2012 to be the best year for short sales?
The Mortgage Debt Forgiveness Act of 2007 allows an income tax
exemption for a homeowner whose mortgage debt is partly or
entirely forgiven by a bank. It's set to expire Dec. 31, 2012.
Matt Alegi, a partner with the Potomac law firm Shulman Rogers
and chair of the firm's residential real estate practice group,
says the tax break has meant a savings in the tens of thousands
of dollars for individuals. Typically, if someone were to have
$150,000 forgiven by the bank, Alegi says, "you just made another
$150,000 of income for tax purposes in that year." So, say
someone makes $50,000 but had $150,000 forgiven by the bank. That
person is now paying taxes on a $200,000 income, and included in
a much higher tax bracket. The loss of the relief will plunge
homeowners further into debt, Alegi says.
He also thinks the expiration of the Debt Forgiveness Act will
have an impact on short sales themselves. Homeowners could try to
push the short sale through this year to take advantage of the
tax break. Alegi believes there will be strong lobbying to
extend the tax break. If it isn't extended, the appeal of a short
sale could greatly diminish for the homeowner. To take advantage
of the Debt Relief Act, you need to fall under very specific
guidelines outlined by the IRS. For example, the debt forgiven
is only for primary residences and the debt must have been used
to buy, build or substantially improve your principal residence
and be secured by that residence. Alegi says homeowners who
spent the forgiven money on education or other bills do not
qualify.
Gridlock an Obama strategy?
When President Obama outlines his goals for 2012 during
Tuesday’s State of the Union address, he shouldn’t expect a
lot of cooperation from Republicans, senate Minority Leader Mitch
McConnell (R-Ky.) said yesterday. “With the Obama economy
established now…unemployment is still at 8 ½%,” McConnell
said. “It didn’t work, and we’re not interested in doing
more of the things that don’t work.” He said Obama was
“AWOL” last year on his bus tour when Republicans wanted to
tackle tax reform and entitlements, and he expects more of the
same this year. “He was not involved whatsoever,” McConnell
said. “So I’m not optimistic, frankly, that in an election
year that he’s likely to be any more engaged than he was last
year.” What’s more, he thinks the logjam in the nation’s
capital is part of Obama’s agenda. “That’s his
strategy…to demonize Congress, to complain because he can’t
continue to get everything he wants, like he did the first two
years,” he said. “It’s all about his re-election and not
about the country.” One thing that McConnell thinks will get
done is the payroll tax cut extension, which was extended for
only two months in December when Congress couldn’t come to an
agreement. “We’ll be back at trying to figure out how to do
that for the balance of the year and how to pay for it,” he
said. “We don’t want to add to the deficit.”
What the $25 billion bank deal means
According to an Associated Press report, five major banks -- Bank
of America, JPMorgan Chase, Wells Fargo, Citibank and Ally
Financial -- and US state attorneys general could adopt the
agreement within weeks. It's expected President Barack Obama will
mention new developments in the negotiations in his State of the
Union address today. A settlement between the banks and the
states doesn't mean homeowners who lost their homes to
foreclosure will get them back. In fact, they're unlikely to
benefit much at all financially, though the total financial
settlement could be as high as $25 billion. What's worse is the
settlement does not apply to loans held by Fannie Mae or Freddie
Mac. Since Fannie and Freddie own about half of all US mortgages
- or 31 million US home loans - that means a lot of homeowners
who have been hurt by the banks' deceptive foreclosure practices
won't be getting much-needed assistance. Nearly 11 million
people - one in four homeowners - owe more than their home is
worth. According to current guidelines, these underwater
homeowners have few options and little chance at refinancing.
Here's how the settlement could shape up:
- $17 billion would go toward reducing the principal balance
struggling homeowners owe on their mortgages.
- $5 billion would be put into a reserve account for various
state and federal programs. A portion of this money would cover
the $1,800 checks that would be sent to homeowners affected by
deceptive practices. Only about 750,000 Americans, or half of the
households who might be eligible for assistance under the deal,
will likely receive checks.
- About $3 billion would be used to help homeowners refinance at
5.25%, far below current mortgage interest rates.
If the proposed settlement terms are accepted, roughly 1 million
of these homeowners could see the principal amount of their
mortgages reduced by an average of $20,000. That's good news for
some, but bad news for the other 10 million homeowners who would
like to claim a principal reduction but won't qualify. The
better news is this settlement has the potential to reshape
long-standing lending guidelines and make things easier for
at-risk and underwater homeowners across the board. But critics
say it doesn't do enough. Sen. Sherrod Brown (D-Ohio) tells the
Associated Press: "Wall Street is again trying to pass the buck.
