A plan for the government to partially insure lenders when they agree to modify troubled borrowers’ loan terms could help stabilize housing markets, restore confidence, and bring buyers back into the market.

Federal Deposit Insurance Corp. chairwoman Sheila Bair wants the Bush administration to provide incentives for lenders to do as many as 2.2 million loan modifications.

Under a proposal unveiled by the FDIC Friday, the government would pay servicers $1,000 for each loan modified to defray their expenses, and then agree to cover up to 50 percent of losses if a loan should re-default.

Assuming one in three modified loans were to re-default, the plan would cost taxpayers $24.4 billion, but prevent 1.5 million foreclosures by the end of next year, the FDIC said.

The plan and others intended to stem foreclosures could help stabilize housing markets, but “speed is of the essence,” said Paul Bishop, managing director of research for the National Association of Realtors.

NAR, which has its own four-point legislative plan to stimulate housing markets, has concentrated on incentives for buyers like a $7,500 tax credit for homebuyers and government-backed interest-rate buy-downs (see story).

NAR also wants Congress make credit more easily available to would-be homebuyers. One way to do that, the group says, would be to make permanent the temporary increase in the upper loan limits for Fannie Mae, Freddie Mac and FHA. The limits, boosted in February to $729,750 in high cost areas, are set to come back down to $625,500 on Jan. 1.

NAR has also been adamant that the Bush administration use at least some of the $700 billion earmarked for the Troubled Assets Repurchase Program, or TARP, the way it originally said it would: to buy up “toxic” assets like mortgage backed securities. But after earmarking the first $250 billion in TARP funds to buy shares in troubled banks, the Treasury Department now says it does not plan to buy any mortgage-backed securities.

While NAR hasn’t formally endorsed the new plan to guarantee loan modifications put forward by the FDIC, the group is generally supportive of initiatives and programs aimed at mitigating foreclosures, Bishop said.

“To the extent that the FDIC plan puts, in effect, a ceiling on the rise in foreclosures sooner rather than later, that’s all good,” Bishop said. “It’s not only how many foreclosures are prevented, but giving homebuyers in the market a sense that maybe we do have a handle on it after all. Whereas now there’s a sense that we don’t know where the end to foreclosures is.”

The FDIC’s foreclosure prevention plan and the buyers incentives and access to mortgage credit advocated by NAR are “complimentary in what they aim to accomplish,” Bishop said.

Limiting foreclosures not only slows growth in inventory and price declines, but provides reassurance to would-be homebuyers who are reluctant to buy into a downturn, Bishop said.

Once that happens, the government must also make sure that buyers who are ready to get off the fence have the financing and incentives needed to make that happen.

First-time homebuyers are key to a recovery, he said, because they are the the least encumbered.

“They don’t have a home to sell, and may be able to get out into the market more quickly than an existing homeowner,” Bishop said. “To the extent that the four-point plan we’ve put out really works to bring first time buyers into the market, that will be one of the key aspects to success for any of these plans.”

Although the Bush administration was said to be weighing Bair’s plan, last week it rolled out a less ambitious loan modification plan involving Fannie Mae, Freddie Mac and the HOPE NOW alliance of 27 loan servicers.

The administration’s plan, which FHA Commissioner Brian Montgomery said might help “hundreds of thousands of borrowers,” involves a streamlined loan modification process in which borrowers’ loan payments would be reduced to 38 percent of gross monthly income by lowering their interest rate, lengthening the term of the loan, or reducing principal and adding it to the back of the loan.

Having placed Fannie Mae and Freddie Mac in receivership, the government has a large say in how they are run. But while Fannie and Freddie own or guarantee about 58 percent of all single-family mortgages, those mortgages represent only 20 percent of serious delinquencies.

About 60 percent of seriously delinquent mortgages have been sold to investors in private-label mortgage-backed securities who may be less willing to engage in loan modifications.

The FDIC said that while foreclosures are costly to lenders, the pace of loan modifications continues to be “extremely slow.” Only 4 percent of seriously delinquent loans are modified each month, the FDIC said.

Fannie and Freddie have boosted loan modifications by 60 percent this year, but are still only averaging 4,600 a month. About 92 percent of borrowers Fannie and Freddie have worked with have been able to keep their homes.

