Election year puts housing on hold
Since 2012 is an election year, some real estate experts suggest that decisions on hot topics -- such as the mortgage interest tax deduction -- may be put on hold until 2013.
However, some changes have and will begin to take effect this year. These changes -- meant to address the fall-out from the housing crisis -- could affect the ability of prospective homebuyers to finance their homes as well as impact homeowners and sellers.
"Everything becomes politically charged because of our four-year election cycle, but the decisions made today will have long-term consequences for our economy and for families," says Juli Anne Callis, president and CEO of the National Institutes of Health Federal Credit Union in Rockville, Md. "I'd like to see all the politicians focus on preserving the American dream for future generations."
Here are some of the issues still on the table as we enter into the second half of 2012.
New mortgage lending rules have yet to be finalized under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the Consumer Financial Protection Bureau (CFPB). Later this year, rules are anticipated that will focus on the ability of borrowers to repay their loans, says Jamie Gregory, deputy chief lobbyist for the National Association of Realtors in Washington, D.C.
Among the proposed rules under Dodd-Frank is the "qualified mortgage" rule. The qualified mortgage rule is meant to protect borrowers from taking out loans they don't understand or can't afford. Lenders will be required to consider a borrower's ability to repay a loan and will receive some protection from lawsuits. While Dodd-Frank mandates that some types of mortgages cannot be offered, such as "option" adjustable rate mortgages, other rules such as the maximum debt-to-income ratio or the minimum down payment have yet to be determined.
"We have yet to know if this will protect borrowers. Our concern is that if the rules clamp down harder on lenders it could dry up the housing market," says Gregory. Gregory expects the rules for a "qualified residential mortgage," or QRM, to be established sometime in the fall.
While QRM has no true definition at this point, it is expected that it will be a loan made to a borrower with very solid credit, a sizable down payment, full income documentation and verification, an actual appraisal and other features, explains Keith Gumbinger, vice president of HSH.com.
"For any QRM, the lender/servicer/investor will not have to hold a 5 percent cash position against the risk of default," says Gumbinger. "As such, these will arguably be the cheapest loans on the market, but will be made only to the 'rich' who can afford to meet such standards. There is a bit of a political clash forming here."
A requirement of 20 percent down has been discussed as a possible QRM requirement, but no headway has been made on such a mandate.
Realtors and home builders oppose a mandatory 20 percent down payment rule, fearing it could hurt home sales and therefore home values.
"One-third of [the U.S.] population is between the ages of 18 and 34 and it's important for that group to have the opportunity to buy their first home," says Sherry Chris, president and CEO of Better Homes and Gardens Real Estate in New York. "It would be a huge challenge for them to be able to save enough to make a 20 percent down payment and that would further slow the housing market's recovery. No one wants people to put too little down and to be underwater on their loan, but we also want people to have the financial and nonfinancial benefits of homeownership."
Short sale changes
Gregory says one of the top complaints from members of the National Association of Realtors is the slow pace of short sales and the lack of communication from lenders.
"The new [Federal Housing Finance Agency] rules say lenders must respond to a legitimate offer within 30 days, so we're hoping to get real movement on short sales," says Gregory. The new timeline went into effect in June, but it's going to take some time for the changes to be felt in marketplace, explains Gumbinger.
Chris is hopeful that speeding up the short sales process will add inventory to the market because some sellers who wanted to attempt a short sale have been discouraged by reports of their difficulty. "Some people have been unable to buy and others have been unable to sell," says Chris. "Two years ago there was over 30 months of inventory in Arizona and now there's only a two month supply. Speeding up the short sale process could get the market moving again."
Tax forgiveness for mortgage debt
The Mortgage Forgiveness Debt Relief Act of 2007, set to expire at the end of 2012, exempts borrowers from paying taxes on the amount of their mortgage debt forgiven in a short sale or principal reduction. Realtors have been lobbying to have this act extended, but at this point, the expiration date remains in effect.
"The idea in 2007 was that homeowners might have opted for foreclosure rather than a short sale if they knew they had a looming tax bill to pay," says Gregory. "Our concern is that if we let it expire, this could increase the number of foreclosures because homeowners who are underwater might make a conscious decision to choose strategic default."
Chris says another potential hazard is that underwater homeowners who want to move might choose to stay put rather than negotiate a short sale, further delaying the housing market recovery rather than starting the process of selling homes and allowing more people to move.
Some experts, like Gumbinger, are holding out hope that it will be extended before year's end. "It's a working guess, but I think it will be extended," he says.
Mortgage interest deduction
Eliminating the mortgage interest tax deduction has been discussed this year both in the context of deficit reduction and as part of comprehensive tax reform. Gregory believes the topic will continue to be discussed after the election and into 2013 as part of a tax reform bill.
"If the mortgage interest deduction is eliminated, it would be a jolt to the confidence of Americans and we might see an unprecedented number of homeowners walking away from their property because of the pressure this would put on home values," says Callis. "Americans are encouraged to invest in a home because of the tax deduction they receive and the prospect of appreciation. If it becomes too difficult to borrow money for a home and the tax deduction is taken away, this will likely lead to more renters."
Gregory says the issues that many Realtors say are hurting housing the most -- tightened credit standards and appraisal problems -- are not likely to ever be addressed through legislation.
"In an election year, not much happens," says Chris. "We're in a holding pattern right now, but 2013 should be interesting and challenging, hopefully with lots of opportunities to resolve some issues so buyers can have confidence about their future benefits and the housing industry can move forward."