Mortgage Workouts, Now Tax-Free for Many Homeowners; Claim Relief on Newly-Revised IRS Form
Updated with FAQs at bottom - Feb. 28, 2008
IR-2008-17, Feb. 12, 2008
WASHINGTON - Homeowners whose mortgage debt was partly or entirely forgiven during 2007 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their 2007 federal income tax return, according to the Internal Revenue Service.
Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on this Web site.
"The new law contains important provisions for struggling homeowners," said Acting IRS Commissioner Linda Stiff. "We urge people with mortgage problems to take full advantage of the valuable tax relief available."
The late-December enactment means that reporting procedures for this law change were not incorporated into tax-preparation software or IRS forms. For that reason, people using tax software should check with their provider for updates that include the revised Form 982. Similarly, the IRS is now updating its systems and expects to begin accepting electronically-filed returns that include Form 982 by March 3. The paper Form 982 is now being accepted, but the IRS reminds affected taxpayers to consider filing electronically, which greatly reduces errors and speeds refunds.
The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on Form 982 (specifically, lines 1e, 2 and 10b).
The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.
Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.
The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home ( Box 7).
As of the time of this post, the new Housing Bill has only passed the senate and has not been signed into law.
Many of you have seen blips about it in the media, some of you have probably even taken the time to read some of the 20 page summaries that explain how this is really about bailing out the Banks on Wall Street, and not helping the Homeowner on Main Street. Anyone who has read into this knows that there is indeed a lot of fine print. ( Owners pledging future appreciation on their home to be paid to FHA in some circumstances )
Just received a call from a homeowner telling me that the government just forgave all prepayment penalties and loan balances over 90% of his home's value, etc. etc. etc. and wanted to know when he can receive a new FHA loan. For anyone in trouble with their home or mortgage, I certainly sympathize.
What this homeowner, and I'm sure so many others missed is the most basic tenet of this Bill.
....That banks only have to allow this if it costs them less to forgive the balance and refinance the loan to a new FHA loan than it does to foreclose...
..... That homeowners without jobs or facing medical problems that keep them from making income are really not going to receive anything out of this...
.... waiving your right to borrow against the home in the future... not that anyone may be lending anyways, but still...
I could go on, and on.
For anyone in trouble with their home or mortgage, I certainly sympathize. As a mortgage planner, as well as an owner of multiple homes, I've also personally seen my share of challenges in this marketplace. I'm not against helping homeowners in need, I am a bit ambivalent about this new bill, though.
My Question is this, what similar experiences are you seeing that are being caused by selective coverage
in the media? What's your take on this new Housing Bill? Helping Homeowners or Bailing out Banks?
Endless myths and misconceptions about the factors affecting credit scores are as abundant and varied as the scores themselves. This post will help you to separate fact from fiction.
Most loan officers, (and probably a lot of sharp agents out there,too!) already know the answers to these questions.
Here's a simple way to test your credit knowledge on some of the most common credit myths by answering the questions below:
Q: True or false; Closing accounts helps your credit score.
A: False. While it's true that having too many lines of credit open can be damaging to a credit score, once a line of credit is established, closing it can actually lower scores. Credit scores compare the difference between available credit and the credit that's being used. Shutting down accounts lowers total available credit, making the credit balance appear larger than it actually is, and hurting scores in the process. Scores also track credit history, so shutting older accounts can make credit history look younger than it actually is, thus hurting scores. A better solution is to pay down credit card debt.
Q: True or false; You don't actually have to use credit to get a good credit score.
A: False. Credit scoring formulas (like FICO) are designed to judge how well a consumer pays bills on time over time. If credit is never established, or the credit that is available isn't used occasionally, it's more difficult for the formula to make a fair assessment. Sadly, failure to maintain a credit history could result in higher premiums when the time comes to secure a large loan. Many conventional first and second mortgage products require a minimum number of active credit accounts, and also often require that those accounts be opened and maintained for a minimum of 12 months or more.
Q: True or false; Checking on your own FICO score can hurt your credit.
A: False. Ordering a copy of your own credit report or credit score doesn't hurt. Applying for new credit, however, can lower an individual's score. To minimize the damage from credit inquiries when shopping for a mortgage, make sure that multiple inquiries are made over a short span of time. The FICO scoring model treats multiple inquiries in a 45-day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed.