Can a Limited Liability Company (LLC) purchase a residential property under the name of the company and plan to use it’s primary residence and also conduct our business from there? Please tell us the pros and cons of making this purchase.

There are probably too many issues to discuss in this answer, but I’ll give you a few to start mulling over.

If the home is your primary residence, you may lose tax benefits by placing the home in a limited liability company. For one, under current tax law, if an individual owns a property, that individual can sell the property and exclude up to $250,000 from federal income taxes if that individual used the property as his primary residence for two out of the last five years ($500,000 can be excluded from gain for married couples).

If the LLC owns the property, the LLC is usually not considered a person for purposes of the primary-residence exclusion. In your case, if the LLC is disregarded for purposes of your owning the home in a similar manner as living trusts are disregarded, you would be entitled to federal income tax benefits as if you owned the home in your name. But for local property tax purposes and state income tax purposes, you may find that those taxing authorities might not allow you to benefit from reductions in state income taxes and local property taxes for homes owned by individuals (also known as the homestead exemption).

Many local governments won’t give those real estate tax benefits to corporations and companies. These real estate tax benefits can be substantial and you might not want to miss out on them.

If you run your business out of this home, you may run afoul of zoning laws in your municipality. In some cities, you may not use more than 10 percent or 15 percent of a home for a home office if the property is located in a residential neighborhood.

For federal income tax purposes, if the home is owned by the LLC, you might create unusual circumstances in your ability to deduct all of the real estate taxes, amortize the entire value of the home, or to deduct the entire amount of the interest payments for the loan on the property on your federal income tax form, particularly if you use all or part of the home for your business.

Since you have indicated that the home will be your primary residence, it’s unclear why you would want to hold the property in the name of the LLC.

If your intent is to protect your personal assets from liens and creditors’ claims against your business, you might be making a mistake by having the home owned by the LLC. If your business is sued and loses in litigation, the assets of your business will be at risk. If you don’t have adequate homeowners insurance and someone slips and falls on your property, the home will still be at risk and you could lose it.

On the other hand, if the LLC runs its business separately from what you and your wife do in the business and if the LLC is sued, the litigation will risk only the assets held by the LLC. You could lose the LLC, but you shouldn’t lose the home. (Still, it seems as though you’d be taking a fairly big risk by mixing your personal assets with the assets of your business.)

Finally, if you’re planning to own the home and obtain loans on the home, you may find it difficult to get a lender to give you a loan on the basis that the home is a primary residence. Because the home is owned by the LLC, most lenders may treat the home as an investment property and you may end up having to pay greater costs to close the loan on the property and probably pay a higher interest rate on the loan.

Talk to an estate planner to help you solve some of your issues. You’ll probably find that he or she feels the home should be owned separately from the business but that you and your wife can lease a part of the home to the LLC. The rent would be income to you on the personal side, but you would be able to deduct some of the home expenses as business expenses due to the rental of that portion of the home to the LLC business.

With the property market in turmoil, especially in the United States, real estate agents around the country are ratcheting up their efforts to woo the Russian oligarchs, Korean industrialists and other international buyers who have been making headlines with splashy top-dollar purchases.

Buyer: London businessman
Where: New York City
Property: A 5,450-square-foot Victorian townhouse close to Central Park. Special features include a large garden, two living rooms and a terrace on the fourth floor.
Price: $7.95 million; buyer paid asking price.
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Atlanta Fine Homes Sotheby’s International Realty

Buyer: Italian couple
Where: Atlanta
Property: A two-bedroom, 2,113-square-foot apartment in the Sovereign, a new 50-story high-rise in the upscale Buckhead neighborhood. The building features a broad terrace and a pool.
Price: $1.242 million
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Steve Mitchell/Associated Press

Buyer: Russian fertilizer tycoon
Where: Palm Beach, Florida
Property: Donald Trump’s lavish 6-acre waterfront estate. The 60,000 square-foot mansion includes gold fixtures, a 50-car garage and a 475-foot beachfront.
Price: $95 million

“They are the most aggressive buyers in the market right now,” said Kevin McBride, an agent with Atlanta Fine Homes Sotheby’s International in Atlanta. In international hubs like Atlanta, overseas clients now account for anywhere from 10 to 30 percent of sales, industry experts say.

