With the election over, and President Obama serving another four years, there is discussion now about whether a certain tax break will be extended in order to help homeowners who have experienced a short sale or foreclosure.
In 2007, the Mortgage Forgiveness Debt Relief Act was implemented to forgive the debt of tax payers who experience foreclosures, short sales, or principal reduction. As stated by the IRS, “The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.”
When is this act expiring? The Mortgage Forgiveness Debt Relief Act is set to expire at the end of this year. If this should happen, there will be many homeowners who will be paying a tax on their unforgiven debt. For example, if you short sale your home for $100,000 and you owe $200,000, you would be required to pay a tax on the $100,000 difference of what you owe.
According to CNNMoney, there are about half a million short sales occurring each year, and 50,000 foreclosures each month. This is a great deal of borrowers that will be affected if this relief act is not extended after 2012.
Now, what would it cost to extend this relief act through the end of 2013? According to the office of Sen. Max Baucus, the estimated cost is $1.3 billion. The original bill was $25 billion in order for banks to forgive homeowners mortgage debt.
However, back in August 2012, the bill made it through the senate finance committee, as a bipartisan bill was passed to extend the act through the end of 2013. Now we just have to wait and see if it continues to pass through government.
Now, if the act is not extended there are certain homeowners that may be protected from paying the tax such as Californians. According to CNNMoney, California borrowers would be protected from paying the tax due to how California handles foreclosures.
Hopefully we will know more about the Mortgage Forgiveness Debt Relief Act as the year comes to a close.
As of August 1, 2012, Fannie Mae has opened Mortgage Help Centers in the Inland Empire. These help centers provide free education and counseling to help California homeowners that are struggling in keeping their home. The goal is to provide valuable and helpful information that will provide the tools necessary to avoid foreclosure.
As we discussed in a previous blog, Fannie Mae is hoping these Mortgage Help Centers will reduce the amount of foreclosures in the country. In order for these help centers to be effective, homeowners need to seek help early on while there is still time to make changes and prevent foreclosure.
Fannie Mae wants to stress that these Mortgage Help Centers are absolutely free. This is information available to the public to help communities and struggling homeowners.
According to Clemente A. Mojica, President and CEO of Neighborhood Partnership Housing Services, Inc. “The Fannie Mae Mortgage Help Center is an example of bringing tangible resources to address a regional issue.”
The Los Angeles Mortgage Help Center, which opened in November of 2010, has already helped 2,320 homeowners. According to Keosha Burns from Fannie Mae, “more than sixty percent of those who have been helped have received a workout that allowed them to stay in their homes.”
As long as struggling homeowners are aware of these help centers and seek help before it is too late, these centers can be very helpful in keeping their home. It will provide knowledge and steps to make improvements in one’s financial situation in order to maintain ownership. Currently, there are twelve Fannie Mae Mortgage Help Centers in the country.
These mortgage centers do not guarantee the ability to avoid foreclosure, but they can evaluate each situation and provide counsel to make the right steps.
The Obama administration has been pressuring Edward DeMarco, the acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, to allow principal reduction on underwater mortgages.
The reason the Obama administration wants Fannie Mae and Freddie Mac to lower the principal is to help reduce the amount of homes resulting in foreclosure.
However, DeMarco has stood his ground and refused to allow Fannie Mae and Freddie Mac to lower the principal balance of underwater mortgages, as it will be coming from the tax payers’ dollars.
Currently, Fannie Mae and Freddie Mac back or own approximately 60% of all mortgages.
The main reason for DeMarco’s refusal in lowering the principal balance is to protect the tax payers’ dollars. According to an article in the LA Times by Jim Puzzanghera, tax payers have contributed $188 billion to the two companies in order to keep them afloat. As of today, $46 billion in dividends has been paid back to the Treasury Department in exchange for the assistance.
DeMarco also believes this program could worsen the underwater mortgage situation, because homeowners may decide to stop paying their mortgages altogether in order to have their principal balance reduced with this program.
