An FHA retreat, with a hitch

Kenneth R. Harney Mar 28, 2014

WASHINGTON – Can you be charged interest on your mortgage even after you’ve fully paid it off? Can the meter keep running when you owe the bank nothing – your principal balance is zero?

Surprise! Much to the chagrin of large numbers of home sellers and refinancers, the answer for years has been yes. If your loan was insured by the Federal Housing Administration and you paid it off before maturity, at closing you’d be expected to cough up a full month’s interest, no matter what day of the month you actually settled

Even if you closed on March 2, for instance, you’d be charged interest by your loan servicer through March 31, potentially adding hundreds of dollars to your costs in the transaction. FHA’s practice has been unique among major players in the housing finance marketplace. Fannie Mae, Freddie Mac and the Department of Veterans Affairs all require interest to be collected only to the day of principal payoff. After that, the meter stops.

But change is on the horizon. Thanks to a regulatory mandate from the Consumer Financial Protection Bureau, FHA has agreed to end its controversial full-month interest policy, but only for future borrowers. FHA has until next Jan. 21 to make the switch, so sellers and refinancers who currently have FHA-insured mortgages are cut out of the deal. Many will still get hit with extra interest charges.

Here’s a quick overview of what’s behind the agency’s belated retreat. For the past decade, homeowners and realty brokers have complained that FHA’s interest payment policy amounts to an unfair gouging. Not only were many sellers unaware of FHA’s odd requirement, but they didn’t factor the extra costs into their financial plans.

The National Association of Realtors, which began publicly criticizing the practice in 2004, said by insisting on full months of interest payments, FHA effectively has been squeezing tens of millions of dollars in unjustifiable extra charges out of sellers. In one year alone, 2003, according to the association, FHA borrowers paid an estimated $587.4 million in “excess interest fees.”

In 2011, complaints from constituents prompted Sen. Ben Cardin, D-Md., to introduce legislation that would have banned full-month interest charges and required FHA loan servicers to compute payoffs on a per-diem basis.

Cardin’s bill ultimately went nowhere. FHA brushed off its critics, arguing that by guaranteeing bond investors a full month’s interest on mortgages, its interest rates were slightly lower than its competitors’. One mortgage industry estimate put the rate break at roughly 0.10 percent to 0.15 percent.

Real estate industry experts, however, said the true beneficiaries of the long-standing practice were loan servicers, who could earn interest on the “float” – the money they collected from borrowers and had free use of until the end of the month, when they had to disburse final interest payments to bond investors.

But financial system overhaul legislation passed by Congress in 2010 – the Dodd-Frank Wall Street Reform and Consumer Protection Act – got in the way of this game. The law empowered the new CFPB to write regulations, banning prepayment penalties. Under the rule the bureau adopted, FHA’s full-month interest policy amounted to such a penalty – essentially a fine on borrowers who couldn’t or didn’t pay off at the end of the month. Since home buyers rather than sellers typically schedule closing dates, many sellers were unable to control the exact date their FHA loans were paid off – leading to hefty interest penalties under the CFPB’s definition.

Tucked away in a Federal Register notice announcing its plan to change policy, FHA finally came clean on whether the tiny interest break that borrowers received was ever worth the extra interest amounts they could face if they prepaid the loan. New borrowers next year “can expect to pay a slightly higher rate,” the agency said, “but they would also receive full benefit from lower interest costs [at closing] when they prepay … in most cases more than offsetting the cost of the higher rate.”

Aha! So in fact under the old practice, FHA’s customers paid more than they should. And presumably some of the estimated 7.8 million existing FHA mortgage borrowers who are not covered by the forthcoming policy change will continue to be vulnerable to paying more than they should.

The only way around it, If you are a seller or refinancer paying off an FHA loan, insist that your closing is at the end of the month, not the beginning.

Reprieve on debt forgiveness?

Mar 21, 2014 Kenneth R. Harney

WASHINGTON – Here’s some good news for homeowners worried that Congress will fail again to renew popular tax benefits for use in 2014 – especially those allowing for mortgage debt forgiveness, write-offs for energy-saving improvements and mortgage insurance premiums.

Though there has been no formal announcement, the Senate Finance Committee under new Chairman Ron Wyden, D-Ore., expects to take up a so-called “extenders” package within weeks, sometime this spring. “This is high on [Wyden's] priority list,” according to a source with direct knowledge of the committee’s plans. That’s an important change from last December, when then-Chairman Max Baucus, D-Mont., who is now ambassador to China, let 50-plus corporate and individual tax benefits expire. The House also took no action to extend.

