HR 3221 Passed - The Housing-Corporate Tax Break-Online Transaction Reporting-Tax Increase Bill

On Wed. July 30th, the bill was signed into law by the President.

Before this, on July 23, 2008, the House Committee on financial Services released an opinion on HR 3221. In reading through the document, it goes through all the painted benefits of the proposed legislation, however, it does not address any of the risks, down sides, or other important things the bill does. In fact it makes some bold claims that I find hard to believe. Here is an excerpt of the summary:

FHA Housing Stabilization and Homeownership Retention Act
• Provides mortgage refinancing assistance to keep at least 400,000 families from losing their homes, to protect neighboring home values, and to help stabilize the housing market at no cost to American taxpayers.

• Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government-insured mortgages they can afford to repay.

• Protects taxpayers by requiring lenders and homeowners to take responsibility. This is not a bailout; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.

• Contains critical protections for taxpayers’ dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.

• Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.

• According to CBO, this three-year program, starting October 1, 2008, will not cost taxpayers a dime, as it is more than paid for by using funds in the first few years from the Affordable Housing Trust Fund.

• Provides $180 million for financial counseling and legal assistance to help families stay in their homes.

Read more here:
http://www.house.gov/apps/list/press/financialsvcs_dem/press072308.shtml

I take issue with the third point above. They claim this requires lenders to take responsibility by participating in reducing loan principals. While this is true, they fail to mention the real benefit to the bank is being able to take a worthless loan and transition it to a secured loan.

If just having banks reduce principle was the solution, why not have the courts mandate loan reductions on a case by case basis? Or the real problem is when home owner’s adjustable rates expire and they can’t afford the new rate, why wouldn’t the banks just hold the lower payments indefinitely and thereby preventing foreclosure. The answer is, they would still have to carry a risk that affects future lending, earnings, and the overall health of the bank. This risk is much more costly then a loan balance reduction, otherwise you would see massive loan restructuring. At the end of the day, the bank needs the loans secured or off the books. Currently the only way to get them off is through foreclosure.

With the passing of this bill signed by the president on Wednesday, from what I have seen and read on the major news networks, it also appears they have only taken the perceived benefits written by this document as well.

Here are some of the lesser reported things this bill does that seem to be overlooked:

-(sec. 3091) did they mention Christopher Dodd and Richard Shelby attached an amendment that requires electronic commerce to collect, aggregate, and transmit details of every electronic sale to the federal government?

That’s right, your latest iTunes, eBay, and Amazon purchase will become government knowledge. What does that have to do with housing?

Well, I can only speculate that this had origins from the major bank lobbyist and has something to do with the major competition they are seeing from companies like PayPal (currently process 30% of online transactions), but I will try to stick to only the facts unless I can prove otherwise.

The main purpose of this appears to be revenue generation to help offset costs of this bill. Companies will be required to file this information to the government on return schedules, if not they are subjected to fines. Given the burden of this task for many of these companies, they anticipate a large amount of fines and therefore place this as a revenue generating measure.

Seems like a silly way to generate revenue by divulging sensitive information regarding your online transactions so there must be more behind it. A word of gratitude should be sent to Dianne Feinstein and Barbara Boxer for issuing a letter objecting this measure.

-did they mention the tax increase: it changes the home residence and sale tax exclusions that state you must own/live in a house for two of five years to a pro-rated system that only gives you exclusions based on the time you lived in the house divided by the time you have owned the house? (sec. 3092)

-how about the provision that extends a tax credit that allows manufactures to use accumulated AMT credits as well as research and development tax credits to make investments that would qualify for bonus depreciation. The amount of investment is capped at the lesser of 6 percent of built up AMT and R&D credits or $30million. (HR 3221 amended by Debbie Stabenow (D-MI) and Sander Levin (D-MI). The idea behind this is to stimulate investment in new technology by reducing the tax burden.)

-Down payments for FHA loans will increase from 3% to 3.5%.

-(sec. 1101) A whole new government agency is created “The Federal Housing Finance Agency”.

-Penalties for business late filings will be increased. (sec. 3094)

-Extension of net operation loss carry back will be extended from two years to four years.

It does not matter if you agree or disagree with the legislation, the fact of the matter is that very few people understand what the bill does in its entirety. If the news and media only highlight positive things with all encompassing messages like “this will bail out homeowners” or “home owners will be saved”, which is certainly not true on that scale, most people will not know the facts and take this as something their representatives did good work on.

The truth of this bill, is that it does a few good things, a few bad things, but most certainly it adds a lot of complication and should have been rejected for something that is more specific and easy to understand. This bill has many hidden agendas that may not impact you and I, but others will benefit because they know how to work the system.