Even Immobel, a company based in Warsaw that specializes in translating online real estate listings into 13 languages, has seen the number of U.S. agents using its services jump by 30 percent in the last year, according to Janet Choynowski, the company’s chief executive. Agents are “really eager to reach out to buyers proactively by any means they can,” Ms. Choynowski said.

But even before the financial meltdown of the last few weeks, there was growing concern that the much-publicized flow of international buyers into the United States was slowing.

Earlier this year a study by the National Association of Realtors found the number of agents who sold a home to an international buyer actually decreased in the last year, from 18 percent to 13.3 percent.

And the dollar has strengthened in the last six months, diminishing the so-called “currency exchange discount” that helped make U.S. property a bargain for many foreign buyers. The euro was worth $1.60 in July; it has been about $1.29 recently. The British pound has dropped from $2.10 in November 2007 to around $1.59.

“The dollar has gotten stronger and that makes the investment appeal that much weaker,” said Melissa Cohn, president of Manhattan Mortgage Company.

Ms. Cohn says the number of international buyers in New York City has dropped by 50 percent in the last six months. And with credit tight, the list of mortgage companies in the city willing to finance a purchase by a foreign resident has dropped from 10 to 4, she says.

That is not good news in Manhattan, where international buyers typically buy a third or more of the apartments in new buildings, according to local experts.

But international buyers continue to play an important role in the local market. For the W NY Downtown, a 56-story project under development in Manhattan, 74 percent of the initial sales have been to foreign buyers, primarily from South Korea, the United Arab Emirates and Italy, a project spokesman said.

In Miami, which has been particularly hard hit by the market slowdown, as many as 50 percent of sales in some neighborhoods are to overseas clients, despite the credit crunch and strengthening dollar, says Teresa Kinney, chief executive of the Greater Realtor Association of Miami and the Beaches. This month the organization was host to a contingent of 150 international agents, including 103 from Russia, who toured properties and networked with Miami agents before they headed to the National Association of Realtors’ annual convention in Orlando, being held from Nov. 7-10. And in the past year group members have traveled to events in Paris, Madrid and Moscow to forge alliances.

“It’s our biggest source for new business in Miami,” Ms. Kinney said.

Around the country, industry executives are organizing similar initiatives. In September, the Texas Association of Realtors, for the first time, led 100 agents from Texas to Guadalajara, Mexico, to a trade conference. Mexican citizens were the third-largest group of international buyers in the United States last year, behind only Canada and Britain, according to the National Association of Realtors study.

Four thousand miles away in Hawaii, Dano Sayles of Coldwell Banker Island Properties is expanding his participation in international groups and attending conferences around the world to make new contacts.

“What really saved my market in south Maui last year was the Canadians,” said Mr. Sayles, who specializes in homes of more than $2 million.

In Honolulu, Sakara Blackwell, president of Optimum Realty, recently hired staffers who speak Mandarin and Korean, hoping to take advantage of moves by China and Korea to loosen restrictions on their citizens making foreign purchases. Overseas buyers now represent about 20 percent of her business.

“A couple of years ago it would have been zero,” Ms. Blackwell said.

The outreach to international markets also has been increasing on the Internet.

As global markets slow, agents say different types of international buyers have been emerging. In many markets, “vultures” are going after depressed and foreclosed properties, sensing that the bottom is near. Others are looking at a luxury real estate as a safe good investment, more than simply a second home.

“People are buying in the U.S. not necessarily because they think it’s cheap; they’re buying because they see it as a safe haven for their money,” said Ms. Choynowski of Immobel.

Many of those buyers aren’t affected by credit problems — they’re paying in cash, agents say.

But the recent headlines and sharp price drops in many markets have left both investors and second-home buyers confused and uncertain. Media reports often don’t reflect the luxury market, which performs differently than the general overall market in many cities, industry executives say. “People don’t know what to believe,” said Bruce Hiatt, owner of the Luxury Realty Group in Las Vegas.

So these days many international clients are “Lookie Lous” — industry slang for those who are shopping but not buying — says Bahar Tavakolian of the New York-based Fox Residential Group, which organized an international division two years ago when foreign buyers were emerging as a big factor in sales.

