Homeowners- Don’t panic yet over Senate tax overhaul

Kenneth R. Harney on Nov 17, 2017

WASHINGTON – If you hoped that Senate Republicans would treat homeowners and buyers more kindly in their tax overhaul plans than their colleagues did in the House, you were an optimist. It didn’t happen.

In fact, the Senate tax bill released last week is harsher on residential real estate in some areas than the House version, with two notable exceptions- Senate tax writers retained the current $1 million ceiling on home mortgage amounts that are eligible for interest deductions. The House bill seeks to cut that in half to $500,000. But the Senate’s seeming concession has limited value, given that only a small fraction of homeowners in the U.S. have mortgages of $500,000 to $1 million. Also, the Senate bill leaves intact mortgage-interest deductions on second homes; the House bill would eliminate them.

Here’s a quick look at some key punitive details in the Senate bill’s fine print that haven’t gotten much attention but could be important to you-

- Home equity loans. Under current law, you can borrow up to $100,000 in “home equity indebtedness” and write off the interest on that amount. Home equity loans have become enormously popular in recent years – especially in the form of lines of credit (HELOCs) – as owners’ equity holdings have soared to record levels. In the first quarter of 2017 alone, according to ATTOM Data Solutions, 227,000 new HELOCs worth $43.4 billion were originated around the country. HELOCs are hot.

Among the traditional attractions of HELOCs and other forms of home equity loans has been their flexibility. You can use the money you pull from your equity for whatever you like. That would change drastically under the Senate Republicans’ bill. It would erase the entire category known as “home equity indebtedness” from the tax code, pulling the rug out from under the booming HELOC market. Though the bill doesn’t get into operational details, homeowners with existing first mortgages might still be able to borrow against their equity, but they could be restricted to using the money for improvements to their principal residence.

- SALT. Deductions of state and local property taxes, sales taxes and income taxes – the so-called SALT write-offs that are heavily used by homeowners – take a heavy hit under the Senate bill. The House Republicans’ bill would limit SALT deductions to $10,000 in property taxes. Currently there is no dollar limit, and income and sales taxes can be included. The Senate bill would kill the deduction outright. For owners in high-tax markets such as Washington D.C., Maryland, Virginia, California, New Jersey, New York, the New England states plus Illinois and Ohio, the Senate’s total wipeout of the deduction could raise their federal tax bills starting next Jan 1.

- Tax-free gains. The Senate bill would also make a major change in one of the most valuable current tax benefits for homeowners – the ability to pocket capital gains on home sales free of federal taxation. Under the current tax code, home sellers filing jointly can “exclude” up to $500,000 of gains from a sale (up to $250,000 for single filers) tax-free, provided they have lived in and used the property as their principal residence for an aggregate two years out of the preceding five years. That’s a big deal for many sellers, especially seniors who expect to depend on the cash raised from their sale to supplement their incomes during their retirement years.

Like the House bill, the Senate version rejiggers the tax-free formula in order to slash the number of sellers eligible to use this benefit. To qualify, sellers would have to live in their homes for five out of the preceding eight years, and could only use the tax-free provision once every five years. That’s likely to create problems for young families who move from their first home within the first five years and people who are transferred or move to new jobs more quickly than they had originally planned.

What’s next? The two bills must survive upcoming floor debates, which could be dicey given that both measures gush red ink, add to the deficit and have generated strong opposition for handing too many costly breaks to corporations and wealthy taxpayers. Republicans in both houses will need every vote they can muster.

Bottom line- The changes the bills propose to make in home real estate rules are drastic, but they are no sure thing. Don’t panic quite yet – this game is just getting started.

Hidden costs for homeowners in latest tax bill

Kenneth R. Harney on Nov 10, 2017

WASHINGTON – The message sent by Republicans in the tax overhaul bill they launched last week is unmistakable and blunt- We think homeowners and buyers have gotten much too sweet a deal from the federal tax code for far too long – and now we’re going to whack them down. No other major sector of the economy gets hit so hard in the proposal in so many places as homeownership.

You’ve probably heard about the splashiest cut proposed in the bill- a reduction in the maximum deductible mortgage amount from $1 million to $500,000. And you might have figured, “Eh, no big deal, my mortgage is nowhere near that size.” But you might have missed some of the other less publicized, but punitive, changes tucked away in the legislative text that just might bite you, now or in the future.

For example, Section 1402 of the proposal would significantly alter the ground rules governing a benefit that millions of homeowners have factored into their financial planning for decades. Under current law, you can exclude from taxation the first $250,000 of capital gains on a sale as a single filer ($500,000 filing jointly) provided you have used the house as your principal residence for an aggregate two years out of the five years preceding the sale. Plus, you can use the exclusion as frequently as once every two years.

