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Archive for the 'Government Programs/Legislation' Category

 

Fannie/Freddie Raise Mortgage Fees

Feb. 2nd 2011

Beginning on April 1, Fannie Mae follow in Freddie Mac’s footsteps and formally raise the fees that they charge lenders, which will almost certainly pass these fees on to borrowers. The bottom line is that for virtually all borrowers, obtaining a mortgage is set to become significantly more expensive.

As mentioned earlier, Fannie/Freddie are currently hemorrhaging money at the combined rate of $1-2 Billion per month. While the government hasn’t yet determined how these two organizations – which currently underwrite 95% of all new mortgages and without whom, the mortgage financing system would collapse – in the mean time, it will certainly seek to limit their losses. Thus, the expansion of “loan-level price adjustments” should not have come as too much of a surprise.

Basically, Fannie/Freddie charge lenders fixed fees for all mortgages that they agree to purchase, and in return, the lender is alleviated of most of the risk. In the past, these fees were relatively modest, and certainly inadequate to offset the risk borne by Fannie/Freddie. Meanwhile, a few years have already passed since the collapse of the housing bubble touched off a wave of defaults, and since then, the mortgage behemoths claim to have learned a few lessons about the actual creditworthiness of borrowers.

Under the proposed changes, all borrowers will be charged an “adverse-market” fee of .25%, which can be paid upfront or rolled into the mortgage. Supplementary “risk-pricing” fees will be set in terms of the borrower’s credit rating, downpayment size, mortgage type, property type, and a handful of other factors. Only those borrowers (encompassing about 12% of the total) with FICO credit scores above 740, that make downpayments >25% for stand-alone residential properties will be exempt from this additional layer of fees. Everyone else will be required to pay up to 3% in fees, depending on their risk profile.

It’s worth pointing out that FHA loans are naturally exempt from these additional fees. In addition, “not all lenders sell all mortgages to the secondary market, so not all loans are subjected to the fees.” In addition, given that the profitability of issuing mortgages has surged in the last year (due to shrinking competition), it’s possible that some of the additional fees will be absorbed by lenders.

A few tips for borrowers, then. All else being equal, try to close on your mortgage before April 1. If you haven’t yet looked into the possibility of obtaining an FHA loan (which permit lower down-payments and lower credit scores), you should probably consider doing so. (However, FHA loans are also becoming more expensive and carrying higher restrictions). Next, make sure that your credit score is as high as possible, and that your credit report is free of errors. A difference of 5-10 points in your score could make a big difference in the fees that your lender charges you.

Finally, remember to shop around for a mortgage, and that all fees are ultimately negotiable. As I said, the dynamics of mortgage lending have changed dramatically since the collapse of the housing bubble, and it’s possible that your lender will agree to certain fee reductions in order to retain your business.

 

Loan Modification Program Yields Mixed Results

Jul. 25th 2010

The government has just released updated “report cards” for most of the participants in its HAMP mortgage modification program, and the results are…interesting. At this point, it can be labelled neither success nor failure.

HAMP oversight stats 2010-06
As you can see from the chart above, an impressive 3 million modifications have been completed by the country’s five largest lenders, with Citi and Chase leading the pack, and Wells Fargo and Bank of America not far behind. However, there are a couple of disappointing sub-trends buried in this figure. First of all, the vast majority of modifications have been completed privately, outside of the government’s HAMP program. Second, the majority of borrowers that receive loan modifications ultimately go on to default anyway, which means the true number of borrowers that have been helped is far below the 3 million documented by the industry.

Let’s begin with the first issue- that loan modifications have been a largely private effort. On the one hand, this could be viewed positively, since only $250 million of public money (a small fraction of the the $40 Billion that was initially allocated by the government for the program) has been spent to date. This means that borrowers are being helped without the use of taxpayer funds. On the other hand, I think the correct – albeit cynical – interpretation of this situation is that lenders are deliberately circumventing the government in order to offer their own, watered-down modifications. Think about it – why would lenders pass up “free” incentive money from the government, all else being equal? The explanation is that the government’s modification program (HAMP) offers terms that are more favorable to borrowers than lenders wish to offer.