As a result, several key tax code housing provisions lapsed into a legislative coma. Without reauthorization retroactive to Jan. 1, they could disappear from the code and not be available for transactions this year. Both Baucus and House Ways and Means Committee Chairman Dave Camp, R-Mich., focused on wholesale rewrites of the tax code last year rather than spending time on extending special-interest tax provisions.

But now there are signs that at least some of the expired housing benefits could be back on Congress’ to-do list. What are these “extenders,” as they are called on Capitol Hill?

Tops on the list is the Mortgage Forgiveness Debt Relief Act, a law that has saved large numbers of homeowners from hefty tax bills – close to an estimated 100,000 taxpayers in 2011, the latest year for which IRS estimates are available. First enacted in 2007 with menacing clouds of the housing bust on the horizon, the law carved out a special exception to the general rule in the tax code, When you are relieved of a debt burden by a creditor, the amount forgiven is treated as income subject to taxation at ordinary rates.

For qualified homeowners whose mortgage debt was reduced or written off by lenders in connection with loan modifications and short sales, the law said, the forgiven amounts would not be taxable. However, the 2007 carve-out for mortgages was temporary. Congress was required to extend it periodically – which it failed to do last Dec. 31. At least one state has a partial remedy for congressional inaction, however, California owners who sell homes through short sales are not subject to taxation on the amounts forgiven, a legal interpretation confirmed by the IRS.

Also part of the housing benefits that Congress failed to extend last December, A $2,000 tax credit for construction of energy-efficient new homes, deductions for home improvements that conserve energy, and write-offs for the mortgage insurance premiums that many borrowers pay in connection with low down payment loans.

Though Wyden is planning to take up an extenders bill soon, that does not guarantee that any specific tax law provision will be part of the bill the Finance Committee ultimately considers. The committee has asked members to suggest what they think should be part of a final package, which may or may not include all the housing-related provisions. But bipartisan support for mortgage debt forgiveness renewal is strong. Sens. Debbie Stabenow, D-Mich., and Dean Heller, R-Nev., are pushing an extension through 2015. Most tax analysts expect that a final bill will include some form of renewal.

The home energy conservation tax programs also are likely to be included in the Senate bill, in part because Wyden has supported them in the past and recently served as chairman of the Energy and Natural Resources Committee.

Meanwhile in the House, Camp has not indicated when he plans to take up the extenders. He recently unveiled a comprehensive tax reform plan that would lower tax brackets, increase standard deductions, and eliminate or sharply curtail most longtime housing tax benefits – including mortgage interest and property tax write-offs. Camp’s bill did not mention reauthorization of the now-expired housing extender items, but he asked colleagues for their views on what might be retained in a large bill.

If, as expected, the Senate Finance Committee approves and the full Senate passes some form of extender package – including two or three of the housing provisions – election-year pressure on Camp to pass some version will be intense, despite his preference for comprehensive tax reform, which has no chance of passage in 2014.

Bottom line, Though there are hurdles ahead, the outlook for renewal of mortgage forgiveness debt relief – and possibly other housing benefits – looks more promising now than it has in months.

Big rebound in home equity

Kenneth R. Harney Mar 14, 2014

WASHINGTON – The economy may be growing at a frustratingly slow pace, but one piece of it is booming, American homeowners’ equity holdings – the market value of their houses minus their mortgage debts – soared by nearly $2.1 trillion last year to $10 trillion.

Big numbers, you say, and hard to grasp. But look at it this way, Thanks to rising prices and equity levels, about 4 million owners around the country last year were able to climb out of the financial tar pit of the housing bust – negative equity.

Negative equity gums up people’s lives and the real estate marketplace as a whole. It makes it difficult or impossible for many owners to refinance out of a higher-cost mortgage into a more affordable one. It makes it painful to sell – you’ve got to bring cash to the table to pay off what you still owe to the bank. Plus almost no one wants to lend you money, at least not at reasonable interest rates secured by your real estate, when you’re deeply underwater. So you’re likely to spend less, invest less, and you’re probably not going to buy another house. Nor will potential new buyers be able to purchase yours.

So when 4 million owners manage to transition out of negative equity into positive territory, that’s significant news not just for them personally, but for the economy overall.

Two statistical studies released last week offered a glimpse of where the country is in terms of homeowner equity, seven years after real estate began to tumble and crash. The first was the Federal Reserve’s quarterly “flow of funds” report. Among many other segments of the economy it toted up, the Fed found that homeowner equity has rebounded to its highest level in eight years – though it’s still not quite back to the $12 trillion it was during the hyperinflationary high point of the housing boom in 2005.

The second study, from real estate analytics firm CoreLogic, focused on the flip side – the impressive shrinkage of negative equity. According to researchers, nearly 43 million owners with mortgage debt have positive equity. Roughly 6.5 million owners are still in negative equity positions, however, down from more than 10 million a year ago and 12 million in 2009.