Under the Republican proposal, the two-out-of-five standard would vanish. Instead you’d need to live in and use the property as your main residence for five of the preceding eight years – a requirement designed to lower the number of people eligible to claim the exclusion. This would inevitably hurt middle income and other families who were forced to sell their houses because of job transfers or medical reasons, as well as first-time buyers moving up to a new home a few years after purchase as their families expand. The bill also would limit use of the tax-free exclusion to once every five years, up from the current two years.

Another noteworthy change that’s easy to miss- Section 1302 of the bill, which would slice the mortgage-interest deduction in half, includes a single sentence that could be important to many Americans who own second homes. It says simply that taxpayers can have only one “qualified residence.” With that brief redefinition, the bill would eliminate thousands of homeowners’ ability to write off mortgage interest on second homes and weekend getaway houses. Removing the deduction would increase the cost of ownership on potentially millions of second homes. According to a study last year by the National Association of Home Builders, 7.5 million second homes qualified for the mortgage interest deduction, based on the latest available Census Bureau survey data.

Then there’s the whole issue of when the housing changes proposed in the bill would take effect. Traditionally major tax bills contain “transition” periods to give affected taxpayers time to adjust. That could happen with this bill as well, but at the moment, the starting dates included for housing provisions are shocking. Check out these effective dates as they currently stand in the bill-

- The reduction in the mortgage-interest deduction ceiling, plus deductions for second homes, would take effect on loans taken out after Nov. 2. Not only is there no transition time, the changes are essentially retroactive. This could negatively impact shopping, sales – even prices – on homes closed after Nov. 2.

- The capital-gains exclusion changes would cover home sales after Dec. 31. No grandfathering, no wiggle room.

- The capping of deductions for state and local taxes to $10,000 – currently there is no limit for taxpayers who itemize – would start for everybody after Dec. 31. Note that only property taxes could qualify for even this limit – sales and income taxes would no longer be deductible.

- Expenses related to moving from one home to another no longer would be deductible after Dec. 31.

You might be wondering- Could all this nasty targeting of homeownership actually make it through Congress and get signed into law? Certainly the major real estate lobbies – the National Association of Home Builders and the National Association of Realtors – plan campaigns to block the housing changes as the bill moves through the House and the Senate unveils its version.

But keep this in mind- The Republicans are desperate to pass a “tax cut” bill by year’s end. There are plenty of obstacles in their way – even from within their own ranks. But it could happen.

Mortgage interest, property taxes in play in tax bill

Kenneth R. Harney on Oct 27, 2017

WASHINGTON – The political jostling and frenetic lobbying on Capitol Hill over the Republican tax overhaul bill are producing unexpected developments that could prove important to home owners, sellers and buyers.

The drafting of legislative language is a work in progress behind closed doors, but it appears that there have been some key changes in thinking since the White House and congressional Republicans released their “framework” for the tax bill Sept. 27.

One of the biggest shifts involves deductions of state and local taxes. Republican tax plans have called for a doubling of the standard deduction – to $12,000 for single filers and $24,000 for joint filers – paired with the elimination of a slew of popular write-offs, including state and local taxes.

The so-called “SALT” deduction is among the most widely used in the U.S. tax code, and it includes income taxes, general sales taxes and property taxes. Eliminating it would raise federal revenues by an estimated $1.3 trillion over the coming 10 years. Zeroing-out SALT has been a crucial element in the Republican tax framework, which badly needs revenue-raisers to counter deep losses caused by rate cuts for corporations and others.

Home owners, especially in the high tax corridors of the Northeast, Washington D.C., Maryland, Virginia, parts of the Midwest and California, are among SALT’s heaviest users. Most of these areas have higher than average home prices and household incomes. They tend to vote Democratic but have some Republican representation in the House and Senate.

Those blue-state Republicans, in fact, have been a key force behind the re-thinking on SALT. They know their constituents would be disproportionately impacted by a total elimination of the SALT deduction, and they’ve lobbied House and Senate tax-writing committee leaders for relief. Among the possibilities-

- Allowing home owners to write off property taxes, but not income or sales taxes.

- Giving home owners the choice of either writing off state and local taxes or mortgage interest, but not both.

- Setting a household income ceiling for eligibility to take the SALT deduction.

It’s not clear which, if any, of these might show up in a final legislative package, but the SALT issue is definitely in play. Any of these changes would lower revenues. Limiting SALT deductions to property taxes but not income or sales taxes, for instance, would cost the government an estimated $300 billion over 10 years. But compromising on SALT would solidify political support for the tax plan among blue state Republicans, whose votes could be essential to passage.

