Federal Bill to Aid First-Time Buyers Advances

We’ve written about a variety of important legislative and consumer issues over the past several months, and it’s time to revisit two of them to bring you up-to-date on some recent developments.

A February column talked about a bill that Sen. Lloyd Bentsen (D-Tex.) was expected to introduce. It would allow first-time buyers or their parents to make penalty-free withdrawals from their retirement accounts to buy a house.

Bentsen did introduce the legislation a few weeks later and an identical bill was introduced in the House of Representatives.

The measure would allow children or their parents to withdraw an unlimited amount of money from an individual retirement account and avoid the 10% penalty usually levied by the Internal Revenue Service if the money was used to purchase a home.

Workers who have 401(k) or 403(b) plans would be given the same break.

Some backers of the proposal have dubbed it “the new GI Bill”--for “generous in-laws.”

“Both bills are progressing nicely, and the outlook for passage is good,” lobbyist Steven Dreisler said last week.

Dreisler works for the National Assn. of Realtors, one of many housing trade groups that support Bentsen’s plan.

More than three-quarters of the nation’s senators have signed-on as co-sponsors of Bentsen’s measure, and sentiment is nearly as strong in the House. “That’s an important sign of congressional support,” Dreisler said.

There is, however, at least one big hurdle that the bill must still jump: Bentsen must figure out how to pay for it. That means he’ll likely have to propose some form of new taxes or suggest cuts in other programs.

Dreisler said Bentsen’s experience as chairman of the influential Senate Finance Committee should help him fashion a payment plan “that the rest of Congress can support. If anybody can devise a way to pay for this program, it’s Lloyd Bentsen.”

While passage of the Bentsen bill should help would-be home buyers, the news from Washington isn’t all good.

Several months ago we told you about a plan by the Federal Housing Administration to raise the fees charged to borrowers who use the FHA’s popular home-loan program.

The plan would require a borrower seeking a $100,000 FHA loan to pay an extra $1,000 in cash when the deal closed, and would increase the monthly payment by about $40.

Analysts for the FHA and several congressional representatives claim the changes are needed to shore up the agency’s shaky finances.

Other legislators--along with realtors, lenders, builders and a handful of consumer groups--have proposed less-expensive modifications that they say would make the program even stronger.

But the FHA has prevailed, and the new rules will go into effect on July 1.

Some realty experts say the new regulations couldn’t come at a worse time. Many lenders have quit making low-down payment loans, leaving the FHA’s 5%-down program the last resort for many cash-strapped buyers.

FHA officials say that only about 20,000 or 30,000 would-be buyers across the nation will be knocked out of the housing market by the new rules. But realty trade groups say as many as 200,000 people could be affected.

The changes “just don’t make any sense,” complained Angelo Mozilo, who helped lead the industry’s charge against the proposed changes as president of banking giant Countrywide Funding Corp.

“Here we’ve got the government and all these politicians complaining about the lack of affordable housing, and at the same time they’re raising the cost of using one of the few government loan programs that are available.”

Although the FHA program is primarily used by people buying entry-level housing, the changes could affect people who own more expensive homes.

“A lot of people who want to ‘trade up’ into a $200,000 or $300,000 home sell their existing home to an FHA buyer,” Mozilo said.

“But with a lot of FHA buyers being knocked out of the market because of the new rules, those existing homeowners will have a tougher time selling their homes and moving up to something nicer. There will be a ‘ripple effect’ on homes in all price ranges.”

If you’re a buyer who is currently in escrow and you have already received the FHA’s approval of your loan, you won’t be affected by the new rules, an FHA spokesman said.

But if you’re in escrow and you haven’t yet received the FHA’s blessing, call your loan officer or broker to see if your loan package can be expedited.

If you aren’t approved before July 1, you’ll likely have to come up with hundreds or even thousands of dollars more than you originally expected in order to close the deal.