Home sales are affected by many things. The economy is indeed the guiding factor for a slowdown, but other problems exist that contribute to the frustration felt by both buyers and sellers. Most of these issues could be eliminated and would bring a level of confidence into the housing market.
Flood insurance: For the past several years, Congress has been approving short-term extensions of the National Flood Insurance Program's (NFIP) authority to issue insurance policies. Without the ability to get insurance the sale of homes and the growth that has been projected in those areas will be severely limited. About 42,000 people that live in a flood plain here in Washington would not be able to sell their homes. Builders are hesitant about constructing in these areas for fear that their homes could not sell. Congress needs to agree to long term extensions.
Short sale process: Owners of non-distressed properties are often challenged by the number of short sales in their neighborhoods which contribute to a longer market time for a lower price. Buyers were originally drawn to distressed properties because of possible “deals.” But, with long delays and uncertainty coupled with banks unwillingness to take deep cuts, buyers are assessing the value of purchasing such properties. Short sales must be expedited. New legislation has been introduced to require servicers to decide whether to approve a short sale within 45 days of completion of the file. Buyers are in limbo for months waiting for a lender reply, forcing some to walk away from a sale.
Loan approvals: Lenders could approve applications quickly based on the new qualifying guidelines. But, many buyers do not get formal approval until a few days before the closing date. This puts contracts at risk of not closing based on change of interest rates or new requirements imposed by the lenders.
Mortgage interest deductions: Looking for ways to cut the national debt, Congress has been debating the elimination of the mortgage interest deduction. One of the advantages of home ownership, this deduction has often been the deciding factor for purchasing instead of renting. The uncertainty of the deduction continuing has led many to re-evaluate proceeding with a purchase. The value of the amount that would be saved would be questioned by the harm it would do to the housing industry.
Tax on loan forgiveness: In a short sale, the difference between the price a home sells for and the actual mortgage amount is considered “income” to the seller and is therefore taxable. Burdening a seller with a large tax bill after going through the pain of a short sale will be problematic. The law that forgives this “income” will expire on December 31, 2012. Extending forgiveness of this portion of the loan amount will unburden sellers and increase the possibility of returning to the market in a few years. It will also eliminate the prospect of a bankruptcy instead of the short sale.
Appraisals: At the height of the market, appraisers sometimes worked with the banks to adjust the true value of the home. In an effort to create an arms-length relationship, laws were enacted to keep a distance between the banks and the appraisers. Unfortunately, this resulted in appraisers working in areas that they were not familiar with. This has resulted in appraisals that were below market value which have stopped many transactions from closing, added additional expense or lost value for the seller.
QRM (qualified residential mortgage): Over the last many months, banks have established new rules and qualifications for obtaining a loan. With those protections in place, the requirement for a 20 percent down payment only results in qualified borrowers, who have the resources to pay a mortgage, unable to obtain one. Statistics show that it would take a borrower up to 14 years to save the necessary 20 percent down payment. Historically, a very high percentage of new home loans were dramatically under that amount. This would have a negative effect on any market rebound.
Addressing these issues will do much to stimulate the housing market. Not fixing these problems will add to the delay of any real recovery.