DeMarco also explained that Fannie Mae and Freddie Mac offer a variety of programs that will help underwater mortgages. There are programs that lower monthly payments to ease the burden on homeowners that owe more on their home than what it is worth.
From just past experiences, it seems when the government steps in to help our housing situation, there is a negative snowball effect that makes it worse than before. There are programs available to help homeowners in need of lowering their monthly payment, interest rates, and terms.
One of the main programs that helps lower the interest rate and monthly payment of underwater mortgages that are Fannie Mae and Freddie Mac owned is the HARP II program (Home Affordable Refinance Program).
Overall, using more of the tax payers’ dollars to help struggling mortgages is not the solution. DeMarco has made a wise decision in respecting the tax payers’ dollars and realizing that the positive outcome does not outweigh the negative.
In today’s economy with many underwater mortgages, many homeowners are opting to short sale their home when unable to refinance or sell for profit. A short sale is when the bank agrees to allow a home to sell for less than the outstanding debt of the mortgage. If the mortgage value is more than what the property was sold for, then that would be considered a short sale.
Many homeowners are turning to this route to avoid foreclosure, and to get out of a situation where they owe more than what their home is worth.
But, how does a short sale affect one’s credit? Many homeowners want to know this answer and what the long-term effects will be.
When doing a short sale, it typically affects your credit in the same way as a foreclosure would. They both damage your credit, and will take years to rebuild.
According to an article in the LA Times by Liz Weston, “If your scores weren’t that high to begin with—say 680 in the 300-to-800 FICO scale—it would take about three years for them to return to their old levels. If they were high, say 780, it would take about seven years.”
According to Fair Isaac, here is a breakdown of how late payments and a short sale can affect one’s credit:
30 days late: 40 to 110 points
90 days late: 70 to 135 points
Foreclosure, short sale or deed-in-lieu: 85 to 160
Bankruptcy: 130 to 240
Keep in mind, the years to rebuild credit also depends on how the individual manages their credit after the short sale.
When it comes to buying a home after a short sale the time frame can range between two and seven years depending on the circumstances of the individuals.
For example, if buying FHA after a short sale and the homeowner never had a late payment during the whole process, they may be able to buy with no waiting period.
However, when buying a conventional loan, the time frame ranges from two to seven years. One would need to speak to a mortgage professional in order to determine the length needed to wait based on specific situations.
As mortgage planning specialists, we advise checking with a lender first to see if you are qualified to refinance your current mortgage and reduce the monthly payment with a better interest rate or lengthening the term.
If you are unable to refinance and want to short sale, speak to a mortgage professional and real estate agent who specializes in short sales. Short sales require specific guidelines and you should make sure you are working with a professional that understands the complexity.
The long awaited $26 billion mortgage settlement has been approved. This means that there will be foreclosures released to the market that have been in limbo for months and some even several years. This settlement is expected to speed up the foreclosure process by creating stricter guidelines.
For months, and some even years, delinquent homeowners have been squatting in their home without making a single mortgage payment. Due to the issue with robo signing, many foreclosures were placed on hold, and allowed delinquent homeowners to live payment free.
According to CNN Money article, the average time it has been taking to foreclose on a home is 370 days, which is almost double the typical length it took to foreclose a home five years ago.
There are homeowners who have been squatting in their home for up to three years. However, once this settlement is released, these homes will be released as new foreclosures.
The down fall of this foreclosure wave, is the possibility and likeliness of decreased home prices again.
According to the chief economist, Stan Humphries, for the listing website Zillow, he is predicting that home prices will drop another 3.7% and reach the bottom by early 2013.
Now, banks are determined to turn foreclosures around and get the properties off the market as quickly as possible. In earlier posts we discussed the possibility of investors purchasing foreclosures and quickly turning them into rental properties in order to help with home prices.
As of now, we cannot accurately predict how the foreclosure wave will affect home prices and our housing market, but we can be prepared for this shift and know we will come out of this in due time.
