Question of the week: Can I deduct my mortgage insurance premiums?
Answer: I preface this answer with: I am not a tax professional please consult with your own tax preparer regarding any tax deductions. Okay, disclaimer in place. According to IRS Publication 936 (2009) mortgage insurance may be deductible for the tax year 2009. To qualify the mortgage insurance must be “in connection with home acquisition debt” meaning the mortgage used to purchase your home. Check with your tax preparer if she/he considers a rate and term refinance of your purchase mortgage(s) to qualify as “in connection with home acquisition debt.” If the mortgage insurance meets that criteria the second criteria is that deduction phases out starting at $100,000 in income for married couples ($50,000 for married filing separate or individual filers), deduction completely phased out after $109,000 in adjusted gross income ($54,000 individual filers). Is your mortgage insurance deductible? Maybe, but please check with a certified tax professional before claiming deductions, especially if you are paying mortgage insurance on a mortgage refinance or if your income exceeded $100,000 in 2009.
Thanks to CPA DJ for assistance on the answer to this question.
Have a question for me? Ask me!
If you or someone you know is planning on taking advantage of the Homebuyers Tax Credit then you better get on it. April 30th is fast approaching.
While I appreciate the opportunity for some extra cash for those eligible, I will be happy when the buyers tax credit expires and hope it is not extended. There has been tremendous fraud across the country that has cost taxpayers millions of dollars. The tax credit is set up to benefit a small percentage of Americans who happen to be at the right place at the right time. When the tax credit was first put in place I was so-so on it because recipients have to pay back their credits. When the credit was extended into 2009 the repayment clause was taken out of the credit. In our experience the credit has not been the deciding factor for whether anyone has bought a home, but rather it has been a factor in their timing. It is my opinion most recipients of the tax credit would become homebuyers anyway. I am very aware that the National Association of Realtors and a great many of its members do not like this opinion and would like to see the tax credit extended yet again, joining members of my industry and others in the real estate professions, but I stand by it. Let’s let the markets settle out with less government interference and tax payer funds being used. Off my soapbox.
Technical Alert! Moving average: the average price of a product for a stated period of time, i.e. 10 day, 50 day, 100 day moving average of DCS Corp stock would be the average of the closing price of the stock for each of the preceding 10, 50 and 100 days. Moving averages can provide resistance to prices going higher above the average price line, or support to prevent prices from moving lower. This past week Mortgage Backed Securities needed a helmet as they slammed against the 100 day moving average and could not break through on Tuesday, Wednesday and Thursday. This morning MBS are strapping on the gear and making another run.
And this means….Despite plenty of negative economic news this week that would add momentum and push to MBS as they hit the resistance barrier the barrier has held firm. This is a pretty good signal that prices need something even more extraordinary to break through. Remember, high prices for bonds mean low rates. What it means is we are probably at the floor on rates for this cycle.
The news this week: Tuesday we had consumer confidence for January over 10 points below December. The Department of Labor announced almost 1800 mass layoff actions across the country affecting over 180,000 workers in January. Fed Chairman Ben Bernanke addressed Congress and said any recovery is muted and rates will need to stay extremely low for an “extended period.” Wednesday the Commerce Department released new home sales figures for January and at just over 300,000 homes it was the lowest level in fifty years. Finally on Thursday initial unemployment claims came out and almost hit half a million Americans filing claims last week (496,000).
The economic data pulled MBS up from the big drop they took last week, most as reaction to the Fed raising the discount rate. The big move above the resistance level may happen today, if so we’ll see how long it lasts. In recent weeks the longest the market has sustained prices above the technical resistance levels has been about two days.
This week in rates dropped on the strength of yesterday’s strong market.
Rates for Friday February 19, 2010:
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional 4.75% Down 0.125%
30 year conforming-jumbo 5.00% Down 0.125%
30 year FHA 4.75% No Change
30 year FHA jumbo 4.875% Down 0.375%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).
Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected. Numbers provided are for comparative purposes only.
We end February this weekend, one-sixth, almost seventeen percent, of the year past—how are your resolutions doing? J
I am around most of the weekend if you or your clients need any mortgage questions answered or numbers run.
Have a great weekend, let me know how I can be of service to you,
Dennis
Question of the week: What does it mean with the Federal Reserve raising its “discount rate” yesterday? Will my rates go up?
Answer: Yesterday, 2/18/2002, the Federal Reserve (the Fed) announced it was increasing its discount rate from 0.50% to 0.75%. The announcement was late in the afternoon on the East Coast, after the stock markets had closed, and was meant by the Fed to be a somewhat non-issue. Au contraire Messieurs Le Fed. Immediately the Mortgage Backed Securities and bond markets (which were still open) dropped, a lot. Joining in the price shedding were the futures markets for stocks. The quiet reaction expected by the Fed was quite the opposite.
So what does it mean? Initially for consumers and most Americans the move has little impact, except as impacted by the overall market reactions, i.e. stock and bond prices reaction. But credit card rates, auto loan rates, equity line rates, all are connected not to the discount rate, which was raised, but the federal funds rate—which was left untouched and per the announcement made with the increase yesterday will remain untouched for “an extended period.”
Also the Fed announcement said the increase in the discount rate does not “signal any change in the outlook for the economy or monetary policy…not expected to lead to tighter financial conditions for households or businesses.”
How can they say this?
The discount rate is for emergency loans from the Federal Reserve to member banks that are short on liquidity and reserves, when in trouble they would go to the discount window, as it is known, and borrow money at the discount rate. Prior to the current fiscal crisis member banks would avoid as much as possible borrowing from the discount window and it carried a negative stigma to do so. The Fed wants this stigma to return and wants banks to not rely on federal funds for their borrowing and liquidity but instead use the markets and other banks. Raising the discount rate to 0.75% increases the gap between the discount rate and the federal-funds rate to 0.50%, which should encourage less borrowing from the discount window.
The federal-funds rate is the rate banks charge each other for overnight loans, the preferred borrowing tool the Feds want banks to use. It has been between 0- 0.25% for over a year now and per the Fed will continue there for that “extended period.” This is the rate, the federal-funds rate (or fed funds) that banks use to set the Prime Rate which is the basis for home equity lines of credit and many credit cards. With this rate remaining unchanged, the Fed can say that consumers and businesses are unaffected by yesterday’s move.
The increase in the discount rate was needed. Borrowing from the discount window had dropped from over $100 billion outstanding in 2008 to only $15 billion earlier this week. Banks had been able to borrow money at 0.25% on the funds rate and lending it out at higher rates, making some tidy profits. This borrowing-lending cycle has done much to increase the financial health of the country. Now that good health is attained it is time to reduce some of the medicine.
Looking forward the move to tighten credit on the banks for emergency loans and force them to be less reliant on the discount window signals the Fed is on the path to higher rates across the board. Everyone knows rates will increase, the questions have been when, how much and how often? The current bets are that the Fed will raise the federal-funds rate, the rate that impacts consumer and business loans and credit, at least twice by the end of the year.
If you have a home equity line of credit you have been enjoying a very low interest rate, don’t get too cozy with it as it will go up this year when the Fed does raise the fed funds rate. If you have and adjustable rate mortgage, your rate has been low as well as LIBOR, MTA, T-bills, and other indices have been extremely low—but will increase as higher rates trickle through all the markets. If you are able I advise you to pay down as much on principal as you can before rates increase to mitigate any increase in payment you will see from rising rates later in the year and into 2011 and beyond.
One last reminder FHA condo buyers effective Monday no more spot approvals and many complexes that were approved will have to go through re-approval process.
