homesmillbrae.com » Debt Forgiveness

Why ‘Fiscal Cliff’ Deal Will Help the Housing Recovery

Thu, 03 Jan 2013 07:04:46 +0000

The housing market is on firmer ground today, as two major tax provisions survived the “fiscal cliff.” Congress did not touch the mortgage interest deduction, and it extended tax relief for one year on mortgage debt forgiveness.

“An extension of the tax break is positive for home values by reducing the number of foreclosures and helping more troubled borrowers stay in their homes,” wrote Jaret Seiberg of Guggenheim Partners. “That means less supply on the market.”

Under a law signed in 2007, debt relief on loan modifications, short sales, and foreclosures were no longer taxable; that break expired at the end of 2012. The fear was that if the tax break was not extended, home owners would not agree to short sales (when the home is sold for less than the value of the mortgage) because they would then face a tax bill. They would also not agree to principal reduction loan modifications, which have proven to be far more successful than other modifications that leave the principal balance as is.

Under the $25 billion mortgage servicing settlement, borrowers have received $6.3 billion in mortgage principal relief through September, according to the settlement’s monitor, Joseph A. Smith, Jr. The average loan balance reduction, $150,000. Banks completed 13,351 principal reduction loan modifications in November alone, according to Amherst Securities Group, a 62 percent jump from September.

Short sales also surged toward the end of the year, thanks to streamlined procedures and a more aggressive stance by the big banks, again in part due to the mortgage servicing settlement. More than 98 thousand short sales were completed in the third quarter of 2012, according to RealtyTrac.

Article source: http://www.cnbc.com/id/100349018

Housing Recovers, but the Repo Man Is Back

Thu, 13 Dec 2012 23:25:27 +0000

Foreclosures continue to ease in the formerly hard hit states, like California, Arizona and Nevada, as investor demand continues to prop up home prices and clear distress from those markets. Newly started foreclosures fell 63 percent from a year ago in California and 59 percent in Arizona.

Foreclosure activity nationwide has now fallen for 26 straight months on an annual basis, according to RealtyTrac, but the large overhang of distress keeps that drop in perspective.

(Read More: Mortgage Break No Longer Sacred)

“While this metric continues being a mild positive for the builders, we do not see it as a meaningful equity driver, but instead, just as another positive data point in the early stages of the housing recovery,” writes ISI’s Stephen East, who also notes that newly started foreclosures are at a 71-month low.

Much of that drop is due to aggressive, principal reduction loan modifications by the nation’s five largest banks under the Mortgage Servicing Settlement. They are also ramping up short sales, which have now surpassed sales of foreclosed homes. Those foreclosure mitigation strategies are at risk from the fiscal cliff. If Congress does not extend a tax relief law on this debt forgiveness, which is scheduled to expire at the end of this month, borrowers will likely reject these loan modifications and short sale offers, given that they would then involve a huge tax bill.

(Read More: Best US Housing Markets for Buyers and Sellers)

Article source: http://www.cnbc.com/id/100311070

Housing Alert: Short Sales May Be in Big Trouble

Sat, 29 Sep 2012 00:03:34 +0000

As lenders plow through a backlog of over five million delinquent mortgages, short sales are becoming an ever more popular escape route. A short sale is when the bank allows a home to be sold for less than the value of the mortgage. The bank takes the loss, but that loss is generally less than a more costly foreclosure.

The government has been pushing more short sales at Fannie Mae and Freddie Mac through financial incentives, and banks are streamlining the process. Short sales have been gaining so much steam, they actually surpassed sales of foreclosed properties last spring, according to LPS Applied Analytics’ Home Price Index. But all the progress that has been made could end abruptly.

A short sale is debt forgiveness. Debt forgiveness is taxable. In order to help the huge volume of troubled borrowers and promote more short sales, Congress in 2007 passed the “Mortgage Forgiveness Debt Relief Act and Debt Cancellation.” The debt forgiveness from a short sale or a mortgage principal reduction would no longer be taxable. That act is part of many Bush era tax cuts that expire at the end of this year. Without an extension, short sales would grind to a halt, as might mortgage modifications that involve principal reduction.

“Realtors believe if the legislation is not extended, households who are already struggling to pay their mortgages will be further burdened with tens of thousands of dollars in additional taxes that they probably can’t afford to pay because the IRS would count the cancelled debt as income,” said Jamie Gregory, a lobbyist for the National Association of Realtors. (Read More: After Brisk Summer, Pending Home Sales Drop in August)

Short sales and mortgage principal reduction are the foundation of the $25 billion mortgage servicing settlement signed early this year by the nation’s largest lenders and state attorneys general. As of the end of August, first lien principal reduction trial modifications were offered and begun for about 28,000 homeowners, totally approximately $3 billion of potential relief, according to the settlement monitor, Joseph A. Smith. Banks have granted $10.6 billion in consumer relief, which would include short sales. More than a quarter of a million short sales were completed in the first half of 2012, according to RealtyTrac.