Since I’m on the subject of HAMP, it’s worth pointing out that only 390,000 borrowers have received permanent modifications. While this is nothing to scoff at in absolute terms, it falls far short of the number of borrowers that could benefit from assistance (10 million?) and even short of the government’s projection that 3 million borrowers would receive assistance from the program. The WSJ recently mused, “So how big a flop is HAMP? Modifications still face a high re-default rate, largely because borrowers still have heavy debt loads. Some borrowers have found themselves worse off because they do everything possible to get a trial modification, only to be turned down.” Still, the author of the story conceded that at the very least, the government’s program galvanized the private sector into action.

Mortgage Re-Default after Loan Modification
As I alluded to above, however, a significant portion of borrowers that receive modifications will ultimately default, or have already defaulted. As you can see from the chart above, half of borrowers (regardless of the extent of the modification) will default on their new mortgages within 12 months. That makes me wonder if the lull in foreclosures we have seen in some states – which have been attributed to loan modifications and other proactive efforts by lenders – might in fact be a mirage, and could perhaps re-emerge in a year or so, after a wave of re-defaults.

While the process of obtaining a loan modification is admittedly frustrating, lenders continue to grant them en masse, namely because they have determined that it is in their financial interest to do so. Thus, if you still think you’re entitled to a modification – whether private or HAMP – you should continue to harangue your lender. If your circumstances warrant it, chances are you will be granted one eventually.

 

The Tax Consequences of Mortgage Debt Cancellation

Mar. 25th 2010
In 2007, the Mortgage Forgiveness Debt Relief Act was passed and, believe it or not, the IRS is now doing everything it can to help Americans take advantage of the law to save money on their taxes. And with (the new deadline) April 17 just around the corner, this campaign could not be more timely.
 
After reviewing the results of a rudimentary survey on the subject, I was shocked at the level of misinformation surrounding mortgage debt cancellation. A handful of respondents were completely unaware of this Act and assumed either that they would be taxed on their cancelled debt. Others were equally unaware of the Act but had otherwise assumed that debt cancellation of any kind can always be written off.
 
Allow me to clear things up: as a result of the law (and its recent extension), taxpayers will not be held liable for up to $2 million in cancelled mortgage debt from 2007 to 2012. This applies principally to short sales and foreclosures on underwater mortgages, as well as to borrowers whose mortgage debt was cancelled (or not!) due to bankruptcy or insolvency. That’s not to say that any losses associated with foreclosure or short sales can be deducted from income (a major difference!), but rather excluded (not subject to taxes).
 
There are a couple of qualifications that I want to mention. First, only $1 million in cancelled mortgage debt can be excluded if filing separately. In addition, the cancelled debt must be associated with a primary residence, and not for a vacation home, rental property, or business property. In addition, home equity debt is eligible for the exclusion, but only insofar as it was used for renovation or other home-related expenditures, and not to pay down credit-card debt, for example. [It should be noted that credit card debt and other loans can also be excluded if the cancellation is associated with a title 11 bankruptcy case or insolvency].
 
If your lender can cancelled more than $600 of mortgage debt, it is required by law to have sent you a 1099-C form by February 2, with the amount of cancelled debt and the fair market value of any foreclosed property clearly indicated. If you haven’t received this form or disagree with any of the figures, you are advised to contact your lender immediately. Otherwise, simply copy the numbers over to IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) and file it with the other forms when preparing your taxes.
 
Bear in mind, finally, that this debt cancellation is the result of a special policy (due to extenuating circumstances) and you should expect that after 2012, the tax treatment of cancelled mortgage debt will revert back to normal. In other words, it will be taxed as ordinary income. This is something that you might want to consider if your mortgage is underwater and you are weighing your options.
For more information, you can consult the full IRS entry on the tax treatment of cancelled debt. If you are having trouble resolving a tax issue, you can contact the Taxpayer Advocate Service.