Another noteworthy area where there’s been some re-thinking- the mortgage interest deduction. Under the framework proposal, this popular benefit would be left untouched in the tax code. But doubling the standard deduction would mean that far fewer homeowners would choose to itemize and claim it. As a result, say critics, the deduction will be watered down as a financial spur to home buying. The 1.2 million member National Association of Realtors has been outspoken in demanding that tax writers preserve the effectiveness of the deduction. But in recent weeks, other major housing groups, such as the National Association of Home Builders and the Mortgage Bankers Association, have expressed willingness to explore alternatives – and that has helped spark interest in creating a new form of subsidy- a mortgage tax credit, perhaps in conjunction with a substantial reduction in the current $1 million ceiling on deductions for mortgage interest.

Under the credit concept, borrowers might be able to subtract some percentage – say 10 or 15 percent – of interest payments off their federal tax bottom line, no matter what their income tax bracket. (Deductions, unlike credits, vary based on tax brackets; the higher your bracket, the bigger your deduction.)

J.P. Delmore, a top lobbyist for the home builders association, told me his group is seeing “serious interest” in the credit idea. “There is a recognition that a properly crafted credit would provide a broad, meaningful tax incentive to millions of middle-class homeowners who do not itemize currently.” In a speech last week, House Ways and Means Committee chairman Rep. Kevin Brady, R-Texas, confirmed that he is open to re-examining the mortgage interest deduction, including ways to open it up to “all phases of homeownership.” A credit, which would be available to non-itemizers, would fit that description, say supporters of the idea.

Where’s this all headed? Republican leaders hope to pass their tax overhaul bill before the end of the year. That’s optimistic. But keep this in mind- Whatever happens to the bill, there’s a surprising willingness afoot to re-evaluate decades-old approaches to encouraging homeownership with tax benefits while simplifying the tax code.

Protect yourself against lasting damage from Equifax theft

Kenneth R. Harney on Sep 15, 2017

EDITOR’S NOTE- Due to Equifax news, Ken Harney is writing this column for this week and taking off next week’s column instead.

WASHINGTON – The catastrophic theft of 143 million consumers’ personal data from national credit bureau Equifax could cause financial grief for years for homebuyers and mortgage applicants.

The odds are that some of your sensitive information was stolen – possibly your address, Social Security number, driver’s license, credit card numbers – and could now be up for grabs to the highest bidders on a Dark Web site. Equifax and the other two national bureaus, Experian and TransUnion, keep files on approximately 220 million individuals, so roughly two-thirds of consumers are potentially at risk from the breach. Ironically, the so-called “credit invisibles” – the millions of Americans with little or no information in the bureaus’ files – may be the least affected by Equifax’s security lapse.

Homebuyers and mortgage applicants, on the other hand, tend to have significant information on file at the bureaus and could run into complications soon or down the road.

Take this scenario- Say your Equifax file was looted but you’ve done little or nothing to detect fraudulent activity on one or more of your existing credit accounts. You sign a contract to buy a house and apply for a mortgage. The lender pulls your credit and confronts you with the shocking news- Your FICO credit score is too low for you to qualify for the loan because you’ve been running up too much debt on one or more accounts. Your “utilization ratio” on your available credit is too high and that has depressed your score. Or there’s a newly established account on your files that has put you deep in debt, even though you had nothing to do with it.

Turns out financial thieves have been racking up thousands of dollars in debts at your expense and now – smack in the middle of a major lifetime investment – you’re stuck with having to get the file corrected, which takes time and can be a pain. In the meantime, what happens to your purchase contract? Will the sellers bear with you, essentially putting off the transaction indefinitely, and possibly blowing up their own plans to move into another house they’re under contract to close on a specific date? It could all get really messy.

Another scenario- Say your lender already has approved you for a mortgage or a home equity loan. Before the scheduled closing, the loan officer does what has become standard practice in the mortgage industry in recent years – runs another credit check to make sure no new debts have been added since your application. But in the meantime, identity theft criminals have created a new account or run up charges on one or more of your credit cards, knocking your debt-to-income ratio out of sight.

At the very least, whatever rate locks you had could be blown as you scramble to get your files corrected. Or your entire loan transaction could be jeopardized if the process takes too long.

Terry W. Clemans, executive director of the National Consumer Reporting Association, many of whose members provide the merged credit bureau reports used by mortgage companies to evaluate applicants, told me that given the extent of the data theft at Equifax, “there’s bound to be a lot of damage” to all types of credit users, including those seeking to finance, buy and sell houses. He said the theft of drivers licenses is especially worrisome because, combined with the possession of names, addresses, Social Security numbers and other data, license numbers could help cyber thieves “create a more credible fake I.D.” – credible enough to fool lenders into believing they are dealing with the real you.