Many of her foreign contacts are surprised to find there are few bargains in Manhattan, with the median price of a condo about $1.2 million, according to the Prudential Douglas Elliman real estate agency.

“I get more calls seeking advice” than those actually wanting to buy, Ms. Tavakolian said. adding that she believes the whole nature of the international business has changed recently.

But many U.S. companies hope the number of foreign buyers will bounce back once markets settle or the dollar weakens again. Partly in preparation for that time, the industry is continuing to lobby for reduced visa restrictions, including a special permit for foreign retirees, which might help encourage international deals.

“People are buying across borders,” Ms. Choynowski said. “That’s just the way it is now.”

Sellers in financial distress require something extra from real estate practitioners. Facing a short time to sell before foreclosure and sometimes prickly negotiations with lenders, some listing agents are turning to the growing cadre of stagers who employ the ancient Chinese technique of feng shui to dissipate the negativity of financial woes.

Proponents say feng shui can remove the disquieting vibes that overwhelm such homes by balancing the negative energy emitted by the property’s objects, places, colors, circumstances, and even residents.

Buyers may not recognize this spiritual housecleaning beyond the subconscious level, but it still has a positive effect, say Katrine Karley and Pandora Seibert, co-owners of Professional Staging with Feng Shui & Design, in Sarasota, Fla. Sellers who aren’t financially stressed themselves but who live in a neighborhood studded with foreclosures can also benefit from an energy or chi realignment, the pair explains.

“I’m a believer,” says Wendy Kay Foldes, broker-associate with Cityscapes International Realty Group in Sarasota. “The first time I worked with Karley to add feng shui to a difficult listing, it sold to the very next person who looked at it.”

The two-bedroom condo had been on the market for two years without an offer. Karley immediately shifted the furniture to create a configuration “with better flow,” she says, and added red flowers and place mats that energized the black and white decor. It sold the next day.

Feng shui has a place in every facet of real estate marketing, says Karley. Yard signs should be placed at eye level (rather than close to the ground) on the right side of the yard as you face the property. This positioning will help draw in buyers. Attaching a 3-inch round mirror to the sign brings two additional benefits: By facing out toward the street, the mirror brings more energy to the property. By catching the eye, it holds a potential buyer’s attention to the property longer.

For sellers facing severe financial woes, she advises that 27, yes 27, items “from couches to ceramic figurines” be rearranged within the home. “The digits add up to nine, which is considered powerful. Doing this should help money flow toward a house,” says Karley.

In homes that are still occupied, feng shui stagers remove physical clutter and perform what they call a spiritual ’space clearing’ using bells, chimes, incense, chanting, and sometimes rice to purify a space and change the chi from negative to positive vibration.

“Blessing or chanting removes negative energy and is a form of clearing out the old ’stuff’ we sometimes call ‘hungry ghosts,’” explains Karley. “The chanting is to move good energy around the property.”

If all that sounds a little too ‘new age’ to you, Karley tells of one Florida builder who had nine homes on the market for about nine months and was getting desperate. The bank was closing in on him, so he figured he’d try feng shui in an attempt to salvage his subdivision.

“Time was of the essence because the bank wasn’t willing to wait any longer,” explains Karley. She made numerous visits to the properties for blessings to remove the fear and misfortune that had befallen them. She used a technique called ‘tracing the nine stars,’ in which feng shui practitioners place nine small round mirrors in the nine power places on the property. “We also concluded that the entrance to the subdivision needed a water element, so the developer installed one,” recalls Karley. Water is synonymous with power and money, according to feng shui principles.

The various measures seemed to help. Within 45 days of Karley’s arrival, seven of the nine homes were sold. Other than the feng shui actions, nothing else was done to enhance the subdivision’s appeal.

“The buyers got ‘positive’ homes that felt great to them, and the developer survived,” says Karley. Hiring a feng shui expert may cost several hundred dollars for a preliminary consultation or $1 per square foot for a total energy overhaul, but improving a home’s inner harmony may well be worth the price. By Charimaine Engleman-Robins, a sales associate with Hunt Real Estate of Florida in Sarasota, Fla.

Questions to Ask Your Feng Shui Practitioner

* What type of feng shui do you practice? (Some forms focus on issues of energy and direction, while others rely more on Chinese astrology and numerology.)

