May 2008      

In this issue of Home Base:

Housing Rescue Initiatives Proceed

The drive for housing rescue legislation is growing and expanding.

Progress is being made in the House and Senate and at the state level. Unfortunately foreclosures continue to increase faster than troubled mortgages can be resolved through other means. As a result home values in most areas continue to drop, and may continue to do so until new efforts stem the tide.

On April 8 the U.S. Senate passed The Foreclosure Prevention Act of 2008, a $15 billion housing bill which would allow homeowners who currently don't itemize deductions to deduct state and local property taxes of up to $1,000 for families and $500 for individuals. This would help the 40% of homeowners who do not itemize, generally older homeowners with small or no mortgage interest deductions. However it would not be much help to those with troubled mortgages, who would have plenty to deduct if they had enough money to make their mortgage payments. The Foreclosure Prevention Act of 2008 would also authorize states to issue an additional $10 billion of tax-exempt housing bonds, $4 billion for cities to buy vacant foreclosed properties, and $150 million for housing counselors and provisions to modernize Federal Housing Administration (FHA) loan guarantee programs. FHA loan limits would be permanently increased to $550,000. To stimulate housing demand, the Act provides a $7,000 tax break, spread over two years, to purchasers of foreclosed homes. Home builders and other businesses hit by the economic downturn would get a large share of the $15 billion in the form of tax rebates.

The American Homeowners Grassroots Alliance and most other consumer advocacy organizations were disappointed when a provision that would have allowed bankruptcy court judges to alter troubled mortgage loan terms of homeowners forced to file for personal bankruptcy was dropped from the bill. While judges can alter mortgage terms on business loans in bankruptcy proceedings, including mortgages of investors in residential real estate, mortgage lenders previously managed to pass legislation denying bankruptcy court judges the ability to lower homeowner’s mortgage interest rates, extend loan durations or forgive part of the loan principle, as they routinely do in business bankruptcies. By some estimates as many as half a million homeowners could avoid foreclosure through 2009, by allowing judges to alter the terms of mortgages on primary residences.

Foreclosure auctions have a very corrosive effect on all home values. Because foreclosure auction buyers often have to pay cash and the sales aren’t subject to home inspections, auction sales frequently bring only 60-70% of what similar homes can be sold for in the current market. Those foreclosure sale prices are matters of public record available to other potential buyers of homes in that neighborhood, and as a result they drive down the values of all other nearby homes, including the homes of responsible homeowners who have paid off their mortgages or who have never had problems making mortgage payments.

The House Committee on Ways and Means passed the Housing Assistance Tax Act of 2008 on April 7. This alternative would provide tax credits to first-time home buyers, expand low-income housing assistance, and allow low income families to deduct property taxes, among other provisions. It does not doesn’t include retroactive business tax deductions.

On April 23, the House Financial Services Committee passed a $15 billion loans and grants package to enable local governments to buy foreclosed homes and land. Part of the grant money would be used to buy housing for low income families. These proposals will be combined with other housing rescue legislation and proposals to reform Fannie Mae and Freddie Mac prior to consideration as a package by the entire House of Representatives.

The Administration has been active on the housing rescue front as well. Treasury Secretary Henry M. Paulson has proposed the creation of a federal Mortgage Origination Commission to create minimum professional standards for loan officers and track state programs to license and regulate mortgage sales professionals. In addition the "FHASecure" program is being modified so borrowers with lower credit scores will have the potential of refinancing into an FHA fixed rate loan. Homeowners who have been late on up to two monthly payments in the prior year, may now be able to get 3 percent equity FHA-insured mortgages. Homeowners who were late on three payments could also refinance through FHA, but they would have to make a 10% down payment or have 10% equity, which will be an unattainable standard for most. Their lenders would also have to be willing to write down principal balances to the 90 or 97% of the homes fair market value. The plan is similar in concept to elements of more ambitious legislation proposed by House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Chris Dodd seeks to rescue as many as 2 million borrowers (versus 500,000 under the FHA secure plan estimates). The Frank/Dodd proposal provides for more flexible underwriting standards and would cost $10 - 20 billion.

Democratic Presidential candidates Barak Obama and Hillary Clinton have endorsed Chairmen Frank's and Dodd's legislative package. After largely resisting major proposals, Senator John McCain is also now supporting a more significant federal government role to help homeowners. He now supports federal government guarantees for refinanced mortgages for homeowners facing foreclosure, which he estimates would cost between $3 billion and $10 billion. McCain also supports the creation of a Justice Department task force to investigate criminal violations by mortgage lenders, something that other policy makers have not suggested.