Instead of criminal prosecutions, we're talking about something
that's not more than a slap on the wrist." Some states have
disagreed over what to offer banks, with states like New York,
Delaware, Nevada and Massachusetts arguing banks should not be
"protected from future civil liability." The deal will not fully
release banks from future criminal lawsuits by individual states,
and a few of those states' attorneys general have already
promised to pursue their own investigations. Bank officials have
argued few, if any, foreclosures wrongfully took place as a
result of documentation issues. Ally Financial CEO Michael
Carpenter has been among the most vocal, claiming the company
found no instances of wrongful foreclosure after its own internal
audit. Carpenter has said he will fight the government in court
if need be.
US Treasurys edge higher after Greek setback
US Treasurys edged higher today, after euro zone finance
ministers rejected an offer by private creditors to restructure
Greek debt, keeping alive fears of a default. Benchmark 10-year
note's yield was at 2.06%, compared with 2.058% in late US trade
on Monday. The yield rose as high as 2.094% on Friday, its
highest since early December. The 30-year bond yield was at
3.14%. Demand for safe-haven US debt was further boosted after a
report rekindled fears that Portugal, seen as the second most
risky country in the euro zone, could be the next potential
default candidate after Greece. Further dousing optimism,
Germany denied a report that it was ready to boost the combined
firepower of the euro zone's rescue funds to 750 billion euros
($979 billion). During its two-day policy meeting starting on
Tuesday the Federal Reserve is expected to push out expectations
on when it will next raise interest rates until at least 2014,
and the meeting will also be closely watched for any hints of new
QE, which analysts expect would focus on mortgage-backed bonds.
The Treasury Department will sell four-week bills and two-year
notes later in the day. The Treasury will sell a total of $99
billion in new two-year, five-year, and seven-year notes this
week.
Mortgage writedowns to cost taxpayers $100 billion
Forgiving mortgage debt on Fannie Mae and Freddie Mac loans would
cost the taxpayer-funded companies almost $100 billion, their
regulator said. The Federal Housing Finance Agency (FHFA) said
that as of June 30, the companies guaranteed nearly 3 million
mortgages on single- family homes that are underwater, or worth
less than the loans they secure. "FHFA estimates that principal
forgiveness for all of these mortgages would require funding of
almost $100 billion," FHFA Acting Director Edward J. DeMarco said
in a Jan. 20 letter to Representative Elijah Cummings, a Maryland
Democrat who had threatened to subpoena the information. The FHFA
posted the letter on its website today. Nearly 80% of the Fannie
Mae and Freddie Mac borrowers with negative equity were current
on their payments, DeMarco said.
DeMarco, whose agency was created by Congress to minimize losses
at Fannie Mae and Freddie Mac and is independent of President
Barack Obama's administration, has maintained that principal
forgiveness would increase the size of the government's bailout
of the companies, which have cost taxpayers more than $153
billion since they were taken under government control in 2008.
The agency compared the cost of principal forgiveness to the
companies' current practice of forbearance, which allows
delinquent borrowers to defer payments. "Given that any money
spent on this endeavor would ultimately come from taxpayers and
given that our analysis does not indicate a preservation of
assets for Fannie Mae and Freddie Mac (FMCC) substantial enough
to offset costs, an expenditure of this nature at this time
would, in my judgment, require congressional action," he said.
WSJ - EU tries to revive Greek talks
European Union finance ministers today piled pressure on Greece
and its private-sector creditors to do more to ensure that a
proposed deal to restructure Greece's private-sector debt will be
enough to put the country back on a firm fiscal footing. The
International Monetary Fund (IMF) and the euro zone's four
triple-A-rated countries-—Germany, the Netherlands, Finland and
Luxembourg—are pushing for a low average interest rate on new
bonds to be issued as part of the restructuring, in order to
ensure the government can pay its debts in the future. But as
they were heading to a meeting Tuesday, EU finance ministers also
urged Greece to implement tough austerity and structural reforms
and provide more written assurances to its partners that it would
commit to its pledges before further aid can be released.
Austrian Finance Minister Maria Fekter said she's "not pleased"
with progress so far. "We're sending a very direct message to
Greece that the community expects more, also in terms of
structural reform," she told reporters. "We're not pleased and
only when there's a written message on the table in front of us,
can further assistance be discussed."
