After the elections, Congress will convene on November 12th at which time work on the Tax Extenders Package (a group of tax cuts that includes the Mortgage Forgiveness Debt Relief Act) will begin. I confirmed the votes are in place to get the legislation passed before the end of the year. Senate Majority Leader Harry Reid has committed to put the bill up for a vote, and regardless of election results Reid will be running the Senate at least until the end of 2014. The only caveat that we warn subscribers to consider is that a member of the Senate may try to add an amendment to the package that makes it impossible to garner enough votes to pass. While unlikely that is still a possibility. Even if this does occur, I would expect the package to be addressed in early 2015.
The following is a great summary of the short sale tax extension prepared by Congressional staff that we wanted to share with our subscribers. I will monitor the progress of this bill and prepare an alert when it is approved.
Under current law, taxpayers who have mortgage debt canceled or forgiven after 2013 may be required to pay taxes on that amount as taxable income. Under this provision, up to $2 million of forgiven debt is eligible to be excluded from income ($1 million if married filing separately) through tax year 2015. This provision was created in the Mortgage Debt Relief Act of 2007 to shield taxpayers from having to pay taxes on cancelled mortgage debt stemming from mortgage loan modifications, through 01/01/2010. It was extended through 01/01/2013 by the Emergency Economic Stabilization Act of 2008; and extended through 01/01/2014 by the American Taxpayer Relief Act of 2012. A two-year extension of this provision is estimated to cost $5.4 billion over 10 years.
Existing Home Sales Data: September 2014
Existing home sales increased 2.4% in September 2014, up 2.4% in August and down 1.7% from September 2013;
Median existing home prices in September 2014 were $290,700, 5.6% higher than September 2013;
All cash purchases: 24% of purchases in September 2014 were all cash, down 1% from August and 9% from September 2013;
Individual Investors: Individual investors purchased 14% of existing homes in September 2014, up 2% from August 2014 and down 5% from September 2013. 63% of these purchases were all cash;
Distressed Sales: Foreclosures and short sales comprised 10% of all existing home sales in September 2014, down 2% from August 2013. 7% were foreclosures and 3% were short sales.
Distressed Sales Discounts: Foreclosure discounts for September 2014 were 14% (same as August 2014). Short sale discounts for September 2014 were 14% (up from 10% in August 2014).
Reaction to FHFA and HUD Efforts to Expand Mortgage Credit Availability
Residential investors who need buyers especially for rehabbed distressed properties in struggling communities could benefit from the expansion of mortgage credit availability. That said, the recent announcement from FHFA and HUD that Fannie and Freddie could soon be guaranteeing mortgages with LTV of 95-97% may be much more difficult to accomplish than by simple government fiat.
First there is the reality that Fannie and Freddie have been forcing banks to buy back mortgages at a very high rate in recent years because the GSEs believed the banks engaged in deceptive practices in terms of representing the quality of the loans. Furthermore, there are now tougher standards in place including an “ability to repay” standard that mortgage lenders need to abide. This new reality begs the question: what bank would be crazy enough to make a loan with a 3% down payment to someone with borderline credit? More details are forthcoming from FHFA on the program, but this does not mean banks will make these loans, because they would appear to be an invitation for enforcement actions and the banks will likely be stuck with the loans if there are any issues.
Former FHFA Director Ed DeMarco criticized the proposal, arguing that these new homeowners with questionable credit and income would effectively be immediately underwater with just a 3% down payment. From a political standpoint the program is clearly designed to strengthen the position of Fannie and Freddie in the housing market and push out private capital. While the private mortgage insurers are ecstatic about the proposal, it has received an extremely tepid response from much of the housing finance industry.
I will provide additional details when the full program is unveiled later this month. We do not believe investors will see a large pool of new potential buyers immediately if the program is adopted because lenders will be extremely reticent to start making these types of loans given the likelihood that Fannie and Freddie could send any underperformers right back to them. One issue that has been almost ignored is the potential risk to taxpayers this program could cause as it mirrors pre-crisis activities. FHFA stated that program details will ease housing experts concerned about the moral hazard issue.
What is going on with Congressional Housing Reform Efforts?
Lack of leadership from Congress on housing finance reform has allowed FHFA to take the reins on housing reform issues. Under the leadership of new Director Mel Watt, FHFA seems committed to strengthening Fannie and Freddie to ensure their survival, rather than protect taxpayers from additional losses and scale down the Enterprises. Backing off on G-fees and now pushing for additional mortgage credit availability are just a couple examples of how FHFA may be trying to protect Fannie and Freddie for the future and secure their monopoly.
I met with Congressional staff recently to discuss prospects for Congress to act on housing finance reform in 2015. The reform would largely center on housing finance issues, but is still important for investors because reform would likely mean new regulatory bodies and dynamics for the housing market. Investors must have a voice in this debate so that they have an independent body to address grievances with housing policies. While Fannie and Freddie have been beneficial to investors in many ways, there have been some serious issues with how the Enterprises view the industry post-crisis.
Congress is planning another attempt at housing reform in 2015. This year Senators Corker and Warner worked on a bill that had some bipartisan support but ultimately stalled in committee. On the House side, Chairman Hensarling’s bill (which removed any government support from the housing market) was not brought to the floor of the House because the votes were not there for passage.
Indications are that Chairman Hensarling may compromise a bit on how he addresses housing finance reform. The Senate dynamic will largely depend on the outcome of the election Tuesday. If Republicans take control of the Senate, Senator Shelby will likely be the new chair of the Senate Banking Committee. He, like Hensarling, largely opposes quasi-government agencies like Fannie and Freddie controlling the housing market. But word is that he will propose legislation as well.
While Congressional leaders talk reform, in the final analysis FHFA has gotten the jump on housing reform efforts and is pushing through significant changes on securitization and broader housing policies like expanding credit. Congress may have missed its opportunity this year to play any effective role in making meaningful housing policy. Congress will likely revert to an oversight role with FHFA becoming the primary housing policymaker in Washington, even more important than HUD.
