The Federal Government has committed almost $2.0 Trillion to stopping the economic free fall and providing a stimulus to a rebound. We have been barraged by acronyms and daily reports of the ups and downs of the recovery. I’d like to take a shot a making some sense of the various plans and indicate how they might affect homeowners.
TARP (Troubled Asset Relief Program)
This $700 Billion program was the result of the Emergency Economic Stabilization Act of 2008 which was the last gasp effort of the Bush Administration to shore up the banking system. This bill authorized the Treasury to purchase troubled assets from financial institutions, and followed on the Federal government’s takeover of Fannie Mae and Freddie Mac in September, 2008. TARP funds have been used to invest in ailing banks and other financial institutions including AIG; about 2/3rd of the money has been allocated. The original intent of TARP was to purchase bad mortgages on the books of financial institutions, but this was dropped in favor of direct investment, when it was decided that there was no way to value these assets and to administer this program. TARP’s results are still questionable. There is no direct assistance to homeowners, though as banks become more stable and begin to lend, the financial system may return to a semblance of normalcy.
Agency Mortgage-Backed Securities Purchase Program
This is a $500 Billion commitment by the Federal Reserve to purchase mortgage backed securities (MBS) on the open market. As there was an active market for MBS (basically Fannie Mae and Freddie Mac loans), there is low liquidity in the market, keeping rates high and loan volume limited. Since the first of the year, the Federal Reserve has purchased almost $130 Billion in MBS resulting in market rates between 4.75% and 5.5% on 30-Year Fixed Rate Loans. The intent in this activity is to establish a normal market for MBS which will encourage outside investors (such as China which holds almost $500 Billion of US debt) to reenter the market. The amount of this allocation should support approximately 6 months worth of mortgages. This is important to homeowners for both purchase and refinancing as it directly affects mortgage rates.
American Recovery and Reinvestment Act of 2009 (ARRA)
ARRA is the Obama Administration’s $787 Billion stimulus package that was passed on February 17, 2009. Even though it was discussed as a massive plan to rebuild American infrastructure, it actually breaks down in the following manner:
• Tax Relief $288B
• Healthcare $147.7B
• Education $90.9B
• Aid to low income workers, unemployed $82.5B
• Infrastructure Investments $65.9B
• Supplemental (including wireless Internet), various Federal departments $15B
• Energy $49.7B
• Housing $12.7B
• Scientific Research $8.9B
• Other (including aid to states) $17.2B
ARRA represents Obama’s efforts to deliver on his campaign promises while shoring up a failing economy. This plan aims to create almost 3 million new jobs over the next two years. It does have a small bonus for existing homeowners as it raised the limit on reverse mortgages from $417,000 to $625,000; and, for first time homebuyers (who have not owned a home in the last three years), earning less than $95,000, there is an $8,000 tax credit.
Homeowner Affordability and Stability Plan
This plan was promulgated the day after ARRA and contains the most benefits for homeowners. It is expected to cost between $275B and $350B and has three major tenets:
1. Refinancing for Responsible Homeowners Suffering from Falling Prices: will provide opportunity for 4 to 5 million homeowners who took out conforming (under $417,000) loans to reduce monthly payments either by lowering rate or lowering amount to reflect the present value of the home.
2. A $75B Homeowner Stability Initiative to Prevent Foreclosures: will provide a means for conforming lenders to modify loans for homeowners who are having trouble making payments
3. Support Low Mortgage Rates by Strengthening Fannie Mae and Freddie Mac.
This is the most specific program for the rest of us. The Treasury will provide an additional $200B to shore up the balance sheets for Fannie and Freddie And, the Federal Reserve will continue to purchase MBS to promote stability and liquidity in the market.
It is this last element that will affect most of us directly. Interest rates have been bouncing around in the low 5% range over the last month. It seems that the administration wants these low rates to continue for a while. There is no published target but it appears that there is a range of 4.75% to 5.25% which is desirable. Actual rates are not dictated by the Federal Government but by mortgage lenders who are responding to their own business goals and needs.
A GIFT FROM THE FEDS
An Explanation of the Homebuyer’s Tax Credit
The Federal Stimulus Bill of 2009 contains a tax credit for first-time homebuyers of $8000. This revises the 2008 credit of $7500 which was in the form of an interest-free loan for 15 years, and now is a direct tax credit which can be taken on 2008 or 2009 Federal tax returns.
A homebuyer qualifies if they purchase a home between April 8, 2008 and December 1, 2009, although purchases before January 1, 2009 are still treated as a 15-year loan. The only caveat for purchases in 2009 is that if you sell the home within 36 months of purchase, there will be a recapture of the credit. A first-time homebuyer is identified as one which has not owned a home for 36 months.
If your adjusted gross income is over $95,000 (or $170,000 if married and filing jointly), you will not get this benefit which is defined as the lesser of 10% of purchase price or $8000.
Find IRS Form 5405 at http://www.irs.gov/pub/irs- pdf/f5405.pdf and give it to your client.
MORTGAGE RATES TODAY
a sampling of rates as of March 4, 2009
30-Year rates seem to be swinging wildly in a “s” curve: up a couple of days to a ceiling of around 5.75% and down for another couple of days to a floor of 5.125%. There is an expectation from all parties that rates will come down below 5%, but waiting is difficult. There are significant savings to be had at 5%; I am not sure what happens below that.
A couple of lenders have entered the conforming market with 5/1 ARMs and there is a portfolio 5/1 and 7/1 jumbo ARM at rates at or below 5%.
30-Yr Amort. 5.125% 6.375%
30-Yr Int. Only 6.875% 7.0%
5/1 ARM Amort 4.875% 5.0%
5/1 ARM Int. Only 5.0% 5.125%
The rates shown above are for example only, and are based on full documentation with good credit. They represent a selection of the best rates available from our active relationships with almost 15 lenders.