Wednesday, February 11, 2009

Millions, Billion, Trillions . . .Oh My

Yesterday, the Senate passed as part of the stimulus bill a $15,000 tax credit if home shoppers buy within the next year. As that was going on, in a separately action, Treasury Secretary Timothy Geithner outlined plans for spending much of the $350 billion in financial bailout money recently cleared by Congress, and the Federal Reserve announced it would commit up to $1 trillion to make loans more widely available to consumers.

All these actions are suppose to get buyers off the fence to complete a purchase, free up the credit markets and make money available for mortgages. So here is what you need to know about all three actions.

The tax credit in the Senate's version of the plan sweetened the current $7,500 homebuyer tax credit provision (that is basically a loan), doubling it to $15,000 or 10% of the home's purchase price (whichever is lower) in Alameda every buyer would get the full credit with the current inventory. The big difference is this credit applies to all buyers - not just those purchasing their first homes.

Here are the bullet points of the Senate Plan:

  • No income limit
  • The credit does not have to be paid back
  • The tax credit is also non-refundable, this means, if your tax obligation is less than the credit, you only receive an amount equal to your tax bill, no more
  • The Senate credit is good for one year following its enactment
  • No retroactive feature. Homebuyers who make purchases before the credit takes effect cannot claim it.
  • Buyers must live in the home for two years or forfeit the credit.

The National Association of Realtors estimated the Senate measure will attract an additional one million buyers who would otherwise have remained on the sidelines. "Consumers will view the tax credit as they do lower home prices," said Lawrence Yun, NAR's chief economist. "And more people will qualify [for buying homes]."

My personal belief is the Senate version will not survive when they confer with the House and come up with a compromise plan.

The financial stability plan will include a comprehensive housing program that will provide $50 billion for foreclosure prevention programs. Secretary Geithner released details of the new financial stability plan, a successor to the much maligned Troubled Asset Relief Program (TARP). The main purpose of the new TARP Plan is to prevent more foreclosures, decrease interest rates and find a place for toxic mortgages. (The video is a little TARP humor)

To drive down mortgage rates, Geithner also alluded to a possible expansion of a $600 billion Federal Reserve program that purchases mortgage backed securities and debt issued by Fannie Mae, Freddie Mac and Ginnie Mae.

The final piece is a $1 trillion program aimed at stimulating lending to consumers and businesses. The program expands on a $200 billion to lend money to investors to purchase securities backed by debt such as credit cards and auto, student and small business loans. The goal is open up all credit.

It is way to early to know what the impact will be, especially since the Senate version of the tax credit still needs to survive its current form, but if all three programs move forward we could see buyers jump back in to buying mode. Exactly what the Obama administration wants. Till then we will have to wait and see what happens.

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