Archive for January 30th, 2012
Tax relief on mortgage debt forgiveness ends in 2013, so hurry
The tax-relief law allows homeowners to exclude from income certain debts forgiven by their lenders. The tax break expires Dec. 31, 2012, but keep in mind that a short sale or foreclosure can take many months.
Reporting From Washington — The window is closing rapidly on one of the most important tax-relief provisions enacted by Congress during the housing crisis to help financially strapped homeowners.
Although the 2007 law that allows taxpayers to exclude from income the amount of debt that is forgiven or canceled by their lenders doesn’t expire until Dec. 31, it’s likely to take every bit of the next 11 months for financially troubled homeowners to persuade their banks to either foreclose or allow their houses to be sold for less than they are worth.
Although owners who are struggling to hold on to their homes shouldn’t throw in the towel solely because of the pending tax bite, it is certainly something to consider.
Under the tax code, borrowed money need not be reported as income because you have an obligation to repay. But if the lender subsequently cancels what you owe, the IRS requires that you report that debt as income because the duty to repay it no longer exists.
So, if you owe $250,000 and your lender forgives $50,000 of that debt in a $200,000 refinancing, that $50,000 is considered income. If your combined federal and state marginal tax rate is 36%, you would owe $18,000 in taxes.
Under the Mortgage Forgiveness Debt Relief Act of 2007, though, taxpayers are allowed to exclude from income the discharge of debt on their principal residence — at least until 2013.
So when your lender agrees to a short sale, there is no tax on the difference between the selling price and the amount you owe. When your lender forecloses, there is no tax on the canceled debt. Even when you refinance at a lower loan balance, there is no tax on the difference between what you owed on the old loan and what you owe on the new one.
But unless Congress extends the law — and there is no indication lawmakers are even thinking about that — all residential mortgage debt relief that takes place on or after Jan. 1, 2013, will once again be considered taxable income.
Why worry about this nearly a year before the law changes? Because the timelines on debt forgiveness decisions by lenders are absolutely horrendous.
As of October, it was taking lenders an average of 674 days to process a foreclosure, according to Lender Processing Services, a Jacksonville, Fla., mortgage technology firm. That’s more than 22 months, or almost two years from the time the process starts to when the property is actually repossessed. And lenders don’t even start the process until an average of 391 days after last receiving a payment.
Of course, each state has a different timeline.
There are no hard and fast numbers when it comes to short sales or refinancings. But they also can be long, drawn-out transactions.
According to a nearly year-old survey by Equi-Trax Asset Solutions, a Santa Barbara analytics company, it can take four to nine months for underwater borrowers to persuade their lenders to sign off on a deal in which the lender will net less than what the borrower owes.
Eighteen percent of the 600 agents polled said short sales can be closed in less than three months if the stars line up just right. But almost 10% said these transactions require more than 10 months to complete.
A refinancing that involves principal amnesty is probably the quickest of the three debt-forgiveness scenarios. At Carrington Mortgage Services, a Santa Ana-based lender licensed in 32 states, a “short-refi” takes 45 to 60 days.
There are many factors besides a tax break to consider when deciding whether to give up your house. What will a foreclosure or short sale do to your all-important credit score? How long will you be precluded from buying another house? Will the extra income push you into a higher tax bracket?
As always when it comes to such matters, you should consult a tax professional before making any decisions.
Here are a few of the other important rules that you and your tax person need to know:
• The debt-relief law applies only to debt incurred to buy, build or improve a personal residence.
• The law does not apply to vacation homes or investment properties.
• The maximum amount you can treat as indebtedness is $2 million, or $1 million if you are married but filing separately.
For more detailed information, see IRS Publication 4681.
Tight-fisted mortgage lenders pressure home sales
Home prices have fallen by a third since 2006, creating tremendous bargains for home buyers. Mortgage rates are at rock-bottom lows, making houses more affordable than they have been in decades. Yet home sales last year fell to the lowest levels since the government began keeping records in 1963.
One big reason: mortgage bankers have gotten a lot choosier about approving loans, according to a report by Goldman Sachs economists Hui Shan and Jari Stehn. By some measures, they’re pickier than they were before the housing boom took off.
With anecdotal evidence showing that home mortgages are harder to get, the economists crunched Federal Reserve data to show just how much tighter lending standards have become. Using the results of the Fed’s survey of loan officers, the report found that lending standards rose sharply after the mortgage market collapsed and the financial system imploded in 2008. Since the recession ended in 2009, lenders haven’t eased their tight grip on mortgage money.
