Realty Views By Terry Ross
January 21, 2014 – As the New Year gets off to a promising start in many economic circles, the housing market is looking at two major issues involving the federal government that may work to torpedo any improvement that has been building for more than a year now.
Probably one of the biggest issues – and it is already in play as of the first of the year – is the expiration of the Mortgage Forgiveness Debt Relief Act that was enacted during the height of the housing downturn to give some tax leniency to those that had to conduct a short sale or obtained a loan modification. Loans on commercial or investment property that were written down still incurred a tax liability, but this bill was passed to help homeowners so that they did not suffer a double hardship and get a huge tax bill on top of struggling to meet their mortgage obligation.
Now it is back to the regulations that were in place before the recession – the difference between what the homeowner owed on the mortgage originally and the lower amount approved by the bank is considered income for the homeowner and subject to tax by the Internal Revenue Service.
For example, someone with a $100,000 mortgage who is allowed to sell their house for $80,000 (or modified to this amount) is supposed to pay taxes on the remaining $20,000. The loan forgiveness is considered income.
Lawmakers and housing advocates argue that the rule hurts those who are already financially strapped. There are more than six million homes still underwater across the country, according to a third-quarter report from research company CoreLogic.
That is down from more than 11 million homes during the peak of the housing crisis in 2009, but it shows that despite the sector’s strong recovery, many homeowners aren’t out of the woods.
Many lawmakers and consumer advocates across the country – not to mention most of the national real estate trade organizations – are campaigning to extend the law and cite the fact that the housing market is far from fully recovered. Thus far Congress has been slow to move.
A second government policy change that has not actually been acted upon but continues to get strong consideration from lawmakers is shutting down the two secondary mortgage-market giants Fannie Mae and Freddie Mac.
These two government-sponsored agencies own $5 trillion worth or mortgage purchased from primary lenders, and 62 percent of new mortgages in the third quarter were financed or funded by them. The Obama Administration and many in Congress want to shut them down because of the huge $187.5 billion bailout they received at the beginning of the recession. The thinking is that the government should not be exposed to this kind of liability again and that these two mortgage giants should be replaced by an entity funded in the private sector.
The reality is that the nation’s real estate financing system is critically reliant on this two entities and whatever replaces them would be “too big to fail” in the eyes of the government and would end up getting a bailout even as a private entity. Basically in the good times private investors would reap the rewards. In another financial crises, the government would undoubtedly be asked to step in and help again because the nation’s housing market would collapse without it.
The other important reality that might, or should make this effort to replace Fannie and Freddie a moot point, is that since the bailout five years ago all of the funds have been virtually repaid. The government took over the stock of these two companies in the transaction and is reaping huge dividends and is going to be making a profit moving forward. The last quarterly dividend check paid to the federal government was for $39 billion. Some observers are now wondering why a “cash cow” like this would be put out of business.
Some of the proposals currently being hashed out in Congress would wind these two agencies down within five years and replace it with a private entity, but with the kind of profits that are coming into the treasury at this time, this might be a hard, long sell.
Both the mortgage forgiveness legislation that was allowed to run out and the proposed legislation to end to Fannie and Freddie are actions that might sound good on paper and in theory – but put into real practice these are ideas that are very detrimental to housing and are counterproductive to the recovery.
(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at email@example.com or call 562/498-1049.)