Greece's debt restructuring is planned to take the form of a bond
exchange in which creditors holding some €200 billion ($260.32
billion) in debt would swap their securities for new instruments
with half the face value. The key sticking point is how much
interest the new bonds should pay. The restructuring is part and
parcel of the second bailout program for Greece amounting to
€130 billion. Without this loan, Greece will default on a
€14.4 billion bond maturing March 20. But talks in Athens with
the Institute of International Finance, which represents the
majority of Greece's private-sector creditors, have dragged on
for three weeks and stalled over the weekend. Private-sector
creditors said in a final offer that they won't accept an average
interest rate of less than 4%. The IMF voiced concerns yesterday
that the deal being discussed by Greece and the creditors would
leave the country with a higher-than-expected debt burden in the
years ahead, people familiar with the matter said. That sets up
a difficult choice: press bondholders to accept more losses, or
accept that Greece's peers and the IMF will have to kick in more
support.
Olick - foreclosure investors a double edged sword
"The best and most expeditious way to clear the vast inventory of
foreclosed properties weighing down today’s housing market is
to get more investors in and sell them these properties at bulk
discounts. That’s what the Obama administration and Federal
regulators are currently considering for the thousands of homes
currently owned by Fannie Mae, Freddie Mac and the FHA. While
big private equity funds are still largely in a very tedious
deal-making stage with banks or waiting on the sidelines for a
government program, smaller individual investors are getting in.
Nearly 23% of home purchases in December were by investors,
according to a new survey from Campbell/Inside Mortgage Finance.
That is a slight increase from November, but the share has
remained largely unchanged for the past year. What has changed
dramatically is how many of these investors are using
all-cash…74% according to the survey, which also found that,
'cash buyers are able to bid significantly lower—and
successfully—on many properties because they offer a shorter
and more reliable closing timeline.' That is precisely what
mortgage servicers want.
'While investor bids may not be the first offers accepted, they
often end up winning properties after other homebuyers are
eliminated because of mortgage approval or timeline problems,'
according to the survey authors. 'Appraisals below the contracted
price are a common reason for mortgage denials. Most mortgage
financing timelines are now in excess of 30 days.' There has
been a lot of concern among industry analysts that bulk
foreclosure sales would push home prices down further, but it
appears that is already happening, as investors usually offer
10-20% below list price, while first time home buyers and current
homeowners are generally offering list. If the offers are
competitive, cash will prevail."
The Mortgage Debt Forgiveness Act of 2007 allows an income tax
exemption for a homeowner whose mortgage debt is partly or
entirely forgiven by a bank. It's set to expire Dec. 31, 2012.
Matt Alegi, a partner with the Potomac law firm Shulman Rogers
and chair of the firm's residential real estate practice group,
says the tax break has meant a savings in the tens of thousands
of dollars for individuals. Typically, if someone were to have
$150,000 forgiven by the bank, Alegi says, "you just made another
$150,000 of income for tax purposes in that year." So, say
someone makes $50,000 but had $150,000 forgiven by the bank. That
person is now paying taxes on a $200,000 income, and included in
a much higher tax bracket. The loss of the relief will plunge
homeowners further into debt, Alegi says.
He also thinks the expiration of the Debt Forgiveness Act will
have an impact on short sales themselves. Homeowners could try to
push the short sale through this year to take advantage of the
tax break. Alegi believes there will be strong lobbying to
extend the tax break. If it isn't extended, the appeal of a short
sale could greatly diminish for the homeowner. To take advantage
of the Debt Relief Act, you need to fall under very specific
guidelines outlined by the IRS. For example, the debt forgiven
is only for primary residences and the debt must have been used
to buy, build or substantially improve your principal residence
and be secured by that residence. Alegi says homeowners who
spent the forgiven money on education or other bills do not
qualify.
Gridlock an Obama strategy?
When President Obama outlines his goals for 2012 during
Tuesday’s State of the Union address, he shouldn’t expect a
lot of cooperation from Republicans, senate Minority Leader Mitch
McConnell (R-Ky.) said yesterday. “With the Obama economy
established now…unemployment is still at 8 ½%,” McConnell
said. “It didn’t work, and we’re not interested in doing
more of the things that don’t work.” He said Obama was
“AWOL” last year on his bus tour when Republicans wanted to
tackle tax reform and entitlements, and he expects more of the
same this year. “He was not involved whatsoever,” McConnell
said. “So I’m not optimistic, frankly, that in an election
year that he’s likely to be any more engaged than he was last
year.” What’s more, he thinks the logjam in the nation’s
capital is part of Obama’s agenda. “That’s his
strategy…to demonize Congress, to complain because he can’t
continue to get everything he wants, like he did the first two
years,” he said. “It’s all about his re-election and not
about the country.” One thing that McConnell thinks will get
done is the payroll tax cut extension, which was extended for
only two months in December when Congress couldn’t come to an
agreement. “We’ll be back at trying to figure out how to do
that for the balance of the year and how to pay for it,” he
said. “We don’t want to add to the deficit.”
