Housing and Economic Recovery Act of 2008

Following months of negotiations, in late July large bipartisan majorities in both the House and Senate passed the Housing and Economic Recovery Act of 2008. President Bush signed the bill into law on July 30, 2008. This bill is intended to provide relief to homeowners struggling to avoid foreclosure, prevent the possible collapse of mortgage giants Fannie Mae and Freddie Mac, and inject new life into the ailing real estate market by offering tax incentives to homeowners and certain categories of homebuyers. But, while the legislation contains breaks for some taxpayers, revenue-raising provisions included in the bill could lead to bigger tax liabilities for other groups, especially those who own second homes.

Among the taxpayers who stand to benefit from the new law are first-time homebuyers. Provided they have had no “ownership interests” in a principal residence during the past three years, buyers who purchase a home between April 9, 2008 and June 30, 2009 may claim a tax credit equal to 10% of the purchase price, up to $7,500. The credit must, however, be paid back interest-free in equal installments over 15 years. The entire outstanding amount owed on the credit becomes due if the taxpayer sells the home during this period, though only up to the gain realized in the sale. The debt is cancelled if the homeowner dies during the period.

Eligibility for the first-time buyer credit starts to phase out for single filers with adjusted gross incomes (AGIs) of $75,000, and for married couples filing jointly with AGIs of $150,000. Single taxpayers with incomes above $95,000, and joint filers with AGIs over $170,000, can no longer claim the credit.

For 2008 only, the legislation provides some tax relief on mortgage interest to homeowners who take the standard deduction on their federal taxes instead of itemizing. Under the new law, non-itemizing single filers can claim a tax deduction on their state and local property taxes of up to $500, and married couples filing jointly are eligible to deduct up to $1,000. Taxpayers who owe less than these amounts in property taxes are only eligible to claim a deduction up to the amount paid in property taxes.

The new law could, however, mean higher taxes down the line for owners of second homes or rental property. Under the legislation, taxpayers who have a second home that later becomes their primary residence will be permitted to exclude a smaller percentage of the gain if the property is sold within a certain timeframe than was previously the case. This is because, starting in 2009, the law pro-rates the exclusion—$250,000 of the capital gain on the sale for single filers or $500,000 for married couples filing jointly—to reflect the portion of the time that the home is used as a primary residence relative to the total length of ownership.

To help Americans in danger of losing their homes, the law creates a program that will allow some homeowners to trade in their current mortgages for a fixed-rate loan worth no more than 90% of a home’s current value. The new loans will be insured by the Federal Housing Administration (FHA) and supplied by FHA-approved lenders only. To qualify for the program, the troubled mortgage must be on a primary residence, and must have been taken out before January 1, 2008. In addition, distressed borrowers will have to demonstrate that their income to mortgage debt ratio was greater than 31% as of March 1, 2008. Participants in the program will have to pay a 1.5% insurance premium to the FHA, and borrowers will be required share no less than half of their new equity and appreciation with the FHA when the home is sold.

The legislation also contains new rules designed to curb abuses in the reverse mortgage market, and restrictions on the ability of lenders to foreclose on the homes or raise the mortgage interest rates of military veterans who have recently returned from active duty.

Under the new law, the limit on the size of the mortgage loans that can be purchased by government-sponsored enterprises (GSEs) Fannie Mae or Freddie Mac is raised to $625,500, or up to 115% of the local median purchase price. At the same time, the law grants the U.S. Treasury Department the authority to ensure the financial stability of GSEs by extending credit to these companies as needed.

“This legislation will help stabilize the housing market and begin to revive our economy,” said Jack Reed (D-RI), a Senate Banking Committee member and author of several provisions of the bill. 

“The housing crisis is perhaps the most significant economic issue that we face and this bill will go a long way toward bringing stability and confidence back to the markets,” Reed continued. “For the first time in over a generation, we are passing legislation to update, modernize, and strengthen the institutions that undergird both our mortgage and housing markets. I believe it will help stabilize our economy by ensuring access to decent, safe, and affordable housing for millions of American families.”