If you hope to buy or sell a house later this year, there are at least two pieces of good news heading your way.
The first has to do with possible changes in tax legislation on Capitol Hill. A new bipartisan bill introduced last week could help pump-prime the market for resale homes, especially in the middle price ranges.
The second bit of good news concerns the private mortgage finance sector. No official announcement has been made yet, but the nation's largest insurer of home loans--the multibillion-dollar Mortgage Guaranty Insurance Corp., known as MGIC or "Magic"--plans to revolutionize the real estate seller-finance field this spring.
The big Milwaukee-based underwriter confirms that it is going to insure "creative financing" deals in all 50 states through as many as 21,000 cooperating lending institutions, beginning in May. For the first time, home-sellers in virtually any community will be able to obtain default insurance to protect themselves against loss when they provide first or second mortgages to their buyers.
The combination of nationally standard mortgage documents with default insurance could even lead to an active secondary market for home seller-assisted loans. This, in turn, would make it far easier for sellers to "cash out" their creative loans whenever they chose. It could also attract pension funds and other large institutions to invest in pools of seller-financed loans, making Wall Street the ultimate provider of dollars for custom-tailored, below-market rate transactions between individual buyers and sellers.
The tax bill in Congress to keep your eye on was introduced March 24 by House Ways and Means Committee members Ed Jenkins, a Georgia Democrat, and James G. Martin, a North Carolina Republican.
The bill (HR 5948) would create a new federal tax credit of up to $5,400 each for first-time home buyers. Purchasers who had not owned a house anytime during the last three years would be eligible to subtract the credit directly from their current federal tax withholding schedules, or demand a lump-sum refund on taxes paid during the prior three years. The money they received could then be used to offset high mortgage payments, "buy down" their mortgage rate from a lender, or be used for any other purpose the buyers wanted.
The credit would be recapturable--that is, owed back to the government--if the subsidized buyers sold their home in less than 36 months.
The sponsorship of Jenkins, a close political associate of Ways and Means chairman Dan Rostenkowski (D-Ill.), gives the bill special significance in the House. Since the White House appears a favor tax-oriented solutions to the housing problem, the Jenkins-Martin bill could become an important element in congressional efforts to stimulate real estate sales this spring.
The sponsors estimate it could produce up to 250,000 additional sales in the coming year alone. Though aimed at the lower-cost end of the market, it would "start the chain reaction going," in the words of a staff aide. "The move-up owners who've been trying for months to sell their units (in the middle- and lower-price ranges) would suddenly find buyers from the ranks of young couples and singles who've been waiting to jump in. The move-uppers would then be freed to purchase a more expensive home. "It would sort of be a 'trickle up' effect," says the aide.
The news coming soon from MGIC should be welcome across the country. The dominant underwriter in the home-mortgage insurance field (with $47 billion worth of policies), MGIC will begin offering default protection for home sellers who finance their own buyers.
The new nationwide program will work like this: A home-seller who wants to provide assistance to a purchaser via a first or second mortgage, deed of trust or land contract will contact a local lending institution. The lender will then handle the credit check, appraisal and document preparation. The local lender will also apply for default insurance on behalf of the seller.
The insurance generally will cost one-half a point (.5 percent of the mortgage amount) for the first year and a .25 percent premium for annual renewals. (This would be on a first trust or mortgage up to 90 percent of the appraised value of the property.)
Like the insurance routinely used by professional mortgage lenders, the MGIC program will reimburse the seller-financer for a percentage of the loss incurred in the event of a foreclosure following default by the purchaser-borrower.
The claim coverage will be for delinquent principal and interest payments, legal costs, property maintenance expenses and other losses typical when a mortgage goes sour. The level of coverage generally would be sufficient to prevent any financial loss whatsoever by the seller, following resale of the foreclosed property. No insurance will be available, however, on "balloon" payment defaults, where a borrower cannot obtain refinancing of the final payment.
With seven out of 10 home resales now involving some form of seller-financing, the market for MGIC's (and smaller competitors') programs is going to be vast. Within three years, such coverage for individual home-sellers could even be the norm, rather than the exception.