Q: True or false; A FICO score is the same score at all three major credit bureaus.
A: Technically, this is a "trick" question, because Experian, TransUnion, and Equifax all actually use the same formula developed by Fair Isaac Corporation, but they each give the scores a different name and they don't all share the same raw data when determining scores. One bureau may list certain accounts over others and these variances across the three bureaus result in three different credit scores. Due to these subtle differences, it's always smart to pull and examine credit scoring from all three bureaus before applying for a big loan. Many lenders use the middle score from the three bureaus when making their decisions, so fixing errors in all three reports before shopping for a mortgage loan is wise.
JPMorgan Chase & Co., Wells Fargo & Co., Washington Mutual Inc. ,Countrywide Financial Corp, Bank of America Corp., and Citigroup Inc. announced new steps to help borrowers in danger of foreclosure save their homes.
The banks offer a 30-day freeze on some foreclosures to consider loan modifications that may be available. The effort, called ``Project Lifeline'', would help stabilize some communities disrupted by mortgage defaults.
``Project Lifeline has the potential to offer new solutions to responsible, able homeowners who want to keep their homes,'' says Treasury Secretary Robert Paulson. ``As our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures.''
According to the plan outline, Lenders would start the process with a letter to homeowners more than 90 days delinquent on payments that lays out procedures for them to ``pause'' the foreclosure process. The homeowner will be given 10 days to respond to the notice and will have to provide the lender additional financial information so the mortgage holder is able to weigh new payment options, or look at writing a new loan, most likely these borrowers will be steared towards an FHA loan that will insure the lenders agains any losses, and heap the problems onto the US taxpayer.
Under the plan, Subprime, Alt-A and prime borrowers may be eligible.
By definition, Subprime mortgages are loans for borrowers having poor credit and/or high debt ratios. Whereas, Alt-A loans are made to borrowers who cannot meet the terms of standard loan products, such as proof of income, noncomforming property type or investment property collateral, and also thosw who may not have larger down payments.
Federal Reserve officials estimate that approximately 2 million homeowners face an increase in their rates over the next two years as their ARM loans reset and adjust. Economists estimate foreclosures this year will approximately 1 million higher than the anuual average of 600,000 in a typical year.
Since August 2007 non-conforming or jumbo loans have been priced significantly higher than they have been in the past due to "liquidity issues". The House and Senate voted to increase the conforming limit to 125% of the median home price in all market areas, and set a cap of $713,000.
We should see these changes implemented by March of this year. The reason for the delay is that, currently, HUD does not track median home prices. Typically, HUD programs are based on income, and as such, they track median income levels. The will need this next 30 days or so to obtain the median home price data that they need, and both FHLMC and FNMA will need the time to model the impact the changes will have on their loan portfolios.
Nationally, we should see this stimulate both purchase and refinance activity for borrowers financing between $417,000 and $713,000. Locally, 125% of the median home price for King County and Snohomish County equates to $493,000, an increase of $76,000 above the previous limit of $417,000.
More buyers will be able afford higher home prices, and this should have a positive impact on property values between $550,000 to $750,000.
So a $493K mortgage today @ 6.875% Jumbo Rate = $3,238.66 if the limit was raised today to the proposed $493,000 then this same buyer would get 5.375% on that same loan for a payment of $2,760.66! That's $478 A MONTH SAVINGS!!!! Or a borrower could purchase a home costing roughly $70,000 more with this savings.
... the Miller-Sánchez bill will treat home mortgages the same as mortgages on investment properties and family farms. The bill repeals a provision that prohibits a bankruptcy court from modifying a home mortgage, but allows a bankruptcy court to modify any other secured debt, including mortgages on other properties.
Called the Emergency Home Ownership and Mortgage Equity Protection Act (H.R. 3608), the bill would make it possible for a bankruptcy court to restructure a home mortgage - meaning a bankruptcy judge could change interest rates or alter principal amounts as part of a Chapter 13 restructuring plan.
If you work in the mortgage industry, this bill should give you strong pause. From an investor's perspective, most structured securities are generally designed to account for prepayment and default risks - and not an additional restructuring risk due to borrower bankruptcy. (And I think we all know how well many of these securities have accounted for the expected impact of the first two risk factors.)
