Archive for April, 2009
Foreclosures
At first blush, the rule seemed so unfair that it must have been a cruel hoax. First, you lose your house in a foreclosure—perhaps you fell behind in the payments after you lost your job, you got sick, or your husband or wife died. Then the law ordered the IRS to pile on the emotional and financial grief by charging you extra income tax.
Outlandish, perhaps. But, until foreclosures became the symbol of the national financial crisis in late 2007, that was the law. First, a look at the basic rule, then a review of the temporary fix that will benefit hundreds of thousands of taxpayers who find themselves in dire financial straits.
Under general tax law, if the bank forecloses and sells your home for less than the amount left on your mortgage—and forgives the excess debt—the amount forgiven is treated as taxable income to you. That’s right; as far as the income tax is concerned, money you don’t have to pay back is treated the same way as money paid to you: Taxable in your top bracket. The IRS even has a special form for reporting this “windfall”: the 1099-C. The C stands for cancellation of debt and the law says cancelled debt is taxable as income. (There are exceptions, which we’ll get into later.)
As a wave of foreclosures began sweeping across the nation in 2007—fueled by the risky loans, rising rates, and a slowing housing market—this arcane rule began to get more and more attention. So did other efforts by strapped homeowners—such as “short sales” or loan restructuring—that can also trigger 1099-Cs reporting taxable income. If a lender agrees to freeze an adjustable interest rate for a period of time rather than allow it to rise as called for in the mortgage, for example, the change can result in forgiven debt that would be taxable under the regular rules.
Congress steps in with relief
To protect homeowners from this double whammy, Congress has declared that when a taxpayer’s principal residence is involved, forgiven debt will not be treated as income. For now, this break applies only for 2007, 2008, and 2009. After that, the old rule is scheduled to come back into play. This is a big deal for affected taxpayers. There are limits, of course, and it is important to know what’s covered and what’s not.
This relief applies only to principal residences, that is, the home you live in. If a lender forgives debt after a foreclosure, short sale or loan restructuring for a vacation home or investment property, for example, the old rule still applies: The amount of debt canceled is considered taxable income to you (unless you qualify for one of the exceptions discussed later). Congress didn’t want to offer a helping hand to speculators who helped fuel the housing boom by buying properties in hopes of “flipping” them quickly for hefty profits.
No more than $2 million of forgiven debt can be excluded from income.
To be eligible for the break, the loan must be secured by your principal residence and the money must have been used to buy, build, or substantially improve the property. If part of the forgiven debt was a home equity loan used for other purposes, for example, that part would be considered taxable income.
The tax basis of the home is reduced by the amount of canceled debt excluded from income. The basis is the amount you compare to the selling price of the home to determine if you have a profit or loss. (And, for tax purposes, a foreclosure is treated the same as a sale.) If a loan restructuring results in cancellation of $25,000 of debt, for example, your basis would be reduced by $25,000… potentially increasing by up to $25,000 the amount of profit you realize when you later sell. (The basis reduction will usually have no tax impact, though, because most home sale profit is tax-free.)
1099-C Confusion
While the new law offers important relief for strapped homeowners, it won’t prevent lenders who forgive debt from sending out 1099-C forms to taxpayers, with copies to the IRS. It will be up to you to know whether or not the discharged debt reported on the form is taxable or tax free.
The 1099-C must show the amount of debt forgiven and the fair market value of property given up through foreclosure. The IRS urges borrowers to check the form carefully and notify the lender immediately if any of the information shown on their form is incorrect. Pay particular attention to the amount of debt forgiven (Box 2) and the value listed for your home (Box 7).
How short sales work
Sometimes, rather than pursuing the costly and time-consuming process of foreclosure, a lender will allow a delinquent borrower to sell the house for less than the mortgage amount and turn the proceeds over to the bank as payment in full. Say you lost your job and can’t keep up payments on your home, you still owe $300,000 on your mortgage but the house value has dropped to $275,000. If the bank agrees to a short sale, you’d sell the place, pay the commission and other selling costs—let’s assume $15,000—and turn the remaining $260,000 over to the bank. The $40,000 gap between the payment and the amount due would show up on a 1099-C form. That’s right, even the $15,000 of selling expenses gets tossed in with the amount of forgiven debt.