Who are they and where are they? Not surprisingly, they are heavily concentrated in areas that saw the wildest price run-ups, the heaviest use of toxic loan products and the steepest plunges during the crash. In Nevada, 30.4 percent of all owners with mortgages are underwater. In Florida, it’s 28.1 percent. Arizona, 21.5 percent. Still, all three areas have improved sharply over the past two years.

Although non-costal California markets suffered some of the most dramatic declines in property values during the bust, researchers found that the state as a whole is nowhere near the top of the latest negative equity list. With 12.6 percent of mortgaged homes underwater, California has a lower overall negative rate than the national average (13.3 percent), and has relatively fewer underwater homes than Maryland (ranked 10th worst in the country with a negative equity rate of 16.2 percent), Ohio (19 percent), Illinois (18.7 percent), Rhode Island (18.3 percent) and Michigan (18 percent.)

Among the best markets if you’re measuring for positive equity, Texas, where just 3.9 percent of owners are in negative positions, Alaska (4.2 percent), New York (6.3 percent), Oklahoma (6.4 percent) and the District of Columbia (6.5 percent.) Higher-priced houses generally have lower rates of negative equity compared with houses in lower-priced areas, many of which saw construction booms for entry-level, low- and moderate-cost homes in the suburbs of major cities during the boom years. Just 8 percent of mortgaged homes worth more than $200,000 have negative equity compared with 19 percent of homes under $200,000.

Having positive equity is one thing but do you have adequate equity? Or are you, as CoreLogic refers to the phenomenon, “under-equitied?” Researchers define under-equity as mortgage debt that is in excess of 80 percent of your home’s resale value. This is important in practical terms, they say, because having less than 20 percent equity makes it more difficult for you to pursue potentially helpful financial options, such as refinancing your primary home loan or obtaining an equity credit line. About 21 percent of all mortgaged homes nationwide are currently in this situation and 1.6 million owners have less than 5 percent equity.

On tax breaks, change is in the air

Kenneth R. Harney Mar 7, 2014

WASHINGTON – You may have seen reports about a major tax reform proposal floated last week by Rep. Dave Camp of Michigan, the chairman of the House Ways and Means Committee.

But you probably didn’t see the grisly list of long-standing home real estate tax benefits that would be eliminated or sharply reduced under Camp’s plan. Here’s a quick overview. But first, some basics,

- This is no back-of-the-napkin set of proposals. Camp and his committee – the primary tax-writing panel in Congress – have been working on this for two years. They’ve held extensive public hearings and done significant research.

- Though Camp’s reform package has zero chance of enactment in an election year, many of its core concepts are likely to reappear on Capitol Hill as early as 2015, when new chairmen at both Ways and Means and the Senate Finance Committee take up fundamental tax reform.

- Even the most die-hard proponents of real estate tax benefits concede that at some point, with the right combination of lower federal income tax brackets and higher standard-deduction levels, housing’s special carve-outs in the tax code will be less compelling to many homeowners. Why itemize when you can just take the standard deduction and save more? Once this sinks in, the political support for retention of owners’ unique tax privileges in the code will begin to crumble.

So what did Camp propose? For the vast majority of individuals and corporations, enticingly lower marginal rates of 10 percent and 25 percent, plus a substantially increased personal standard deduction – $22,000 for married joint filers, $11,000 for singles. Individuals with annual incomes above $400,000 and joint filers above $450,000 would pay taxes at a marginal rate of 35 percent.

In exchange, say bye-bye to the mortgage interest deduction in its current form. The $1 million limit on mortgage amounts that qualify for interest deductions would phase down to $500,000 in four annual steps, with no indexing to inflation. This would effectively diminish its value year after year as inflation takes its bites. The good news on interest deductions: Anyone with an existing mortgage of $500,000 or higher on the date the tax bill takes effect would be grandfathered for the life of the loan. The bad news: Interest write-offs on home equity borrowings, currently limited to $100,000, would be prohibited unless the money was being used to improve your property.

Another set of changes Camp would make: He’d revise the present $500,000 and $250,000 capital gains exclusions for profits on sales of home by joint filers and single filers, respectively. Under today’s rules, you can claim a tax-free exclusion once you’ve owned a home for two years out of the preceding five years and you can do so once every two years. Under Camp’s proposal, you’d need to own your house for five out of the preceding eight years to claim a tax-free exclusion and you could only exercise this privilege once every five years. Capital gains exclusions for home sellers with upper incomes – $250,000 a year for singles and $500,000 a year for joint filers – would be phased out altogether over a period of years.

Besides these, Camp’s tax bill would,

- End all deductions for local property taxes, which he considers subsidies for excessive spending at the local government level.

