By Kenneth R. Harney July 13, 2012

When the Supreme Court upheld the health care reform law on federal tax grounds, it restoked a housing issue that had been relatively quiet for the past year: The alleged 3.8 percent “real estate tax” on home sales beginning in 2013 that is buried away in the legislation.

Immediately following enactment of the health care law, waves of emails hit the Internet with ominous messages aimed at homeowners. A sample: “Did you know that if you sell your house after 2012 you will pay a 3.8 percent sales tax on it? When did this happen? It’s in the health care bill. Just thought you should know.”

Once litigation challenging the law’s constitutionality surfaced in federal courts, the email warnings subsided. But with the law scheduled to take effect less than six months from now, questions are being raised again: Is there really a 3.8 percent transfer tax on real estate coming in 2013? Does it pre-empt the existing $250,000 and $500,000 capital gains exclusions for single-filing and joint-filing home sellers, as some emails have claimed?

In case you’ve heard rumors or received worrisome emails about any of this, here’s a quick primer. Yes, there is a new 3.8 percent surtax that takes effect Jan. 1 on certain investment income of upper income individuals – including some of their real estate transactions. But it’s not a transfer tax and not likely to affect the vast majority of homeowners who sell their primary residences next year. In fact, unless you have an adjusted gross income of more than $200,000 as a single-filing taxpayer, or $250,000 for couples filing jointly ($125,000 if you’re married filing singly), you probably won’t be touched by the surtax at all, though you could be affected by other changes in the code if Congress fails to extend the Bush tax cuts scheduled to expire at the end of this year.

Even if you do have income greater than these thresholds, you might not be hit with the 3.8 percent tax unless you have certain types of investment income targeted by the law, specifically dividends, interest, net capital gains and net rental income. If your income is solely “earned” – salary and other compensation derived from active participation in a business – you have nothing to worry about as far as the new surtax.

Where things can get a little complicated, however, is when you sell your home for a substantial profit, and your adjusted gross income for the year exceeds the $200,000 or $250,000 thresholds. The good news: The surtax does not interfere with the current tax-free exclusion on the first $500,000 (joint filers) or $250,000 (single filers) of gain you make on the sale of your principal home. Those exclusions have not changed. But any profits above those limits are subject to federal capital gains taxation and could also expose you to the new 3.8 percent surtax.

Julian Block, a tax attorney in Larchmont, N.Y., and author of “Julian Block’s Home Seller’s Guide to Tax Savings,” says it will be more important than ever to pull together documentation on the capital improvements you made to the property and expenses connected with the house – including settlement or closing costs, such as title insurance and legal fees – that increase your tax “basis” in order to lower your capital gains.

Since the health care law targets capital gains, you could find yourself exposed to the 3.8 percent levy on the sale of your home next year. Here’s an example provided by the tax staff at the National Association of Realtors. Say you and your spouse have adjustable gross income (AGI) of $325,000 and you sell your home at a $525,000 profit. Assuming you qualify, $500,000 of that gain is wiped off the slate for tax purposes. The $25,000 additional gain qualifies as net investment income under the health care law, giving you a revised AGI of $350,000. Since the law imposes the 3.8 percent surtax on the lesser of either the amount your revised AGI exceeds the $250,000 threshold for joint filers ($100,000 in this case) or the amount of your taxable gain ($25,000), you end up owing a surtax of $950 ($25,000 times .038).

The 3.8 percent levy can be confusing, and can bite deeper when your taxable capital gains are far larger or you sell a vacation home or a piece of rental real estate, where all the profits could subject you to the investment surtax. Definitely talk to a tax professional for advice on your specific situation.

DOJ Claims Prize in Wells Deal, But Bank Avoids Trip to Court

By Kevin Wack

JUL 12, 2012 4:36pm ET

WASHINGTON – The $175 million fair-lending settlement that federal authorities announced Thursday with Wells Fargo (WFC) offered both sides the chance to claim some measure of victory and move past a three-year-long investigation.

With the settlement, Wells Fargo was able to deny – contrary to the allegations of the Justice Department – that it unlawfully discriminated against minority borrowers related to mortgages originated during the housing boom. But at the same time, the Justice Department, which has been pursuing fair-lending cases more energetically during the Obama Administration, was able to claim its second-largest prize following a $335 million settlement with Countrywide last year.

“All too frequently, Wells Fargo’s African-American and Latino borrowers had no idea whatsoever that they could have gotten a better deal,” Assistant Attorney General Thomas Perez said at a press conference in Washington. “No idea that white borrowers with similar credit would pay less. That is discrimination with a smile.”