* How long did you study? (Most certification programs take two years.)
* How much experience do you have?
* What kind of projects have you completed?
* What references can you provide?

Also, ask yourself if you feel comfortable with the person. Your own instincts about the practitioner count for a lot.

The 2008 National Association of Realtors reveals that the number of first-time buyers have risen as a percentage of the market share and they plan to own their homes longer than buyers in the past.

Lawrence Yun, NAR chief economist, said a higher share of first-time buyers makes perfect sense, and it’s a trend he expects to grow.

“First-time buyers are much more flexible in entering the market because they aren’t concerned about selling an existing home,” he said. “Given low home prices, plentiful supply, and affordable interest rates, it’s been an optimal time for entry-level buyers with a long-term view.

“Considering the temporary first-time buyer tax credit and improvements to the FHA loan program, we expect stronger entry-level activity as the flow of credit improves that, in turn, should free more existing owners to make a trade in 2009.”

The number of first-time buyers rose to 41 percent from 39 percent of transactions in last year’s survey and 36 percent in 2006. “Although modest, this is a meaningful gain for the 12-month period ending at the close of June, and more recent independent data show a stronger uptrend in first-time buyers who are helping to reduce excess inventory,” Yun said.

According to the NAR study, the median age of first-time buyers was 30, down from 31 in 2007, and the median income was $60,600. The typical first-time buyer purchased a home costing $165,000 and plans to stay in that home for 10 years, up from seven years in 2007.

The median down payment by first-time buyers was 4 percent, up from 2 percent in 2007; the number purchasing with no money down fell from 45 percent in 2007 to 34 percent in the current survey.

“The study covers transactions through the middle of 2008, so we can assume the down payment numbers have shifted recently because credit tightened and no-down payment loans all but disappeared around the close of the survey,” Yun explained.

Of first-time buyers who made a down payment, 69 percent used savings and 26 percent received a gift from a friend or relative, typically from their parents. Another 7 percent received a loan from a relative or friend, while 16 percent tapped into a 401(k) fund, stocks or bonds. Ninety-two percent chose a fixed-rate mortgage.

The percentage of buyers who purchased a home in foreclosure jumped to 6 percent of transactions in the 2008 survey from 1 percent in 2007. Another 38 percent of buyers considered purchasing of a home in foreclosure but did not, primarily because they could not find the right home.

Commuting costs factored greatly in neighborhood selection, with 41 percent of buyers saying they were very important and another 39 percent saying transportation costs were somewhat important.

“Since fuel costs began rising in the latter part of the survey period, it’s reasonable to assume they’ve become even more important to home buyers since,” Yun said. “We’ve heard from our members that commuting costs are playing a bigger role in buyers’ decisions.”

Environmentally friendly features also were important, cited by 90 percent of buyers. Heating and cooling costs were of primary importance, followed by energy efficient appliances and energy efficient lighting.

The study found that 81 percent of sellers used full-service brokerage, in which real estate agents provide a range of services that include managing most of the process of selling a home from listing to closing.

Nine percent chose limited services, which may include discount brokerage, and 9 percent used minimal service, such as simply listing a property on a multiple listing service. All of these types of services are provided by REALTORS as well as non-member agents and brokers. The results are identical to findings in 2007 and comparable to findings in 2006.

Primarily, sellers want agents to price their home competitively, market the property, find a buyer and sell within a specific timeframe. Home buyers are consistent in their expectations of real estate agents.

Buyers thought the most important agent services are helping find the right house, and negotiating sales terms and price. Because agents often are chosen based on a referral or were used in a previous transaction, two-thirds of buyers contacted only one real estate sales associates in the search process.

Sixty-one percent of buyers are married couples, 20 percent are single women, 10 percent single men, 7 percent unmarried couples and 2 percent other. Twenty-six percent are nonwhite, 9 percent were born outside of the United States, and 4 percent primarily speak a language other than English.

Seventy-eight percent of all respondents purchased a detached single-family home, 9 percent a condo, 8 percent a townhouse or rowhouse, and 5 percent some other kind of housing.

Fifty-five percent of all homes purchased were in a suburb or subdivision, 17 percent were in an urban area, 16 percent in a small town, 10 percent in a rural area, and 2 percent in a resort or recreation area. The median distance from the previous residence was 12 miles.