 

Changes to the Mortgage Tax Deduction?

Mar. 2nd 2010

A new Congressional proposal would eliminate one of the distinguishing features of a (US) mortgage: the mortgage interest tax deduction. Critics of the deduction have long argued that it deprives the federal government of much-need revenue, that it contributes to home-price inflation, and that it doesn’t do much to spur home ownership. As a result, the consensus is that an alternative system needs to be legislated into existence, and it must be equitable, effective, and efficient.

Towards those ends, the Wyden-Gregg bill, which is currently working its way through the system, would either completely do away with, or scale back the deduction that many homeowners currently claim when filing their taxes. One proposal would impose a maximum income constraint of $250,000 on would-be filers, in order to address the concern that the deduction primarily benefits the wealthy. Another proposal would replace the annual tax deduction with a one-time homebuyer tax credit, amounting to perhaps $10K. Rest assured, however, since the bill doesn’t have much support – given current economic conditions – and it seems unlikely that the deduction will be phased out any time soon.

For the time being, then, you can still deduct interest on the first $1 million of mortgage debt, as well as all of your property taxes, for up to separate residences. (That’s $1 million all together, not each). In addition, you can also deduct interest costs on up to $100,000 for a home equity line of credit. For now, you can also deduct private mortgage insurance (PMI), but only if you bought your house  in 2007 or later. Property taxes – but not homeowners insurance – are also deductible. As with any aspect of the tax code, the mortgage interest tax deduction is much more complicated than you think, and there are a handful of conditions that must be met before you can claim it. The most important one is that you itemize when filing your taxes. For more information, refer to the IRS website, and review the flowchart below.

IRS Mortgage Interest Tax Deduction
If you are in the process of buying a home (and obtaining a mortgage), you can use our Real Estate Tax Benefits Calculator to estimate the savings associated with deducting your mortgage interest. Basically, the calculator will multiply your marginal tax rate by your estimated annual mortgage interest (as well as PMI and property taxes) to determine how much you will save as a result of the deduction. Given the uncertainty surrounding this perk, however, you would be wise to treat the savings as a gift, and not try to apply all of it towards a more expensive mortgage.

 

A Word of Caution about HUD 203(k) Mortgages

Jan. 14th 2010

Not the most stimulating headline, I admit, but it’s a topic that deserves some bandwith. Let’s be honest: who out there even knows what a HUD 203(k) Mortgage is? Who’s first instinct (I’m guilty) was that it is an abstruse program that brings together 401K retirement accounts with mortgage financing? That’s what I thought.

Let’s get serious for a moment. A 203(k) is a HUD program that provides mortgage loans for the purchase of so-called “fixer-upper” properties. According to HUD,  203(k) mortgages serve a very important function because, “The purchase of a house that needs repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.”

Towards that end, the 203(k) allows the borrower to roll all of the costs of renovation into the mortgage. While these costs are theoretically uncapped, they must be estimated ahead of time. Further, it must be confirmed by an appraiser that the value of the home will increase at lease by these costs upon the work’s completion. In this way, those that might have otherwise been discouraged from buying dilapidated properties have an inexpensive source of financing (only 3.5% down, consistent with the FHA’s other mortgages).

There is also a new Streamlined 203(k) “Limited Repair Program, that permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this new product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.”

The costs of these repairs, along with a “contingency reserve” of 10-20%, origination fees, and of course the purchase price of the property, are all rolled into the mortgage. Since it’s assumed that many of these properties won’t be of inhabitable condition until after the repairs are completed, the borrower also has the option of rolling 6 months of pre-payments (PITI) into the mortgage as well. Upon closing of the mortgage, the repair costs are deposited into an escrow. Withdrawing these funds can be tricky, however.

While FHA loans are effectively guaranteed by the government, they are originated and administered by private lenders. As one couple’s story illustrates, dealing with one’s lender is not always straightforward when it comes to the 203(k):

“As the contractors were hungry for work, we got started improving the property right away,” she said. “We had been told by our mortgage broker that we could expect the first draw against our $35,000 escrow 15 days after closing.”

