A break for housing tax breaks?

Oct 25, 2013 Kenneth R. Harney

WASHINGTON — Here’s a side effect of the 16-day federal shutdown and debt-ceiling crisis that could prove popular among tax-sensitive homeowners: The stalemate removed even the remotest possibility that Congress could undertake fundamental tax reforms curtailing housing breaks this year and renders it unlikely next year as well.

This means that the mortgage interest deduction, local property tax write-offs, second home deductions and capital gains exclusions are safe for the time being — despite a far-reaching tax reform package taking final shape in the House which may be outlined by Ways and Means Committee Chairman Dave Camp, R-Mich. in the coming weeks and could target these write-offs directly. A parallel reform effort is underway in the Senate but reportedly is not as far advanced as Camp’s.

Even if the bipartisan special committee appointed last week to resolve differences between House and Senate budgets by Dec. 13 proposes a tax reform schedule, the prospects for any serious action appear slim.

As a general matter, Democrats insist that any major reforms produce net new revenues — taxes — to help lower the federal deficit. Republicans counter that by streamlining the labyrinthine tax code and lowering the top marginal brackets for corporations and individuals, the economy will be stimulated and generate more earnings. Those additional earnings, in turn, will yield greater tax revenues for the government and lead to lower deficits and debts.

Through an extraordinary effort, Camp has managed to keep details of his plans secret by excluding Democrats from the bill-drafting process, strictly limiting access by staff members to meetings and imposing a gag order on participants. But given his publicly announced goals of sharply lower top tax brackets — 25 percent for corporations and individuals — housing analysts can’t see how he can make up the lost revenue without deep cuts in current individual tax deductions.

J.P. Delmore, federal legislative director for the National Association of Home Builders, said that “we expect to see changes” to existing real estate and mortgage-related write-offs in the Camp tax reform package. The overall plan, according to Delmore and other key tax experts, is likely to touch virtually every industry and taxpayer in some way. Whatever pain a given taxpayer experiences from the loss of deductions or credits theoretically would be balanced out by lower taxes elsewhere. Cutting total write-offs for mortgage interest, for example — whether by eliminating the deduction altogether or capping it — would be counterbalanced by an individual paying taxes at a lower marginal rate.

At the bottom line, so the theory goes, the country would get a much simpler system with lower tax rates on incomes but far fewer tax preferences that favor one group of citizens over another — one of the main critiques of current housing tax breaks.

Reformers often cite real estate property tax deductions as a case in point. These write-offs cost the Treasury approximately $30 billion a year, and reformers argue that they are heavily skewed toward owners in high-cost, high-tax states such as California, Connecticut, New York, New Jersey and Maryland. The mortgage interest deduction costs the government more than twice as much in tax revenue — about $70 billion a year — and also shows geographical differences based on home prices and sizes of mortgages.

Under the current system, only people who itemize on their federal tax returns — a minority of all taxpayers — can claim deductions.

Details about precisely how Camp’s forthcoming bill and the Senate counterpart handle potentially explosive issues such as reining in housing write-offs may not prove to be crucial in the near term. That’s because there’s no sign in the current Congress of the sort of political comity necessary to craft an agreement.

Democrats and Republicans can barely work out temporary solutions for a single fiscal year’s budget, much less fundamentally remold a sprawling tax code that’s been getting more complex and more heavily influenced by special interests year after year.

Homeownership is one of those special interests, of course, but one with millions of current beneficiaries, large numbers of whom vote their pocketbooks.

Bottom line: With 2014 an election year for all 435 members of the House, and with enormous fissures not only between the parties but within their own caucuses on key issues, the odds against major tax reform affecting real estate next year or even well into 2015 are steep — especially in the wake of the latest budget debacle.

Read more at http://www.arcamax.com/homeandgarden/thenationshousing/s-1411118-909395#bpRj OGDdzRffzJgt.99

The take on closing-cost rebates

Kenneth R. Harney Oct 11, 2013

WASHINGTON — The government shutdown and the debt limit have dominated the headlines, but a behind-the-scenes fight over federal mortgage policy has been brewing and it could affect your choices the next time you apply for a home loan.

The issue concerns differing rules for different types of mortgage sources. Some mortgage brokerage firms have begun advertising that they offer substantial credits to their customers — often in the $2,000 to $5,000 range per loan but sometimes more than $10,000 — that can be used to defray borrowers’ closing costs. A survey of 164 member firms of the National Association of Mortgage Brokers found that these companies provided more than $69 million in closing-cost credits to clients last year, and are on track to pay out the same or more this year. The group estimates that brokers nationwide rebated upward of $2 billion in 2012.