What the $25 billion bank deal means
According to an Associated Press report, five major banks -- Bank
of America, JPMorgan Chase, Wells Fargo, Citibank and Ally
Financial -- and US state attorneys general could adopt the
agreement within weeks. It's expected President Barack Obama will
mention new developments in the negotiations in his State of the
Union address today. A settlement between the banks and the
states doesn't mean homeowners who lost their homes to
foreclosure will get them back. In fact, they're unlikely to
benefit much at all financially, though the total financial
settlement could be as high as $25 billion. What's worse is the
settlement does not apply to loans held by Fannie Mae or Freddie
Mac. Since Fannie and Freddie own about half of all US mortgages
- or 31 million US home loans - that means a lot of homeowners
who have been hurt by the banks' deceptive foreclosure practices
won't be getting much-needed assistance. Nearly 11 million
people - one in four homeowners - owe more than their home is
worth. According to current guidelines, these underwater
homeowners have few options and little chance at refinancing.
Here's how the settlement could shape up:
- $17 billion would go toward reducing the principal balance
struggling homeowners owe on their mortgages.
- $5 billion would be put into a reserve account for various
state and federal programs. A portion of this money would cover
the $1,800 checks that would be sent to homeowners affected by
deceptive practices. Only about 750,000 Americans, or half of the
households who might be eligible for assistance under the deal,
will likely receive checks.
- About $3 billion would be used to help homeowners refinance at
5.25%, far below current mortgage interest rates.
If the proposed settlement terms are accepted, roughly 1 million
of these homeowners could see the principal amount of their
mortgages reduced by an average of $20,000. That's good news for
some, but bad news for the other 10 million homeowners who would
like to claim a principal reduction but won't qualify. The
better news is this settlement has the potential to reshape
long-standing lending guidelines and make things easier for
at-risk and underwater homeowners across the board. But critics
say it doesn't do enough. Sen. Sherrod Brown (D-Ohio) tells the
Associated Press: "Wall Street is again trying to pass the buck.
Instead of criminal prosecutions, we're talking about something
that's not more than a slap on the wrist." Some states have
disagreed over what to offer banks, with states like New York,
Delaware, Nevada and Massachusetts arguing banks should not be
"protected from future civil liability." The deal will not fully
release banks from future criminal lawsuits by individual states,
and a few of those states' attorneys general have already
promised to pursue their own investigations. Bank officials have
argued few, if any, foreclosures wrongfully took place as a
result of documentation issues. Ally Financial CEO Michael
Carpenter has been among the most vocal, claiming the company
found no instances of wrongful foreclosure after its own internal
audit. Carpenter has said he will fight the government in court
if need be.
US Treasurys edge higher after Greek setback
US Treasurys edged higher today, after euro zone finance
ministers rejected an offer by private creditors to restructure
Greek debt, keeping alive fears of a default. Benchmark 10-year
note's yield was at 2.06%, compared with 2.058% in late US trade
on Monday. The yield rose as high as 2.094% on Friday, its
highest since early December. The 30-year bond yield was at
3.14%. Demand for safe-haven US debt was further boosted after a
report rekindled fears that Portugal, seen as the second most
risky country in the euro zone, could be the next potential
default candidate after Greece. Further dousing optimism,
Germany denied a report that it was ready to boost the combined
firepower of the euro zone's rescue funds to 750 billion euros
($979 billion). During its two-day policy meeting starting on
Tuesday the Federal Reserve is expected to push out expectations
on when it will next raise interest rates until at least 2014,
and the meeting will also be closely watched for any hints of new
QE, which analysts expect would focus on mortgage-backed bonds.
The Treasury Department will sell four-week bills and two-year
notes later in the day. The Treasury will sell a total of $99
billion in new two-year, five-year, and seven-year notes this
week.