Much of the alleged wrongdoing involved the bank’s wholesale lending channel, which utilizes outside mortgage brokers, and Wells suggested in a press release that any bad conduct was beyond the bank’s control because mortgage brokers operate as independent businesses.

“Wells Fargo cannot set loan prices for independent mortgage brokers nor control the combined effect of the negotiations that thousands of these independent mortgage brokers conduct with their customers,” the bank stated.

Wells separately announced that it is closing the wholesale mortgage channel, which currently represents about 5% of its residential mortgage volume. The San Francisco bank had already closed its wholesale nonprime division five years ago, and it stopped making retail nonprime loans more than four years ago.

The settlement also frees up resources inside the Justice Department, and in particular in the Civil Rights Division’s Fair Lending Unit, to pursue similar cases against other banks.

Perez would not comment Thursday on other specific probes, but did say: “We have other investigations pending.”

Anand Raman, a lawyer at Skadden Arps who often represents banks, said, “The Justice Department sees as part of its mission going after big settlements, and I would not be surprised if this is not the last such resolution.”

When pressed on why the Justice Department agreed to settle a case involving what it alleged was a racial surtax on loans, rather than going to court, Perez said: “There are real people affected, and we were able to reach a resolution with Wells now to provide assistance for people.”

“When you have protracted litigation, that can take years,” Perez added. “There’s obvious mutual litigation risk on everyone’s side. And our goal here is to help people, and to come to a resolution that can in fact help ensure equal credit opportunity.”

Like many recent fair-lending cases, the government’s case against Wells Fargo did not allege that the bank, or the mortgage brokers with whom it did business, discriminated against minority borrowers intentionally.

Instead, the Justice Department relied on statistical analysis to show that minority borrowers were far more likely than whites to be steered into subprime loans even though they qualified for prime mortgages, and that minorities were also more likely to pay higher rates and fees.

“It meant that an African-American wholesale customer in the Chicago area in 2007 seeking a $300,000 loan paid on average $2,937 more in fees than a similarly qualified white applicant,” Perez said.

This kind of statistical analysis – which prosecutors use to support claims that lending practices have a “disparate impact” on minorities, even if minorities were not intentionally targeted – is controversial at banks.

But Perez insisted that discrimination took place, and he rejected Wells Fargo’s suggestion that the problem could be blamed on mortgage brokers.

“The complaint alleges that individual originators, whether they were retail or wholesale, were given discretion which wasn’t properly monitored, to go beyond the terms and conditions that were based on objective indicia of a person’s creditworthiness,” he said.

As part of the settlement, Wells Fargo agreed to provide $125 million to the roughly 34,000 alleged victims, and also committed another $50 million to community improvement programs in Washington DC, Chicago, Baltimore, Philadelphia, Oakland-San Francisco, New York, Cleveland and southern California’s Inland Empire.

The bank will also conduct an internal review of certain retail subprime loans that it originated between 2004 and 2008 to identify and provide compensation to minorities who were improperly steered into subprime loans.

Perez estimated that between 3,000-4,000 borrowers will be identified through that process, and he said that payments to them will be in addition to the $175 million committed under the settlement.

The Wells Fargo case was referred to the Justice Department by the Office of the Comptroller of the Currency in 2010, prior to the start of Comptroller Thomas Curry’s tenure.

While Justice Department officials spoke Thursday about a reinvigoration of fair-lending enforcement, Curry was careful not to suggest that anything has changed with regard to his agency’s handling of such cases.

“In terms of fair lending, we’ve had a long-standing practice that goes way back and prior to my becoming the comptroller of referring of businesses of credible complaints,” Curry said. “So this is a continuation of the long-standing practice and tradition of the Comptroller’s Office.”

No Wonder Eminent Domain Mortgage Seizures Scare Wall Street

Rep. Brad Miller

JUL 11, 2012 7:00am ET

There is a great disturbance in the force.

Wall Street’s political operatives – the American Bankers Association, American Securitization Forum, the Securities Industry and Financial Markets Association, and the Financial Services Roundtable – wrote a panicked letter to the Supervisors of San Bernardino County in California to express “strong objection” to a proposal by a startup mortgage company. The letter conveys the unmistakable threat that Wall Street will sic its lawyers on the county and will “likely be reluctant to provide future funding to borrowers in these areas.”

The proposal is that the county use eminent domain to buy underwater mortgages, almost half the mortgages in the county. The mortgage company, working with the county, would then negotiate new mortgages with the homeowners that they could afford. If the proposal worked as planned, the county would get relief from the foreclosure crisis, the mortgage company would make a profit, and the idea would spread to other counties and towns.

A legal challenge by Wall Street might be expensive to fight, but the arguments are pretty flimsy.