The biggest factors influencing neighborhood choice varied by household type, but overall they were quality of the neighborhood, cited by 62 percent of respondents; convenience to jobs, 51 percent; overall affordability of homes, 41 percent; and convenience to family and friends, 38 percent.

Other factors valued highly by consumers include quality of the school district, 27 percent; convenience to shopping, 27 percent; and neighborhood design, 24 percent.

Legislation is impactful to the cyclical nature of this business. And today, there are critical issues on the horizon that will affect the next leg of this cycle. Here is our take on the current pressures facing housing and the economy:

We expect a lame-duck special session of Congress in November with the following outcome:

* A second consumer stimulus package in the $150-$300 billion range, mostly helping the most affected (the unemployed, etc.).
* An employment stimulus package, possibly in the form of tax breaks to businesses, an extension of the NOL look-back period to 4 years because it will help more than home builders at this point, and “Federally encouraged” lending by banks.
* Unfortunately, no tax credit for home buyers.
* A sustained low Fed Funds rate.
* The implementation of an unprecedented homeowner loan modification program.

Additional measures that may be postponed until next year:

* Additional regulatory powers that could make it more difficult and expensive for banks to make and securitize loans.
* A more formalized process for bank asset disposition.

The Waxing Phase: What Will Be Revealed?
It has been nearly three months since the passage of the Housing and Economic Recovery Act of 2008 (a.k.a. the Housing Stimulus package), and less than one month since the Emergency Economic Stability Act (a.k.a. the Bailout) was signed into legislation.

As each initiative burst onto center-stage, they were scrutinized for their ability to restore consumer confidence, stave off a recession, and grease the dehydrated wheels of national (and then global) lending machines. Instead, attempts to plug the leaks proved ineffective. When housing and the economy needed a welding kit, they were handed bubble gum.

But, almost immediately following the Bailout, it was apparent that the current administration would be pressured into one more attempt at a “fix.” Last week, the much-discussed idea of a second stimulus got a nod of support from Federal Reserve Chairman Ben Bernanke. Following the election, Congress typically would not be scheduled to reconvene until January 3, 2009, when new elected officials take office. But now that Bernanke is throwing his weight behind a second stimulus, there is strong indication that Congress will scramble to fast-track the consideration into a structured bill during a lame-duck session. Reports are that both the House and Senate will convene on November 17.

Word in Washington is that the package being discussed ranges from $150-$300 billion in total. Many feel that the bulk of its eventual provisions will likely target individuals (by way of extensions in areas like unemployment benefits, loosening qualifications for food stamps, low-income heating assistance, etc.). Leaders are still pondering what they can do on the business side.

So what does this mean for housing?

In an earnings call with analysts on October 29, Centex CEO Tim Eller referred to a “coalition” of builders supporting stimulus measures that would ultimately have a “strong impact on housing supply and demand.”

The package of measures he cited includes:

* Offering a home buyer tax credit, which we discuss below.
* Targeting the potential foreclosures from an estimated 2 million ARM resets due to occur in the next two years. The FDIC and Treasury are reportedly hammering out details on a foreclosure relief plan this week that would provide $50 billion of bailout money to troubled homeowners. But the impact of potential ARM resets is an anticipated aftershock to the current fallout caused by the subprime mortgage quake.
* Offering below-market mortgage rates.

Eller also noted that other industries back these ideas because they recognize the impact housing has on the general economy. “There [are] a lot of constituencies and stakeholders in this – it’s not just the builders,” said Eller. “That is our message, and that is the coalition that we are building.”

In our October 8 e-mail newsletter titled Running with the Devil, we took an in-depth look at the Bailout and highlighted key housing initiatives that were excluded. Here’s an update, along with our take on the odds of their likelihood of making it into this next piece of legislation:

* The Senate is (again) talking about a net operating loss (NOL) carry-back extension. When discussion on this issue began earlier this year, it was viewed as a housing handout for a small number of public companies. The fact is: the tax benefits apply to many private companies as well – not just in housing.

Today, banks, insurance companies, automakers, retailers and others desperately need it for the same reason: if businesses can’t carry back losses, they lose deferred tax assets. Now that the entire economy is in a recession, there is more momentum behind this push.

