Help, and snares, for walking wounded

By KENNETH R. HARNEY

Nov 9, 2012

Though there are still some snares and drawbacks for participants, one of the federal government’s most important financial relief efforts for underwater homeowners started operation on Nov. 1.

It’s a new short-sale program that targets the walking wounded among borrowers emerging from the housing downturn – owners who owe far more on their mortgages than their current home value but have stuck it out for years, resisted the temptation to strategically default, and never fell seriously behind on their monthly payments.

Industry estimates put the number of underwater owners across the country at just under 11 million, or 22 percent of all homes with a mortgage. Of these, approximately 4.6 million have loans that are owned or securitized by Fannie Mae or Freddie Mac. Eighty percent of these Fannie-Freddie borrowers, in turn, are current on their mortgage payments and meet the baseline eligibility test for the new short-sale effort.

Here’s how the program works and where the potential snares are. Traditionally short sales, where the lender agrees to accept less than the full amount owed and the house is sold to a new purchaser at a discounted price, are associated with extended periods of delinquency by the original owner. The new Fannie-Freddie program – designed by the companies’ overseer, the Federal Housing Finance Agency – breaks with tradition by allowing short sales for owners who are current on their payments but are encountering a hardship that could force them into default.

Say you are deeply underwater on your mortgage and recently lost your job or had your work hours reduced. Under the new program, you can contact your mortgage servicer and ask to participate in a Fannie-Freddie short sale for non-delinquent borrowers. You’ll need to find a qualified buyer for the house, typically with the help of a real estate broker or agent knowledgeable about short sales who will list the property and obtain an offer and communicate the details and documentation to the servicer. If the proposed short-sale package is acceptable, the deal would then proceed to closing weeks – or months – later.

Eligible hardships under the new program run the gamut: job loss or reduction in income; divorce or separation; death of a borrower or another wage earner who helps pay the mortgage; serious illness or disability; employment transfer of 50 miles or greater; natural or man-made disaster; a sudden increase in housing expenses beyond the borrower’s control; a business failure; and a you-name-it category called “other,” meaning a serious financial issue that isn’t one of the above.

Borrowers who take part in the new program can expect to rid themselves of the money-devouring albatross their mortgage has become – without going through the nightmares of foreclosure or bankruptcy – and to get a chance to start anew, better equipped to deal with the financial hardship that caused them to sell their house in the first place.

What about the snares in the program? There are several that participants need to consider.

. Credit score impacts. Though officials at the Federal Housing Finance Agency are working on possible solutions with the credit industry, at the moment it appears that borrowers who use the new program may be hit with significant penalties on their FICO credit scores – 150 points or more. This is because under current credit industry practices, short sales are lumped in with foreclosures. According to Laura Arce, a senior policy analyst at the agency, the government is in discussions with the credit industry to institute “a special comment code” for servicers who report the new Fannie-Freddie short sales to the national credit bureaus that would treat participants more fairly on FICO scores.

. Promissory notes and other “contributions.” In the majority of states where lenders can pursue deficiencies, Fannie and Freddie expect borrowers who have assets to either make upfront cash contributions covering some of the loan balance owed or sign a promissory note. This would be in exchange for an official “waiver” of the debt for credit reporting purposes, potentially producing a more favorable credit score for the sellers.

. Second lien hurdles. The program sets a $6,000 limit on what second lien holders – banks that have extended equity lines of credit or second mortgages on underwater properties – can collect out of the new short sales. Some banks, however, don’t consider this a sufficient amount, and may threaten to torpedo sales if they can’t somehow extract more.

Help, and snares, for walking wounded

By KENNETH R. HARNEY

Nov 9, 2012

Though there are still some snares and drawbacks for participants, one of the federal government’s most important financial relief efforts for underwater homeowners started operation on Nov. 1.

It’s a new short-sale program that targets the walking wounded among borrowers emerging from the housing downturn – owners who owe far more on their mortgages than their current home value but have stuck it out for years, resisted the temptation to strategically default, and never fell seriously behind on their monthly payments.

Industry estimates put the number of underwater owners across the country at just under 11 million, or 22 percent of all homes with a mortgage. Of these, approximately 4.6 million have loans that are owned or securitized by Fannie Mae or Freddie Mac. Eighty percent of these Fannie-Freddie borrowers, in turn, are current on their mortgage payments and meet the baseline eligibility test for the new short-sale effort.

Here’s how the program works and where the potential snares are. Traditionally short sales, where the lender agrees to accept less than the full amount owed and the house is sold to a new purchaser at a discounted price, are associated with extended periods of delinquency by the original owner. The new Fannie-Freddie program – designed by the companies’ overseer, the Federal Housing Finance Agency – breaks with tradition by allowing short sales for owners who are current on their payments but are encountering a hardship that could force them into default.

