Dennis' Mortgage Blog

Question of the week:  Should I wait to do anything on my mortgage based on your email last week about the banks having to work out foreclosures and modifications?  We are upside down and want to have our loan modified or if not walk away and let them foreclose.

Answer:  My advice is that if you are in trouble on your mortgage that you do not wait for the banks or the government to present a solution for you.  Find out what your options are today to refinance your mortgage under current programs, what options your current lender may give your and what options you have in the market place through a short sale. 

My advice to not wait takes on added urgency when you consider the huge tax implications of not acting quickly. 

As I mentioned in the answer to last week’s question of the week the major settlement between the top lenders and the states’ Attorneys General intended to assist and speed up assistance for borrowers who are in trouble on their mortgages will take almost a year before an administrator and the bureaucracy is in place to manage the settlement and the guidelines the lenders will follow.  This means that the bulk of the $25 billion in assistance to borrowers will not occur until after 2012.

After 2012 creates a major financial hardship for most of those who will get relief from the settlement in the form of streamlined foreclosure or short-sale process, or principal reduction of their mortgage in the form of a tax liability.

Prior to the Mortgage Debt Relief Act of 2007 anyone who had a debt cancelled or forgiven could have a federal tax liability as a result of the debt cancellation or forgiveness.  If you owed $250,000 and your home was foreclosed on and the lender sold the home for $200,000 then you could, and often did, receive notification of $50,000 in forgiven debt upon which you would owe taxes.  The Mortgage Debt Relief Act (MDRA) allowed taxpayers to exclude from their income the discharge of debt on their principal residence for the years 2007 through 2012.

Unless the  MDRA is extended then anyone who is foreclosed upon, goes through a short-sale or receives a principal reduction from their lender on their primary residence mortgage will be subject to the debt forgiveness tax liability.  Since the recent lender settlement will not be fully up to speed to assist homeowners with debt forgiveness until after December 31, 2012 it behooves anyone who may be in a position to undergo a short-sale, foreclosure or principal reduction to do so before the end of the year to avoid tremendous tax consequences.

My guess is that like most political issues no action will be taken until the deadline is looming that will impact American homeowners susceptible to the tax and that the lame-duck Congress will take up and pass the issue after the November elections and before this 112^th Congress adjourns in December.  But if my guess is wrong then those who wait for to see if they can benefit from the $25 billion lender settlement may wish they had acted sooner.

As always with any tax issue or question please consult a licensed CPA or tax advisor as I am neither.

Have a question?  Ask me!

Some positive economic news this week helped push rates a bit higher from last Friday.  Initial unemployment claims dropped yet again and are under 350,000 for the week which bodes well for some solidity in the job markets.  Mortgage delinquencies hit a three year low in January which bodes well for potential solidity in the housing markets.  And Greece continues to be on again, off again with political resolution to its problems so it can get a second bailout from its European neighbors.

The week started off with big news that has long term economic and mortgage rate impact as the President presented his budget to Congress.  It calls for $3.8 trillion in spending and an increase in the deficit of $1.33 trillion which would push the national debt to close to $17 trillion in about twelve months.  On top of the current deficit, the money being poured into the economy from the Federal Reserve and the trillions already put into the economy from the Fed and federal government the past three years there are literally ten trillion reasons why our low rates will climb quickly when they begin to climb.

Housing prices decline locally in Southern California and across the state.  The number of sales increased but a growing percentage were cash sales of foreclosures and bank owned properties by investors.  Looking to take advantage of a soft market investors are loading up on cost effective rental properties or “flips” for quick capital gains.  As discussed above, these opportunities may become more prevalent in the next two years when the foreclosure settlement process begins to send more properties to market.

Credit agencies and companies are the latest to face the scrutiny of the new Consumer Finance Protection Bureau (CFPB) which announced it will investigate the major consumer credit reporting agencies, their practices and their reporting.  While I am usually, okay always, skeptical of major investigations of private industries by government bureaucrats, the case of the credit agencies where you are presumed guilty and having information corrected and properly reported is very onerous is one that I think could not make the situation worse; however I am ready to be surprised by the CFPB somehow making the situation worse.

Regarding the CFPB, among the slew of emails I have received from them requesting I received one the other day asking “do you know of any financial regulations that can be streamlined?”  I can think of many and will be putting my suggestions on their website.  You can also participate by going to http://www.consumerfinance.gov/regcomments/.  Please check out the site, especially if you are in a financial services industry or one, such as real estate, that is impacted by a financial services industry and put in your suggestions for streamlining government redtape and regulations.

Rates for Friday February 17, 2012: Rates inch back up from last week’s dip on positive economic news and rallies in the stock markets.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.625%             Up 0.125%

30 year high-balance conforming           4.00%               Up 0.125%

30 year FHA                                        3.5%                Up 0.125%

30 year FHA high-balance*                   3.75%               Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked.  Rates are based on 20% down (3.5% for FHA)  with 740 FICO score for purchase mortgages.

* Current rates include credit towards closing costs, call for quote on rate and credit.

A big weekend for the household as we head to Disneyland very early Sunday morning to spend the day celebrating our youngest’ s tenth birthday.  If you know anyone else planning to go as part of their three day President’s Day weekend please discourage them so we can minimize our wait time in the lines, thanks!

Have a great week,

Dennis