This has been a rockin’ week for economic data. Wednesday had a lot of low and medium impact data on housing starts (up), permits (down), industrial production (up), capacity utilization (up) and MBS were flat until late in the day. It was a warm up act. Thursday the main news hit the stage: Producer Price Index, wholesale costs, was up well above expectations. Wholesale prices are up 4.6% for the year and 9.8% for the past six months. Also yesterday initial jobless claims came in at 473,000 initial claims, above expectations and 31,000 ahead of last week’s number—which was briefly celebrated as “low”. Yesterday’s number puts the four week average higher than many expected, or want. Finally came the late market punch of the increase by the Fed of the discount rate.
The Mortgage Backed Security market reaction was not a surprise. Many economists, myself included (though technically not an economist by trade I do have degree in economics), feel the worst economic cycle a country can enter is one with combined job loss and inflation. To stimulate growth and job creation low rates and access to credit are needed. To fight inflation high rates and tight credit policies are needed. So how much inflation is acceptable to allow for putting Americans back to work? How tight can credit get and still enable businesses to expand and grow and hire more workers?
Markets hate uncertainty. That is a standard axiom that is time tested and proven. When there is uncertainty people will not invest, will not spend except on necessities and hold (horde?) their money. This seizes markets and the flow of goods and services slows significantly. This is what has been occurring in our economy for the past year. Personal spending is down and savings is up. Long term this is a much needed mind-set for Americans. Short-term it delays economic recovery and growth.
The challenge for the government and regulators is how to free up the markets to borrow, lend, invest and grow without creating an environment that spurs inflation even higher. The primary way to do this is eliminate as much uncertainty as possible. The past year has seen anything but certainty coming into the markets.
This week in rates popped 0.125%, except FHA, with almost all of it coming from yesterday’s market activity.
30 year conventional 4.875% Up 0.125%
30 year conforming-jumbo 5.125% Up 0.125%
30 year FHA jumbo 5.125% Up 0.125%
Eight years ago this evening I was at the office and Leslie called, “I think tonight maybe the night, can you stop by Le Yen’s and pick up some dinner?” I got home with the dinner and barely had time for a few strands of chow mein. We called her sister, Kelly, and packed Blaire a bag for one or two nights. About 8:30 Kelly arrived and picked up Blaire. Leslie and I headed a short way down Atlantic and headed into Memorial Hospital. After a brief wait, with no one there which frustrated me immensely, we were shown into a room. A nurse came in and said, “whoa, you’re close!” I left to go park the car in the lot and went back into the room. As I walked in I heard the nurse say, “We’re there, I can see the head!” A minute later a diminutive resident from UCLA walked in and basically caught our new daughter. Had I not found a parking spot right away I would have missed it!
Happy Birthday Jenna! You wasted no time joining our family and all the smiles and laughs you share with us every day!
Question of the week: What preparation do we need to do for filing our taxes?
Answer: DISCLOSURE: I am not a tax professional nor a certified public accountant. Any tax advice is my opinion and you should not rely solely on my information or opinion for filing your own taxes but rather should consult with a tax preparation professional.
The basic homeowner deductions for homeowners are deductions for primary residence mortgage interest (with limitations) and property taxes. If you have a second home you can, with limitations, generally claim similar deductions. If you have investment property then you have a slew of deductions, but also have income you must declare to off-set the deductions.
Regarding the mortgage interest deduction make sure you have the proper number. Many banks and mortgage servicers were bought or taken over by other banks or loan servicers. For instance anyone with a mortgage with Washington Mutual in 2008 had it go to Chase in 2009, or those paying Countrywide are now paying Bank of America. Lenders send out IRS Form 1098 to borrowers stating the amount of interest paid on the mortgage they hold. With the transfer of mortgages some lenders may not fully disclose interest paid prior to the transfer. As I say to the answer to many questions in this industry, do the math. Does the interest on the 1098 add up to what you paid in 2009 to the lender for interest? A quick ballpark test is to look at your recent mortgage statement, see how much of your payment is going to interest and multiply by twelve. Is the answer close to what the 1098 is? It probably is not exact due to principle reduction causing your interest payments to decline, but it should be somewhere in the ballpark.