However, our question is more concerned with whether these bills are actually going to be good for our industry or end up causing more trouble. Having over 30 years of experience in this industry, we have never experienced such a terrible economic time in our industry. When this happened a previous time, the market recovered in about 18 months with no government involvement. However, this time the process has been extremely lengthy.
According to the Los Angeles Times, a few of the new legislations would do the following:
1. “End so-called dual track foreclosures that allow mortgage holders to simultaneously negotiate loan modifications to lower homeowners’ interest payments while taking legal steps to foreclose on the same properties”
What is the problem with this ? Realistically, loan modifications should not even be offered. Granted, homeowners should not be taken advantage of, and homeowners should be fully informed of the financial decision that they are making. However, most homeowners who seek a loan modification are incapable of making their current mortgage payment either due to loss of job, injury or some other financial hardship. A loan modification is changing their loan agreements that were legally agreed to at the purchase of the home. They are contacting a bank to lower their interest rate, or principal balance to make their monthly payments more affordable.
However, realistically, homeowners who are facing hardships and seeking a loan modification, end up not being able to make their new lower mortgage payment months down the road and end up foreclosing anyways. This option to modify a home loan lengthens the foreclosure process. Also, what most homeowners experience is being advised to miss a few months’ payments in order to begin the modification process, but in the meantime will then be foreclosed due to a lack of payments. A loan modification should not be offered in order to prolong homeowners keeping a home that they cannot afford.
In the eyes of FICO, a foreclosure, short sale, and loan modification all equally negatively affect your credit report. Not one is better than the other. If any of those are reflected on your credit, it shows that you defaulted on a mortgage. There is a lie that a short sale is better for you versus a foreclosure and that is not true when related to a FICO score.
2. “Allow renters more time to stay in a foreclosed residence”
Who are renters paying rent to in a foreclosed residence? No body. A legislationwould be passed to allow renters to live rent free in a foreclosed property for a lengthened time.
3. “Collect fees from banks to pay for enhanced law enforcement actions to defend homeowners.”
4. “Provide a single point of contact for homeowners with their loan servicers and impose a $10,000 civil penalty for “robo-signed” mortgage documents containing unverified information.”
5. “Give local governments tools to force banks and property owners to maintain blighted, foreclosed homes and to give new homeowners incentives to improve their properties.”
More specific details would be needed to fully understand what this legislation would cost dollar wise for the “tools” and “incentives” for the property maintenance. It is definitely a positive thing for banks to maintain foreclosed homes for the neighborhood appeal, as well as decreasing crimes in areas with vacant homes. Areas with HOA’s tend to have banks maintain the properties that have been foreclosed.
6. “Create a statewide grand jury to investigate alleged financial and real estate foreclosure crimes”
These are the 6 legislations that are wanting to be passed in order to protect homeowners. There are pros and cons to all of the above bills. There is false information posted all over the internet and media that is providing homeowners with poor advice. Ultimately, homeowners need to be given wise counsel and speak to mortgage professionals with years of experience before making any financial decisions related to their mortgage.
Apparently banks are now paying people up to $35,000 to short sell their home.This approach is much different than forcing homeowners to leave empty handed. According to CNN Money, banks are offering delinquent homeowners $35,000 to short sell their home before they end up in a foreclosure.
Why would banks give up to $35,000 to homeowners in order to short sell their home?
Well, when a home is short sold, the banks are agreeing to sell the home for less than what it is worth, and erasing the extra debt. However, for banks this is beginning to look like a better option, rather than letting homeowners foreclose. In many cases, people who experience a foreclosure tend to neglect their property and the maintenance; therefore, causing the bank a bigger expense in fixing things such as plumbing, roofing, etc.
With this new offer of a cash incentive, banks are eliminating the risk of the homeowner neglecting the maintenance. Also, the foreclosure process is causing banks to lose tons of dollars in cases that drag out. Homeowners are also getting a “free ride” in a sense by living in a home and not making the monthly payments.