So what is the possibility of congress extending the tax relief? One Hill-watcher puts it at 60-40. The Senate Finance Committee passed a package of tax extenders right before the recess, including a one year mortgage relief extension, but leadership in the House of Representatives has not figured out how it wants to handle these extenders. With the looming “fiscal cliff,” tax cuts are an increasingly tough sell. This particular extension does have bipartisan support, but that doesn’t always mean passage in Congress, especially around a presidential election.

“It could be an uphill fight to get this passed this fall, as it will likely get caught up in larger debate of over taxes, deficits and the financial cliff. But we believe that it is a helpful provision for distressed borrowers, as getting a tax bill on forgiven debt can be another punch in the gut for families who are already facing financial hardship,” says David Stevens, president and CEO of the Mortgage Bankers Association. (Read More: Is Housing Risen From Ashes? ‘Industry Has Come Back’)

Rep. Jim McDermott (D-WA), who introduced legislation last March to extend the tax relief for three years said in a release, “Collecting federal income tax on relief intended for struggling homeowners is not only bad policy, but is simply wrong.”

With great uncertainty as to the fate of the tax relief, some say short sales could get a boost this fall. Borrowers and banks alike may rush to get in before the expiration, which could help boost overall home sales numbers.

Sector Watch: US Home Builders

—Toll Brothers
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—DR Horton
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—Hovnanian Enterprises
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—PulteGroup
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—Ryland Group
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—Lennar Corp
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—Beazer Homes USA
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—Meritage Homes
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—KB Home
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Questions? Comments? And follow me on Twitter @Diana_Olick

Article source: http://www.cnbc.com/id/49214903?__source=RSS*blog*&par=RSS

Obama Gets Big ‘No’ On Slashing Mortgage Debt

Wed, 01 Aug 2012 05:30:16 +0000

Despite strong pressure from the Obama administration, a federal regulator will not allow Fannie Mae and Freddie Mac to reduce mortgage principal. The Federal Housing Finance Agency’s Ed DeMarco has previously opposed the program, which uses taxpayer money to pay lenders to reduce loan balances of severely troubled borrowers, but had not made the final decision until now.
“After much study, I have concluded that Fannie Mae and Freddie Mac’s adoption of HAMP PRA [the government's Home Affordable Modification Program Principal Reduction Alternative] would not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers,” DeMarco wrote in a letter to the chairman and ranking member of the Senate Committee on banking, Housing and Urban Affairs.

DeMarco concludes that the program presents the risk of more losses to taxpayers, not to mention operational challenges to the GSE’s. He cites moral hazard, suggesting that as many as 19,000 borrowers who are current on their mortgages could strategically default in order to qualify for debt forgiveness. Even more significant, he goes on, could be long-term consequences for mortgage credit availability.

“Fundamentally, principal forgiveness rewrites a contract in a way that other loan modification programs do not. Forgiving debt owed pursuant to a lawful, valid contract risks creating a longer-term view by investors that the mortgage contract is less secure than ever before,” writes DeMarco in the letter to lawmakers.

Treasury Secretary Timothy Geithner responded immediately in a letter to DeMarco:

“I do not believe it is the best decision for the country, because, as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation’s housing market, and result in a net benefit to taxpayers.”

A study of the program by Treasury’s Michael Stegman showed that mortgage modifications that included principal reduction had a far lower re-default rate than those without the debt forgiveness.

“Fannie Mae’s analysis suggests that using principal reduction to reduce the loan-to-value- (LTV) ratio not only increases a borrower’s ability to pay, but for these selected borrowers, it also increases the likelihood that they will continue to pay,” writes Stegman in the analysis.

The FHFA estimates that up to 500,000 Fannie and Freddie borrowers could have been eligible for principal reduction. The Treasury’s current program pays lenders large incentives to write down loan balances, using unspent money from the $700 billion TARP (Troubled Asset Relief Program). But FHFA says despite a positive financial benefit to Fannie and Freddie, it is really just a transfer of taxpayer funds, adding “to the over $188 billion in taxpayer support the Enterprises have already received.”

Some lawmakers, however, may not be done fighting yet. Several have been pushing for more action to help homeowners, and the heat is on with the election less than 100 days away.

“It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners stay in their homes,” said Rep. Elijah Cummings (D-MD) in a statement. “He should immediately withdraw this reckless and misguided letter and start following the law Congress passed.”

Questions? Comments? And follow me on Twitter @Diana_Olick

Article source: http://www.cnbc.com/id/48425201?__source=RSS*blog*&par=RSS