States are becoming more active as well. Nine states have either begun or are preparing refinance programs intended to help challenged subprime borrowers. Pending federal legislation would help them expand existing tax-exempt housing bonds to fund mortgage programs. Other states have made various efforts to curb the kinds of mortgage lending practices that have contributed to the problems. Among them are several bills in Maryland that would subject some of the worst mortgage scams to criminal prosecution, prohibit prepayment penalties in cases where homeowners were talked into signing over their houses to third parties, and extend the minimum foreclosure process duration from 15 to 150 days. Other states have extended the foreclosure process as well.

The big question, assuming the pending legislation passes, is whether all of these efforts will be enough to collectively staunch the growing number of foreclosures and continuing drop in housing values. There were 1.5 million foreclosure actions in 2007, and U.S. foreclosures in March totaled 7,500 a day. The Case Shiller index of home prices in 20 major metro areas dropped 12.7% in February, 2007 compared to last February (and almost 15% since July 2006). Other economic numbers continue to trend downward, and some economists project an additional 10% drop before home values level out. Also of concern is that existing programs intended to encourage lenders to restructure troubled mortgages have had little impact. For these reasons we fear that unless Congress puts some teeth behind those programs by allowing bankruptcy court judges to alter the terms of homeowner’s mortgages when appropriate, the downward trend will continue without significant abatement.

top

Earth Day Home Energy Ideas

April 22 was Earth Day, and it's good time to think about helping the environment and saving money at the same time .

With gasoline, home energy costs, food and so many other costs rising, anything we can do to save energy helps not only the planet but also our own pocketbooks. To help homeowners find ways to save energy you can use the American Homeowners Foundation's Free Energy Audit. The audit leads you on a 10 minute self guided tour through your home and will help you identify inexpensive do-it-yourself steps you can take to reduce home energy costs.

There are many other things you can do as well: buy products with less packaging, products that use less toxic chemicals, and permanent items instead of disposables. With gasoline now $3.60 a gallon, take steps to reduce your gas consumption, which will save money and help the environment. Properly inflated tires can improve gas mileage by 3%, so get an inexpensive tire gauge ($2-5) and monitor tire pressure regularly to keep them close to recommended levels. Properly inflated tires also last longer, so you’ll save on tire expenses as well. Reduce the miles you drive by combining trips, walking, or taking mass transit, and buying products or services online rather than driving to the mall. Participate in your employers telecommuting program if they have one. Telecommuting one day a week will significantly reduce your gas consumption and wear and tear on your vehicle. It will also help reduce rush hour traffic jams and reduce pressure on your state’s transportation infrastructure. If your employer currently does not have a teleworking program, suggest that they consider it or other options, such as ten hour shifts four days a week. Most cars get their best highway mileage at 55 mph. Mileage starts dropping dramatically at higher speeds so don’t exceed highway speed limits, and use your cruise control to save even more by maintaining consistent gas use.

Other lifestyle changes can help as well. Wear lighter weight clothes in the summer and you can set your thermostat higher, saving on air conditioning costs. Wearing sweaters and other warmer clothes in the winter and you can set the thermostat lower, saving on heating costs. Programmable thermostats are inexpensive (as little as $30), and can save many times their cost through reduced energy use.

Repairing things rather than replacing them helps the environment and can usually save money. Switch to electronic billing, statements, and payments as much as possible and you'll save a lot of trees, not to mention postage. Recycle as much as possible, and not just paper, plastic and glass. Find recycling centers in your area that will take old consumer electronics, such as computers, monitors and TVs. The Consumer Electronics Association’s website, mygreenelectronics.org identifies recycling locations by ZIP code. When you buy new electronics make sure they have the Department of Energy’s Energy Star certification (a list is at www. energystar.gov). As the saying goes "one man's trash is another man's treasure." If you doubt that, take a look at some of the stuff for sale on eBay or Craig’s list. Try to find new homes for serviceable things you no longer use through such alternatives or yard sales rather than throwing them in the trash.

In early April, the Senate agreed to extend solar and wind energy tax credits in its housing package. The provision allows up to $500 for installation of energy-efficient products in homes and extends the tax credit for wind, solar and other renewable sources of electricity. Some form of energy tax credits, perhaps including credits for energy efficient new homes and/or remodeling projects to improve your home's energy efficiency, is likely to pass in the House. As conventional energy costs continue to rise and renewable energy technologies continue to drop in cost and improve in efficiency, they are becoming increasingly viable investments.

The National Association of the Remodeling Industry (NARI) reported that there is a growing interest in "sustainable design". Sustainable design helps homeowners reduce energy costs, consumption of natural resources, and health risks from products in home building or remodeling projects. For example, spray-in cellulose insulation is made from 80 percent post-consumer recycled newspaper, which is a very effective seal to heat and cold. Solar water heaters can pay for themselves through energy savings in four to eight years. Appliances and fixtures that conserve water can significantly cut water bills. Many new building materials are non toxic, and have no volatile organic compounds (VOCs) that bother many who are sensitive to airborne irritants. Increased interest in recycled materials such as reclaimed wood, bamboo flooring and recycled glass countertops have far less impact on the environment than other alternatives.

Remodeling can be an excellent alternative to replacing your home, especially since homes are so hard to sell right now. In addition the two transactions (selling plus buying the next home) can easily cost 10% of your current home's value by the time you figure in the real estate commission, mortgage loan points, etc.). But be careful - complaints about remodeling contractors are the most frequent complaint received by the American Homeowners Foundation, and also the most frequent complaint to the Better Business Bureau in most years. The American Homeowners Foundation's free Top Ten Remodeling Tips can help you avoid many of the pitfalls. The Foundation also offers an inexpensive home remodeling contract form to protect your interests.
 
top

Homeowners Offer Tax Simplification, Improvement Ideas

There are many things Congress could do to help the rapidly growing number of homeowners with offices in their homes.

As the nation’s homeowners struggled to complete their taxes by April 15, the American Homeowners Grassroots Alliance (AHGA) on April 10 urged Congress to simplify and improve the tax code. In Testimony submitted to the House Small Business Committee, AHGA suggested a number of reforms that will help between 34.3 million and 36.6 million home office households. At least 18 million are home-based businesses, according to U.S. Census figures. They include Internet-centric businesses, such as the millions of eBay Power Sellers who derive all or most of their income from Internet commerce, service businesses such as website designers, real estate agents, mortgage brokers, and millions of other home-based businesses. The rest are employees of businesses of all sizes or governments at all levels who telecommute from home.

“These changes would help all of these homeowners, the economy, and the environment,” observed AHGA President Bruce Hahn. “By reducing their tax burdens and improving economic efficiency, they may also help many hard-pressed homeowners avoid foreclosure.” he added

Among AHGA’s suggestions:

• Simplify and liberalize home office tax deductions
• Provide new tax incentives to encourage working from home
• Provide faster write-offs of business equipment used in the home
• Allow a penalty free withdrawal or loan from IRA or 401k for all expenses
  attendant to home office creation
• Prohibit state and local sales taxes on goods or services sold over the Internet
• Repeal the federal excise tax (FET) on communications services
• Repeal state "convenience of the employer" rules that creates dual state
   income tax liability
• Create new tax credits or deductions to encourage broadband and cellular
   providers to speed up the build out of networks to rural or other underserved
   homes that currently lack access to these services.

top

Rewarding Renovations

Remodeling can be a great idea, but there are some important questions to be answered first.

May is National Home Improvement Month. The Nest, a home-improvement website, says before undertaking any major remodeling projects, you should ask yourself these important questions:

= How long do I plan to stay in my house after the renovations? The longer you plan to live there, the more creative you can be. But if you’re planning on selling the house in the next five years, keep potential buyers in mind with your choices. For instance, go with neutral colors in the kitchen and bathroom, and consider maple cabinets. Some people hate oak, others hate cherry, but the majority can live with maple.
= Am I doing just cosmetic fixes or am I ready for an all-out overhaul? It’s OK to make small changes one at a time, but think long-term about the next step. For example, if you’re buying a new sink, buy one with enough holes on the deck for the faucet, sprayer and soap dispenser you might want to add on later. (Cutting more holes into stainless steel or porcelain after the sink is installed is an onerous job you don’t want to get stuck with.) And if you know you’re going to buy new cabinets later, don’t replace the countertop with expensive granite now. The chances of reusing it are very slim _ either it breaks when you try to remove it, or it doesn’t match the footprint of the new cabinets.
= Am I prepared for the home upheaval? Be realistic about how long these changes might take. Renovations can go on for months, so you need to be prepared to make do without that bathroom, kitchen or bedroom. When checking references before you hire your contractor, be sure to ask if the company finished the work on time. You’d be surprised how quickly a week can turn into a month. And if you’re bunking up with your in-laws during renovation, that month can seem like a year.
= Are the renovations keeping with the style of my home? Any big changes you make to a home inside should reflect what future buyers will expect from the outside. If you live in a Victorian house, don’t make it too contemporary. People who see a historical exterior will expect a historical interior, so stay true to the details. The same goes for a contemporary or modern home, where future buyers may not expect old-fashioned details like antique crown molding.
= Are my DIY choices reasonable? You may consider yourself handy, but many do-it-yourself jobs demand your time more than anything else. If you have a full-time job, are you capable of taking on a second one? Some makeovers that are not technically difficult can take longer than you think. For that reason, if you start any job yourself, try to sample it before committing to the whole thing. For example, while refinishing cabinets with a new stain isn’t rocket science, sanding down each one can take forever.

top

States Becoming Active on Home Ownership Policy Issues

A number of issues impacting how you buy or sell a home, and the costs involved, are cropping up at the state level.