Why would a bank choose a Short Sale over a Foreclosure?
Short sales actually do have benefits for the homeowners versus a foreclosure. For example, if the homeowner decided to do a short sale, they are at least involved in the selling process and will be involved with whoever is buying their home.
According to the article from CNN Money,
“Short sales also command higher prices than foreclosed homes. In December, foreclosed properties sold for an average of 22% less than conventional sales, while the discount for short sales was only 14%, according to the National Association of Realtors.”
Keep in mind, both a foreclosure and short sale will have negative effects on the homeowner’s credit report.
However, by opting to do a short sale, it limits the amount of foreclosures on the market which is negatively affecting the home values. By having less vacant homes on the market, it will hopefully slowly improve the values of homes.
What other options are available?
If you are underwater on your mortgage, but are current on your monthly payments you may consider using HARP 2.0 which allows you to refinance your mortgage to a lower monthly payment and interest rate. This doesn’t erase the debt, but it will lower your payments.
However, if you are not current on your mortgage and foreclosure is looking like the road you are headed, see if your bank is offering this $35,000 incentive for you to short sell your home. Always speak with a mortgage professional before making a final decision.
In an article from CNNMoney, it discussed the possibility of the Federal officials proposing to sell foreclosed homes in bulk to investors who would then turn those homes into rental properties. This program was cited by Federal Reserve Chairman Ben Bernanke last week. He addressed the current housing crisis and the new idea of turning foreclosed homes into rental properties.
Is this a good idea, or not?
Well, the Federal Reserve has the belief that by turning these foreclosed homes into rental properties will then stabilize the neighborhoods, and hopefully the values. Currently, Fannie Mae and Freddie Mac own approximately 250,000 foreclosed homes.
Whether these homes are purchased by consumers or investors, they are still being sold for far less than what homes could be worth. So the issue is to either wait for the homes to be purchased by individual homebuyers, or clean up the inventory by selling to investors who in turn will create rental properties and eliminate the properties from the government’s books.
Another reason why the Federal officials think rental properties would be a great idea is due to the increased demand in rental properties. Since rentals are in high demand, the government is thinking of providing more rentals to help meet that demand.
Keep in mind, no specific details have been released about the rental program. Only talks about the program has been surfacing and causing people to start discussing the possibilities ahead. In the meantime, the rental program is still being developed and possibly released in the upcoming year of 2012.
What is keeping the government from selling the foreclosed homes to investors?
Well, investors are demanding a much bigger discount than a typical consumer would for a foreclosed home. Therefore, they would actually be losing more money in that sense, because a foreclosed home will sell for more to an individual (although still far less than market value) when compared to an investor – but it is a longer process. However, if they were to take a bigger price cut, the homes could be sold in bulk to help stabilize the housing market by putting the homes back into use.
We will have to wait and see how this program develops and plays out in 2012.
The Holiday season is a stressful time and the last thing one wants to worry about is experiencing a foreclosure and then eviction during Christmas and New Year’s. In a recent article found from CNNMoney.com (2011), it is stated that Fannie Mae, Freddie Mac and other large banks are halting evictions temporarily this Christmas season.
The moratorium will last from December 19, 2011 to January 2, 2012. This does not mean that they are going to stop the proceedings for foreclosures, but one will be able to stay in their home during the holiday season.
Terry Edward, the executive vice president for Fannie Mae stated, “No family should have to give up their home during this holiday season.”
This small grace period from the lenders can be appreciated for keeping families in their homes during this holiday season. However, there are only several banks that are offering this grace period including Chase, Bank of America and Wells Fargo. Other banks may still continue in the eviction processes that are not committed to this grace period for the holiday season.
In the article it also explained that halting this foreclosure process for a few weeks will benefit tens of thousands of homeowners. Many families can be thankful for the grace period that banks are giving foreclosed homeowners.