If we want change, which seems to be the message, it needs to start with legislation and calling out bills like this. The news and media agencies need to stop publishing what people want to here and simply lay out the facts, who is responsible, and how each party (individual, corporations, and federal) benefits. Let people make their own decision, hold the bill sponsors liable from good or crappy bills, and let people push for change when they see that every bill by their representative has some concession to some lobby group.

Subscribe to this blog's RSS feed

The 600+ bill is aimed at helping distressed homeowners. I am sure we all don’t have time to read the full document (housing act), so here is a great summary of what the bill is going to do provided by Votesmart.Org:

-Establishes the Refinance Program Oversight Board, which is responsible for coordinating a program that insures “homeownership retention mortgages,” which are refinance loans designed for borrowers who are at risk of foreclosure (Sec. 112).

-Specifies that the aggregate original principal mortgages insured under the “homeownership retention mortgage” program may not exceed $300 billion (Sec. 112).

-Expands eligibility for FHA mortgage insurance to include borrowers who have been deemed “high risk” due to having a credit score equivalent to a Fair Isaac Corporation (FICO) score of less than 560 (Sec. 206).

-Provides incentives for “high risk” borrowers who have consistently paid their premiums on time that would reduce the amount of annual premium payments to payment levels equal to that of individuals who are not deemed “high risk” borrowers (Sec. 208).

-Mandates the establishment of underwriting standards which allow the FHA to insure mortgage loans for qualified borrowers who have existing mortgages with adverse terms or rates, qualified borrowers who do not have access to mortgages “at reasonable rates and terms for such refinancings due to adverse market conditions”, and qualified borrowers who are in default or at imminent risk of being in default (Sec. 210).

-Outlines the following eligibility requirements for receiving insurance for a “homeownership retention mortgage”:

-The insured residence shall be the sole residence in which the mortgagor has a full ownership interest,

-The mortgagor shall be verifiably unable to pay the existing mortgage(s) and, as of March 1, 2008, the mortgagor shall have had a mortgage debt-to-income ratio of greater than 35 percent,

-The new loans shall not exceed 90 percent of the property’s value,

-Prepayment, default, and delinquency penalties on existing mortgages shall be waived,

-Indebtedness under the existing senior mortgage shall have been reduced by such percentage as the Refinance Program Oversight Board may require, and holders of liens on property securing a mortgage to be insured under the program shall agree to accept the proceeds of the insured loan as payment in full for all indebtedness under all existing mortgages,

-The Secretary of Housing and Urban Development shall hold and retain a lien on the residence which will be subordinate to the mortgage insured under the program but will be senior to all other mortgages,

-The mortgage insured under the program shall bear a single rate which will be fixed for the entire mortgage term,

-The mortgagor shall undergo a criminal history check to ensure that he or she has not been convicted of mortgage fraud in the past seven years (Sec. 112).

-Requires the implementation of the following underwriting standards for the “homeownership retention mortgage” program: the mortgagor insured under the program shall have “a reasonable expectation” of repaying the mortgage, there shall be no denial of insurance based on credit scores, based on previous delinquency or default, or based on bankruptcy, and a total debt-to-income ratio of up to 50 percent shall be allowed (Sec. 112).

-Terminates “homeownership retention mortgages” two years after the enactment of this amendment, in the absence of any approved extensions (Sec. 112).

-Increases the allowed levels of principal obligations for mortgages insured by the FHA (Sec. 203).

-Extends the term of mortgages insured by the FHA from thirty-five to forty years (Sec. 204).

-Establishes the Federal Housing Finance Agency, which shall supervise and regulate Fannie Mae, Freddie Mac, and Federal Home Loan Banks (Sec. 311).

-Raises limits on loans that Fannie Mae and Freddie Mac can purchase from $93,750 to $417,000 for a single-family residence, from $120,000 to $533,850 for a two-family residence, from $145,000 to $645,300 for a three-family residence, and from $180,000 to $801,950 for a four-family residence (Sec. 333).

As it stands today, the bill as passed the Senate 84-12.
Bill Sponsor: Nancy Pelosi 

Key attention should be noted that this bill will reduce loan balances for troubled homeowners and transition the debt carried by the banks to the Federal Government (taxpayers).

One should also pay attention that this bill has roots to the banking industry. While the stated goal is to help troubled homeowners, it is a bank bailout. You can read an internal document from Bank of America posted by the bigpicture and help but not see how similar the bill is to the ideal plan outlined by BofA.

My favorite quote in the document “we believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market”