Thanks to the new law, when the short sale in 2007, 2008 or 2009 involves a principal residence, the canceled debt is not considered taxable income.
Banks don’t always agree to a short sale—among other things, they look at the gap between the balance on the loan and the expected proceeds of the sale and the homeowner’s other assets. Basically, they weigh the cost of a short sale against the cost of foreclosing and selling the property themselves.
Dodging the tax bullet
Even if you’re not covered by the new tax-relief rule—say the house you lost was a vacation home rather than a principal residence—there’s a very important exception to the debt-relief-equals-taxable-income rule. Although lenders must send 1099-C forms reporting taxable income whenever canceled debt is $600 or more, the tax bill itself is forgiven if you are in bankruptcy or are insolvent.
Insolvency means your debts (including that mortgage) exceed the value of all your assets. You use IRS Form 982 to claim the exclusion.
Foreclosures
CFO Sink to hold foreclosure summit
TALLAHASSEE, Fla. – April 9, 2009 – Florida Chief Financial Officer Alex Sink said Wednesday that she planned to convene a meeting of lawyers working pro bono on foreclosure cases and the 12 largest Florida lending firms. The meeting will be held in Tampa April 20.
Announcing the foreclosure summit Wednesday with attorneys from the Florida Attorneys Saving Homes program, Sink said the meeting would help remind Floridians about free legal assistance and allow lawyers to pick the brains of lenders about loan repayment problems that don’t require eviction. According to Sink, the pro bono lawyers have already received 25,000 calls about foreclosures, but their efforts have been hamstrung by varied processes from lenders, a problem the CFO said could be easier to solve by bringing the largest firms together.
“The purpose of our meeting is to find out how we can be more efficient and effective so our volunteer attorneys don’t get frustrated and say ‘I don’t have time for this,’” Sink said.
Representatives from Bank of America, Citibank, Countrywide, IndyMac Bank, JP Morgan, Litton Loan Servicing, Wells Fargo, Saxon Mortgage Services, Suntrust, Wachovia and Washington Mutual will be invited to attend the summit, Sink’s office said.
In 2007, CFO Sink asked the Florida Bar to provide assistance to struggling homeowners in the state, leading to the creation of the Florida Attorneys Saving Homes program. The program pairs pro bono attorneys with Florida homeowners who are behind on their mortgage payments. Over 1,000 lawyers across the state have volunteered their time in response to CFO Sink’s call to launch this program.
In addition to the Florida Attorneys Saving Homes Program, CFO Sink also launched the Florida Housing Help Initiative to assist homeowners facing foreclosure. The initiative partners with community organizations and elected officials to hold foreclosure workshops around the state.
For more information on CFO Sink’s Florida Housing Help Initiative or the Florida Attorneys Saving Homes program, visit www.MyFloridaCFO.com. Details, including venue information and time of the April 20 roundtable, will be announced soon.
Tax Credit
Tax credit might be shot in the arm for first-time homebuyers
TALLAHASSEE, Fla. – April 7, 2009 – A coalition of powerful groups, including the Orlando-based Florida Association of Realtors, is lobbying the state to find a way to advance first-time homebuyers a new, $8,000 federal tax credit designed to spur home sales.
Many first-time buyers have the income and credit to qualify for a home loan but need help with the downpayment, said Cynthia Shelton, an Orlando Realtor and current president of the statewide trade group. Fronting the money for the new tax credit could draw more qualified buyers into the slumping home market sooner, she said.
A study by Miami-based economist Antonio Villamil concluded last week that “front loading” the tax credit, part of the federal government’s stimulus package, would give Florida’s economy a significant boost – equivalent to creating 33,206 jobs and generating $514 million in federal, state and local tax revenue.
