affordable housing

US House Releases Tax Reform Plan: Housing Takes a Hit

House Republicans on Thursday released their highly anticipated plan to reform the U.S. tax code – which aims to cut the corporate rate and reduce the number of tax brackets.

It is the first tax code revamp since 1986.

The bill would cut the corporate tax rate from 35 to 20 percent, double the standard deduction, increase the child tax credit to $1,600 and eliminate the estate tax. It does not, however, change the rates for 401(k) and Individual Retirement Accounts.

Also, the cap on the mortgage deduction would drop from $1 million to $500,000 – and it would cap the state and local tax deduction at $10,000. Republicans in high-tax states, including New York and California, had been opposed to SALT (state and local tax) changes.

The plan retains the top individual income tax rate of 39.6 percent but cuts the number of brackets from seven to four. The highest bracket's plan is for individual income of more than $500,000 compared with the current rate of $418,000. For those married filing jointly, the cutoff is more than $1 million from the current $470,000.

The other new brackets are 12 percent, 25 percent and 35 percent.

The lowest individual bracket is $45,000 from the current lower rates of 10 percent up to $9,325 and 15 percent up to $37,950. For married filing jointly, the lowest bracket proposal is up to $90,000 from the 10 percent of up to $18,650 and 15 percent up to $75,900.

The other brackets are 25 percent (up to $200,000 for individuals and $260,000 for married) and 35 percent ($500,000 for individuals and $1 million for married).

The standard deduction increases from $6,350 to $12,200 for single filers, $12,700 to $24,400 for married couples and $9,250 to $18,300 for head of household.

For an average family of four making $60,000, The Wall Street Journal estimates their tax bill will drop from $1,608 to just $472.

House Republicans delayed revealing the plans from Wednesday to Thursday as they worked on parts of the plan.

Republicans in the House hope to get the legislation passed before Thanksgiving and advance it to the Senate before the end of the year. President Donald Trump said he wants to sign the bill before Christmas.

The House of Representatives narrowly passed the 2018 $4 trillion budget resolution last week in preparation of moving toward tax reform. The budget allows Republicans to pass a tax overhaul that adds up to $1.5 trillion to the deficit.

Root Causes for U.S.'s Depressed Homeownership Rate

Despite steadily improving local job markets and historically low mortgage rates, the U.S. homeownership rate is stuck near a 50-year low because of a perverse mix of affordability challenges, student loan debt, tight credit conditions and housing supply shortages.

That's according to findings of a new white paper titled, "Hurdles to Homeownership: Understanding the Barriers," released in recognition of National Homeownership Month at the recent National Association of Realtors® (NAR) Sustainable Homeownership Conference at University of California, Berkeley.

Led by a group of prominent experts, including NAR 2017 President William E. Brown, NAR Chief Economist Lawrence Yun and Berkeley Hass Real Estate Group Chair Ken Rosen, the conference addressed the dip and idleness in the homeownership rate, its drag on the economy and what can be done to ensure more creditworthy households have the opportunity to buy a home.

"The decline and stagnation in the homeownership rate is a trend that's pointing in the wrong direction, and must be reversed given the many benefits of homeownership to individuals, communities and the nation's economy," Brown said. "Those who are financially capable and willing to assume the responsibilities of owning a home should have the opportunity to pursue that dream." One of Brown's main objectives as president of NAR is identifying ways to boost the homeownership rate in a safe and responsible way.

The research was commissioned by NAR, prepared by Rosen Consulting Group (RCG). and jointly released by the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley Haas School of Business. It identifies five main barriers that have prevented a significant number of households from purchasing a home. They are:

Post-foreclosure stress disorder: There are long-lasting psychological changes in financial decision-making, including housing tenure choice, for the 9 million homeowners who experienced foreclosure, the 8.7 million people who lost their jobs, and some young adults who witnessed the hardships of their family and friends. While most Americans still have positive feelings about homeownership, targeted programs and workshops about financial literacy and mortgage debt could help return-buyers and those who may have negative biases about owning.

Mortgage availability: Credit standards have not normalized following the Great Recession. Borrowers with good-to-excellent credit scores are not getting approved at the rate they were in 2003, prior to the period of excessively lax lending standards. Safely restoring lending requirements to accessible standards is key to helping creditworthy households purchase homes.

The growing burden of student loan debt: Young households are repaying an increasing level of student loan debt that makes it extremely difficult to save for a downpayment, qualify for a mortgage and afford a mortgage payment, especially in areas with high rents and home prices. As NAR found in a survey released last year, student loan debt is delaying purchases from millennials and over half expect to be delayed by at least five years. Policy changes need to be enacted that address soaring tuition costs and make repayment less burdensome.

Single-family housing affordability: Lack of inventory, higher rents and home prices, difficulty saving for a downpayment and investors weighing on supply levels by scooping up single-family homes have all led to many markets experiencing decaying affordability conditions. Unless these challenges subside, RCG forecasts that affordability will fall by an average of nearly 9 percentage points across all 75 major markets between 2016 and 2019, with approximately 5 million fewer households able to afford the local median-priced home by 2019. Declining affordability needs to be addressed with policies enacted that ensure creditworthy young households and minority groups have the opportunity to own a home.

Single-family housing supply shortages: "Single-family home construction plummeted after the recession and is still failing to keep up with demand as cities see increased migration and population as the result of faster job growth," said Rosen. "The insufficient level of homebuilding has created a cumulative deficit of nearly 3.7 million new homes over the last eight years."

Fewer property lots at higher prices, difficulty finding skilled labor and higher construction costs are among the reasons cited by RCG for why housing starts are not ramping up to meet the growing demand for new supply. A concentrated effort to combat these obstacles is needed to increase building, alleviate supply shortages and preserve affordability for prospective buyers.

"Low mortgage rates and a healthy job market for college-educated adults should have translated to more home sales and upward movement in the homeownership rate in recent years," said Yun. "Sadly, this has not been the case. Obtaining a mortgage has been tough for those with good credit, savings for a downpayment are instead going towards steeper rents and student loans, and first-time buyers are finding that listings in their price range are severely inadequate."

Added Rosen, "A healthy housing market is critical to the overall success of the U.S. economy. Too many would-be buyers have been locked out of the market by the factors found in this study, and it's also one of the biggest reasons why economic growth has been subpar in the current recovery."

College Debt No Longer a Deal Breaker for Millennials

Home buyers with student loans could find it easier to get a conventional mortgage under some important new rules.

And parents who took on student debt to help their children go to college now have a new refinance option to tap into home equity to pay off those student loans, as well. It might make sense to refinance out of a higher student loan rate into a lower mortgage rate for some, but it's not smart for everyone.

Fannie Mae has re-done its rules to reflect the growing burden that student loan debt has on many households. Outstanding student loan debt now adds up to more than $1.4 trillion, according to the Federal Reserve Bank of St. Louis.

Overall household debt today is just 0.8 percent below its peak of $12.68 trillion reached in the third quarter of 2008, according to the Federal Reserve Bank of New York.

Bill Banfield, executive vice president of capital markets for Detroit-based Quicken Loans, said it became more difficult for many borrowers with student loans to obtain a mortgage when tighter guidelines relating to college debt went into place after the financial crisis in 2008-09. Under the restrictions, he said, lenders had to calculate student debt payments according to certain, generally more conservative formulas when underwriting a new mortgage.

One such calculation: The lender could take 1 percent of the outstanding student loan balance to calculate the potential monthly student loan payment. So a mortgage applicant with $30,000 in student loans would be considered to be paying $300 a month for student loans.

How much you're paying on other debt, of course, influences how much you can afford to pay for a new mortgage.

In reality, though, Banfield said the borrower could be paying far less than that $300 a month under some situations, such as when the borrower has an income-driven repayment plan that reduces their monthly payment.

Under the rule change, the lender now can accept the student loan payment information that's included on the borrower's credit report. For some millennials and other borrowers, the change can help provide more access to a mortgage.

