The House passed the bill last week, the Senate in a special session last weekend, and this morning President Bush signed the Foreclosure Prevention Act of 2008 into law.
As we pointed out last week, while the Economic Stimulus Act of 2008 temporarily raised the conforming loan limit in San Francisco (and other high-cost areas) to $729,750, the Foreclosure Prevention Act of 2008 establishes a new maximum of $625,500 (effective January 1, 2009).
A decent summary of “what the new housing law means for you” from Holden Lewis.
Bush Signs Measure for Homeowners, Fannie, Freddie [Bloomberg]
Will San Francisco Suffer From Premature Loan Limit Reduction? No. [SocketSite]
If Lowering Rates Isn’t Working, Perhaps Increasing Limits Will [SocketSite]
What the new housing law means for you []

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Comments from “Plugged-In” Readers

  1. Posted by tony

    It’ll be interesting to see how rescue there is in this bill. A couple of things I hadn’t realized they were changing…
    1 – The $7500 tax credit is actually a 15 year 0% loan, that must be repaid (starting in the second tax year after purchase, if I read it correctly), with AGI phase outs that it’ll limit its impact on areas like SF
    2 – They 2 year $250/500K tax exemption will only apply (100%) to primary residences and will be prorated for second/vacation homes (which would seem to discourage some amount of RE investment)
    Still not at all wild about paying for other people’s greed and poor decision making, but I suppose that’s a matter of perspective (and perhaps personal growth ).

  2. Posted by sf

    I bought some stock in Enron a while back and that never worked out, do I get free money too???

  3. Posted by ex SF-er

    There is so much rediculous pork in this bill it’s flabbergasting. As example: did you know there is a provision that gives $$$ to Cerebrus/Chrysler? how Chrysler relates to housing I have no idea.
    my favorite part of this bill: it raises the allowable debt ceiling by hundreds of billions of dollars. I find that ironic since the projected cost of the Fannie/freddie action was only going to be $25 billion.
    i’d laugh if I didn’t want to cry so much. we are continuing to SOCIALIZE the losses through the taxpayer, so that the hedge fund managers and Investment Bank executives can make hundreds of millions of dollars a year EACH.

  4. Posted by badlydrawnbear

    Unfortunately with banks still writing fraudulent, sure to end in foreclosure, mortgages like this one another bailout bill is sure to be needed.
    Moral Hazard appears to be alive and well.
    Oh, and another big part of the bill, Down-payment Assistance Programs (DAPs) for FHA loans have been eliminated. There are Pro’s and Con’s to this move but overall I feel that this will just make it harder for many first time buyers to purchase in CA. This can be seen this as either slowing the recovery (bad) or preventing lending to unqualified borrowers(good). I am not sure how I feel about it myself.

  5. Posted by tipster

    Read the bill. I liked a lot of what I saw.
    It raises the downpayment for FHA loans and eliminates the phony downpayment scam that allowed the seller to give a “nonprofit” the downpayment (plus $600), and then had the nonprofit pay the downpayment, leaving the buyer to get the home with nothing down.
    It requires the people who want to refinance to be current with their mortgages or they can’t refinance, and has max LTV provisions.
    The $7500 “credit” is a good example of the sham “help” being given out: you have to pay it back, though with no interest, and it phases out at incomes that would even begin to support artificially high prices. OK that costs something but with the income limits, home prices are going to have to come down before this costs very much. This looked like it was done more for show, to allow congress to tell the “folks back home” that they had “done something” to help housing.
    It reduces the jumbo conforming limits.
    It helps save homeowners who did some stupid things but are most likely to be in a position to pay the loan back (which will really just cause the bankers to renegotiate the loans, for a much smaller reduction than they would have to use to dump the loans, and keep them).
    So while it serves more of a purpose than any of the prior three so called bailout programs, it’s not a bailout. I saw it as really a pretty intelligently crafted bill to gently deflate a housing price bubble in a controlled manner without costing the taxpayers too much, and probably benefiting the treasury as much as it costs when you look at all of its effects.
    I wasn’t happy with all of it, but overall, I thought it was a pretty good effort. Read the bill: it should have been called the controlled bubble deflation act. It does a pretty good (not perfect) job of just that.

  6. Posted by ex SF-er

    and has max LTV provisions.
    it has max LTV provisions based on what the current APPRAISAL is. and the appraisal system is massively broken and prone to abuse, as we’ve seen these last 5-8 years
    i’m sorry, I’m not as optimistic as you are. I agree that there are some “penalties” in here… but not enough.
    For instance: homeowners will get instant equity through the writedowns of their loans, but then they have to share appreciation with the Federal Government for the first 5 years (a good penalty IMO). However I see a large loop hole-such as what if they go through the program, and then sell to a relative for zero profit, then the relative sells to a third party for a huge gain?
    I also don’t trust any of this LTV stuff, since that can easily be manipulated by bad appraisals, which have been a massive problem the last several years.
    i’m sorry: what I foresee is this: the banks will find their most terrible loans possible, and then find an inflated appraisal and shunt this into a govt-secured loan. they’ll take a loss, sure… but nowhere near the loss they “should” take.