Note that you do not need a Form 1098 to file a deduction for interest, just as you do not need and do not get a statement from the County for your taxes paid. But if filing without a Form 1098 to support the interest paid make sure you have proof as to the interest you paid in case you get audited.
If you sold a home, had a short-sale, loan modification or foreclosure in 2009, I suggest you consult with a professional tax preparer to assist you with your tax filing. The U.S. tax code runs to a couple of thousand pages, several deal with homeownership transfers and mortgages. With a “non-standard” scenario such as a sale or loan modification or foreclosure you want to ensure you are making the proper claims and deductions.
If you co-own a home with someone other than your spouse or do not file a joint return with the co-owner, make sure the combined claims for eligible deductions equals the amount available. If the total interest and taxes paid on a primary residence is $27,000 then the deductions can be split between the co-owners however you want, 50-50, 60-40, 95-5, as long as the total claimed deductions do not exceed the total paid—but also make sure you do not underclaim eligible deductions.
If you are eligible for one of the homebuyers tax credits from 2009 make sure you have the proper forms for filing.
If you purchased or refinanced in 2009 have your final HUD-1 closing statement from escrow or settlement agent to provide your tax preparer so you can get the proper deductions for points, origination fees, etc.
No one likes tax preparation, except paid tax preparers! But having your information organized and checked to ensure you receive the proper deductions and claims on your Federal and State tax returns.
FHA REMINDER! Today is the last day case numbers can be ordered for FHA transactions with broker/lender able to select appraisers on certain transactions. All FHA transactions after today with case numbers ordered after today will have to have appraisals done through the same, wonderful HVCC process we have used for Fannie and Freddie transactions since May.
For those of you into technical stuff this was a fun week in the Mortgage Backed Security markets as moving day averages converged creating a squeeze between levels of support and resistance and bonds have been rebuffed from cracking through either way. Not just bonds either as the stock markets have been flitting around this week and even more so today. For stocks it appears 10,000 the support level for the current market.
This week we saw the Treasury sell many more billions of U.S. debt. Unlike previous offerings this week’s sales were not that well received by investors. Could it be the troubles in Greece and Europe focusing on pulling that nation back from the brink? Could it be the Chinese Army leadership’s comments about punishing America for selling weapons to Taiwan by selling U.S. bonds kept the Chinese from buying? Could it be the market is saturated with American debt and with a huge supply in the pipeline for the coming year(s) investors are holding out for cheaper prices and higher rates of return? Or could it be the weather?
Whatever the reason(s) for the relatively poor performances of the auctions one this is for sure, Treasury rates got a bump up as a result of the lack of enthusiasm. Future auctions will let us know if this week’s results were an anomaly or a trend.
Economic data this week was somewhat positive, or less negative. While first time unemployment claims dipped to 440,000 in January from 480,000 in December, that is still 440,000 Americans who filed to receive unemployment insurance benefits. Retail sales in Janaury barely beat expectations, but still a paltry 0.5% increase. So while we spent more as a nation, mostly due to post-holiday sales and inventory clear-outs, we are not consuming as we were a few years ago. Spending is still down and savings are still up. Good for long term economic stability, not so good for short term economic recovery. Finally, consumer confidence is weaker than expectations—which means we still will put extra money aside for the rainy day instead of buying the new pair of shows or latest electronic gadget.
The road ahead is rocky for interest rates. China appears to be raising its rates and tightening its banks’ lending criteria which should reduce their demand for bonds. Short term this is good news for rates as investors dump stocks of companies that sell and trade with China and purchase bonds. Long term the loss of Chinese demand given how they have dominated the market will need to be filled from somewhere if bond prices are to stay stable or increase.