As time passed, however, “we heard nothing from Bank of America, other then where to send our first mortgage payment,” she said.

For three months, the couple paid their mortgage, yet received no check for the work done so the contractors could be paid.

To pay for the work, “we have had to empty our savings and run up our credit cards,” she said. “We finally asked them to stop until we can find resolution with Bank of America.”

Unfortunately, borrowers who get the run-around from their lenders unfortunately don’t have much recourse, and can’t expect any help from the government. The best advice, then, is to make sure that the escrow is available to you start shelling out money for repairs. In fact, the raison d’etre of the 203(k) is to prevent the borrower from having to pay for repairs out of his own pocket. In hindsight, this couple would have been wise to heed this advice.

 

IRS: Mortgage Interest Deduction Could Become Stricter

Oct. 2nd 2009

Over the summer, the Government Accountability Office (GAO) released a report on the IRS handling of the Home Mortgage Interest Deduction. Despite being published with little fanfare, the report was widely circulated and could lead to big changes to the tax treatment of mortgages.

As almost everyone who takes out a mortgage is certainly aware, mortgage interest payments are tax deductible, which means the actual interest rate paid by the borrower is often significantly lower than the rate quoted by the bank. [The precise discount depends on one’s tax bracket]. However, the understanding of most borrowers doesn’t extend much beyond this, which is problematic because it turns out mortgage-related tax matters are actually quite complicated.

For example, the tax benefit can only be claimed on mortgages under $1 million, and cannot generally be increased as a result of a refinancing, unless the proceeds are used to improve one’s home. Points, which are used to buy down the interest rate when the mortgage is first issued, are deductible in the year they are paid, as are loan origination fees. Lender fees, private mortgage insurance, and other settlement costs cannot be deducted.

As for home equity loans, the limit is $100,000. Paradoxically, the proceeds from a home equity loan cannot be used in relation to the home in order to be eligible for the deduction, but can be used for almost anything else, from credit card payments to school tuition, etc. If the borrower is subject to the Alternative Minimum Tax (AMT), however, the opposite applies, and the proceeds MUST be used towards the improvement of the home in order for the interest to be tax deductible. Confused yet? If so, the chart below represents the best summary of the IRS rules I have ever come across and should be a great reference when it comes time to file your taxes!

Mortgage Interest Deductibility by Type of Debt
The IRS doesn’t make things easier. According to the GAO assessment, taxpayers have to go through as many as 13 steps to determine first whether mortgage interest is tax deductible, second whether points are deductible, and third the size of any deduction. Included in the official tax forms is a handy flow chart, which borrowers can theoretically use to complete these steps. However, the increasing majority of taxpayers that use tax preparation software to file probably doesn’t ever see this chart. To make matters worse, the GAO report found that such software uses inconsistent methods to determine tax detectability, sometimes even asking the borrower to make the determination/calculation himself.

The main purpose of the report was to assess the ability of the IRS to properly determine and manage mistakes in mortgage tax issues, and in this aspect, the report was scathing. Due both to inadequate resources and insufficient information about taxpayers’ mortgages, mistakes were often allowed to slide. Although, the GAO found that the claimed deduction was understated as often as it was overstated, so the net result is probably a wash for the government.

In any event, it seems clear that something has to change. Either the IRS has to streamline paperwork associated with the mortgage tax deduction, or the government needs to revamp the rules. When you consider that the deduction costs the government $80 Billion in foregone tax revenues per year – especially in the context of the current budget problems – this could conceivably become a major political issue.

 

Status Report: Mortgage Modification

Sep. 18th 2009

Here at the Mortgage Calculator, we try to provide timely updates on the government’s loan modification program. It has many shortcomings, which are responsible for the program’s dismal 9% participation rate. Since then, we’re happy to report that the program has really taken off, as the largest lenders have been shamed by the federal government into submission.

