The venerable FHA has helped millions of Americans purchase a home, but its financial strength has dwindled since the nation's housing market began its long decline several years ago.
Q. I heard an alarming report on the radio that said the federal government is planning to shut down the Federal Housing Administration. Is this true? My wife and I were planning to get an FHA loan this spring in order to buy our first home!
A. Don't worry. There currently are no plans to end the government's low-down-payment FHA mortgage program, but there's growing concern among lawmakers, regulators and economists alike that the venerable agency may need a massive taxpayer bailout to stay afloat.
The FHA does not make loans directly to buyers, but instead insures private-sector lenders against default. Because banks know that some or all of their losses will be covered if a loan turns sour, they're willing to issue FHA-backed mortgages to borrowers who make a down payment as small as 3.5 percent.
The system worked well for more than seven decades, but the wheels started coming off the cart when home prices began their long decline several years ago. The FHA's insurance payouts to lenders soared as foreclosures mounted, and has now pushed its ability to pay future claims to an all-time low.
The agency likely will need a taxpayer-funded bailout of at least $50 billion in the next three to five years, according to Joseph Gyourko, a real estate professor at the University of Pennsylvania's Wharton School and author of a new report titled "Is FHA the Next Big Housing Bailout?" More-conservative estimates suggest it would need about $20 billion to meet federally set requirements.
FHA officials believe no bailout will be needed unless home prices drop another 4 percent to 5 percent and defaults continue to rise. But while some economists note that prices in many areas are showing signs of stabilizing, others say values could fall 5 percent or even more than 10 percent during the next few years, before they start rising again. So, only time will tell if taxpayers will get stuck with another big bill.
Q. We installed some energy-efficient windows last year. The contractor who did the work said the new windows would qualify us for a federal tax credit, but my brother says the tax-credit program ended in 2010. Who's right?
A. The contractor is right. Although credits for making certain types of energy-saving improvements were scaled back in 2011 from the previous year, the work will still save you some money when you complete your upcoming income tax return.
Credits are more valuable than tax deductions because every $1 in credits directly reduces your tax bill by the same amount. Deductions merely reduce the amount of income that's subject to taxes.
Most homeowners who made certain types of energy-saving improvements last year can take a credit worth 10 percent of the cost, up to a maximum of $500. Improvements that qualify include windows and doors, nonsolar water heaters and insulation. Many new metal and asphalt roofs also qualify, as do biomass stoves and most heating, ventilation and air-conditioning systems.
There's an important catch, though: If you have claimed the credit in the past, you might not be able to claim it now. That's because that $500 limit is the maximum credit allowed on all returns from 2006 through 2011. For example, if you claimed a $400 credit on your 2008 return for the installation of energy-efficient doors, you can only get a $100 credit for the windows you installed last year.
Homeowners who installed geothermal heat pumps, residential turbines or solar-energy systems in 2011 can get even bigger tax breaks. They may qualify for a credit equal to 30 percent of the work, and there's no maximum.
Visit the Environmental Protection Agency's Energy Star website at www.energystar.gov for additional eligibility requirements, and also consult with an accountant or other tax expert. To get the credit, complete Internal Revenue Service Form 5696, Residential Energy Credits, and attach it to your return.
Also remember that many state governments and utility companies offer incentive programs that can boost the savings of owners who make energy-saving improvements. Contact state regulators and your local utilities to see if any are available.
Q. My wife and I like the idea of forming the type of basic living trust you recently wrote about so that our home and other assets could pass quickly to our only son instead of going through the expensive probate process. Would each of us have to form an individual trust, or would only one suffice?
A. One would be enough. The two of you would form the trust as "co-trustees," which would allow both of you to control your jointly owned property while both of you are alive.
When one dies, the deceased's half-interest in the assets would pass to the surviving trustee. And when the survivor later dies, all of the trust's property would quickly and automatically pass to your son instead of going through the costly and time-consuming probate proceedings.
• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960.
© 2011, Cowles Syndicate Inc.