Fannie Mae said its new policies address the obstacles to home ownership that hit because of a significant increase in student loan debt over the past decade.

"We think it's going to help people with student loans qualify," Banfield said. "It's a positive and meaningful change. "It doesn't mean we're taking on more risk necessarily. It just means we're not penalizing people with an overstated payment on their student loans."

Under Fannie Mae's new rules, the lender can take into account student loans that are actually paid by someone else, such as the parent, too. Documentation would be needed to prove that the parent is making the monthly payments on the student loans taken out under the child's name. For example, lenders must obtain the most recent 12 months of checks or bank statements to prove payment by the parent and there can be no delinquent payments in that 12 months.

But if the parent is paying those loans, the younger borrower is better able to take on a monthly mortgage payment. Fannie Mae said that looking at debt paid by others would widen borrower eligibility to qualify for a home loan.

Banfield said it is not unusual to hear millennials say that their parents are making their student loan payments.

Perhaps the parent didn't have savings or want to use their savings to pay college tuition and room-and-board, but the parent feels comfortable paying off a child's student loans over time.

"Who doesn't want their child to have a higher education?" Banfield said.

Sometimes, it's cheaper for a student to take out loans than the parent. For example, undergraduates who obtain student loans get a lower rate than parents under federal student loan programs. The rate on subsidized and unsubsidized federal loans taken out by undergraduates is 3.76 percent for loans taken out between July 1, 2016 and July 1, 2017. The interest rate is fixed for the life of the loan.

By contrast, the current rate is a fixed 6.31 percent for Parent PLUS loans first disbursed on or after July 1, 2016, and before July 1, 2017.

Rohit Chopra, senior fellow at the Consumer Federation of America and former assistant director of the Consumer Financial Protection Bureau, said the new cash-out refinancing option for home owners will likely be marketed to parents who want to pay off some of that student loan debt, too.

Under the new cash-out refinancing program, cash taken out of the equity in the home would go directly to the student loan servicer to fully pay off at least one loan.

Chopra noted that the Parent PLUS loan rate can be higher than the going rate on mortgages. But parents have to make certain that the mortgage rate they'd qualify for when they refinance would be lower than what they are paying on student loan debt.

Another attractive selling point: Mortgage interest is deductible for people who itemize so refinancing could be an advantage to some parents.

But it's important to pay attention to your own tax return and situation. Depending on your income, student loan interest is deductible for some taxpayers. The maximum amount of student loan interest that can be deducted from your income each year is $2,500. If you're in the 25 percent tax bracket, for example, the tax savings would be $625 if you were able to claim the full $2,500. This deduction applies to the interest payment – not the entire payment on your student loans.

The interest paid must apply to qualified education loans, which include federal student loans, private student loans, and parent education loans.

The student loan interest deduction is claimed as an adjustment to income. So you can claim this deduction even if you don't itemize deductions on Schedule A of Form 1040.

And income limits apply. To qualify for the deduction, you'd have to have a modified adjusted gross income that's less than $80,000 if single or less than $160,000 if married and filing a joint return.

But before anyone rushes to take equity out of the house to pay off student debt, ask another question: Will you be putting your home at risk?

If someone has a good paying job and stable employment, refinancing could help. But someone who could face a layoff or a wage cut could be signing away some student loan benefits that can ease the financial pain when a hardship hits.

Borrowers who hold federal student loans and face financial difficulty can tap into attractive deferment and forbearance plans, loan forgiveness options and income-driven repayment plans. By applying for an income-driven repayment plan, a borrower can obtain a monthly payment amount that is intended to be affordable based on your income and family size.

Income-driven repayment options on federal student loans cap federal student loan payments at roughly 10 percent of the borrower's income. These programs are generally targeted at student borrowers, not parents, though some ways exist for parents with Parent PLUS loans to deal with some hardships.

"Swapping student debt for mortgage debt can free up cash in your family budget, but it can also increase the risk of foreclosure when you run into trouble," Chopra said in a news release.