According to Bloomberg News, “Bank of America Corp. and Wells Fargo & Co., among the worst performers of banks in the U.S. government’s main foreclosure prevention plan, stepped up their pace of mortgage modifications by at least 60 percent in August.” Leading the pack is Morgan Stanley’s mortgage origination unit, which has modified over 40% of eligible loans, defined as owner-occupied homes, with a pre-2009 conforming mortgage that is in danger of “imminent default.”

As always, the devil is in the details, since a loan modification doesn’t necessarily lower the risk of default, and doesn’t even translate into a lower payment. “Of loans modified from Jan. 1, 2008, through March 31, 2009, monthly payments increased on 27% and were left unchanged on an additional 27.5%…Many modified mortgages fall delinquent — 25% to 40%, depending on the type of mortgage — often because of homeowners’ loss of income or additional outstanding debt…”

There are a few reasons for these outcomes. First of all, when executing loan modifications, lenders can choose between lowering one’s interest rate (temporarily or permanently), extending the loan term, and cutting principal from the loan amount. In theory, all would seem to lead to lower payments, but as the statistic above attests to, this is the case less than half the time, due primarily to the adding back of deferred taxes. Astonishingly, over 90% of loan modifications lead to higher principal balances.

Advocates argue that this represents the best approach. They point out that mortgage problems for many are a temporary result of unemployment, rather than long-term financial hardship. “A lot of what’s being done is a misplaced focus on modest, long-term relief when what they need is fast, short-term, massive relief (due to job loss),” maintains one economist. This philosophy is reflected in Bank of America’s approach to loan modification, which offers “mortgage forgiveness for three to six months in hopes the borrower will find a new job in that time.”

Those on the other side of the debate argue that this misses the point, and that the focus instead should be on “permanent debt reduction.” Many have begun to direct their attacks on the industry’s Net Present Value model, which is used to asses whether a loan modification is ultimately in the best interest of the lender. According to critics, this model is overly conservative, and leads to an overly high rate of rejection. At the very least, it confirms what cynics have maintained all along- that the mortgage lending industry still does not remain behind the loan modification program.

There’s even a small minority of critics who insist that loan modifications are a bad deal, on the grounds that it damages the credit of borrowers. “Under reporting guidelines set forth by the credit bureaus and the Consumer Data Industry Association, your loan modification will be reported as a ‘Partial Payment Plan.’ Under the FICO scoring method, that designation will lower your credit scores, even if you have never missed a payment.” From a credit standpoint, then, loan modification is not much different from foreclosure that far away from foreclosure, and might ask some to consider whether the consequences justify it.

Outside of this debate are the millions of people still waiting to receive modifications. For every borrower that is emerged “victorious” from the maze of requirements, there are at least 10 more who are stuck in “loan modification hell,” as one columnist put it. Anecdotal reports indicate that the experience is both time-consuming and frustrating; the best advice is to be patient, and to keep a paper-trail.

 

Homebuyer Tax Credit Could Expand

Aug. 11th 2009

The federal government’s homebuyer tax credit has been a boon for both the housing industry and the housing market, causing a surge in sales over the last few months. In fact, the program has been such a success, that some states are now introducing their own versions, and stakeholders are lobbying both to expand the federal program and to extend its deadline.

In its current form, the “tax credit is equal to 10 percent of the home’s price, up to $8,000. So, for example, if a buyer is paying $50,000 for a house, the credit would be worth $5,000. The tax credit never has to be repaid. Last year, Congress created a different tax credit, but that one was effectively an interest-free loan. This money involves no repayment or interest…Buyers will get the money when they claim the tax credit while filing their federal income taxes for 2009.” If a taxpayer owes less than the tax credit he is due, then he is still entitled to receive the difference.

