The Federal Reserve was widely expected to hold the short-term bank lending rate at between zero and 0.25 percent, so it came as no surprise when it did. The decision to dump money into the economy to try to buy us out of the recession was only slightly more surprising, but the amount — $1.2 trillion — took everyone by surprise. Hoping to lower mortgages rates and consumer debt, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Market reaction

The immediate market reaction was good: the Dow bounced 90 points, the S&P soared, and all market indicators were generally positive. Government bond prices leaped too, since mortgage rates will be going down even further than before. If, and it’s a great big if, this can help stabilize credit markets and get us all spending, the economy may start to climb out of recession this year. But is there a catch? You bet.

Inflation

Some economists — the ones with more than 10 minutes training in economics 101 — say the $3.9 Trillion slated for the budget can’t help but create galloping inflation the minute the economy starts to recover. In fact, inflation may not even wait for the recovery; the dollar took an immediate tumble against other major currencies with the Fed announcement. The Wall Street Journal’s Judy Shelton doesn’t mince words: “How can capitalism find its footing when the monetary foundation is shifting with each new government bailout — each new infusion of deficit-financed government expenditure? American families deserve better than to be punished by wasteful public spending and ruinous inflation.”

More free eco-cash

So you didn’t qualify for freebies from the mortgage bailout? Cheer up — Washington is on a spending spree, and you can get up to $19,000 in upgrades to your house. Expanded tax incentives in 2009 and 2010 for energy-efficient and renewable-energy home improvements include $1,500 in tax credits for qualifying windows, doors, insulation, roofs, heating and cooling equipment, water heaters, and even wood and pellet stoves. You’ll get a tax credit of 30% with no upper limit through 2016 for installing qualifying solar technology, small wind-energy systems, or geothermal-well systems.

AIG again

The House will vote today on a bill to levy a 90 percent tax on bonuses paid to employees with family incomes above $250,000, who work at companies that have received at least $5 billion in government bailout money. Edward Liddy, brought in last year by the government to run AIG, told a House subcommittee Wednesday that the company was contractually obligated to pay the bonuses but added that many of them had already returned part of all of the bonuses. The saga continues.

Now on to our real estate investing education section …

Fast Facts About the Stimulus Bail-Out

Short sale investors are likely to encounter clients that want to hold out for a big fat government paycheck rather than walk away from a home. After all, the media is filled with reports about big checks, bail-outs and “free money.” Of course, scams and other fraudulent schemes abound making it tough to educate consumers about the facts versus fiction of the stimulus plan. Here to help is a quick primer about the proposed bail-out:

Fact: In order to refinance homeowners must be up to date on their current mortgage yet still demonstrate that they are “at risk” of facing foreclosure. The government anticipates up to 4 million households will fall into this delicate balancing act in order to qualify for funds…and it’s not limited to just owner occupied homes.

Fact: Mortgage modification clauses are much more difficult to obtain. Homeowners will have to satisfy the following stipulations in order to qualify:

Second lien holders must agree to waive or write-off obligations.

The home must be worth 80 to 105 percent of the current mortgage.

The primary lien holder must agree to modify principle, extend the duration of the loan and/or reduce interest rates to as little as 2 percent…or a combination of all of the above.

The homeowner must agree to credit counseling if they have extensive household debt in addition to high mortgage obligations.

Homes must be the primary residence and currently occupied. Homes cannot be vacant, in need of extensive repairs or otherwise hindered.

Up to $1,000 annual incentive payments will be made for up to five years – but only if the homeowner isn’t late on payments.

A new inspection may be required as well as the following documents:

Recent tax return and 2 to 4 recent pay stubs. Self-employed borrowers will need copies of quarterly estimated tax returns and prior year return.

Copies of all bank statements.

Proof of income from Social Security, alimony, child support or other income that you intend to use for the purpose of qualifying.

Current mortgage and liens including second mortgages.

Completed copies of Form 4506-T…a Request for Transcript of a Tax Return.

Completed copies of Form 1126 – a Borrower Financial Information form.

Proof or documentation of hardship, job loss, or other factors that may have influenced your current financial situation.

Want an extra $8,000? If you’re a first-time homebuyer then we have a nice surprise for you
Last fall, the Federal Government introduced a financial incentive to prospective first-time homebuyers — an income tax credit of up to $7,500. The rules were simple: you must have been a first-time homebuyer (as defined by not owning a home in the previous three years) and you met certain income restrictions.

The new $8,000 tax credit is available to those who buy between January 1, 2009 and December 1, 2009. It’s not a deduction, it’s an actual credit. Unlike the $7,500 first-time homebuyer tax credit introduced last summer; this does not need to be repaid.

First timers who qualify can make no more than $75,000 in adjusted gross income if they’re single or $150,000 if filing jointly. The maximum tax credit is $8,000 or 10 percent of the sales price of the home, whichever is less. Three years residence in the property are required. As always, check with your accountant for details and be sure to submit IRS form 5405 when you file your taxes.

Max Amount of Credit $8,000
· Max credit given if home price exceeds $80,000
· If Less than $80,000, 10% is Max Credit ($65,000=$6,500)

Eligible Property
· Single Family Residences Only
· Must be Principal/Primary Residences Only (no investment or second homes)

Income Limit
· $75,000 Individual Incomes
· $150,000 for Joint/Married Incomes

First Time Homebuyer Eligible
· Anyone who has not owned a primary residence in the last 3 years is considered a first time homebuyer.

Tax Credit with MHDC Bond Loans
· Yes, borrowers can still get the Tax Credit even if they bought the home with a Bond Loan

Repayment
· Absolutely NONE (See Recapture Tax)

Recapture Tax
· Yes. If buyers sell the home within three (3) years, 100% of the tax credit must be paid back.

Tax Credit on 2008 Tax Returns
· Yes, if a borrower has not filed their 2008 tax returns but have bought a home in 2009, they can claim the tax credit.
· Also, if a buyer has already filed their taxes for 2008 and then purchase a home, there MAY be a way to amend your return and claim the tax return this year instead of waiting until 2010. Borrowers will need to see a tax professional to arrange this and more details.

Getting Money Sooner than 2010
· Borrowers, who are certain they will be eligible to receive the tax credit in 2010, may reduce their monthly federal withholdings (W4). Borrowers will need to seek advice from a tax professional prior to making any adjustments to monthly withholdings from their income.

Program Terms
· Home purchased between January 1, 2009-December 1, 2009