State real estate associations and consumer advocacy organizations were on the same side in several cases. In Illinois the U.S. Department of Justice, American Homeowners Grassroots Alliance, the Consumer Federation of America, and the Illinois Association of Realtors all opposed a state bill that would have prohibited real estate commission rebates to home buyers.

In New Jersey, which currently prohibits commission rebates, the U.S. Department of Justice and the American Homeowners Grassroots Alliance is supporting state legislation to repeal the prohibition. New Jersey is one of 11 states that restrict real estate licensees from offering rebates to consumers. Unfortunately the New Jersey Association of Realtors is not as enlightened as their Illinois colleagues. NJAR is opposing the legislation, Assembly Bill 373 and Senate Bill 139, introduced by state Assemblyman Patrick J. Diegnan Jr., D-South Plainfield, N.J.; and state Sen. Nicholas P. Scutari, D-Linden, N.J. AHGA commends these legislators for standing up for the rights of homeowners.

Earlier this month, the Department of Justice announced that the Montana Board of Realty Regulation had voted to repeal a rule forbidding real estate brokers from offering rebates and other incentives to their customers. The Board took this action in response to an investigation by the Department's Antitrust Division. "Amending this rule to allow rebates in real estate transactions is a good change for Montana consumers," said Thomas O. Barnett, Assistant Attorney General in charge of the Department's Antitrust Division. "As we have consistently seen in other states, the repeal of rebate bans lead to increased competition between brokers and lower prices for consumers of real estate brokerage services." The Montana Board's action follows the lead of other states including West Virginia, South Dakota, and Kentucky, that have recently repealed anti-rebate regulations in response to concerns raised by the Department of Justice and the American Homeowners Grassroots Alliance. To learn more about the importance of rebates and competition in the real estate industry, visit the Antitrust Division's "Real Estate and Competition" Web site at www.usdoj.gov/atr/public/real_estate/index.htm.

The North Carolina Association of Realtors has led the charge to oppose a measure that would increase the state's real estate transfer tax. The proposal would hurt homeowners and real estate agents and brokers. AHGA has joined with NCAR in opposing the measure and has worked with other state real estate associations opposing similar initiatives.

top

Some Glimmers of Good News on the Home Front

Despite all the bad news about foreclosures and falling home values, we're beginning to see a few rays of hope.

Among them are the return of first time buyers who have accounted for half of the recent home purchases in some markets. This is not so much a reflection of consumer confidence, which is near an all time low, but of housing prices. In many areas prices have dropped to the point that more homes are now affordable for growing numbers of buyers, thanks also to low mortgage rates. The Mortgage Bankers Association of America's national survey reported an 8.1% increase in mortgage applications during one week in April. Admittedly, that is from a very low base, but it is still encouraging. FHA-insured mortgage applications increased over 15%.

While home inventories remain unusually large in many areas, they are no longer increasing as fast as they did in the last two years. Picky home buyers are finding it much easier to find just what they want. Those types of buyers are frequently more interested in getting the features they are interested in than sitting on the sidelines and waiting for the market to hit rock bottom.

Recent and pending legislative and regulatory changes are bound to help to some degree, but the question is how much? If Congress passes homeowner bankruptcy reform legislation, the number of foreclosures could drop dramatically. This will help reduce inventories and falling home values, and restore some confidence to the marketplace. The now permanent PMI tax deduction will certainly help first time buyers and the modification of FHA loan rules is clearly already helping quite a bit. While lenders are getting pickier, home buyers with decent credit scores can get mortgages without significant difficulty (although it's getting harder to finance condos in many areas).

Lender's inventories of foreclosed properties have grown to the point that many will likely soon be forced from their current state of denial to repricing those homes at market-clearing prices. As the surplus draws down, so too will the downward pressure on home prices. Indeed, a decline in inventories will very likely be the first leading indicator that home prices are about to stabilize. While bad news still outweighs the good, there are some positive signs, and many efforts in progress that will likely help more in the near future.

top