The biggest rock in the road however is the Fed and the end of its mortgage purchase program of $1.25 Trillion that commenced in January 2009 to prop up MBS and keep rates low and stable. The plan worked in that regard. With $66 billion left to spend and only six weeks to spend it the markets are looking at April 1st as a huge question mark. The Fed has purchased 80% of the MBS in the past fourteen months, who will fill the void and at what price will they have to be lured to market?
The impact on rates from the Fed purchase program has ranged from 0.75% to 1.5%. That means that for the past year where we have seen rates pretty much at or below 5%, without the Fed program the rates would have been 5.75% to 6.5%. How would our housing recovery and bank rehabilitation gone if that had been the case? For a more practical look at the impact, a $360,000 mortgage (about the average for our company for 2009) at 5% has a monthly principle and interest payment of $1933 per month, at 5.75% it is $2101 and at 6.5% it reaches $2275. A difference of $342 per month has a big impact on income to debt ratios and loan qualifying.
Mortgage applications nationwide for the first week of February dipped with the decline due to a drop of over 7% in purchase applications. Currently refinance applications are approximately 68% of the national volume, with the prospect of higher rates and the pending end (again) of the homebuyer tax credit in April we should see an increase in purchase activity the next few months perhaps enough to see the total purchase volume push above 35% and get closer to 40%.
This week in rates conforming ($417,000 and below) remain flat while hi-balance/jumbo ($417,001 - $729,000 for some counties) increase from last week.
Rates for Friday February 5, 2010:
30 year conventional 4.75% No Change
30 year conforming-jumbo 5.00% Up 0.125%
30 year FHA jumbo 5.00% Up 0.125%
Happy Valentine’s Day to everyone! It is my hope that everyone has as special a Valentine as me!
Who was St.Valentine? Here is link to story on History Channel Website.
Question of the week: We are very upside down on our home we bought in 2006, with loss of overtime we are starting to feel a strong financial pinch but cannot refinance because of our home’s value and the amount we owe on the mortgage. We do not want to sell our home but are seeing fewer options. Our credit is very strong. What can we do?
Answer: If your current lender is willing to reduce the principal balance for a payoff, as they would in a short-sale situation, you may be eligible for a “short-refinance” or short-refi using FHA financing.
A short-refi works in much the same way as a short sale, except instead of selling the home to another buyer, you refinance the home to a smaller mortgage amount. The lender will take a loss on the transaction, it is up to them to decide if they will approve the reduction necessary to accommodate a short-refi. With the poor performance they are seeing on many loan modification transactions, the costs of short sale transactions they have been through and the even higher costs to the bank of foreclosures, many lenders are favorable to approving short-refi transactions.
For a short-refinance using FHA financing to go through the following must occur:
· There can be no late payments on the existing mortgage, and payments must be maintained current through the entire process
· Lender must approve the short-refinance loan balance and pay-off of the existing mortgage
· Lender must provide statement of “non-recourse” to borrower, meaning they will not come after the borrower for any deficiency balance after the transaction closes
· Borrower must fully qualify for the FHA loan with full income, asset and credit documentation
The loan amount for the short-refinance will be 96.5% of the appraised value of the property (if your home appraises for $400,000 then you may be eligible for FHA short-refi loan of $386,000). During the approval process with the existing lender, part of the approval process needs to be whether the lender will allow the transaction costs to be included in the loan amount; i.e. if lender will agree to a lower pay-off amount so borrower does not need to bring closing costs to escrow out of pocket.
There are some disadvantages to a short-refinance. First, obviously there is a disadvantage to the original lender who will be losing money and taking a loss on the original mortgage they made with the borrower. Second, the borrower will have a derogatory reporting on their credit report for settling the existing mortgage balance for less than what was owed; which would happen through a short-sale or foreclosure anyway.
There are many benefits to the short-refi transaction as opposed to a short-sale or just walking away. First, and most important, you get to keep your home. While there will be a fairly significant hit to credit scores, since you will be in your home and have a mortgage the impact on qualifying for a new mortgage is eliminated. Usually there is a benefit of reducing your monthly mortgage payment, I say usually because some of the transactions occur to refinance from an adjustable rate to a fixed rate and the payment may stay close to the same as it is now. From a community standpoint the short-refinance transactions eliminates another home going on the market, potentially through short-sale or foreclosure, helping neighborhood home values stabilize.
