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.
Dodd-Frank legislation
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."