Say you are deeply underwater on your mortgage and recently lost your job or had your work hours reduced. Under the new program, you can contact your mortgage servicer and ask to participate in a Fannie-Freddie short sale for non-delinquent borrowers. You’ll need to find a qualified buyer for the house, typically with the help of a real estate broker or agent knowledgeable about short sales who will list the property and obtain an offer and communicate the details and documentation to the servicer. If the proposed short-sale package is acceptable, the deal would then proceed to closing weeks – or months – later.

Eligible hardships under the new program run the gamut: job loss or reduction in income; divorce or separation; death of a borrower or another wage earner who helps pay the mortgage; serious illness or disability; employment transfer of 50 miles or greater; natural or man-made disaster; a sudden increase in housing expenses beyond the borrower’s control; a business failure; and a you-name-it category called “other,” meaning a serious financial issue that isn’t one of the above.

Borrowers who take part in the new program can expect to rid themselves of the money-devouring albatross their mortgage has become – without going through the nightmares of foreclosure or bankruptcy – and to get a chance to start anew, better equipped to deal with the financial hardship that caused them to sell their house in the first place.

What about the snares in the program? There are several that participants need to consider.

. Credit score impacts. Though officials at the Federal Housing Finance Agency are working on possible solutions with the credit industry, at the moment it appears that borrowers who use the new program may be hit with significant penalties on their FICO credit scores – 150 points or more. This is because under current credit industry practices, short sales are lumped in with foreclosures. According to Laura Arce, a senior policy analyst at the agency, the government is in discussions with the credit industry to institute “a special comment code” for servicers who report the new Fannie-Freddie short sales to the national credit bureaus that would treat participants more fairly on FICO scores.

. Promissory notes and other “contributions.” In the majority of states where lenders can pursue deficiencies, Fannie and Freddie expect borrowers who have assets to either make upfront cash contributions covering some of the loan balance owed or sign a promissory note. This would be in exchange for an official “waiver” of the debt for credit reporting purposes, potentially producing a more favorable credit score for the sellers.

. Second lien hurdles. The program sets a $6,000 limit on what second lien holders – banks that have extended equity lines of credit or second mortgages on underwater properties – can collect out of the new short sales. Some banks, however, don’t consider this a sufficient amount, and may threaten to torpedo sales if they can’t somehow extract more.

Help, and snares, for walking wounded

By KENNETH R. HARNEY

Nov 9, 2012

Though there are still some snares and drawbacks for participants, one of the federal government’s most important financial relief efforts for underwater homeowners started operation on Nov. 1.

It’s a new short-sale program that targets the walking wounded among borrowers emerging from the housing downturn – owners who owe far more on their mortgages than their current home value but have stuck it out for years, resisted the temptation to strategically default, and never fell seriously behind on their monthly payments.

Industry estimates put the number of underwater owners across the country at just under 11 million, or 22 percent of all homes with a mortgage. Of these, approximately 4.6 million have loans that are owned or securitized by Fannie Mae or Freddie Mac. Eighty percent of these Fannie-Freddie borrowers, in turn, are current on their mortgage payments and meet the baseline eligibility test for the new short-sale

effort.

Here’s how the program works and where the potential snares are. Traditionally short sales, where the lender agrees to accept less than the full amount owed and the house is sold to a new purchaser at a discounted price, are associated with extended periods of delinquency by the original owner. The new Fannie-Freddie program – designed by the companies’ overseer, the Federal Housing Finance Agency – breaks with tradition by allowing short sales for owners who are current on their payments but are encountering a hardship that could force them into default.

Say you are deeply underwater on your mortgage and recently lost your job or had your work hours reduced. Under the new program, you can contact your mortgage servicer and ask to participate in a Fannie-Freddie short sale for non-delinquent borrowers. You’ll need to find a qualified buyer for the house, typically with the help of a real estate broker or agent knowledgeable about short sales who will list the property and obtain an offer and communicate the details and documentation to the servicer. If the proposed short-sale package is acceptable, the deal would then proceed to closing weeks – or months – later.

Eligible hardships under the new program run the gamut: job loss or reduction in income; divorce or separation; death of a borrower or another wage earner who helps pay the mortgage; serious illness or disability; employment transfer of 50 miles or greater; natural or man-made disaster; a sudden increase in housing expenses beyond the borrower’s control; a business failure; and a you-name-it category called “other,” meaning a serious financial issue that isn’t one of the above.

Borrowers who take part in the new program can expect to rid themselves of the money-devouring albatross their mortgage has become – without going through the nightmares of foreclosure or bankruptcy – and to get a chance to start anew, better equipped to deal with the financial hardship that caused them to sell their house in the first place.

What about the snares in the program? There are several that participants need to consider.

. Credit score impacts. Though officials at the Federal Housing Finance Agency are working on possible solutions with the credit industry, at the moment it appears that borrowers who use the new program may be hit with significant penalties on their FICO credit scores – 150 points or more. This is because under current credit industry practices, short sales are lumped in with foreclosures. According to Laura Arce, a senior policy analyst at the agency, the government is in discussions with the credit industry to institute “a special comment code” for servicers who report the new Fannie-Freddie short sales to the national credit bureaus that would treat participants more fairly on FICO scores.

. Promissory notes and other “contributions.” In the majority of states where lenders can pursue deficiencies, Fannie and Freddie expect borrowers who have assets to either make upfront cash contributions covering some of the loan balance owed or sign a promissory note. This would be in exchange for an official “waiver” of the debt for credit reporting purposes, potentially producing a more favorable credit score for the sellers.

. Second lien hurdles. The program sets a $6,000 limit on what second lien holders – banks that have extended equity lines of credit or second mortgages on underwater properties – can collect out of the new short sales. Some banks, however, don’t consider this a sufficient amount, and may threaten to torpedo sales if they can’t somehow extract more.

A Taxing Question For Homeowners

By KENNETH R. HARNEY

Nov 2, 2012

Could the popular $250,000-$500,000 tax-free exclusion of capital gains on sales of homes be a target in any broad-scale, post-election effort to reduce the federal debt and deficit?

Absolutely. Though far more public attention has been given to the presidential candidates’ proposals for reining in the mortgage interest deduction, the capital gains exclusion is one of a number of housing “preferences” – subsidies – embedded in the tax code that are on the table in fiscal negotiations beginning later this month on Capitol Hill and likely extending well into 2013.

Nonpartisan, corporate-backed groups such as Fix the Debt, which has nearly 100 CEOs of blue-chip companies such as GE, Dow Chemical, AT&T and Microsoft on its list of supporters, define the report of President Obama’s deficit reduction commission as the starting “framework” for their forthcoming national debt-reduction campaign. The deficit commission, headed by former Wyoming Republican Sen. Alan Simpson and Erskine Bowles, White House chief of staff for Bill Clinton, called for eliminating or restricting most current tax deductions as part of a plan to reduce the federal deficit by $4 trillion by 2020. The commission also envisioned deep cuts in federal spending and a reduction in corporate and personal income tax rates.

Though the commission carved out one possible exception for housing – converting the mortgage interest deduction to a 15 percent tax credit – tax experts say that under the Simpson-Bowles version of fiscal reform, virtually all real estate write-offs, including the capital gains exclusion, would disappear in a vastly simplified federal tax code. Others on the list: deductions for local and state property taxes; federal tax exemption for interest on state government bond issues used to help provide mortgages for moderate-income home purchasers; and exemption for income taxation of mortgage amounts forgiven by lenders in loan modifications and short sales.

The exclusion of home sale profits, which is projected to save homeowners $86 billion between 2010 and 2014 according to congressional tax estimates, allows taxpayers who have owned and used their principal residences for two years out of the five years preceding a sale to escape capital gains taxation on as much as the first $250,000 (for single filers) and $500,000 (married joint filers) of the profits they make from the transactions.

The ability to pocket home sale gains without taxation is available to all qualified owners once every two years. But it is of special importance to pre-retirees and retired owners as it allows many of them to owe no federal taxes on their home sale gains – most sales do not generate anywhere near the $250,000 or $500,000 threshold limits – and to factor this tax-free money into planning for their retirement years. A Pew Research Center study released Oct. 22 found that growing numbers of American adults are worried about having enough money for retirement – nearly 40 percent describe themselves as being in this category, up from 25 percent in a similar study in 2009. Though families’ real estate equity holdings were hit hard by the recession and housing bust, Americans still have approximately $7.3 trillion available to them, according to the latest Federal Reserve quarterly study.

In a so-called “grand bargain” comprehensive reform plan based on the Simpson-Bowles framework, as advocated by Fix the Debt, owners might pay ordinary income taxes at a lower rate but could also lose valuable preferences built into the tax code over a period of decades that were designed to encourage ownership of a home. Whether the net financial benefits of the lower tax brackets would outweigh owners’ loss of deductions for mortgage interest and other current advantages – including tax-free treatment of gains on sales of their homes – would depend on the specifics of the grand bargain, phase-in timetables for the tax code changes, and on each owner’s personal situation.

Bottom line here: Almost no one opposes the concept of reducing the federal deficit. But how this is achieved – who gets hurt, who benefits – will be key. During the coming lame-duck congressional session and into the new Congress, a variety of plans are expected to surface, some cutting spending drastically, others claiming to straighten out the tax code by ridding it of special preferences for individuals while lowering rates for big corporations.

If you own a home, keep your eye on the tax deduction ball. The largest single tax-free benefit most owners will ever receive from the federal government could be in play.