To illustrate: Charles W. Berryman, a departmental chairman at Louisiana State University, closed on a $295,900 mortgage to purchase a home earlier this year. It carried a 3 percent fixed rate for 15 years. Essential Mortgage Co., a large brokerage firm in his area, credited him $3,500 to defray his closing costs. In an interview, Berryman said he had shopped at two competing banks before making his choice. They offered the same attractive 3 percent fixed rate, he said, but no credits.

The availability and size of the closing-cost money sealed the deal for him, he said. Plus “it really surprised me,” he added, that one mortgage company could offer such a sweetener while competitors apparently would not or could not.

Though no one explained it to him at the time, there was an important reason for the difference. The brokerage firm, Essential Mortgage, was required by federal rules to rebate the money to Berryman. The two competing banks were not.

This is because under regulations issued by the Federal Reserve, brokers — who do not lend their own money but can shop among multiple creditors on behalf of borrowers — must disclose all their fees upfront to applicants. They are not permitted to earn any more than the disclosed amounts even if the funding source they choose for a buyer at a specific interest rate will pay them a premium for the loan. When brokers do receive premiums, the extra money must be credited to the borrower. The rules are an outgrowth of abuses during the mortgage boom years, when some brokers steered unsuspecting customers to higher-cost loans in order to fatten fees for themselves.

Banks who lend their own money, by contrast, are under no such requirements on premiums. They have the option to offer an applicant a credit — or not

Schools can be a selling point

Oct 4, 2013 Kenneth R. Harney

WASHINGTON — It’s a key question for many homebuyers who have or plan to have young children: We want a house in an area with good schools, but what sort of price premium — if any — will we have to pay?

Academic research generally has found that, all other factors being held equal, you pay somewhat more for houses in highly rated school districts compared with homes in neighborhoods where the schools have lower ratings and test results.

Now a national realty brokerage, Redfin, has come out with a study that purports to put hard numbers on the pricing differential. Using a huge database of about 407,000 home sales and nearly 11,000 elementary school districts in 57 metropolitan markets, the study concluded that on average, buyers pay $50 more per square foot for homes in top-rated school districts compared with homes served by average-rated schools. The study’s data came from multiple listing services plus school characteristics and test scores provided by research firms GreatSchools and Onboard Informatics.

The net result, according to Redfin, is that the price differentials for similar homes — same square footage, number of bedrooms and baths — that are located near each other but served by different school districts can range from tens of thousands to hundreds of thousands of dollars. In some expensive areas, such as coastal California, “homes in the highest ranking school zones” come with cost differentials ranging from $300,000 to nearly $500,000.

Even when similar homes are separated by just a school district dividing line from each other — half a mile to three-quarters of a mile apart — the price gaps can be significant. To illustrate the point, the study focused on five pairs of recent home sales. One case in Alexandria, Va., involved what Redfin termed “nearly identical” homes — both four bedroom, three baths and 3,000 square feet of living space — located three-quarters of a mile apart. For one house, the local school ratings were high. For the other, lower. The price premium: $130,000, 16 percent.

The study offered parallel examples in San Diego, Seattle, Gilbert, Ariz., and Beaverton, Ore. Researchers found large pricing differences between home sales in highly rated school districts compared with average-ranked districts in major metropolitan areas from coast to coast, including Los Angeles, Boston, Miami, Washington, D.C., Charlotte, Chicago, Seattle, San Diego, San Antonio and Las Vegas, among others. The study defined top-rated schools as those with test scores in the 90th percentile and above, average schools as those in 40th to 60th percentiles, in their respective states.

But hold on. Could these apparently large pricing differences be attributable solely to school quality? Are test scores from elementary schools really so powerful that they can add such hefty premiums onto the prices of “identical” houses that are simply on different sides of a district school line?

Take another look at the Redfin study. Unlike academic studies that employ sophisticated statistical techniques to separate out multiple other variables that may be influencing the pricing disparities, Redfin did no regression analyses on its data. Tommy Unger, the principal researcher for the study, conceded to me in an interview that “we wanted to tell the high-level story” for the homebuyer, and therefore did not analyze the data with the sort of statistical rigor that would be necessary for an academic paper designed to prove a point scientifically — in this case, how much extra buyers pay for top schools.

Also, although the study said the houses it used for comparison were “identical,” there was no attempt at creating true “comparables” as in an appraisal report detailing interior condition, improvements, neighborhood facilities and amenities, views and other locational pluses and minuses — all of which can affect pricing. The homes highlighted in the study were similar in numbers of bedrooms, baths and interior square footage. Potentially that leaves out a lot.