- Eliminate credits for owners who make energy-saving improvements to their homes.

- End penalty-free withdrawals from IRAs to help fund first-time home purchases.

- Leave in limbo popular mortgage debt forgiveness tax benefits used by large numbers of short-sellers and foreclosed owners in the past several years. Camp’s plan is silent on extending the benefits – which are currently expired, awaiting extension – but in this case silence would be fatal.

- Kill tax federal tax exemptions for state and municipal bond programs used to fund mortgages for moderate-income families.

Bottom line, Though preliminary action on tax reform is at least a year away, homeowners need to grasp a sobering, emerging reality: To pay for a streamlining of the ballooning federal tax code and provide lower rates on income, there’s a chance that Congress will demand that you give up long-entrenched tax subsidies that have put homeownership on a pedestal, supported prices and sweetened the household finances of millions of Americans for decades.

Whoa. Didn’t we all assume that homeownership is politically sacrosanct? Right, but when the chief Republican tax writer in Congress proposes throwing out most of those perks, you’ve got to re-examine that assumption.

Americans again cash in on home equity

Kenneth R. Harney Feb 28, 2014

WASHINGTON – One of the mortgage products that contributed to the housing crash is booming again, New home equity credit line borrowings soared by 42 percent in the final three months of 2013 and were up sharply for the entire year, to $111 billion.

But does this point to a return to the “my house is an ATM” mentality that characterized excessive home equity borrowing from 2004 through 2007, just before the crash? Should consumers – and the banks doling out the cash – be cautious about this trend?

Researchers at Experian Information Solutions estimate that originations of home equity lines of credit – HELOCs in mortgage industry shorthand – rose by 58 percent in the final quarter of last year in the Western states, 38 percent in the Northeast, and 36 percent in the Midwest.

The average line of credit for new borrowers with “super-prime” VantageScores (781-850) was $120,000. VantageScores are one of the two main types of risk-evaluation scores used by lenders. More ominously, new equity credit lines extended to owners with “deep subprime” scores (300-499) increased faster than in previous years and averaged more than $60,000, roughly triple the amounts in late 2010. On the other hand, according to researchers, serious delinquencies in outstanding HELOCs continued to be low, generally well under 1 percent. What’s behind the equity credit line eruption? A record-fast rebound in owners’ equity holdings tied to rising home prices is one key. Between the third quarter of 2012 and the same period last year, Americans’ real estate equity accounts expanded by $2.2 trillion, according to the Federal Reserve. That growth is offering owners more options to tap their real estate wealth to fund home renovations, tuition payments, auto purchases and a variety of other consumer expenditures.

Banks are also pushing equity line products. Mike Kinane, senior vice president of TD Bank, said that home equity lines are providing a money-saving alternative to refinancing in a rising interest rate environment. With rates that are currently well below those quoted for fixed-rate 30-year mortgages, tapping “home equity looks attractive” to growing numbers of owners. TD Bank’s equity line rates go as low as 2.75 percent (prime bank rate minus half a percentage point) for qualified applicants.

Lenders I interviewed for this column, however, insisted that the rapid rise in new equity lines is different this time around, under much tighter controls. Cindy Balser, senior vice president of consumer credit products for Key Bank in Cleveland, says underwriting in 2014 is more intensive than it was a decade ago. Not only are credit limits more restrained – generally held to 80 percent of the home value, counting both the first and second mortgages against the property – but banks like hers require full appraisals or property condition reports by licensed appraisers to supplement electronically derived valuations.

But even with tighter controls, bankers and lending industry analysts acknowledge that there are potential downsides. Competition is encouraging some lenders to push their limits for combined first and second mortgages debt to 90 percent of home value or higher. That’s risky for them and for borrowers who could find themselves underwater in the event of another economic downturn.

Also, warns Amy Crews Cutts, chief economist for Equifax, today’s enticing interest rates are likely to increase. Since equity credit lines typically carry floating rates, borrowers could eventually find themselves paying much more every month than they ever anticipated.

Here’s what else to watch for if you’re thinking of jumping on the equity line bandwagon,

- “Teaser” rates. These short-term discounts on new credit lines may beguile you, but they are simply borrower bait. Focus on the index your credit line rate will be based on and the size of the “margin” tacked on by the bank. Run scenarios of what you might be paying if the index increases.

- Look for credit lines that come with an option to switch to a fixed rate if you choose. If your variable rate starts to take off sharply in future years, this will be a way to lock in your rate before things spiral out of control.

- Read the fine print. Credit lines can be complicated – your maximum draw can be limited or the entire line frozen under certain conditions. Your early payments may be interest-only but they’ll switch to full amortization at some point. You should understand all the features of your credit line before signing up.