  7. Posted by Satchel

    I basically agree here with tipster. It could have been worse, and it’s another attempt to slow the housing price decline, while awarding taxpayer dollars directly into the pockets of a few big banks, which will lie, cheat and steal with the appraisals (and collude with the second and third mortgage holders) in order to select those loans most underwater and most likely to cause the largest percentage losses for “absorbtion” by the foolish taxpayer (through FHA purchases of the adversely selected loans). It will not do anything to stop the declines or stabilize housing, which is being driven by a fundamental overvaluation, but it will act as a speedbump that is necessary for the banking system.
    It also “keeps hope alive”; and in that sense the $7500 tax “credit” (really an interest free loan) is another obfuscation that will only have the effect of raising the purchase price (for a while) of the homes in those situations in which the “credit” will be applicable. Again, this safely places foolish taxpayer dollars (taxes are reduced by the aggregate amount of the “credits”, at least until these “zero interest loans” are repaid by – you guessed it! – the foolish taxpayer) in the hands of those who are more deserving, ie, the banks holding the foreclosed homes being sold subject to the credit.
    I wrote something here 7 months ago, which basically sums up what is going on IMO, and (while no one will ever get every detail exactly right) broadly is consistent with what has happened:
    (see the post at Posted by: Satchel at January 8, 2008 12:16 PM)

  8. Posted by FSBO

    OK, maybe the final bill could have been worse. But, Bush missed another opportunity to at last do something right. He should have stuck to his principals and vetoed any bill. ex Sf-er has this right – this is massive socialism for the undeserving. I’d be hard pressed to find a least deserving entity than Cerberus. Whatever happened to the notion of limited, non-interventionist government? (Yeah, I know that’s a stupid question.)

  9. Posted by tipster

    It’s a product of a political system in which 65% of the country own their homes and want to see the declines stop altogether, and don’t much care how that is accomplished as long as someone else helps pay for it.
    It’s a political system that is run by money, and bankers have lots of it. Are they getting bailed out? Of course, but not to a huge extent, and there IS a benefit to keeping people in their homes who can pay for them that all of us share. It doesn’t drop home prices as fast as I would like, but it doesn’t really prop them up.
    I didn’t see the phase out of the vacation home gain (which can be avoided by selling the primary residence and moving into the vacation home), but thats another step in a direction I’d love to see.
    Will it be abused? Yes, but the current system is being abused to the extent possible. There is abuse everywhere. The GSEs are in no hurry to take bad loans: THEY have to hire the appraisers and if they don’t want the problems, they won’t hire the shady appraisers (though I do question whether the real appraisers weren’t squeezed out of the market a long time ago by appraisers whose job it was to make the numbers work, however possible).
    It was the best that could have been done under those political circumstances. We here in SF haven’t seen the decimation of the outlying areas. If we had, we’d probably think they hadn’t gone far enough.
    If Bush had let this simmer until he was out of office, it would have been much worse. I thought this was about as favorable as non-homeowners could expect.

  10. Posted by NoeValleyJim

    This is a pretty good bill, much better than I expected. The FHA getting a share of the appreciation for taking on the risk of the loan is key.
    The net.libertarians here are predictably against it, but it is deregulation that got us into this mess in the first place.

  11. Posted by ex SF-er

    It could have been worse
    is that how we’re judging this? Potentially $800 billion added to the national debt and we’re happy that it could have been worse? not to mention that this is likely not the end, and when this fails we’ll get another bailout of the banks?
    I guess I’m just ornery today, because I’m not consolled by the fact that it could have been worse… (even though I agree that it could have been worse).
    If we’re going to spend this kind of cash I’d rather just wipe out the banking system and nationalize it all, and nationalize housing too. then the money will go to us peons, and not into Goldman Sach’s multibillion dollar bonus pool. sure, we’d all be in Cuba-style living conditions, but at least we’d know how we got there. [/sarcas,]
    but honestly, there were much better plans out there, such as Bill Ackman’s plan from Pershing Capital Management. it would have done far more for far less tax $$$ IMO.

  12. Posted by majr

    Satchel – That was a pretty prescient post. Is the goal a softer landing? Do you think that is possible? I know a lot of people bought beyond their means and perhaps should walk away, but is it so bad to lessen their feeling of loss to help keep the banking system going? Won’t it be people that are more sensible that can help keep things going? If the money is not there for responsible borrowers, then there can be no fix, right? Nobody wants anything crazy happening that will totally screw our economy. Maybe that is a bad thing to say, but people do need a place to live no matter what. Would it be so bad if they can get a good portion of what they agreed to pay for forgiven? There is mutual fault here for both the consumer and the greedy lenders that approved them for knowing it wouldn’t be possible to pay. It sucks for me as a renter and taxpayer to have to help foot the bill, but it isn’t the only thing the government is wasting our money on. The pork in the bill and every other bill is what screws us in my opinion. It is disgusting.

