March 12, 2009
Previously published on February 20, 2009
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the Stimulus Act). The approximately $787 billion Stimulus Act is a broad mix of government spending and tax cuts aimed at stimulating economic growth. This article summarizes the Stimulus Act provisions and other federal government efforts that most directly impact the real estate industry.
First-Time Homebuyers Tax Credit
The most prominent provision in the Stimulus Act that impacts the real estate industry is the expansion of the tax credit for first-time homebuyers. In the Housing and Economic Recovery Act, passed by Congress in 2008, a $7,500 tax credit was created for first-time homebuyers. The tax credit was designed to increase sales in the declining residential real estate market. The principle criticism of the tax credit, however, was that it was not really a credit as much as it was an interest-free loan because taxpayers were required to repay the credit over a 15-year period.
The Stimulus Act makes several amendments to the first-time homebuyer tax credit. First, the credit’s original expiration date of July 1, 2009 is extended to December 1, 2009. Second, the Stimulus Act increases the maximum amount of the first-time homebuyer tax credit from $7,500 to $8,000. Third, and perhaps most importantly, the Stimulus Act eliminates the repayment requirement after a taxpayer has lived in the home for 36 months.
These provisions apply to purchases of a principal residence by a first-time homebuyer after December 31, 2008. Purchases on or after April 9, 2008, and before January 1, 2009, continue to be governed by the first-time homebuyer credit as enacted in the Housing and Economic Recovery Act of 2008. The credit is phased out for taxpayers with Adjusted Gross Income in excess of $75,000 ($150,000 for joint filers).
FHA, Fannie Mae and Freddie Mac Loan Limits
In the Economic Stimulus Act of 2008, Congress temporarily increased loan limits for FHA, Fannie Mae and Freddie Mac mortgages. The Stimulus Act extends those increases throughout 2009, with the intent of enabling creditworthy borrowers to obtain such mortgages in higher-cost markets.
Aid to Communities
The Stimulus Act invests more than $10 billion in affordable housing programs and community-based programs to reduce neighborhood blight. These provisions are intended to assist communities with high foreclosure rates by funding the purchase, repair and resale of foreclosed and abandoned properties.
Additionally, $2.25 billion will be used to provide gap financing to restart low-income housing construction stalled during the credit crisis.
Energy-Related Provisions
The Stimulus Act includes numerous provisions related to energy efficiency. For instance, the Stimulus Act expands the tax credit available to individuals who make qualified energy efficiency improvements like installing new energy efficient windows, doors, air conditioners or water heaters. The Stimulus Act also allocates funds toward making federal and local government buildings more energy efficient, and similarly establishes a program to competitively award funds to make energy efficient improvements (including upgrading insulation, windows and furnaces) to HUD sponsored housing. Additionally, the Stimulus Act will provide $6.3 billion to state and local governments to make investments in energy efficiency.
The Stimulus Act also extends by three years the “production tax credit” for wind energy (as well as a tax credit extension for biomass, geothermal, landfill gas and some hydropower projects), and creates an option, available to many developers, to turn tax credits into direct cash, under a grant program by which the government will underwrite 30 percent of a project’s cost.
Environmental Provisions
The Stimulus Act invests in numerous environmental cleanup programs. For instance, the Stimulus Act allocates $600 million toward Superfund hazardous waste cleanup sites and $200 million toward cleanup of petroleum leaks from underground storage tanks. Additionally, $100 million is allocated toward competitive grants for Brownfields cleanup of former industrial and commercial sites.
Improvements on Public Lands
The Stimulus Act allocates $2.5 billion for infrastructure projects on federal lands. These projects include improvements to visitor facilities, preservation of buildings of cultural and historic importance, and environmental cleanup projects. Of the $2.5 billion, $750 million is dedicated to the National Park Service, $320 million is dedicated to the Bureau of Land Management, $280 million is dedicated to the National Wildlife Refuges and National Fish Hatcheries, and $650 million is dedicated to the Forest Service.
Transportation Improvements
Under the Stimulus Act, approximately $46.7 billion is allocated to capital investment in transportation, including improvements to highways, bridges, transit and rail. The foregoing spending programs may provide opportunities for contractors and may spur development on adjacent private property.
