As policymakers in Washington wrestle to find a common ground in settling the fiscal cliff, avoiding the issue altogether, or “going over,” the cliff would have devastating effects to the housing market just as it has marked 12 consecutive months of home price increases at October 2012, according to data collected by Zillow. Some aspects of the mortgage business may experience additional woes.
Among programs that are on the January 1 chopping block to receive possible spending cuts are payroll tax cuts, health care spending, and possibly most important in terms of economic turnaround, the Mortgage Debt Relief Act of 2007.
Enabling borrowers to avoid paying income taxes on the amount of principal during short sales, elimination of the Mortgage Debt Relief Act could jeopardize the housing market’s struggling progress marked in recent months of steady growth, according to Bloomberg News.
Immediately reducing the mortgage interest deduction could shock the fragile housing market, believes the Urban Institute.
“Though it does not encourage homeownership, it does encourage going deeper into debt,” the Urban Institute writes in its fiscal cliff toolkit.
Falling off the cliff, as the Congressional Budget Office (CBO) notes, would result in a continued surge in national debt for the rest of the decade where the government would lose the ability to borrow at affordable interest rates.
“A failure to resolve the fiscal cliff, including the necessary approval by next year of an increase in the debt ceiling, could undermine the global investing community’s faith in the United States’ credit,” says Ethan Handelman, vice president for policy and advocacy at National Housing Conference.
If, as a result, investors demand higher interest rates on federally-backed securities like Treasury bills and Fannie Mae or Freddie Mac mortgage-backed securities, the impacts could ripple throughout the economy to individual borrowers, making mortgages and most other forms of borrowing more expensive for homeowners of various classes.
But even a fiscal resolution would hit federal housing programs hard, Handelman says, as cuts mandated by the Budget Control Act of 2011 would reach various program funding.
Signed by President Obama in August 2011, the Budget Control Act established an agreement between the House and the Senate to increase the national debt ceiling and limit federal spending, something both parties are currently struggling to find a common ground on as the fiscal cliff approaches.
They could extend to the reverse mortgage market specifically by limiting funding for aspects of the loan process such as housing counseling.
“Cuts to rental assistance, public housing, housing counseling, community revitalization, and more would occur just when they’re most needed to help sustain the nascent housing recovery,” says Handelman.
The reverse mortgage industry already faced minor cuts after the budget for housing counseling was eliminated from government appropriations entirely in 2010. Since then, obtaining grant funding for Home Equity Conversion Mortgage (HECM) counseling have proved to be an uphill battle as many borrowers attend counseling sessions but do not ultimately end up closing a loan.
In October, the Department of Housing and Urban Development launched a new office designated to housing counseling. Mandated under the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act, The Office of Housing Counseling was created in an effort to streamline counseling policies.
Another setback to mortgage counseling under the fiscal cliff could even threaten business for small counseling agencies, according to Sue Hunt, director of reverse mortgage counseling for CredAbility.
With funding falling through, smaller, local agencies might not be able to provide counseling services any more, Sue Hunt, director of reverse mortgage counseling for CredAbility expressed to RMD in October.
Congress passed legislation to cut HUD’s counseling programs back in 2011, the consequences of which impacted many older Americans interested in reverse mortgages.
A similar scenario for fiscal year 2013 may be in the works if the bicameral Congress does not reach a definite solution in its ongoing fiscal negotiations.
Written by Jason Oliva