  13. Posted by ex SF-er

    and there IS a benefit to keeping people in their homes who can pay for them
    the people can’t pay for them. that’s what got us here.
    in the current fiasco, 40% of loan workouts are defaulting anyway. Perhaps the new guidelines will reduce this default ratio, or perhaps not. just so we’re clear, we have set up UNLIMITED taxpayer liability here. we have no idea how many billions or even trillions of dollars this could potentially cost. we only know that the first phase should cost less than $800 billion *(until congress rubber stamps another rise in the national debt ceiling)
    as for Fannie/Freddie/FHA. they will take all the crap that the IB’s and Banks want to give them, and more. Under this plan, FHA was “modernized” and EXPRESSLY FORBIDDEN to use risk-based pricing for it’s loans. This after it saying that it cannot remain solvent if it can’t do risk based pricing for it’s loans. Fannie/Freddie are now under the government’s protection. And that protection comes with a cost. The government wants/needs Fannie/Freddie/FHA to give out bad loans. And thus they will. and they’ll use any means necessary to do it, to forestall the necessary fall in housing prices. Politics supercedes profit now.
    anyway, I’ll get off my soapbox. I usually agree with Satchel and Tipster, but not here, not today. this “bailout plan” is a huge boondoggle for the banks and we will all pay dearly for it IMO.

  14. Posted by Satchel

    ex SF-er,
    You’re definitely not disagreeing with me! I totally agree that this is an enormous boondoggle, bought and paid for by the banks. What do you really expect? In the entire history of the republic, it is hard to imagine that the voting population (and possibly the population gnerally) has ever been more gullible, coopted, and just plain dumb. I guess there have always been problems with political awareness and voting consituencies, but IMHO these problems have grown exponentially greater, as government has grown dramatically both in size (budget) and scope (regulation) since the time when the US was truly the productivity and wealth creation miracle of all history (most of the 19th century through about the time the income tax was instituted in the late-1910s).
    @ majr – About whether we would be better off if the whole system collapsed quickly, rather than “massaged down”, it’s a philosophical discussion, not a practical one. While there are arguments on all sides, and reasonable people could disagree, FWIW I favor the quick collapse, as I think we recover more quickly and achieve higher (and more sustainable) growth and productivity trends under such a “succeed or die trying” economic regime. It’s not practical because the bankers and bureaucrats are firmly in control of the economy, and the population is too foolish to understand (and in fairness, things are not so bad – they’re actually pretty good for most of us relative to our experience). It’s also ahistorical, because there is no way to run a controlled experiment regarding what the US would look like today had there been a smaller, less-intrusive government, and no Fed. I can point to some fairly convincing (well, at least to me) evidence, namely the ultimate failure of state-run economies (eg, Soviet Union), dramatically lower growth for socialistic ones (Europe, after of course the boom from post-WWII rebuilding and associated free Marshall Plan government cheese), the speed with which the US recovered from numerous “panics” and “depressions” in the 1870s, 1880s, 1907, etc.) and still retained faster growth rates than today, etc. But people will just say, “It’s different now” and retreat into the idea that only government can “solve” the pressing problems of “modern” society. In the meantime, the smartest among us – the banks and financial fraudsters of New York City – stage a quiet coup, safely diverting the lion’s share of the wealth of the population into their pockets.

  15. Posted by Spencer

    “As we pointed out last week, while the Economic Stimulus Act of 2008 temporarily raised the conforming loan limit in San Francisco (and other high-cost areas) to $729,750, the Foreclosure Prevention Act of 2008 establishes a new maximum of $625,500 (effective January 1, 2009).”
    This $100K decrease in mortgage limits should be just fine considering the median home will be down $100K in value anyway.

  16. Posted by mac

    What was the reason years ago of eliminating the rule whereby we could sell our home and buy one of equal or greater value and not pay cap gains tax?
    It seemsed a much more sensible idea than the present 250/500 rule.

  17. Posted by NoeValleyJim

    The loss, as much as possible, should be borne by the banks who made the risky loans and the borrowers, who borrowed too much in the first place.
    Pushing a bunch of people out of their homes is not going to help anyone, with the possible exception of a few vulture buyers, and it guarantees that the borrowers won’t be around to do the hard work of getting back above water.
    Numbers like $800B total loss to the government are silly to throw around. It is true that the government is going to be guaranteeing the FNM and FRE loans, which are less than $1.6T. Are these institutions going to have a loan loss rate of 50%? Not a chance!
    What bothers me is that so many who profited by this explosion of greed are now going to walk away. Too bad we can’t claw back some of the bank and FRE bonuses from the last few years. We should have never deregulated the mortgage business in the first place.

