homeowners Grassroots Alliance, on behalf of the nation’s 70 million+ American homeowners, congratulated President Barack Obama on his inauguration, welcomed him to his new home, and pledged support for his efforts to help homeowners. The Alliance also identified some of the challenges relating to home ownership, the economy, technology, and other areas facing homeowners and his Administration, which have not been addressed in the pending stimulus package, and made constructive suggestions for future initiatives to address them.

The Alliance’s suggestions are contained in the text of the letter, which appears below:

January 21, 2009

The Honorable Barack Obama
President of the United States
The White House
1600 Pennsylvania Ave., NW
Washington, DC 20500

Dear President Obama:

On behalf of the over 70 million+ American homeowners, we congratulate you on your inauguration, welcome you to your new home, and pledge our support for your efforts to help American homeowners. The challenges faced by our nation are immense, and we thank you for your vigorous and successful preparations to address them immediately. We would also like to make some constructive suggestions for future initiatives.

We look forward to supporting the economic stimulus package that you have developed with Congressional leaders. Components of the package will directly address the housing crisis, and other provisions will help homeowners address important economic challenges. We also thank you for your commitment to allocate $50 -100 billion from the Troubled Asset Relief Program (TARP) to solve the foreclosure crisis, and for your support of separate legislation to make foreclosures subject to bankruptcy proceedings.

We are delighted that the stimulus package includes improvements to the existing 10% first time buyer’s tax credit. With home values dropping at an average annual rate of nearly 10% over the last two years, this credit will help reluctant potential home buyers offset the risk of further declines in housing prices. Due to the $7,500 maximum limit on the credit, it will be most effective in rural and other areas with lower housing prices. In areas where entry level homes can be found for $75,000 or less, the tax credit will effectively negate a further decline of up to 10% on the value of those homes. In more expensive urban/suburban areas, where entry level homes start at $200,000 or more, the credit cap will cover less than a 4% decline in home values, and may be a less effective buyer stimulus.

The $825 billion economic stimulus package announced by House Democrats last Thursday contains many other provisions that will benefit American homeowners. Your "Making Work Pay" tax credit of $500 per worker and $1,000 for couples is desperately needed by many homeowners who have lost their jobs and/or face foreclosure, and it will help many millions of other homeowners begin to replenish the savings they have lost in the stock market and the equity they have lost in their homes.

The stimulus package’s substantial funding for “shovel ready” infrastructure projects will create jobs and help the entire economy. Funding to weatherize modest-income homes and renewable energy tax credits will help both homeowners and the environment. The funding for high-speed Internet access for rural and underserved areas will also help the environment as well, because high speed broadband is necessary for teleworking. It will also enable more homeowners to benefit from telemedicine, which will become more accessible as a result of the package’s funding for modernization of health-information technology systems.

The economy has continued to deteriorate rapidly since the TARP fund was created and the additional need for a major stimulus package was recognized last year. At minimum both TARP and the stimulus bill will help slow our economic decline, at least for the short term. However, we also share the concerns expressed recently by House Appropriations Committee Chairman David Obey and a growing numbers of economists, who fear that the pending stimulus package and remaining TARP funds may be inadequate to turn the economy around, and believe that additional economic stimulus may be required before the end of the year.

You have been ahead of the curve in recognizing the need to address the declining economy and propose a balanced and thoughtful response to our challenges. No doubt you and your senior advisors have already discussed the real possibility of a need for an additional stimulus package. We all hope that it won’t be necessary, but also realize that advanced thought and planning is prudent given the risk. We offer the following suggestions as candidates for a second stimulus package, should it be necessary:

Bruce N. Hahn, President

*based on refinancing an existing $200,000 fixed rate 6.8% mortgage

The Federal Reserve took control of a vast portfolio of billions of dollars of mortgages of Bear Stearns and American International Group (AIG), and is now trying to prevent foreclosures on many of them. It will try to renegotiate mortgages that might otherwise enter foreclosure, Fed Chairman Ben S. Bernanke told congressional leaders in an early January letter.

The Fed has the authority to reduce mortgage balances, lower the interest rate, lengthen the term of the mortgage and/or take other steps to keep a loan from defaulting, as long as the action yields a better long-term payoff for taxpayers than foreclosure. That will likely be the case in many instances, especially where the homeowner would be able to keep up with payments if the loan were reduced to present market values at current market rates. To find out if their mortgage is in the Federal Reserve’s pool and whether they qualify for a renegotiation, homeowners should contact their mortgage servicer, with whom they would work with on the process.

Most importantly, in many cases the Fed is reducing the amount of principal owed by people at risk of foreclosure, especially those with a loan balance that is more than 125 percent of the estimated value of their property. Although data shows this has been the best way to prevent subsequent foreclosures, private lenders have rarely been willing to reduce loan balances.

One of the most important laws of physics is that for each action there is an equal and opposite reaction. That may turn out to be true in the housing sector, where an array of federal actions are underway or in various stages of process to prevent foreclosures, encourage first time buyers back into the market, and stimulate the overall economy. If they are successful they are also likely to cause lenders to begin unloading their growing inventory of foreclosed properties.

Lender-owned homes are up 134% from a year ago, according to the Federal Deposit Insurance Corporation (FDIC). More than 860,000 homes were foreclosed on by lenders in 2008, twice the number in 2007. There was an 11-month supply of homes for sale at the beginning of 2009, and Moody's Economy.com estimates that 12 million homeowners owe more on their homes than they are currently worth. Even scarier, a January, 2009 analysis by RealtyTrac, a real estate research firm, showed that only 25% of lender-owned homes are currently on the market in the four states they studied. If that’s the case, there’s a large volume of additional homes that will be on the market in the near future in any event.

