Last week The Hill posted an article [Ax May Fall On Tax Break For Mortgages] reporting that lawmakers in Washington were looking at scrapping the Federal tax deduction for home mortgage interest. as you might expect, this comes in the guise of deficit reduction. Last year, President Obama proposed cutting the deduction rate for itemized expenses [which includes the mortgage interest deduction and the charitable deduction] for families with incomes above $250,000

What I find interesting about this is the change in terminology. Instead of being a deduction, mortgage interest is now being called a “tax entitlement.” “Entitlement” makes it sound like something that can’t be touched, but puts a negative connotation on it at the same time.

So, where do things go from here? Some of my observations/predictions

• The Federal government is spending like the proverbial drunken sailor. Because of that, it will be desperate of any source of income over the next decade
• The mortgage interest deduction is a fairly large pot of money. The White House estimates it’s proposal would increase government revenues by $208Billion over the next ten years. This combination makes change almost inevitable.
• Despite that inevitability, you won’t see Congress take action prior to the elections in November. THat would be a scary vote to make right before an election. Instead, wait for it in December when lame duck Congressmen can vote for it and people won’t notice ’cause it’s Christmas.
• This might start with people who make over $250,000, but it won’t stay there long. Tax law is one of the places that defines “slippery slope.”

I would encourage every homeowner to keep an eye on this issue and contact their Congressmen if and when this comes up for debate. After all, it’s a difference of several thousand dollars in most taxpayers’ taxable income.

[Since we talked about terminology before, it's also worth noting in the second paragraph of the Hill article, it calls an increase in your tax liability a "savings." That is an attitude in the Government we need to address -- that all money belongs to the Government, but they allow you to keep some of it.]

Much has been made of the many Federal programs to stop home foreclosures. The ugly truth, however, is, thanks to the Federal government, banks make more money by forcing you out of your home [through foreclosure or short sale] than they would be letting you pay your loan [modified or not]. The following video explains how it’s done.

OneWest’s Sweetheart Deal

The frustrating thing is that you know this isn’t the only one. I’d bet lunch that a similar deal was made for just about every major Federally supported bank takeover.

[In fairness, the FDIC has put out a rebuttal press release. It's to the right of the video in the link above]

Like every other lender, Fannie Mae has its share of bank-owned property [called REO, or Real Estate Owned]. Unlike most other lenders, however, Fannie Mae is taking some aggressive steps to move that inventory. most recently, Fannie Mae has stepped up to offer a 3.5% incentive to buyers who buy one of the homes listed on their HomePath website. The 3.5% incentive can be used for the following

• Closing costs
• The purchase of new Whirlpool appliances by Fannie Mae
• Any combination of closing costs and appliances up to the 3.5% limit

Like anything, this offer has some limitations;

• Offers must be accepted on or after January 28, 2010
• Property sales must close before May 1, 2010
• Buyers must be owner-occupants, investors are excluded

This is a great incentive to get people looking at HomePath, especially since the $8,000 tax credit can’t be used towards a downpayment. The incentive gets you past the closing and into the home, while the $8,000 tax credit can take care of the first six months of payments.

If you’re interested in making an offer on a HomePath home, please send me an email. To take advantage of the $8,000 tax credit, you must have a home under contract by April 30, which is less time that most people think.

Last week the Wall Street Journal reported that Rep. Barney Frank [D-MA], the chariman of the House Financial Services Committee, called for the elimination of Fannie Mae and Freddie Mac. To quote Rep. Frank

“The remedy here is…as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance.”

No details were given about what would replace them, but given Frank’s political DNA, I’d bet much more towards direct government control than a smaller privatized company.

Currently, Fannie and Freddie combined own or guarantee about half of the $11 Trillion in outstanding home mortgages. By controlling such a large percentage of mortgage assets, they essentially control the mortgage industry. The market [or more accurately, the lack of a market] for jumbo loans is a prime example of this. Having that completely replaced with a government agency would, essentially, nationalize the mortgage industry.

This might be good in the short term, as it would make the mortgage markets more predictable and stable. In the long run, however, government control is a mistake — it would give the government almost total control over what gets built, who can buy it, and where citizens can live. Putting something this integral to the lives of Americans in the hands of politicians only invites a repeat of the tragedy that got us here in the first place.