Part of the reason is that there’s less money available to lend. During the housing boom, as brokers produced a flood of new mortgages, Wall Street bankers churned out a torrent of mortgage-backed bonds for investors waiting to snap them up. That market has all but vanished; 90 percent of new mortgages written today are backed by the government.
The new mortgage pipeline also has slowed because it is clogged with paperwork. These days, you’ll have to fill out many more forms and produce a lot more documentation, on average, just to get your loan considered.
The percent of loans that required “full documentation” declined steadily from 2000 through 2006, hitting a low of less than 60 percent. Those “no-doc” loans were a big part of the reason mortgage bankers made the bad underwriting decisions that created the mortgage mess. Today, nearly 90 percent of mortgage applications require full documentation. That’s much higher than the pre-bubble level.
You’ll also have to show a much higher credit score than you did in the go-go days of the housing boom. In a separate report, Mortgage Marvel, an online mortgage-shopping website, analyzed data from more than 700,000 mortgage applications filed last year and found that the average FICO score was 730. That’s a significant jump from the days when borrowers with scores in the high 500s were routinely steered to high-cost subprime loans.
Applications with highest credit scores concentrated in California, Oregon, Wisconsin, District of Columbia and Hawaii, the company said. The states with the lowest credit scores were Mississippi, Arkansas, West Virginia, Louisiana and Oklahoma.
Obama administration expands foreclosure prevention program
By Les Christie @CNNMoney January 27, 2012
NEW YORK (CNNMoney) — The Obama administration is taking another swing at improving its main foreclosure prevention program.
The administration said it was expanding eligibility for its Home Affordable Modification Program, known as HAMP, to borrowers with higher debt loads and tripling the incentives it pays banks that reduce principal on loans.
The administration also said it would offer incentives to Fannie Mae and Freddie Mac to reduce principal on loans. Previously, the government had only offered incentives to private lenders and banks. The program was also extended to December 2013. It was initially set to expire at the end of this year.
The changes were announced in a joint press conference held by Housing and Urban Development Secretary Shaun Donovan, Assistant Treasury Secretary Tim Massad, and White House National Economic Council Director Gene Sperling on Friday afternoon.
Originally designed to help some 4 million mortgage borrowers when it was first introduced in February, 2009, HAMP has helped fewer than 1 million homeowners.
With these changes, HAMP is turning into an “all of the above strategy to help responsible homeowners lower their costs and stay in their homes,” said Gene Sperling, the Director of the National Economic Council, who also took part in the press conference.
Here’s a rundown of the new changes:
- Expansion of eligibility: HAMP was designed to bring the debt ratio of mortgage borrowers down to 31% of their incomes. Those whose mortgage payments were already below that level had been ineligible for a modification. They may qualify now. The new guidelines will allow for a more flexible approach that takes other debt into account when calculating debt-to-income ratios.
- Extension of eligibility to owners of rentals properties: The old HAMP rules applied solely to owner-occupied homes but now those who own rental properties may also qualify for a HAMP modification.
- Triple balance-reduction incentives: The new HAMP will pay between 18 cents and 63 cents for every dollar that lenders take off the mortgage principal, up from between 6 cents and 21 cents.
- Pay Fannie and Freddie the same incentives: Currently, Fannie Mae and Freddie Mac do not offer principal reduction plans as part of their HAMP modifications. To encourage this assistance, Treasury said it will pay the same principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.
While the new changes could greatly expand the number of homeowners that receive help from HAMP, it could invite controversy. Subsidizing real estate investors with taxpayer money in a time of rising rents doesn’t makes much sense to Anthony Sanders, a real estate professor at George Mason University, for example.
Yet, HUD Secretary Shaun Donovan said that it doesn’t matter whether the house next door to you is occupied by a tenant or an owner.
“If the house goes vacant, the value of your house goes down $5,000 or $10,000 that day,” he said. “These are major problems for homeowners.”
Following the press conference, the Federal Housing Finance Agency, which oversees Fannie and Freddie, issued a statement that said it would consider the changes to the HAMP program.
However, it noted that an analysis it recently conducted found “that principal forgiveness did not provide benefits that were greater than principal forbearance,” signaling that the housing authority may not support reducing the principal on loans as a way to help homeowners.
No new funds need be allocated for HAMP’s expansion. Since less than $10 billion of the $29 billion set aside for the program has been spent so far, said Timothy Massad, Assistant Secretary for Financial Stability at the Treasury Department. The administration would not hazard a guess at how many more borrowers the expanded program would help.
The changes in HAMP do not take effect until the end of April, but a Treasury spokeswoman said any struggling homeowners should reach out and seek foreclosure prevention counseling immediately. That way, they can learn their options, which could include trying to hold on until the new HAMP is ready.
