One of the highlights of the bill waiting to be signed by Bush is a tax credit of up to $7,500 for first-time home buyers, but according to the bill, the tax credit has to be returned in installments over 15 years. As you read the fine print,  a recent MarketWatch report shows the direct  benefits for consumers do not seem to be adding up to all the hoopla surrounding this piece of legislation.
In addition to the tax credit, here are some of the measures that will directly affect consumers:

• FHA foreclosure rescue: Borrowers at risk of foreclosure may be able to refinance into a more affordable loan backed by the FHA. But there are conditions. In the program, lenders write down the loan balance to an amount that doesn’t exceed 90% of the current appraised value of the home. To qualify, borrowers need to have a mortgage debt-to-income ratio of at least 31%. The catch: Borrowers who participate in this program will be penalized if they want to refinance or sell the home in the next five years
• FHA modernization: The bill allocates money to improve the way FHA works, and also increases the loan limit for FHA loans — While FHA loans were always available, people often didn’t use them because the approval process could be difficult. One point that could have a negative impact on sales: Seller-funded down-payment assistance got eliminated , removing that option for buyers who had difficulty coming up with a down payment
• Expanded standard deduction for homeowners: An additional standard deduction for homeowners is also included in the bill, providing a standard deduction of up to $500 for single filers and $1,000 for those filing jointly. This will likely affect a subset of homeowners who don’t itemize, including those with small mortgages, retirees whose homes are paid off or first-time buyers who bought late in the year.
• Increased conforming loan limits: Conforming loan limits were temporarily raised earlier this year, but that hike was set to expire in December. Starting next year, the limit will be $417,000 or 115% of the local median price, up to $625,500. Conforming loans are those that can be purchased by Fannie Mae and Freddie Mac. That doesn’t necessarily mean, however, that larger loans will have much lower rates than they would have if they were nonconforming jumbo loans; the measure doesn’t take into account how the markets will respond to the larger conforming mortgages

Today I heard a commentator compare Fannie Mae and Freddie Mac to  distant cousins you vaguely know but don’t hear much about until they show up at a wedding and get totally drunk and trash the place, so why should we care about Freddie and Fannie?
Fannie and Freddie are the two largest mortgage finance companies in the US, and hold about  half of the $12 trillion US mortgage market. They buy mortgages from lenders and then sell them to investors as “packages, the banks sell these loans to get more money to make more loans.
Huge losses have resulted in  worries  of insolvency and  stock in both companies lost half their value in volatile  trading.  Both lenders have stated that their capital positions are adequate, but that is what Bear Stearns, and Indy Mac said right before they imploded, so naturally the market is a little skittish.
 Failure of either or both lenders could reach far beyond the US financial sector. Many mutual funds, and a number of central banks around the world hold some of this debt, and further undermining in confidence could put additional strain on liquidity in the entire global  economic system.
Everyone hopes the emergency credit won’t be needed and that its existence alone will help regain confidence to the point where Freddie and Fannie could continue functioning on their own.

This Week’s Real Estate Insight

Chrysler Corp. borrowed $1.2 billion from the government in the late 70’s, and  The  1980’s savings and loan bailout cost taxpayers $124 billion. Considering the possible continued fallout, Freddie and Fannie are worth saving.