Preserve real estate tax provisions and extend flood insurance

Last week, REALTORS® from Berkshire County joined about 9,000 others on Capitol Hill in Washington, D.C. to advocate for two major issues – sensible tax reform and the re-authorization of the National Flood Insurance Program. We met with Massachusetts Senator Elizabeth Warren and Congressman Richard Neal.  We had an opportunity to hear an update on the housing economy from Chief Economist Lawrence Yun and HUD Secretary Ben Carson. For a full report, please make sure to attend the Legislative Awards Luncheon on Friday June 9th, 2017.  Here is an overview of the legislative issues:

Tax Reform – Preserve Mortgage Interest Deduction & 1031-like kind exchanges:

Since its inception, our income tax system has recognized the favorable effects of homeownership for families, communities and society by incentivizing homebuyers with tax benefits. The result is a home-owning society that is the envy of the world. However, tax reform plans now being discussed threaten to decimate or even wipe out the tax benefits of owning a home for 95 percent of American families. In addition to almost doubling the standard deduction, these plans would outright repeal the deduction for property taxes while gutting the Mortgage Interest Deduction (MID) for all but the richest. Ironically, a hollow shell of the MID would stay on the books, allowing proponents of this type of tax reform to emptily boast that the deduction has been preserved.

The question raised was, ‘Do we want a county of homeowners or country of renters?’  Historically, it is homeowners that invest the most in their properties, work to improve their neighborhoods and serve as integral stewards of land and community space. One speaks to the American Dream, the other to exclusive wealth.  Here are the specific issues:

  • Homeowners Must Be Treated Fairly in Tax Reform
    • Middle-income homeowners could be worse off under proposals that limit tax incentives for homeownership. Analysis of a blueprint-like tax reform plan shows that home-owning families with incomes between $50,000 – $200,000 would face average tax hikes of $815 in the year after enactment while non-homeowners in the same income range would enjoy average annual tax cuts of $516.
    • Homeowners already pay 83 percent of all federal income taxes, and this share would go even higher under similar reform proposals. Homeowners should not have to pay a higher share of taxes because of tax reform.
  • We Must Reverse the Decline in First-time Homebuyers
    • The tax code historically has encouraged homeownership. Proposals that limit interest and property tax deductibility would reverse this course.
    • The number of first-time homebuyers is coming off an all-time low and in 2016 the homeownership rate was at a 50-year low.
    • Homeownership provides social benefits to communities, increasing neighborhood stability and community involvement. America must continue to encourage homeownership.
  • We Cannot Afford Another Housing Crash
    • Proposals limiting tax incentives for homeownership would cause home values everywhere to plunge. Estimates show that values could fall in the short run by more than 10 percent if a blueprint-like tax reform plan were enacted. The drop could be even larger in high-cost areas. It may take years for home values to rebound from such a significant decrease.
    • With this size of a dive in values, homeowners with relatively small amounts of equity would again see their mortgages go under water, finding they owe more than what their home is worth. For many, this will lead to defaults, foreclosures or short sales, creating havoc for families, neighborhoods and communities.
    • The home is the most valuable asset for most owners. Millions of families have built equity for years with the hope of using it to help pay for retirement or college for children. Many of these dreams would evaporate.
  • Like-Kind Exchanges Must Be Preserved:
    • The Section 1031 provision encourages growth by permitting real estate held for investment to be exchanged for property of a like kind on a tax-deferred basis.
    • Exchanges are essential to the commercial real estate sector and to the economy.

Reauthorize the National Flood Insurance Program (NFIP)

The NFIP is set to expire September 30, 2017. Congress must reauthorize the program by that date to ensure flood insurance is available for loan products.

The NFIP was created to provide incentives for communities to rebuild to higher standards and steer development away from flood zones. In exchange, communities gain access to flood maps, mitigation assistance and subsidized insurance to prepay for future damage and recover more quickly from flooding. However, the program was never designed to absorb the catastrophic losses of the last decade including Katrina (2005), Sandy (2008) and Baton Rouge (2016). As a result, NFIP has borrowed $25 billion from the Treasury and is making interest-only payments of $400 million a year.  Private insurance is great, but without NFIP, no one is mapping

The NFIP was last up for reauthorization in 2008. There were 18 short-term extensions and a two-month shutdown before Congress reauthorized the program in 2012 for five years, which expires on September 30, 2017.

What should be included in NFIP reauthorization?

Accurate Flood Maps Are Essential

  • NFIP should use modern mapping technology to produce building specific risk assessments.
  • Currently, homeowners bear the burden of amending the maps to remove low-risk buildings from the floodplain.
  • Map amendments require homeowners to buy 25,000 land surveys each year at $500 each.
  • The current method of flood mapping and amendment is inefficient when states are using light detection and ranging (LiDAR) to collect the data for whole neighborhoods at once.

Risk Mitigation Keeps Rates Affordable

  • The best way to keep NFIP rates reasonable is to reduce the risk.
  • Elevating a home by two feet can cut flood insurance premiums by two-thirds.
  • US government spends $1.4 billion a year on grants to homeowners to repair flood damage.
  • Mitigating, elevating or relocating these homes would save taxpayers $4 for every $1 spent.
  • Currently, property owners cannot access mitigation grant dollars until after the property floods despite it being more cost effective to elevate or relocate beforehand.

Private Market Options Must Be Included

  • Pass the “Flood Insurance Market Parity and Modernization Act” (S. 563(link is external)/H.R. 1422(link is external)), which was unanimously adopted (419-0) by the House last year.
  • NFIP premiums are based on national averages, so half of policyholders pay too much and half pay too little in premiums.
  • Enabling consumers to meet federal requirements with a private plan offers an alternative to overpriced NFIP policies.
  • There is a considerable and growing private market that is offering better coverage at a lower cost than the NFIP.

HUD slashes housing programs in a 6.2 billion dollar proposed budget cut.

On May 23rd, the 2018 federal budget proposal for HUD was released, including a $6.2 billion cut to rental assistance reforms and eliminating funding for certain programs. The department claims it will also see savings through streamlining HUD’s internal operations.

  • Eliminated:  The proposal seeks to eliminate several programs which it claims have not demonstrated a measurable impact on communities. Some of those programs include the Community Development Block Grant Program, Choice Neighborhoods Initiative, HOME Investment Partnerships Program and the Self-Help Homeownership Opportunity Program.
  • Changed:  The budget seeks to reform the Housing Choice Voucher program, Public Housing Operating/Capital Fund, Project-Based Rental Assistance, Housing for the Elderly and Housing for Persons with Disabilities. The administration will look to provide funding flexibilities as well as ease regulatory burdens on the programs.  The budget also proposes various changes to tenant rent contributions, with some protections for families who experience hardships.
  • Grown:  The budget requests $130 million to promote lead-safe housing.  The Administration also proposes removing the statutory limit on the number of public housing units that can participate in HUD’s Rental Assistance Demonstration (RAD). IT also requests that senior housing developments participating in HUD’s Section 202 Program become eligible to participate in RAD to help preserve housing for the elderly.  The budget seeks to strengthen the Federal Housing Agency’s Home Equity Conversion Mortgage, or its reverse mortgage program. It will also provide $30 million towards modernizing the FHA’s system and updating its programming language. Under the new proposal, Ginnie Mae will receive $500 billion in new guarantee authority as it seeks to create more affordable housing options.

The budget would provide $1.32 billion for HUD’s internal operations and $250 million for the department’s Information Technology Fund, which includes $10 million for cybersecurity and modernization investments.

Thanks to the following local leaders for devoting a week away from business for these meetings: