H.R. 3221: Housing and Economic Recovery Act of 2008-Is It the Boost the Economy Needs?
Many hope that H.R. 3221, which was signed into law on July 30, 2008, is the boost the economy needs to bring about the much desired market shift. Among a number of protections extended, a few highlights 1 of the law include:
- The establishment of the Home Ownership Preservation Entity Fund to fund the HOPE (Home Ownership Preservation Entity) for Homeowners Program, which will insure up to $300 billion for 30-year refinanced loans for distressed borrowers between October 1, 2008–September 30, 2011.
- The allocation of $3.92 billion in grants to states and other units of local government to redevelop abandoned and foreclosed property and $180 million to the Neighborhood Reinvestment Corporation, given that at least 15 percent of the $180 million be provided to housing counseling organizations that provide services for loss mitigation to minority and low-income homeowners (Sec. 2305).
- A limitation on the sale, foreclosure, or seizure of property owned by service members from 90 days to nine months after their return from military service, and limits their interest rates to 6 percent during service and one year after their return (Sec. 2203).
- Provides first-time home buyers with a tax credit of up to $7,500 for residences purchased on or after April 9, 2008, which the homebuyers will repay over fifteen years following their purchase (Sec. 3011).
- Expands home ownership counseling eligibility to include people who have a reduction in income due to divorce or death, or who have an increase in expenses due to medical expenses, divorce, unexpected property damages not covered by insurance, or a large property tax increase (Sec. 2127).
- Allows a real property tax deduction on the amount of state and local real property taxes paid during the taxable year of up to $500 for individuals and $1,000 for joint returns, applicable to taxable years beginning in 2008 (Sec. 3012).
In an effort to contain the skyrocketing foreclosure rate, the section captioned HOPE for Homeowners Act of 2008 authorizes the FHA to insure refinance loans for distressed mortgagors. Effective October 1, 2008 through September 30, 2011, mortgage holders would write down qualified mortgages to 90 percent of the current appraised value and qualified mortgagors would get a new FHA 30-year fixed mortgage at 90 percent of appraised value. Moreover, lenders would have to accept the proceeds of the loan as full satisfaction of the debt. Thus, there would be no deficiency liability for the mortgagor.
To qualify to participate in this program, borrowers must lack the ability to pay the existing mortgage. They must also certify the absence of fraud in both obtaining the loan as well as in defaulting on any current debt, mortgage and consumer debt alike. In addition, the borrower had to have a mortgage debt-to-income ratio greater than 31 percent as of March 31, 2008.
One provision of H.R. 3221 that some may not deem a benefit is the modification of the $250,000/$500,000 exclusion. Historically, an individual taxpayer could exclude up to $250,000 ($500,000 if married and filing jointly) of the profit of the sale of their primary residence provided they physically lived there for two of the last five years prior to the sale. However, effective January 1, 2009, the exclusion as it applies to a second home (or rental property) that is converted to a primary residence will be allocated based upon actual usage as a primary residence over its qualified life. When the second home is sold, any gain attributable to use as a second home (or rental property) will be taxed at capital gains rates, while gain attributable to use as a primary residence will remain excludable, up to the prescribed limits.
Although the capital gains exclusion may not yield as sweet a deal for those second home owners who in the past were savvy enough to move into the property in ample time to meet the exclusion rule, it will be a welcome change for surviving spouses who now can exclude $500,000 of profit from the sale of the principal residence if the sale occurs within two years of the spouse’s death.
It is much too soon to determine the real value of the law. We’ll let the pundits make the predictions, while time reveals the true story.
Arnettia S. Wright, principal of Wright Law Group, P.C., in Washington, D.C., handles primarily real estate and trust and estate matters. She is a fellow of the ABA’s RPTE Section.
© Copyright 2009, American Bar Association.