“I was in Tallahassee last week and I met with some senators. We’re pressing like mad to get this through,” Shelton said.
But with state lawmakers rushing to complete their annual session by May 1, the chances of passing any such bill are remote, so other avenues are being explored, said Walt Dartland, executive director of the Consumer Federation of the Southeast.
“The Legislature may or may not play a part,” Dartland said Monday from Tallahassee. “It’s true, we are out of time” for passing a new law from scratch. Other options being researched that might not require legislation, he said, include leveraging some of the resources of the Florida Housing Finance Corp., which already has a down-payment assistance program. Qualifying homebuyers would sign over their tax credits to repay the fund.
In addition to the Realtors and the consumer federation, the alliance now urging the Legislature to consider the home-financing proposal includes the Florida Home Builders Association, Florida Bankers Association, Florida Credit Union League, Florida Manufactured Housing Association and Florida Association of Mortgage Brokers.
Supporters of what the consumer federation is calling the “Florida formula” said the state has a short time in which to act because the tax credit is for homes purchased by the end of November. A tax credit is a dollar-for-dollar reduction in federal taxes owed.
Steve Auger, executive director of the Florida Housing Finance Corp., said the agency has provided $66 million in downpayment assistance since 2007, but its ability to continue doing that is jeopardized by the possibility that lawmakers may commit all of the housing agency’s trust fund to the general fund this year because of a record budget shortfall.
“I would hope the legislators would think long and hard about that,” Auger said.
Dartland said that another idea being discussed would involve the state issuing short-term notes that could be sold to participating banks. Those notes could then be repaid with the homebuyers’ tax credits.
Copyright © 2009 The Orlando Sentinel, Fla., Jerry W. Jackson. Distributed by McClatchy-Tribune Information Services.
New Homes
Buying New Makes Sense
One quick glance at today’s headlines, and it’s no wonder that, as concerned consumers, we’re pinching pennies more than ever. In a recent survey conducted by HSBC Bank USA, 64 percent of us plan to cut unnecessary spending this year. And, in a similar survey by Discover Financial Services, about half of consumers plan to cut down on such non-essential spending as dinners out and movies – even remodeling.
Still, when it comes to buying a house – something that many consumers are doing because of the many good deals to be had in a slow market – most of us prefer new. Even better, buying a new home also makes good financial sense. New homes offer countless advantages for consumers when it comes to saving money. Perhaps the biggest plus is that, since they’re brand-new, the maintenance headaches that often accompany maintenance – as with older homes – simply don’t exist, and won’t for a while.
New homes also use the latest in whole-house systems, like heating and air conditioning, so they’re not likely to break down, saving consumers money. They’re also more energy-efficient, which is also good for saving lots of green. Speaking of green, with interest rates that aren’t too far away from historic lows (just over 6 percent for a 30-year fixed mortgage as of March 11), consumers can also save money on new home mortgages. And, since mortgage interest and real estate taxes are deductible, it’s another way to save money by buying a new home, especially when it comes to tax time.
There’s a saying that when you buy a pre-owned home, you’re buying someone else’s vision of a home, and that’s true. Even if that “vision” involved avocado green counters, white laminate floors in the kitchen and neon Hollywood-style lighting in the bathroom. Today’s homebuilders are offering the latest in popular choices at up-to-the-minute design centers that allow consumers to choose from hardwood flooring to cabinetry, fixtures to lighting – and everything in between.
With a new home, the sky’s the limit when it comes to design choices – and they’re all yours. New homebuyers end up with a house that’s perfectly suited for their needs. Buying new means also adding elements as your home is built – the kind of custom features that would cost far more if they were added after the fact. Consider the cost of such finished spaces as game rooms or media rooms, or such extras as fireplaces and built-in microwave ovens.
Any builder will tell you that it’s much less expensive to choose these kinds of options up-front. In the end, buying new just makes more sense: less worries about maintenance, lower interest rates on mortgages, and design choices that fit your lifestyle. And who doesn’t want that?