Eminent domain is commonly used to buy land for projects like roads and schools. Existing law allows the use of eminent domain to buy any kind of property, however, including even intangible property like trade secrets. There is no apparent reason that eminent domain could not be used to purchase mortgages.

The Constitution requires only that the county pay fair market value and that there be a public purpose. Deciding a fair price would not be hard. There are frequent auctions of mortgages with a sufficient number of informed, sophisticated buyers. The auctions are an almost perfect pricing mechanism. There would be comparable sales to determine almost any mortgage’s fair market value.

Showing a public purpose would not be hard either. A public purpose can be cleaning up contaminated land, renewing a “blighted” neighborhood, or even stimulating economic growth by replacing residential neighborhoods with commercial development.

Wall Street argues that the county’s purpose would not be to reduce the foreclosures that are wreaking economic havoc, but to enrich the mortgage company. But law professors, economists, community advocacy groups and politicians with no financial interests at stake have argued for just such an effort to address the foreclosure crisis. A program by a government agency not motivated by the pursuit of profit would be greatly preferable, but this proposal by the for-profit mortgage company obviously serves a public purpose.

The threat of a boycott is also hollow. A decade ago Wall Street bullied Georgia into gutting a state predatory lending law by refusing to buy Georgia mortgages. Wall Street has not bought mortgages since the collapse of the private securitization market five years ago, however. A threat of a boycott by Fannie Mae and Freddie Mac would be credible, but the threat of a boycott by Wall Street is not.

Wall Street quickly persuaded some mortgage investors, such as pension funds and insurance companies, to oppose the proposal, but investors will do fine – maybe even better than they would otherwise. The program would likely target homeowners with second liens. Mortgage investors own most first mortgages, but the biggest banks own most second mortgages and home equity lines of credit.

About half of delinquent first mortgages also have second liens. Second liens are secured by the value of the home in excess of the amount of the first mortgage. Since the housing bubble burst, there often is no excess. At foreclosure, first mortgage holders are paid in full before second lien-holders are paid anything, and the holders of seconds usually come away empty-handed. Courts give firsts the same priority over seconds in bankruptcy.

Second liens have a ransom value in voluntary modifications, however. Unless the second lien-holder agrees to something different, the voluntary reduction of principal on a first mortgage is a gift of collateral to the second lien-holder and may still not get the homeowner above water. Second lien-holders sometimes offer to reduce the second by the same percentage that the first is voluntarily reduced, a far cry from the priority in foreclosure and bankruptcy. Mortgage servicers, the companies responsible for negotiating voluntary modifications of first mortgages owned by investors, frequently have a stunning conflict of interest. The four biggest banks – Bank of America, JPMorgan Chase, Citigroup and Wells Fargo – control two-thirds of all mortgage servicing, mostly of mortgages owned by investors. The same four banks hold $363 billion in second liens, very commonly on the same property as first mortgages they service.

So the real losers from the program would be the biggest banks, the holders of second liens, not investors in first mortgages. And even for the biggest banks, eminent domain would not cause losses but reveal losses.

The biggest banks have delayed recognizing losses on seconds for years while paying dividends and lavish executive bonuses. Involuntary sales of seconds at fair market value would end fictitious valuations and require an immediate accounting loss, making dividends and executive bonuses much harder to justify and perhaps even revealing some banks to be insolvent.

The biggest banks have used their political power in Washington to defeat any effort that would effectively reduce foreclosures, such as allowing judicial modification of mortgages in bankruptcy, allowing a federal agency to use eminent domain to buy mortgages, or providing teeth for the chronically ineffective Home Affordable Modification Program, because those efforts would also require the immediate recognition of losses on mortgages.

But Wall Street’s power in Washington may be as useless in defeating a proposal in San Bernardino County as strategic nuclear weapons are in fighting an insurgency. No wonder Wall Street is panicked.

Brad Miller is a Democratic Congressman from North Carolina.

House Republicans Launch New Push Against Dodd-Frank

By Kevin Wack

JUL 10, 2012 4:24pm ET

WASHINGTON – House Republicans on Tuesday launched a two-week campaign designed to sour voters on the Dodd-Frank Act.

Coinciding with the reform law’s second anniversary, the GOP’s aim is to convince the electorate that Dodd-Frank’s rules are hurting everyday Americans rather than just the financial sector.

“What is not being discussed or identified is what is the combined impact of all these rules and other rules will ultimately have on the cost of credit for borrowers in the country,” Rep. Scott Garrett, R-N.J., said Tuesday during a hearing of the House Financial Services capital markets subcommittee.

“When you take them individually, the cost might be tolerable,” added Garrett, who chairs the subcommittee. “But when you take these all together, cumulatively, it will prove extremely onerous.”

