Harney: Housing relief bill just around corner

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WASHINGTON -- Congress left town for the July 4 recess with a half-baked cake in its legislative oven -- one that has huge potential significance for the housing and mortgage markets.

The unfinished work is a major relief bill designed to rescue hundreds of thousands of homeowners heading for foreclosure, pull buyers back into the real estate arena, and permanently raise conventional and FHA loan limits in high-cost markets.

The Senate is on the verge of final passage of its bill, and could do so as early as next week. The House has already passed its version. Final legislation could go to the White House later this month.

You might find something in the bill that directly benefits you if you are:

Thinking about buying a first home. The legislation offers federal tax credits up to $8,000 per couple -- $4,000 per single -- for qualified purchasers of newly constructed or resale houses.

There's no cap on the number of buyers to be assisted, and the definition of "first-time buyer" is more generous than a literal reading would suggest.

Saddled with a debt-laden home heading for foreclosure. The pending legislation may offer a way out for you, if your lender agrees to participate. Even if you're behind on payments and your mortgage balance exceeds your property's value, you could end up with a new, affordable FHA fixed-rate loan.

Searching for a home in a high-cost market. The bill is certain to provide higher limits than the $417,000 cutoff for Fannie Mae and Freddie Mac that prevailed before the temporary increase to $729,500, set to expire at the end of this year. The odds are the new maximum will be below $700,000. But the final compromise number should be high enough to help out buyers in California, New England and the mid-Atlantic states who otherwise could be forced to pay higher interest rates for jumbo loans.

The new credit program would dangle tax savings in front of almost anyone considering buying a first house, or buying a house after not owning one for at least three years. Tax credits are more valuable than deductions because they are dollar for dollar reductions off whatever you would otherwise owe on your federal taxes.

The credit has limitations.

You've got to repay the credit to the IRS over an extended period -- up to 15 years after the tax year of the home purchase. And if you sell the house or convert it to another use other than principal residence, such as a second home or investment property, you've got to repay the credit.

The income restriction is $75,000 for singles, $150,000 for married joint filers. Beyond those limits, the maximum allowable credit would phase down in increments. The credit program covers qualifying home purchases between last April 9 and April 1, 2009.

The portion of the legislation that deals with financially distressed homeowners is restricted to those who cannot afford their current loans and have a mortgage debt-to-income ratio above 31 percent. The owner of the mortgage must agree to reduce the balance of the principal amount to 85 percent of the current market value, i.e., to write off a chunk of what's owed.

If these and other conditions are met -- including borrowers agreeing to split any future appreciation with the government -- they may qualify for a new, fixed-rate 30-year FHA loan they can more easily afford.

E-mail Ken Harney at kenharney@earthlink.net.