By Lowell L. Kalapa
(Released on 8/31/08)
Before Congress adjourned for the summer and the party convention season, they put to bed a bill that will help nearly a half million homeowners avoid foreclosure but more importantly will stabilize the economy.
Some have viewed the rescue of Fannie Mae and Freddie Mac, the nation’s largest issuers of mortgages, as a bailout at the expense of the taxpayer. However, when one considers the magnitude of these two institutions, one can begin to understand the importance of keeping them afloat. On a relative basis, the obligations or debt held by Fannie Mae and Freddie Mac total just over $5.3 trillion whereas the obligations of the federal government total just over $4.6 trillion. Thus, if these two institutions were allowed to fail, the fallout would not only hurt homeowners but the national economy as a whole.
While the major focus of the measure passed by Congress and signed into law was the ability for homeowners to refinance their burgeoning mortgages, there are a number of other elements in the bill that will stabilize the housing market and address credit issues in the capital markets. Congress approved $300 billion in federal loan guarantees to address the threats of loan foreclosures which will allow those families to refinance their mortgages. It will be a give and take for the lenders as well as the families. Lenders will have to refinance the outstanding balances of existing mortgages while the borrowers, or families, will have to share some of the profits made on the resale of the homes which benefitted from the loan guarantees.
The new law also creates a new fund that will be used to provide housing for low-income families living in very expensive housing markets like Hawaii. The new National Housing Trust Fund will not be funded out of taxpayer dollars, rather it will be funded with the earnings from Fannie Mae and Freddie Mac beginning a couple of years from now.
The new loan fund also would allow the federal guarantee of loans made by federal home loan banks, an exception to the general rule that is currently extended to loans made by Fannie Mae and Freddie Mac. This new exception would help to lower borrowing costs and make more financing available to state and local government infrastructure projects from bridges and hospitals to roads.
Another goodie for taxpayers is that the new law will allow non-itemizers to deduct an amount for real property taxes paid by increasing the standard deduction amount by the lesser of the amount of real property taxes paid or $500 for individuals and $1,000 for joint returns. This should benefit those taxpayers who have few other deductions such as mortgage interest because they have paid off their mortgages or have little or no state income taxes as their income is exempt, like pensions. Thus, this will be a boon for the elderly.
In addition, the bill makes a number of changes to the low-income housing tax credit by raising the amount of the tax credits allocated to a small state like Hawaii to more than $2.5 million a year. The bill also establishes that the 9% low-income housing tax credits shall be “9%” instead of a tax rate that floats with interest rates that have ranged anywhere from 7.25% to 8.75% in the past. This fixed rate of 9% will be good for the next five years.
The measure also eliminates the concept of “below market Federal loans” which in the past disqualified a project from applying for the 9% low-income housing tax credits. As a result, new construction and substantial rehabilitation of affordable housing will qualify for the 9% tax credit even if the project receives a below market federal loan. Tax-exempt bond financed projects, on the other hand, are still considered federal subsidized loans and remain qualified only for the 4% low-income housing tax credits.
As a result, what appeared to many as just a “bailout” of Fannie Mae and Freddie Mac will instead have substantial implications for the affordable housing picture across the nation. Given the fact that this new law goes much farther than just a bailout, it might be worthwhile for local officials to review the wide-sweeping changes and incentives this new law provides to affordable housing.
What we know is that the state and its leaders have struggled for years with the issue of affordable housing to no avail. It now seems the issue of affordable housing has caught the attention of national leaders as a result of the collapse and the recent meltdown of the mortgage industry. So what has been a disaster on the mainland may turn out to be blessing for the local community. State leaders need to take a closer look at this new law.