  18. Posted by ex SF-er

    I threw out the $800 billion number because that’s how much this bill raises the US Federal Government Debt ceiling.
    It’s true that Fannie/Freddie are holding $1.6 Trillion or so on their books… but we aren’t just backing Fannie and Freddie’s portfolio, we are ALSO backing the mortgages that they have gauranteed. They have gauranteed $5 Trillion worth of securities. because of this bill Fannie and Freddie will gaurantee MORE mortgages, so this number may go up. not to mention FHA.
    the govt has now explicitly backed Fannie and Freddie. Thus, the US Federal Govt has explicitly backed $5 Trillion worth of mortgages. Some good. Some bad. what’s the percentage of good vs bad? who knows.
    but by doing it this way the US Govt can keep Fannie and Freddie off their books… thus, it’s stealth debt that nobody knows we have (theoretically). it only goes on the books as the losses come in.
    so the problem is again: we have just passed a law that provides UNLIMITED taxpayer liability for somewhere north of US$5 Trillion (not including FHA and Ginnie etc). a 10% loss on those loans is $500Billion. a 20% loss is $1 Trillion.
    to put this in perspective: Merril Lynch just wrote down some of it’s loans by nearly 80%. An Australian firm just wrote down it’s American Mortgage Securities by 90%. I don’t think the US Govt will see those kinds of losses… but it’s not unreasonable to expect a 20-30+% haircut.
    so this could easily cost trillions.

  19. Posted by San FronziScheme

    Yeah, it could cost taxpayers a bundle.
    Worst case scenario: the housing downturn becomes deep and protracted.
    If that’s the case, then the losses will go on and on as RE decreases 5% a year for 10 years like in Japan.
    I hope this will be faster and cleaner, but I’m not so sure. Most households are economically sound, with sufficient income to pay mortgages. This means people under water equity-wise are likely to suck it up for as long as the downturn lasts and/or they’re back to positive equity. The ones who will lose are those who HAVE to sell (life goes on whatever the market does). They’ll have to mark to market and that will not be pretty.

  20. Posted by NoeValleyJIm

    Back when we were on the gold standard and had no Central Bank, the United States had repeated bank panics and severe recessions.
    There was a Panic in 1873 which lead to a six year recession, with unemployment spiking into the double digits. Just fourteen years later, in 1893, we had another panic, which lead to over five years of double digit unemployment. Of course, bad government monetary policy made each of these worse.
    Ah, the good ole’ days!
    No thanks.

  21. Posted by tony

    I read a different source (than the ones provided by SocketSite) early this AM. Check out #3 in the link below (also pasted) w.r.t. the vacation/second home phase out provision:
    “3. Vacation-home hit
    We’ve been taking for granted that lovely $250,000 ($500,000 for couples filing jointly) personal residence capital-gains-tax exclusion for about a decade. Savvy taxpayers have played hopscotch, moving from home to vacation home to the next home, etc. and avoiding income taxes on the sale of each one. That free ride is at an end.
    The personal resident exclusion is still good on your personal home. However, you’ll be paying taxes on the sale of your vacation home, or rental property converted to a home. The tax will be based on the amount of days the house was not a qualified personal residence divided by the total number of days you owned it. This ratio is multiplied by the amount of gain realized on the sale of the property.
    Gain resulting from depreciation taken on the property after May 6, 1997 won’t be included in this computation. That gain will still be taxed separately as ordinary income.
    The good news:
    This won’t affect any sales you make this year since the law becomes effective on Jan. 1, 2009 The ownership period to take into account as the numerator for nonqualified use also starts on Jan. 1, 2009.
    Snowbirds, folks who typically summer in their principal residences up north and spend winter in their vacation homes in the south will have to wait until IRS writes up regulations interpreting the new law. It’s not clear if their temporary absences will be considered a period of nonqualified use.
    The new law defines unqualified use as:
    any period after the last date the property is used as the principal residence of the taxpayer or spouse (regardless of use during that period), and any period (not to exceed two years) that the taxpayer is temporarily absent by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances, are not taken into account.”

  22. Posted by Mole Man

    My prediction is that fewer than half of the potentially qualified borrowers will actually make use of the refinance guarantee program. That would imply a participation count below 200k which is less than a tenth of a percent of the population.
    Putting the costs and moral issues aside for a moment, it doesn’t seem like even the entire package has the capacity to make a significant change in the correction apart from potential softening. Trillions of dollars in phantom wealth is evaporating as we post, so even the remarkable hundreds of billions loaded into the breech won’t be enough to turn the downward charging market. Bonus for the safari analogy; it’s a zoo out there!

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