What the Government Shutdown Might Mean for Real Estate in Southern California

CLOSED

As of last weekend, HUD (U.S. Dept. of Housing and Urban Development) reversed its original position about loans and stated that applications for all government-backed mortgages will continue to be processed during a government shutdown, which for many California buyers means FHA loans.

But, though the loan may be processed, getting the FHA loan funded (meaning you're up to the last few days of your escrow period and ready to close) is another story.  To close an FHA loan, an IRS tax transcript (the 4506-T Form which is filed with the IRS to get your income tax information) and the Social Security Administration's verification for that buyer are needed.  The IRS is currently closed and Social Security is closed to new business.  The two closures will not affect anyone who received these items prior to the shutdown date, but to open a new loan and get it funded and closed will probably not happen during the shutdown. (NOTE: A particular FHA lender source may be willing to not require the 4506-T form itself, and be willing to close a loan without it, but not common.)  And, FHA may not have the ability to continue any loans beyond another two months in the future if the shutdown continues.  But we're not there yet.

But with FHA currently providing the majority (approximately 80%) of California buyers with their home purchase loans, there will be probably an impact to at least some parts of the California and Long Beach area real estate market, and certainly to many prospective California buyers.

Fannie Mae and Freddie Mac loans will not be affected because they are funded by fees from lenders, not by government appropriations.  Freddie Mac stated it will not require the 4506-T Form to be processed by the IRS, but that the information be provided as part of the loan.

VA loans are supposed to continue at this point, but there could be some delays with those loans.

While "economists" believe that there will be minimal impact overall, this shutdown could go on into the upcoming debt ceiling issue, and as certain legislators continue to balk, so probably the rate of home purchases.  "Research firm Capital Economics predicted that the effect of a shutdown would be minimal provided that it doesn’t presage a fight over the upcoming debt ceiling increase."  See more at DSNews .

What Does Homeowner Insurance Cover, or Not Cover?

What does your homeowners insurance cover? 

The short answer is: A basic homeowners insurance policy (called HO-1 in insurance lingo) covers your home and possessions if they’re damaged or destroyed by these things:

Fire
Lightning
Windstorm (unless you live in a hurricane zone)
Hail (not available everywhere)
Explosion
Riots
Civil commotion
Aircraft (and things falling from aircraft)
Vehicles (and things thrown from vehicles)
Smoke
Vandalism (although some policies exclude this)
Malicious mischief
Theft
Volcanic eruption.

But many states don’t allow this basic policy to be sold. Instead, you have to buy an upgraded policy that covers more perils.

Upgraded Homeowners Insurance

That upgraded policy (called HO-2) adds protection to your home and possessions from even more perils. You get protection from everything on the HO-1 list (above) plus:

New California Bill Will Cost Property Owners Addtional Recording Fees

Since the downfall in the economy and the upswing in distressed property sales, sellers of short sale properties were not taxed by the federal government on what was called "unearned income".  Thus, if the loan balance before the sale was $200,000, but the owner could only sell at $150,000 as the current market value, there was no IRS tax on the difference and mortgage debt was forgiven.  California's Franchise Tax Board followed the IRS provision, so there was no California tax either.

But that state provision was due to expire and the bill to renew that provision, SB 30, has been up for vote by the Assembly and the Senate. However, a surprise amendment last May added Senate Bill 391 (California Homes and Jobs Act of 2013), and now is tied to the first bill and which includes a provision that requires a $75.00 recording tax to all recorded documents, which could be as many as 28 different types of documents, on a property.  The idea behind SB 391 is to fund a low-income housing trust with these $75 fees.  Bear in mind, not only the California Association of Realtors objected to this, but also the county recorders, assessors and title industry opposed this bill.

If the current impasse isn't overcome in the next few days, homeowners who sold a short sale this year might end up with a big tax bill.

Some people think that only "irresponsible" people are involved with short sales (really? what about if you just lost value in your home because the market went down?), however as one person recently pointed out:  "Why should just one subset of society, those that happen to need to record a document, be on the hook for funding subsidized housing?"  So true, jskdn, who wrote to The Sacramento Bee. 

27388.1.

 (a) (1) Commencing January 1, 2014, and except as provided in paragraph (2), in addition to any other recording fees specified in this code, a fee of seventy-five dollars ($75) shall be paid at the time of recording of every real estate instrument, paper, or notice required or permitted by law to be recorded except those expressly exempted from payment of recording fees. “Real estate instrument, paper, or notice” means a document relating to real property, including, but not limited to, the following: deed, grant deed, trustee’s deed, deed of trust, reconveyance, quit claim deed, fictitious deed of trust, assignment of deed of trust, request for notice of default, abstract of judgment, subordination agreement, declaration of homestead, abandonment of homestead, notice of default, release or discharge, easement, notice of trustee sale, notice of completion, UCC financing statement, mechanic’s lien, maps, and covenants, conditions, and restrictions.

Don't panic yet, home sales are excluded (normally there's about two recorded documents on a home sale).  But to return to the low-income housing trust fund, Dan Walter of The Sacramento Bee states: "One of the rare times the supermajority functioned was last spring when the Senate voted 27-0 for Senate Bill 391, which would impose fees on real estate transaction documents to raise money for low-income housing, at least $300 million a year."   This is another great example of how real estate is seen as the mother's milk for every funding idea/tax/fee that comes along.  $300 million to be gained from recording fees?  I wish there was an explanation for that projected amount of income. 

Did someone count 4,000,000 documents recorded statewide last year?

Read more here: http://www.sacbee.com/2013/09/06/5711663/dan-walters-posion-pill-would.html#mi_rss=Dan%20Walters#storylink=cpy