FHA Loans
Government considers propping up federal loan program
WASHINGTON – April 3, 2009 – The Obama administration soon may be forced to subsidize the government’s mortgage insurance program with taxpayer dollars as economic troubles cause defaults and foreclosures to surge.
No decision has been reached, officials said Thursday at a Senate subcommittee hearing focused on the fiscal health of the Federal Housing Administration. But if the agency’s losses grow too high, the FHA would be forced to raise money – either by increasing insurance premiums on new borrowers or seeking a subsidy from the federal budget.
President Barack Obama’s housing secretary, Shaun Donovan, told senators that officials are evaluating whether aid for FHA will be needed as part of the administration’s $3.6 trillion budget for next year.
However, Donovan said FHA is “unlikely to face the catastrophic losses borne in the subprime sector.” That’s partly because the agency has more conservative standards than the subprime lenders that fueled the housing boom. It also didn’t back loans for more expensive properties that have plummeted in value, particularly in places like California, he said.
As of February, 7.2 percent of loans backed by the FHA were either 90 days overdue or in foreclosure, up from 5.8 percent in August. “Based on the numbers we’re seeing, I think it’s going in the wrong direction,” said Kenneth M. Donohue, inspector general for the Department of Housing and Urban Development.
Lawmakers, meanwhile, are worried taxpayers will be stuck with the final bill.
Sen. Kit Bond, R-Mo., called the FHA a “powder keg” waiting to explode, and said Congress and the Obama administration shouldn’t place a greater financial burden on the already strapped agency. “The taxpayer credit card is maxed out,” Bond said.
“My constituents have been clear that they don’t want to wake up to learn that Congress has taken steps that leave the taxpayer holding the bag,” said Sen. Patty Murray, D-Wash. “That is exactly what could happen if the FHA is pushed to buy loans that could go bad soon or down the line.”
The FHA became the main source of home loans to borrowers with poor credit and low down payments after the subprime lending market’s collapse. It allows borrowers to take out home loans with down payments as low as 3.5 percent, compared with 20 percent for a typical loan that doesn’t require mortgage insurance.
FHA loans are made through by banks, insured by the government and sold as mortgage-backed securities by Ginnie Mae, the government’s mortgage finance agency. The FHA currently backs around a third of new home loans, up from about 3 percent in 2006.
To combat fears that shady mortgage lenders are feeding fraudulent loans into FHA, Donovan said the government has activated “SWAT teams” that will conduct unannounced inspections of lenders whose loans are showing unusually high default rates. The agency has the right to revoke lenders’ ability to do business with FHA.
Obama last month nominated real estate industry veteran David Stevens to head the FHA. Stevens is currently president and chief operating officer of Long and Foster Cos., a Chantilly, Va.-based real estate brokerage. The position requires Senate confirmation.
Meanwhile, a program launched by former President George W. Bush’s administration to assist troubled borrowers has been canceled. The “FHASecure” refinancing program announced with great fanfare in August 2007 produced disappointing results, aiding few delinquent borrowers, and was allowed to expire at the end of last year.
Copyright © 2009 The Associated Press, Alan Zibel (AP Real Estate Writer). All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Homebuyer Tax Credit
FAR supports push to advance homebuyer tax credit aid
ORLANDO, Fla. – April 3, 2009 – – Finding a way to turn a new $8,000 federal tax credit for first-time homebuyers into money that they can use right away for a downpayment would spark the recovery of Florida’s housing market and boost the state’s economy, says Cynthia Shelton, 2009 president of the Florida Association of Realtors® (FAR).
“A revitalized housing market and commercial real estate industry are crucial to Florida’s economic recovery,” Shelton says. “While the new tax credit provides a great incentive for first-time homebuyers to find the home of their dreams here in Florida, many qualified buyers may be unable to take advantage of it because they cannot come up with the necessary downpayment to purchase a home in the first place. We need to encourage Florida lawmakers to take action now – converting the tax credit into cash upfront could help thousands of first-time buyers overcome that financial barrier to homeownership, which generates an economic ripple that stimulates the state’s overall economy.”