Last Wednesday GMAC Financial Services, citing losses in its mortgage division, received another infusion of cash — $3.8 Billion this time — from the Federal government. This means that GMAC has received a total of $16.3 Billion from American taxpayers. In exchange for this aid, the Feds now own 56.3% of GMAC. No matter what your political leanings, this is a huge amount of money and an unprecedented amount of government control.

Here is the interesting question: DiTech Mortgages, one of GMAC’s subsidiaries, is one of the nation’s largest mortgage lenders. Given that Fannie Mae and Freddie Mac are both now owned by the Feds, and now have unlimited capital to buy mortgages, will mortgages from DiTech receive preferential treatment? After all, this level of vertical integration is the goal of many private corporations. If the Feds could somehow pick up a national real estate firm, they could pretty much control the transaction from start to finish.

What do you think? Is this level of government control what is needed to revive the mortgage market?

[photo credit: Creative Commons and Shiny Things]

On Christmas Eve the Treasury Department announced that it was lifting the caps that limited the amount of available capital for Fannie Mae and Freddie Mac. Prior to Christmas Eve, each company was limited to $200 Billion of capital from the Federal government [read taxpayers]. the decision was, in the opinion of the Treasury, “necessary for preserving the continued strength and stability of the mortgage market.” Now, and through the end of 2012, the Federal government [again, that's you and me] are guaranteed to cover all losses of the two companies. You can see more of the details in this Wall Street Journal article.

What does that mean for you and me? In the short run, this will probably help hold mortgage rates down. With unlimited reserves, Fannie and Freddie will almost certainly be more aggressive in buying mortgages. This increased demand will encourage lenders to increase the supply of mortgages, which they do by either lowering rates [to encourage more good borrowers back into the market], or loosening standards [to attract more borrowers from the edges]. This is good news for borrowers, especially people looking to take advantage of the extended and expanded first-time home buyers credit.

The long run, however, is more concerning. To get access to all this new capital, Fannie and Freddie had to give the government preferred stock paying 10% dividends [preferred means the dividends are guarenteed no matter what]. They each also gave the government warrants that allow the government to purchase roughly 80% of each company. So, in effect, the Federal government owns Fannie Mae and Freddie Mac. And the Feds track record for running anything isn’t too great.

Hopefully we will have the best of both worlds — a well capitalized secondary mortgage market and a Federal government dedicated to allowing Fannie and Freddie to operate as somewhat  independent entities. We will certainly see what happens over the next few months.

One of the ways the Federal government is trying to reform the housing industry is by adding more structure to the closing transaction. In particular, HUD is requiring two new forms for all closings after January 1, 2010. Those new forms are;

The Good Faith Estimate. When one applies for a mortgage, the lender is expected to provide an estimate of the expenses and fees involved in getting the new mortgage. Starting in 2010 those estimates will be given on a standardized form – the Good Faith Estimate. This form lays out all the charges related to the loan and note which charges can not change, which can change a small amount, and which have no restrictions. By doing this, HUD hopes to make comparison shopping easier and to help consumers understand the loan they are applying for.

The second form is a revised Settlement Statement or HUD-1 form. The HUD-1 is given to the buyer and seller by the closing attorney prior to closing [supposedly 24 hours prior - usually about 30 minutes prior] and is the official record of where all the money comes from and where it ends up. The new form has a new section which compares the actual settlement costs to the Good Faith Estimate and a final section which spells out the details of the mortgage in relatively clear English.

Overall, these changes are pretty positive. They make good strides towards making the money trail in a closing clear and in making the estimates given by lenders mean something. They certainly aren’t perfect — for example the Good Faith Estimate doesn’t actually tell the borrower what the mortgage payment is — but I expect a couple of quick revisions will take care of the main points.

For a great review of the new forms, including some sample forms, take a look at the Virginia Association of Realtors website. Since the forms are Federal, their comments should also be valid here in NC.

[Thanks to Tina Merritt and the Trump Blog for pointing out the VAR site]

In all the sound and fury about the extension of the First Time Homebuyer’s Credit, you might have missed the news from Fannie Mae. Last Thursday, Fannie Mae announced a new program to allow troubled homeowners a chance to stay in properties threatened by foreclosure. Under the program, homeowners would transfer ownership of the property to Fannie Mae [a "deed-in-lieu of foreclosure"]. Fannie Mae would then allow the [now former] homeowners to sign a lease for up to one year to remain in the property. As you might expect, there are a number of conditions;

1. You must have a mortgage owned by Fannie Mae. If you aren’t sure, you can check here to see if your loan is owned or backed by Fannie Mae.
2. You must be behind on your current mortgage.
3. You can not qualify for a loan modification under current Federal guidelines.
4. You must qualify for a deed in lieu of foreclosure under Fannie Mae guidelines
5. You must demonstrate that you can afford a market rent. Generally this means that the market rent is less than 31% of your monthly gross income.
6. Any subordinate lien [a second mortgage, HELOC, etc] must be released by payment in full or some other arrangement.

This program is similar to one offered by Freddie Mac. The main difference is that Freddie Mac is signing month-to-moth leases to allow homeowners to stay in the home while Freddie Mac finds a new buyer.

Both of these programs will certainly advance the Government’s immediate goal of helping people stay in their homes — at least for a little while. It will, however, make the Federal Government a landlord for an increasing number of properties. Both Fannie and Freddie expect to hire management companies, but it is still one more bureaucracy in companies stretched to the limit already.

The second thing these programs will do is delay the needed and eventual adjustment of the housing market. With Fannie delaying the sale of these homes for a year [or possibly more] becomes even more of the long drawn out pain instead of the short sharp adjustment the economy needed.

What do you think? do these programs help or hurt the overall economy?

If you have read this blog at all, you know that the $8,000 First Time Home Buyers Credit expires on November 30, 2009. To take advantage of the credit, you must complete your purchase by November 30. Being under contact is not enough – the transaction must be done and recorded with the county by the deadline.

“No problems” you say. “The end of November is a long ways away.” Actually, it’s closer than you think. Let’s work through the timing.

First of all, Thanksgiving is the last week of November. Between the holiday and all the “Last Minute Larrys” who need to close on November 30, I would strongly suggest buyers schedule their closing not later than November 20 [the Friday before Thanksgiving].

As I mentioned in a previous post, processing mortgage paperwork is taking 30-45 days. Let’s be optimistic, and assume 30 days from the contract date to the closing. Assuming that November 20 closing date, you need to have a home under contract by October 21.

October 21 is just three weeks away. That’s three weeks to find the right home, make an offer, negotiate with the seller and get in under contract. There is still time to find that first home — just not as much of it.

If you are still looking for that first home, please let me know. There are many great homes to choose from [starting with the home in Woodcroft that heads the right column]. The time to get started, however, is today.

As a small part of the Stimulus package, Congress passed the “Mortgage Disclosure Improvement Act.” This act, which took effect of July 30, attempted to ensure that buyers went into their closings with all the [correct] information. The main provisions of the Act are

• A borrower must receive a Good Faith Estimate [GFE] and a Truth in Lending [TIL] disclosure within three days of submitting a mortgage application. [This was already required, but is reinforced by the Act]
• The borrower must have at least seven days to review the GFE and TIL disclosures. This can not be waived by the buyer.
• If the terms of the loan change, or the loan APR increases by more than 0.125% [one-eighth of a percent], the buyer has to receive a new GFE and TIL disclosure. The buyer than receives three days to review the new documents. The buyer can not waive this period, so if the change is made the day before closing, the closing is delayed.

All of this is supposed to prevent buyers from arriving at the closing table to discover the terms and expenses of their mortgage are not what the buyers thought they were. That is a admirable goal. What it will also do, however, is slow down the application process. Think about it — under the new system, lenders are going to want to be absolutely certain of all the numbers 72 hours prior to closing. Otherwise, the closing ends up delayed and everyone is unhappy [and they blame it on the lender, which makes it doubly bad].

The mortgage pros I’ve spoken to have said that buyers should assume the application process under the new system will take 45 days, where it used to take around 30. If you are a first time home buyer trying to get closing done before the tax credit goes away [on November 30], that’s another 15 days you need to build into your schedule. Don’t wait until the last minute. Email me today, and we’ll get started finding that first home for you.