The GOP has altered its message on Dodd-Frank somewhat since the law’s first anniversary. A year ago, Republican lawmakers spoke largely about the law’s impact on the private sector – and how it reflects big government – rather than its effects on individuals.

But on Tuesday, the Republican-controlled House Financial Services Committee unveiled a new online survey – titled “Think the Dodd-Frank Act’s Impact is Felt Only on Wall Street? Think again .” – that is aimed squarely at the public at large.

The survey asks no-brainer questions such as “Do you purchase food for yourself and your family?” and “Are you an energy consumer?” and then argues that anyone who answered affirmatively will suffer from the two-year-old law.

Last year, House Republicans were generally mum on the question of whether Dodd-Frank should be repealed. Now their message is that a targeted approach to eliminating some of the law’s most onerous provisions makes better sense than a full repeal of the law.

A panel of industry witnesses who testified Tuesday was on board with that strategy.

The witnesses – including representatives of the securitization industry, the U.S. Chamber of Commerce and the commercial real estate sector – all declined to raise their hands when asked by a Democratic lawmaker if Dodd-Frank should be completely repealed.

But they argued at length that various new rules implementing the law have had a negative impact on Main Street.

One specific grievance deals with a relatively obscure proposal – included in a broader proposal compelling securitizers to retain some credit risk – that requires the creation of premium capture cash reserve accounts. While such accounts, designed to limit the monetization of excess spreads, are surely not on the minds of middle-class voters, GOP lawmakers and industry witnesses argued Tuesday that it will have a negative effect on the interest rates they pay for a mortgage.

Rep. Jeb Hensarling, R-Texas, cited a Moody’s Analytics study that concluded the rule could raise mortgage rates by one to four percentage points, before asking industry witnesses if Dodd-Frank has the potential to double rates.

“I guess my response is that just one provision of Dodd-Frank could double the interest rate,” said Tom Deutsch, executive director of the American Securitization Forum. “If you add all the provisions relative to Dodd-Frank, it would be well more than that.”

But Democrats countered that the GOP was overlooking the enormous economic costs felt by Americans from the financial crisis.

“Whatever unintended effect Dodd-Frank may have on job creators, it pales in comparison to the havoc Wall Street wreaked on our economy during the financial crisis,” said Rep. Stephen Lynch, D-Mass.

“Let me recount that according to the Treasury Department, the crisis, the financial crisis that we’re trying to deal with here, cost Americans $19.2 trillion in household wealth.”

The GOP’s message was also undercut somewhat by the testimony of Anne Simpson, senior portfolio manager for the California Public Employees’ Retirement System, or CalPERS, which is the nation’s largest public pension fund.

“The financial crisis hit us hard; $70 billion were wiped from CalPERS’ portfolio. We simply cannot afford another crisis,” she said. “Those arguing that we cannot afford the cost of regulation are in danger of being penny wise and pound foolish. We see smart regulation as an investment in safety and soundness of financial markets, which generate the vast bulk of the returns to our fund.”

Tuesday’s hearing was the first of six hearings on Dodd-Frank that House Republicans have scheduled over the next two weeks, with the lawmakers planning to look at the law’s impact on mortgage lending, jobs, consumers, municipal advisors, and competition in the financial services sector.

New Jobs Report Shows Demand for Mortgage Brokers

By Brian Collins http://www.americanbanker.com/authors/63.html

JUL 6, 2012 7:56pm ET

Total employment in the mortgage industry was flat in May, but the ground has been shifting over the past few months with brokerage firms hiring while other lenders have been cutting back, according to figures released Friday.

The U.S. Bureau of Labor Statistics reported that employment in the mortgage banking and brokerage sector edged down to 266,500 full-time positions in May from 266,600 in April.

However, government figures show that brokerages have hired 6,000 employees since January while mortgage banking firms cut their payrolls by 6,100 full-time employees since March.

Overall, employment in the mortgage industry is down 1% from May 2011. (The residential finance jobs numbers lag that national ones by a month.)

Meanwhile, Friday’s jobs report shows the U.S. economy created just 80,000 new jobs in June, up from a revised 77,000 in May. The unemployment rate was unchanged at 8.2%.

Surprisingly, employment in the construction industry was flat in May despite encouraging signs in residential construction.

Single-family starts are running 20% ahead of their year-ago pace (through May) and multifamily starts are up an impressive 45%, according to a new report from Wells Fargo Securities.

However, this year’s jump in construction activity started from a low base and housing starts will make only a “modest contribution” to economic growth this year, WFS economists said in their July 5 “Housing Data Wrap-Up” report for June.

“Even with recent gains, new home sales and residential construction remains shadows of their former selves,” write the Wells economists.