Municipal Bonds
The Stimulus Act includes a number of provisions related to bond programs. One change is that tax-exempt interest earned on specified state and local bonds issued during 2009 and 2010 will not be subject to the Alternative Minimum Tax (AMT). Additionally, the Stimulus Act increases the small issues exemption from $10 million to $30 million. This will allow smaller government entities to place their debt directly with banks which can then deduct 80% of the purchasing costs for the bonds issued in 2009 and 2010.
The Stimulus Act also creates a new “Build America Bond” which allows an issuer of a bond that would qualify for tax exemption to instead issue taxable bonds with a tax credit to the bondholder of 35% of the interest payments. This option is available to issuers of such bonds in 2009 and 2010.
Indian tribal governments, under the Stimulus Act, are now authorized to issue tax-exempt bonds to finance any purpose that could be financed by a State or local government, other than certain gaming facilities and facilities located outside reservations.
Also included in the Stimulus Act is an allocation for an additional $1.6 billion of clean renewable energy bonds for certain renewable energy projects.
With regard to qualified small issue bonds issued in 2009 and 2010, the Stimulus Act expands the definition of “manufacturing facilities” to include facilities used in the manufacturing, creation or production of intangible property, such as software and biotechnology. Additionally, for “manufacturing facilities,” the Stimulus Act replaces the 25 percent allowance for directly related and ancillary property with an unlimited allowance for functionally related and subordinate property.
Other Federal Efforts
The Homeowner Affordability and Stability Plan
On February 18, 2009, President Obama proposed the Homeowner Affordability and Stability Plan (the Plan). There are two major components of the Plan. The first major component is aimed at borrowers who have remained current on their mortgage payments but who have been unable to refinance their mortgages to obtain a lower interest rate because their homes have decreased in value and they do not have the equity required to refinance. Under the plan, these borrowers will have an opportunity to refinance into a 15-year or 30-year fixed rate loan. Eligible loans include those where the first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. Complete eligibility details will be announced on March 4, 2009 when the program starts; however, the program is limited to loans held or securitized by Fannie Mae or Freddie Mac and a borrower’s eligibility will be based on income and mortgage payment history.
The second major component of the Plan is directed toward borrowers who are already behind or are struggling to stay current on their mortgage payments. While the first component of the Plan applies only to mortgages held or securitized by Fannie Mae or Freddie Mac, the second component of the Plan applies to all mortgages regardless of who owns or services the mortgages. Under this component of the plan, mortgage lenders will be given $1,000 to modify borrowers’ mortgages and will continue to be paid “success” fees of up to $1,000 per year that the borrower is able to stay current on the loan. In that sense, the Plan is not only designed so that lenders will reduce interest rates and lower monthly payments, but also to encourage lenders to reduce the principal amounts of the loans. The Plan similarly provides incentives for borrowers, including a program that pays down the amount of a mortgage by up to $5,000 for borrowers who make five years’ worth of timely payments under a modified loan. The Plan appears to be a temporary solution only. After five years, payments are expected to increase at a gradual rate. To qualify for this type of mortgage modification, a borrower must (a) occupy the home as the borrower’s primary residence; (b) have a monthly mortgage payment that is greater than 31% of the borrower’s monthly gross income; and (c) have a loan that does not exceed current Fannie Mae and Freddie Mac loan limits. Final eligibility guidelines will be available on March 4, 2009. It should be noted, however, that this program is voluntary, and lenders need not modify any mortgage loan if they choose not to do so. The Obama administration expects “most major lenders” to participate in the Plan.
The incentives in the Plan are designed to get lenders to participate, but the Plan also includes a “threat” to mortgage lenders. The Obama administration is calling for Congress to give bankruptcy judges the power to change the terms of mortgages. The mortgage lending industry has long-opposed this potential change for fear that it would introduce uncertainty about the value of a mortgage as an investment.
Purchases of Mortgage Backed Securities and Toxic Assets
Elsewhere, the Federal Reserve continues its efforts to purchase mortgage-backed securities and Treasury Secretary Timothy Geithner has announced (though not in much detail) plans for a public-private partnership for purchasing toxic assets from banks.
Conclusion
It is clear that Congress and the Obama administration are beginning to take bold steps in an effort to stimulate the economy.
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