Mortgage writedowns to cost taxpayers $100 billion
Forgiving mortgage debt on Fannie Mae and Freddie Mac loans would
cost the taxpayer-funded companies almost $100 billion, their
regulator said. The Federal Housing Finance Agency (FHFA) said
that as of June 30, the companies guaranteed nearly 3 million
mortgages on single- family homes that are underwater, or worth
less than the loans they secure. "FHFA estimates that principal
forgiveness for all of these mortgages would require funding of
almost $100 billion," FHFA Acting Director Edward J. DeMarco said
in a Jan. 20 letter to Representative Elijah Cummings, a Maryland
Democrat who had threatened to subpoena the information. The FHFA
posted the letter on its website today. Nearly 80% of the Fannie
Mae and Freddie Mac borrowers with negative equity were current
on their payments, DeMarco said.
DeMarco, whose agency was created by Congress to minimize losses
at Fannie Mae and Freddie Mac and is independent of President
Barack Obama's administration, has maintained that principal
forgiveness would increase the size of the government's bailout
of the companies, which have cost taxpayers more than $153
billion since they were taken under government control in 2008.
The agency compared the cost of principal forgiveness to the
companies' current practice of forbearance, which allows
delinquent borrowers to defer payments. "Given that any money
spent on this endeavor would ultimately come from taxpayers and
given that our analysis does not indicate a preservation of
assets for Fannie Mae and Freddie Mac (FMCC) substantial enough
to offset costs, an expenditure of this nature at this time
would, in my judgment, require congressional action," he said.
WSJ - EU tries to revive Greek talks
European Union finance ministers today piled pressure on Greece
and its private-sector creditors to do more to ensure that a
proposed deal to restructure Greece's private-sector debt will be
enough to put the country back on a firm fiscal footing. The
International Monetary Fund (IMF) and the euro zone's four
triple-A-rated countries-—Germany, the Netherlands, Finland and
Luxembourg—are pushing for a low average interest rate on new
bonds to be issued as part of the restructuring, in order to
ensure the government can pay its debts in the future. But as
they were heading to a meeting Tuesday, EU finance ministers also
urged Greece to implement tough austerity and structural reforms
and provide more written assurances to its partners that it would
commit to its pledges before further aid can be released.
Austrian Finance Minister Maria Fekter said she's "not pleased"
with progress so far. "We're sending a very direct message to
Greece that the community expects more, also in terms of
structural reform," she told reporters. "We're not pleased and
only when there's a written message on the table in front of us,
can further assistance be discussed."
Greece's debt restructuring is planned to take the form of a bond
exchange in which creditors holding some €200 billion ($260.32
billion) in debt would swap their securities for new instruments
with half the face value. The key sticking point is how much
interest the new bonds should pay. The restructuring is part and
parcel of the second bailout program for Greece amounting to
€130 billion. Without this loan, Greece will default on a
€14.4 billion bond maturing March 20. But talks in Athens with
the Institute of International Finance, which represents the
majority of Greece's private-sector creditors, have dragged on
for three weeks and stalled over the weekend. Private-sector
creditors said in a final offer that they won't accept an average
interest rate of less than 4%. The IMF voiced concerns yesterday
that the deal being discussed by Greece and the creditors would
leave the country with a higher-than-expected debt burden in the
years ahead, people familiar with the matter said. That sets up
a difficult choice: press bondholders to accept more losses, or
accept that Greece's peers and the IMF will have to kick in more
support.
Olick - foreclosure investors a double edged sword
"The best and most expeditious way to clear the vast inventory of
foreclosed properties weighing down today’s housing market is
to get more investors in and sell them these properties at bulk
discounts. That’s what the Obama administration and Federal
regulators are currently considering for the thousands of homes
currently owned by Fannie Mae, Freddie Mac and the FHA. While
big private equity funds are still largely in a very tedious
deal-making stage with banks or waiting on the sidelines for a
government program, smaller individual investors are getting in.
Nearly 23% of home purchases in December were by investors,
according to a new survey from Campbell/Inside Mortgage Finance.
That is a slight increase from November, but the share has
remained largely unchanged for the past year. What has changed
dramatically is how many of these investors are using
all-cash…74% according to the survey, which also found that,
'cash buyers are able to bid significantly lower—and
successfully—on many properties because they offer a shorter
and more reliable closing timeline.' That is precisely what
mortgage servicers want.
'While investor bids may not be the first offers accepted, they
often end up winning properties after other homebuyers are
eliminated because of mortgage approval or timeline problems,'
according to the survey authors. 'Appraisals below the contracted
price are a common reason for mortgage denials. Most mortgage
financing timelines are now in excess of 30 days.' There has
been a lot of concern among industry analysts that bulk
foreclosure sales would push home prices down further, but it
appears that is already happening, as investors usually offer
10-20% below list price, while first time home buyers and current
homeowners are generally offering list. If the offers are
competitive, cash will prevail."
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