For example, in the pair of Virginia houses selected to show a $130,000 price disparity across school lines, local real estate agents said there were important differences that the Redfin analysis missed: a community pool open to all residents in the higher priced neighborhood, a strong sense of community involvement, and “walkability” designed into the neighborhood’s physical layout — all of which increase value.

“All the boxes are checked” to make that neighborhood more attractive and in demand, said Sue Goodhart, a broker with the McEnearney Associates Inc., a firm that specializes in the area.

“It’s just not all about the schools.”

The snag of part-time income

Sep 27, 2013 Kenneth R. Harney

WASHINGTON — It’s an issue that hasn’t gotten much attention, but should be a red alert for first-time buyers and others who supplement their incomes with part-time work: Though part-time earnings are playing an increasingly important role in the post-recession American economy, the income you earn part time may not count when you go to buy a house.

What? Isn’t income always income? If you make $42,000 from your regular full-time job and another $18,000 by working part time at a second job, isn’t your gross income $60,000?

The IRS would tell you it is. But mortgage lenders may disregard the $18,000 unless you can document that you’ve been receiving the extra money steadily for two years and the pay is likely to continue.

There might be some wiggle room on this depending on your specific circumstances, but under rules established by the dominant players in the home loan market — Fannie Mae, Freddie Mac and the Federal Housing Administration — part-time income generally isn’t “qualifying income” for mortgage purposes until it’s been flowing for a couple of years.

The problem can be especially severe for borrowers with moderate incomes who have solid credit histories and have taken on second jobs to support their families. Robert Montalbo, a loan officer in San Antonio with Premier Nationwide Lending, a mortgage banking firm, says he sees many credit-worthy applicants who “get a [part-time] second job to make ends meet” and who simply want a piece of the American dream — to buy a home of their own.

“Even if they can show they’ve worked at that [part-time] job for 16 months straight I may have to turn them down,” Montalbo said in an interview.

But modest-income applicants are hardly alone in confronting the problem. Richard M. Bettencourt Jr., a branch manager with the Mortgage Network Inc., in Danvers, Mass., recounts a recent experience he had with a borrower who earns $96,000 a year. The applicant had been self-employed as a certified public accountant for 12 years but had to close his business because of a heart condition. However, two of the CPA’s previous clients convinced him to accept part-time positions for their firms. He received regular salaries from both companies but had worked for only one of them for more than two years. As a result, only the salary from that company qualified as “income” for mortgage application purposes; the earnings from the other were deemed ineligible by underwriters.

“Because of the guidelines” — in this case Fannie Mae’s rules — “I had to deny him a mortgage because the ‘second’ job was not on the books for two years,” said Bettencourt. “How’s that for a scenario?”

Part-time income snags like this could prove to be an increasingly important constraint to the housing market recovery, especially since relatively few prospective buyers who depend on part-time work become aware of the problem until they apply for a loan.

According to data released earlier this month by the Bureau of Labor Statistics, 7.9 million Americans were employed part time “for economic reasons” in August — 4.8 million worked part time because of “slack work or business conditions,” 2.7 million “could only find part-time work” — and 19.3 million worked part time for “noneconomic reasons.”

Keith Hall, who served as commissioner of the Bureau of Labor Statistics between 2008 and 2012 and is now a senior research fellow at George Mason University’s Mercatus Center, says the proportion of jobs in the economy that are part-time has been climbing and is now 19.4 percent, up from 17.4 percent just before the recession.

Some analysts predict the percentage could rise even higher if businesses seeking to avoid paying insurance premiums for full-time employees under the Affordable Care Act (Obamacare) downshift large numbers of positions to part-time.

The two-year rule for counting part-time income has been an industry standard for years, and was recently incorporated into regulations adopted by the Consumer Financial Protection Bureau. The rationale is straightforward: If part-time income hasn’t been established for an extended period of time, it may not be dependable or available in the future to make monthly payments on a mortgage. The industry also has restrictions on qualifying seasonal income and overtime earnings.

Equally important, in an era of conservative underwriting and full documentation, there’s little likelihood that Fannie, Freddie or FHA will loosen their standards. So homebuyers with part-time income need to know the sobering fact: You may assume that all income is equal. But it’s not.

Some signs of credit-score easing

Sep 20, 2013 Kenneth R. Harney

WASHINGTON — Could the end of the refinancing boom be stimulating slightly more favorable mortgage terms for homebuyers? The latest comprehensive study of activity in the market suggests the answer could be yes.

Ellie Mae, a mortgage technology firm based in Pleasanton, Calif., conducts a widely regarded survey involving a massive, nationally representative sample of loans closed each month. Its August findings, released this week, point to a gradual easing on credit scores for borrowers.

Consider these hard numbers provided by Ellie Mae CEO Jonathan Corr: