Real Estate Insights

As 2009 winds down lawmakers are discussing which key ingredients of last year’s economic stimulus plan to reinstate for next year. Looking back over 2009, the real estate markets have reacted better than expected to the legislatives’ efforts to stimulate the housing market:

• the continuance of the temporary high balance loan limits for both the GSE’s (Fannie Mae and Freddie Mac)and for FHA,
• the implementation of the $8,000 first time homebuyer tax credit,
• as well as the Treasury’s budgeted purchase of mortgage backed securities to artificially keep interest rates at historic low rates
  

But as we head towards 2010 much of the aforementioned has been headed towards an end with no clear hope of extension.

Temporary Loan Limits

You may recall that these temporary loan limits, set at 125% of local area median home price and capped at $729,750, were first introduced in 2008 and then re-extended in early 2009, as a way to make up for a fall-out in the jumbo loan market. Up until 2008, the conforming loan limits that allowed Fannie Mae and Freddie Mac to purchase loans were capped at $417,000. Any loans that were more than $417,000 were considered a “jumbo” mortgage and were funded by money invested in Wall Street.

When Wall Street failed due to the subprime mortgage meltdown and resulting real estate bubble, jumbo loans all but disappeared creating a huge lack of credit for those homeowners looking to purchase or refinance loans that were higher than $417,000. So, as part of the first stimulus plan back in 2008, the legislature gave Fannie Mae and Freddie Mac the ability to “temporarily” purchase loans up to 125% of local area median home price and capped at $729,750. But this legislature was scheduled to expire at the end of 2008.

By the end of the year the legislature had agreed to set the permanent conforming loan limit to 125% of local area median home price but capped at $625,000. Then, as part of President Obama’s stimulus package at the beginning of 2009, the conforming loan limit was once again “temporarily” reinstated to as much as $729,750 dependant of local area median home price.

And now as we head into 2010vwe are faced once again with loosing these higher limits. Currently the temporary loan limits will expire on December 31, 2009 in which case loan limits will be reduced in many markets, the loan limit for Santa Clara County will be reduced to $625,000.

That was of course until last week when the House and Senate passed legislation to extend the current loan limits for FHA and Freddie Mac and Fannie Mae (the government sponsored enterprises, or GSEs) through December 31, 2010. The extension is included in the Continuing Resolution (CR) to fund the government for the remainder of 2009. The CR is part of the Department of Interior FY2010 Appropriations bill. As of the deadline for filing this report, the President was expected to sign the bill into law over the weekend.

Extending the Tax Credit

Currently first time homebuyers are eligible to receive a tax credit equal to 10% of the purchase price (maximum credit of $8,000) of their home when they purchase through December 1, 2009. The tax credit is in addition to any income tax refunds that they may already qualify to receive. But, even though there has been an over whelming response to the credit (as more buyers have taken advantage of the credit than previously anticipated) there has been no clear message that the tax credit will remain an option come 2010 until just recently.

The extension and expansion of the homebuyer tax credit is currently the pending business in the Senate. And after a long week of negotiation on the credit, an agreement on the scope of both expansion and extension has been reached.

The extension is part of a larger bill that has not yet gone to a vote, however. A Senate vote on the underlying bill will occur in the Senate during the week of November 1. The package will then go back to the House. The House is expected to accept the Senate amendments, vote on the package and send it to the President for signature.

The underlying bill is an extension of unemployment benefits. Other provisions in the bill include expansion of the net operating loss carry-back rules, new requirements for some tax return preparers and noncontroversial provisions that "pay for" these changes.

The agreement on the extension and expansion of the credit is as follows:

• Credit available for purchases before May 1, 2010. Prospective purchasers with binding contracts in place as of April 30, 2010 will be allowed an additional 60 days to complete the transaction.
• Credit remains at $8000 for first-time purchasers. No change to definition of first-time purchaser.
• New $6500 tax credit for repeat buyers who purchase between December 1, 2009 and May 1, 2010. Repeat buyers must have lived in their homes consecutively for 5 of the previous 8 years.
• Income limits are expanded to $125,000 on a single return and $225,000 on a joint return. Current law $20,000 phase-out retained.
• New anti-fraud limitations are imposed.

The White House has indicated that President intends to sign the legislation.