ODDS OF INCLUSION: 50%
The Senate has already telegraphed they would like to include it. House Democrats are still not in favor, but recognize both banking and housing need to be invigorated. Insiders predict a one-year extension.

* The industry is increasingly vocal about its desire for a true home buyer tax credit of $15,000 or more. Last week, during the company’s quarterly earnings call with analysts, Pulte’s CEO called for a $20,000 tax credit with no repayment provision. We’ve heard more of the same this week as the bulk of public builders report earnings. He and other builder executives have made it clear that last summer’s $7,500 tax-credit-as-loan incentive was not effective at stimulating demand. But there are questions as to whether political leaders view a do-over as warranted.

Conventional opinion is that there were two strikes against the current tax credit initiative:
1. The Dollar Amount: In late summer, when the initiative was being formed, the large public builders hoped for a higher dollar amount and expressed their disappointment with the $7,500 figure. The only other time a buyer tax credit was implemented was in 1975, during the Ford administration. Indexed for inflation, that $2,000 credit would amount to nearly $8,200 in today’s dollars, which is above the credit currently offered.
2. The Tax-Credit-as-Loan Structure: The fact that this was not a true credit, but a loan that needed to be paid back, was a great source of confusion. Some builders used the scenario to a marketing advantage, offering to assume the pay-back status and wiping out the connotation of a $7,500 “loan” – but to no avail. Consumers who were uncertain about making a purchase decision – even with prices that had dropped by $120,000, free pools, free landscaping, upgraded appliances and more – have not viewed the tax credit as the final nudge they need to jump into a new home purchase.

ODDS OF INCLUSION: 50%
One could argue that, by addressing the concerns above, a true buyer tax credit would be an effective stimulus. But, now that it has been tried once, the initiative carries a stigma of failure. In addition, such an initiative is estimated to cost roughly $75 billion. Layer that in, and it becomes even tougher to imagine Congress allocating such a large percentage of any new package directly at this measure.

Another consideration: Banks are getting relief in a variety of forms. Home building should lobby hard to ride the coattails on measures that are applicable. One example: An IRS measure that promotes M&A activity. If a bank acquires another bank with losses, normal rules dictate the new owner can’t take those losses in the future. That rule has been waived for banks. Home builders should have that too. Why not encourage companies that want to do M&A and stay afloat?

The Waning Phase: What’s In the Shadows?
Today, financial stability is priority number one, including the ability to assure and continue lending for small businesses, plus the restructuring of mortgages and mortgage lending. Both parties are calling for government to get involved in the mortgage issue in some form: either to re-write existing contracts so that troubled borrowers get a windfall, or to provide a huge infusion of cash to make up the deficit.

The thinking is that if the government directs its funds toward buying mortgages and restructuring bad loans, stability will be restored. However, one link in that food chain is broken: Remember, just because we are pumping finds into the banks, doesn’t mean they are forced to lend it. Are banks really going to loan funds to people who get a down payment by virtue of the government giving it to them?

As always, the pendulum swings . . . question is, where does it stop?

Theory 1: “We’ll never do this again because, in the end, nobody wins.”
Given the rampant abuses, many speculate that – regardless of the powers in place – we will overcorrect into a “never-again” period, creating a highly regulated environment. Underwriting standards are likely to revert back to what they were 20 years ago.

Theory 2: “Can we try to make it happen again?”
A clean sweep of Democrats might not want to undermine what they turned Fannie/Freddie or the CRA into. The party’s “welfare mentality” will put the onus on the banks to encourage low-income and minority lending. Some who subscribe to this theory even believe that a Super Majority in Congress would make moves to liberalize the FHA. We might see a return of initiatives like DPA, a re-packaging of subprime-like lending and other creative programs that push to get people into houses.

Today, as much remains unknown, industry leaders shouldn’t abandon their core business strategies in response to the outcome of this election – or any other election, for that matter. But as you head to the polls next week and continue to navigate through the ensuing stormy climate, keep this perspective in mind:

The ownership society that Presidents Clinton and Bush respectively envisioned is a laudable goal – supporting the idea of Americans living in homes. But there is a level of practicality that can’t be ignored: Creating an environment where homeownership can flourish is desirable. But forcing it to flourish brings trouble.