Many lenders have been unwilling to accept the low ball offers they’ve received for many of their foreclosed properties. The money many lenders have thus far received from the Troubled Asset Relief Program (TARP) has, among other things, saved them from having to unload their inventory at fire-sale prices. That’s a blessing because the fire sale prices would only have dragged everyone else’s home values down that much farther.

If demand picks up, and assuming that buyers begin raising their offers on foreclosed properties closer to market rates, lenders will likely begin pushing more of their growing foreclosure inventory back into the market as quickly as it can absorb them. That in turn will likely slow or prevent a return to home appreciation until that inventory is absorbed.

Still, a stabilization of housing prices would be an improvement over recent trends. Also, Federal Reserve Board and other actions to prevent foreclosures may be mimicked by lenders if they succeed. Those actions could collectively reduce the rate of future foreclosures, and shorten the time necessary to clear the lenders’ inventories. Another development in the law of political physics are the growing number of states enacting or considering laws that slow down the foreclosure process, and growing support for a federal law to enable bankruptcy judges to order loan modifications.

Legislation enabling bankruptcy judges to reduce the mortgage balances and make other modifications of mortgages for homeowners at risk of foreclosure is advancing in Congress. It passed the House Judiciary Committee in January. The American Homeowners Grassroots Alliance and most other housing advocates believe the tool is necessary to prod lenders into making more rational decisions that are in their own best interests as well as the best interests of homeowners.

Similar bills were considered in previous Congresses. This year additional momentum has been created by the mortgage meltdown and the welcome decision of Citigroup, one of the nation's largest lenders, to break rank with other lenders and support the measure. Democratic leaders considered adding the measure to the economic stimulus bill. While AHGA appreciates their good intentions, passage of the stimulus package is critical, and its prospects are best if it is restricted only to provisions that provide substantial immediate stimulus. Despite the temptation, it is better in the long run for the bankruptcy measure to be considered separately on its own merits.

Under the legislation a judge could reduce the mortgage balance or interest rate, or extend the length of the loan. Bankruptcy judges have the same leeway in resolving small business bankruptcies. Like small business bankruptcies, the judges are required to look after the best interests of lenders. If the judge determines that the lender would be better off financially if the small business was liquidated, he is obligated to do so. As with small business bankruptcies, the bankruptcy judge would modify mortgage terms if he determines the lender would yield more through such a restructuring than they would recover after foreclosing and selling the home. Before making such a modification, the judge would also have to determine that the homeowner is capable of making their mortgage payments under the modified terms.

An amendment excluding people who have committed mortgage fraud from receiving such modifications was added to the bill. AHGA supported this amendment. The Alliance also believes that separate federal legislation to address the ill-considered and unethical actions of senior mortgage executives must be enacted to prevent another meltdown of the financial services sector in the future. Similar sanctions against similar behavior from real estate investors or homeowners are consistent with that objective and appropriate as well.

New FICO Credit Score Announced

Fair Isaac Corp. has announced a new formula for computing its FICO score, an important predictive tool used by lenders to qualify mortgage applicants. The new evaluation formula is intended to be a more accurate predictor of future borrower defaults. The company says the new formula will be more forgiving of first time mistakes, but is tougher on repeat offenders.

TransUnion will start offering Fair Isaac’s "FICO 08," immediately, and Equifax and Experian are expected to follow around midyear. In addition to improving predictive accuracy, the changes are also intended to reduce gaming of the scoring mechanism by "credit repair" companies. It could be some time before the new system is widely used.

Consumers with good credit histories will probably see their scores increase slightly. Nevertheless, any new system can have bugs, and consumers should check their credit score over the next year to make sure they didn’t get bit by one of them.

Yet at the same time, homes sales surged 6.5 % in December. No doubt a combination of low mortgage interest rates and low housing prices had much to do with the surprising jump in sales. In addition, real estate Internet searches are surging in Florida and California, two of the hardest hit areas. The Fort Myers, FL area experienced the largest gain in Internet searches on Realtor.com in December 2008, up 106.1% from the previous December. This is very significant because 87% of all buyers, regardless of age, use the Internet in their home searches, according to the National Association of Realtors. Why are some areas turning into real estate hotspots while most of the others continue to languish?

The Pittsburg Multiple Listing Service (MLS) recently signed a consent order with Federal Trade Commission (FTC) agreeing to cease blocking listings of discount brokers. The federal competition agencies continue to score wins on this issue, and our sense is that the real estate trade groups and MLSs are increasingly resigned to the reality that these types of anticompetitive behavior cannot be sustained.

The FTC has also been active in shutting down scam mortgage aid companies who charge high fees and do little to help consumers. The FTC successfully sued Mortgage Foreclosure Solutions reaching a final settlement in which it obtained a $1.2 million judgment against the company and an agreement to cease future foreclosure rescue efforts. The FTC has posted on its website a very useful list of things to watch out for when seeking foreclosure assistance. The American Homeowners Foundation has a simple piece of advice for homeowners in need of foreclosure counseling – look first for a nonprofit counseling agency in your area. Their services are usually free and the usually have ongoing working relationships with lenders in their area, and know how far each is willing to go in making mortgage loan modifications.