Some pitfalls that will impact a short-refinance transaction center mostly around the existing lender and their process to approve and finalize the pay-off. We have experienced some very long and onerous transactions waiting for lenders to approve a short-sale transaction. In the short-refinance process an appraisal must be done up front to provide the short-ref loan amount to the existing lender so they can calculate their pay-off. Until the pay off is approved and agreed to the new mortgage rate cannot be locked in as there is no time frame within which to have the rate lock. If the approval process takes too long then a new appraisal may be required, this may or may not impact the original loan balance submitted to the lender.
The first step in a short-refinance transaction, is to contact the lender and determine who to communicate with regarding a short-refinance, what the process is, what paperwork is required and any other information that can be provided.
If you feel you may be a candidate for a short-refinance transaction please contact me to discuss your situation.
Mortgage Backed Securities this week spent considerable time pushing up against levels of resistance. Yesterday prices broke through the ceiling and we saw some strong gains after the initial unemployment claims report came out. This morning after a strong sell off following the Department of Labor’s January jobs report (20,000 jobs lost) and reporting that unemployment has fallen to 9.7% the market sold off very hard.
Then the numbers and report were analyzed and it seems the unemployment number fell from 10% to 9.7% because the Labor Department “found” 500,000 jobs it previously had not counted. It also revised December’s report to 150,000 jobs lost from the reported 85,000 jobs lost. One more revision, previously it had been reported that since the recession started in December 2007, 7.2 million jobs have been lost, today’s revision puts that number at 8.4 million jobs lost. Not good numbers.
Because of the severe negative employment numbers investors are selling off on stocks and investing in bonds creating a possible momentum for rates to fall for the next several days. There is a lot of chatter about taxes, government spending, government debt, and regulation. Underlying all of this chatter is over eight million jobs lost in our economy in the past twenty-five months. The arguments in Washington shift from health care to how to allow, support and enable the private sector create jobs and stop the shrinking of our economy so it can begin to grow.
Normally the bad economic news would be very good news for long term prospects of lower rates. The normal market reactions are tempered however by two factors I have mentioned previously. First, the Federal Reserve after having purchased over $10 billion in mortgage backed securities, and almost $1.2 Trillion since its MBS purchase program began which means it has about $75 billion left to purchase MBS by the end of March 2010. Who will absorb the MBS that the Fed has been buying? At what price/rate? Secondly, the concerns over the growing Federal deficit and the selling of debt to finance our government center not just on the ability to pay back the debt, but the rising cost of that debt, i.e. higher interest rates.
While from week to week and day to day rates go up and down and I/we try to educate clients as best we can on when to lock in rates to take advantage of the markets; the best advice is to avoid risk and lock as soon as possible on most transactions. The risk of higher rates striking quickly in any given escrow time period is much greater than the chance of rates dropping significantly during the same period. Lack of risk aversion from 2001 through 2006 by many sectors of the economy and many families is a big reason for the housing and credit collapses that started in 2007. If we learned one lesson through this period should be our tolerance for risk as a nation and for many individuals should be lower than it was before.
This week in rates looks a lot like last week with the exception of the late break through on the resistance levels. Gains have been seen in the hi-balance/jumbo products and some accruing on the price level for conforming loan amounts. If we can close high today then next week we may see some reduction in rates for conforming as well.
30 year conforming-jumbo 4.875% Down 0.125%
30 year FHA jumbo 4.875% Down 0.125%
Are you watching the Super Bowl? For the game or for the ads? Who are you pulling for, or do you just want a good game?
Dennis C. Smith, California Dept. of Real Estate Broker #00966315 Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
Dennis C. Smith, California Dept. of Real Estate Broker #00966315
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
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