With tighter credit restrictions these days, many banks are reluctant to lend money, notes John Sebree, vice president of public policy for FAR. Research indicates that 8,000 to 12,000 prospective first-time homebuyers in Florida could benefit if the federal tax-credit stimulus provision could be accessed on the front-end to help consumers with downpayment and closing costs.
“Finding a state solution to this problem is key,” Sebree said. “The money should only be available to people who are eligible for the new tax credit. The state would advance the cash to these buyers, who would then forward their tax credits back to the state. These families could get their $8,000 tax credit in a matter of months, so it basically would be a short-term loan. But we have to move quickly, since homebuyers have to complete their purchase by Nov. 30, 2009, to receive the tax credit.”
Gov. Charlie Crist is considering the proposal. A coalition of Florida consumers, Realtors, lenders and homebuilders are lobbying state legislators to come up with a “Florida Formula” to allow first-time homebuyers to use the federal tax credit upfront. Spearheaded by the Consumer Federation of the Southeast (CFSE), a nonprofit consumer advocacy group, the alliance includes the Florida Association of Realtors, the Florida Home Builders Association, the Florida Bankers Association, the Florida Credit Union League, the Florida Manufactured Housing Association, Florida Association of Mortgage Brokers, the Latin Builders Association, and the Builders Association of South Florida.
Short Sales
MANATEE COUNTY, Fla. – April 3, 2009 – Area real-estate professionals are hoping Fannie Mae continues a limited pilot program aimed at facilitating short sales, especially as local foreclosure filings continue to hit record highs.
Since its January launch, the program has prevented at least a handful of homes in 11 Florida counties – including Manatee and Sarasota – from falling into foreclosure by making it easier to sell them for less than their outstanding mortgages.
The project initially was scheduled to last three months, but officials with a regional listing service said Wednesday they’re hoping to persuade Fannie Mae to extend it.
“We’re very excited about the project, and we’d like to see it continue,” said John Weeden, marketing manager for the Mid-Florida Regional Multiple Listing Service, which is collaborating on the pilot program and is scheduled to update Fannie Mae on its progress next week.
About 300 Florida homes are in the program, which streamlines the short sale process by getting all necessary approvals and property research done beforehand. A short sale is one in which the lender – Fannie Mae for homes in the pilot program – agrees to accept less than what is owed on the home to avoid the costs of foreclosure.
Weeden said he did not know how many short sales have closed through the program, which applies only to homes with Fannie Mae mortgages.
Quicksilver Real Estate Group Inc., a Tampa firm with an office in Bradenton, has closed three and has two others pending, broker/owner Linn Wyllie said. Those sales have come together in a matter of weeks as opposed to the several months or longer that a typical short sale can take, he said.
“It’s huge for the industry,” Wyllie said of the pilot program’s time savings.
Fannie Mae, officially known as the Federal National Mortgage Association, also launched a similar program in the Phoenix area.
The program didn’t prevent lenders from maintaining their record pace of foreclosure filings in Manatee, however. Lenders filed 608 foreclosure suits in Manatee County Circuit Court in March, the highest monthly total ever, court records show.
There have been 1,653 foreclosure actions filed through the first three months of 2008, up 33 percent from the 1,241 filed during the same period a year earlier. At that pace, last year’s record of 5,592 foreclosure filings will be broken in September.
For the third straight month, more primary homes than seasonal, vacation and rental homes fell into foreclosure: 54 percent were homesteaded, while 46 percent were not. That’s largely the result of mounting job losses and indicates foreclosures likely will remain high as the county’s unemployment rate worsens, experts said.
Copyright © 2009 The Bradenton Herald, Fla., Duane Marsteller. Distributed by McClatchy-Tribune Information Services.