Clemans said he would advise consumers to “lock down your files” with fraud alerts or credit file freezes. The latter can prevent criminals from creating new, fraudulent accounts in your name by denying access to your credit reports. The former signals potential creditors to take extra steps to verify identity before issuing new credit in your name.

The Federal Trade Commission, which along with the Consumer Financial Protection Bureau, regulates the credit arena, offers defensive guidance at a special new website, www.consumer.ftc.gov/blog/2017/09/equifax-data-breach-what-do. The FTC also has helpful information on identify theft counter-measures at www.consumer.ftc.gov/features/feature-0014-identity-theft. Another good site if you’re thinking of doing a freeze is www.uspirg.org/resources/usp/protect-yourself-against-new-account-id-theft. You can also avail yourself of the free, three-bureau credit monitoring service being offered by Equifax at www.equifaxsecurity2017.com. Most important first step- Check your three credit reports free at www.annualcreditreport.com and see whether anyone already has been tampering with your accounts.

Wells Fargo accused of unwarranted “rate lock” fees

Kenneth R. Harney on Sep 8, 2017

WASHINGTON — Wells Fargo & Co., the controversy-battered big bank, has a new problem — this time directly affecting mortgage applicants. Last week a first-time home buyer filed a class action suit against the company, alleging widespread abuse of a procedure well known to most mortgage borrowers: Interest rate “locks.”

The suit alleges that Wells Fargo engaged in “a systematic effort” to charge unwarranted rate lock extension fees — sometimes costing thousands of dollars per extension — to borrowers who should not have been required to pay them.

The Consumer Financial Protection Bureau is investigating the same practices, according to Wells Fargo’s most recent quarterly filing with the Securities and Exchange Commission. The CFPB generally does not confirm or discuss ongoing investigations and declined to do so for this column.

A Wells Fargo spokesman, Tom Goyda, said the company could not comment on the suit, but added that “we are reviewing the complaint in detail” and that “our current processes are designed to ensure that our rate lock extension fee policy is interpreted and applied consistently.”

Rate locks guarantee interest rates quoted to borrowers for specific time periods, typically ranging from 30 to 90 days, although some can be as short as 15 days or as long as 120. During the covered time period, the lender cannot raise the rate, even if market interest rates have spiked. When a loan is not closed within the lock period, the guarantee expires and the borrower must request an extension.

In Wells Fargo’s case, according to the suit, the company assured clients that they would not have to pay for lock extensions if the delay causing the expiration was the bank’s fault. If the delay was attributable to the borrower, the borrower would have to pay an extension fee, which could be significant if the loan amount was large.

The plaintiff in the new class action, Victor Muniz, says he decided to buy a home in Sandy Valley, Nevada, near his parents, and turned to Wells Fargo for his mortgage. Wells offered a rate lock on the loan commitment, but when the closing was delayed — not by Muniz, according to the suit, but by an appraiser who was out of the country — Wells charged him a fee of $287.50. This was despite assurances to Muniz by a bank employee that he would not be charged anything.

Though Muniz’s extension fee was relatively modest, consumer agencies around the country have received complaints about Wells Fargo’s rate lock extension practices, where fees sometimes exceeded $1,000 and ranged as high as $4,500. “We ended up paying a rate lock extension of $4,500 purely because our rate was great and the cost of not getting that rate was far worse,” the suit quotes a complainant to one unnamed consumer agency. Another consumer complained about being charged $500 extra even though “I did not cause any delay.”

A whistleblower letter from a former Wells Fargo employee sent to congressional committees in the House and Senate estimated that the company’s practices have led to overcharges in the Los Angeles area alone amounting to “millions of dollars.” The suit quotes a former Wells Fargo branch officer as having told ProPublica, the nonprofit investigative news group, that Wells Fargo’s approach to rate lock expirations amounted to “just stealing from people.”

Muniz’s suit claims the rate lock policy was overseen by regional and area managers, who routinely turned down local branch requests to exempt clients who had not caused any delay to processing from having to pay the extra fees. One former bank official quoted in the suit said that “99 percent of the time our requests [were] denied” at the regional level. If a borrower refused to pay the fee, “we just canceled the loan,” the former employee said.

Muniz’s suit, filed in U.S. District Court in San Francisco, claims violations of the Real Estate Settlement Procedures Act (RESPA), which prohibits receipt of unearned fees in mortgage transactions, among other statutes. The proposed class of victims could involve thousands of borrowers.

The takeaway here: Whatever the ultimate judgment by the courts in Muniz’s litigation, when you are obtaining a rate lock on a mortgage, focus on the details. Ask whether the lender has specific policies on fees for rate lock extensions. If they require you to pay money for all extensions — even when the lender screws up the process — is that fair to you as a consumer?