Given that the program is slated to expire on November 30, several lawmakers have already moved to legislate an extension. In fact, there are two bills currently winding their respective ways through Congress: “H.R. 101, The Economic Recovery Through Responsible Homeownership Act of 2009, which would provide up to $10,000 in tax breaks to any homebuyer who makes a qualifying down payment and H.R. 1245, the Homebuyer Tax Credit Act of 2009, which would provide a tax credit of up to $15,000.” The Senate is currently working on developing similar legislation.

Another change could affect borrower eligibility. With the current credit, “Congress set an income limit for the full credit. For a single person, it’s $75,000 and for married couples, it’s double that.” With the extension, it’s possible that these income limitations (and maybe even the requirement that the credit be applied towards a first-time home purchase) could be eliminated, in order to make the credit available to more people.

Meanwhile, the federal government is not the only one working overtime on this issue. New York recently became the first state (that I know of) to implement a similiar program, which “would allow home buyers to take a dollar-for-dollar deduction of 20 percent of mortgage interest paid, Gov. David A. Patterson and other state officials announced. The remaining 80 percent of the mortgage interest paid for the year will be treated as usual, as itemized tax deductions.” For some borrowers, this could amount to savings in excess of $1,000 a year. Not a bad deal, especially when you factor in the federal money. It will be interesting to see if other states follow suit, and we’ll keep you posted as this story unfolds.

 

Plain-Vanilla Mortgages as a Solution to Mortgage Crisis

Jul. 1st 2009

One of the cornerstones of the Obama administration’s plan to overhaul the US mortgage system is an emphasis on so-called “plain-vanilla” financing. Specifically, “The government would give its seal of approval to a handful of mortgage types — a standard 30-year fixed-rate mortgage and perhaps a few varieties of adjustable-rate loans. For a loan to get the ‘vanilla’ label, the lender would have to verify borrowers’ income and have them set aside money for property tax and insurance.” A 20% down-payment would be required, prepayment penalties would be eliminated, and all fees/costs would have to be clearly stated. [See chart below, courtesy of WSJ].

'Plain' Vanilla Mortgages

The primary purpose of the plain-vanilla system would be to protect borrowers, many of whom were burned by complicated mortgages during the height of the housing boom. Types of mortgages have exploded both in number and complexity, such that there are now hundreds of different variations, requiring various levels of risk disclosure and creditworthiness. Ostensibly, this innovation was designed to help consumers by giving them more choices. Human nature being what it is, many borrowers opted for the riskiest mortgages. Meanwhile, banking profits soared. Given how opposed the banks are to the return to plain-vanilla lending practices, it’s pretty obvious as to who is benefiting most from the current system.

There is a strong political bend to this regulation, given the assumptions about human nature that it makes. Still, there is something to be said for simplicity. A fixed-rate mortgage is predictable and easy to understand. Income verification confirms the borrower’s ability to afford the mortgage, and a large down-payment lowers the possibility of default. Sure there are borrowers who liked the freedom to use their mortgage to make a bet on the direction of interest rates, and/or who successfully exploited liar’s loans to purchase a house they otherwise wouldn’t have received lending approval for. But for everyone who came out ahead with a zero down payment ARM, anecdotal evidence suggests that there are 9 who came out behind and are now in default.

Under the new system, those who want to play roulette with their home/finances can still do so, but will be strongly discouraged in the form of un-preferential treatment/pricing. “According to the administration’s ‘white paper’ on the proposal, the agency ‘could impose a strong warning label on all alternative products; require providers to have applicants fill out financial experience questionnaires; or require providers to obtain the applicant’s written ‘opt-in’ to such products.’ ” In this way, banks will also be protected, since consumers can no longer pretend that they weren’t aware of the risks when they signed up for the mortgage.

In the wake of the housing crisis, risk aversion has increased, and it looks like banks/consumers are actually one step ahead of the government. “With the housing bubble burst and mortgage rates near historic lows, fixed-rate loans — 30-year, 15-year and other types — now account for about 95 percent of the market,” compared to only 50% during the height of the boom in 2004. But people have short memories. If this regulation passes, it will make it more difficult for people to overextend themselves when the economy begins to recover.