But it doesn't really stop there. If I'm understanding the bill correctly, I believe it would eliminate the "relief from stay" from a lender's/servicer's legal toolkit during property repossession and disposition. The result would seem to inevitably be an increase in the timelines surrounding default management and REO disposition, introducing a new cost source that would place further pressure on an investor or insurer's ability to recoup some of their losses.
Making it more difficult for lenders to take back homes when a default takes place - whether or not a forced modification is approved during bankruptcy - also hurts consumers, not just those making the loans. Consumers will either be charged higher rates to compensate for the higher risk of loss given default, and many lenders themselves will become less likely to lend to consumers whose credit profiles mark them as a relatively greater default risk. (That would be subprime.)
In case you missed it: if enacted, this bill will likely have the unintended effect of hurting the very group it is purported to help. Given the lack of options already facing many subprime borrowers today, I just don't know how much I can get behind a bill that seems likely to further thin out the herd of available options even further.
This helpful email was a forward from Mortgage Mastery.
Ok, this is going to be a long one, but please don't get glassy eyed :). This is important and will affect your closings (for the good)!
IMPORTANT FHA NEWS!
The Senate Banking Committee passed by a vote of 21-1 the FHA modernization legislation this week. Senator Dole was the only "no" vote largely in principle over the way FHA is implementing risk-based pricing (administratively without Congressional authorization). The near unanimous vote virtually guarantees full Senate passage of the bill. It will then go to conference to reconcile differences with the House bill that was passed yesterday. Please understand that NONE of these items below have been finalized........ This is only what is on the table.
The speed with which the bill moved through the Committee demonstrates the political significance of the FHA program in today's marketplace. Accordingly, we expect the next steps to move equally fast and it is now likely that there will be an FHA bill ready for the President's signature in less than 30 days.
The key provisions of the Senate bill are:
FHA "floor" - increases from 48% to 65% of the GSE limit (i.e. from $200,160 to $271,050) The House bill contains the same language virtually ensuring its inclusion in the final bill. The new "floor" will likely be effective upon signature by the President.
FHA "ceiling" may increase to $417,000 The House bill raised the FHA limit to around $730,000 in high cost areas- (note that we are in a low cost area, so our max should probably be $271,050 or it could go to $417,000 (which is also Fannie/Fannie's conforming limit). At a minimum therefore, the increase to $417,000 (in some areas) is a certainty assuming the bill passes. An increase above $417,000 will likely depend on market events.
This provision will likely not be effective immediately. FHA will need to analyze local markets to determine whether an increase is justified. We do believe that FHA will move to increase limits ASAP.
Lower and more flexible downpayment The Senate passed the compromise provision that will require 1.5% borrower cash investment (vs the 3% now). There will be a cap of 100% loan-to value ratio. However, the upfront MIP will be required to be included in the 100% LTV effectively capping the loan amount at 98.5% assuming an upfront MIP of 1.5%. At first glance, our thoughts on this provision are:
The House bill still contains the zero downpayment provision. In this market environment, we believe it will be difficult to include the no downpayment proposal in any legislation. We believe the Senate provision will be the more likely scenario. However, lowering of the cash investment requirement is possible but unlikely.
No mention of risk-based pricing There was no mention of risk-based pricing in the bill and no increase in the annual premium. In light of HUD's preemptive administrative action earlier this week to implement risk based pricing on January 1, 2008, it will be curious to see how this issue unfolds in the coming weeks and months. In the limited discussion this morning, risk based pricing was the one issue in which both Republicans and Chairman Dodd expressed concern at FHA's actions and want FHA to explain what they are planning to do with this change.
Condominium improvements The bill will facilitate the acceptance of Fannie Mae and Freddie Mac approved condominium projects.
HECM (Reverse Mortgages) There were several HECM improvements. They are: 1) raising mortgage amount to $417,000, 2) eliminating the cap on volume, 3) permitting use of HECMs for purchase transactions and cooperatives (right now only Fannie-not FHA- allows purchases using a Reverse Mortgage) and 4) lowering of the origination fee to 1.5% vs 2%
There were also several amendments accepted unanimously. They were: 1) much stiffer penalties to fraud (the draft called for 35 years in prison and $5 million in fines), 2) pre-purchase counseling demonstration, 3) expanding counseling to borrowers in trouble and 4) study on reverse mortgages.
What is next and when will the bill be enacted?
As we indicated, Senate was/is/will be the key to the enactment of the FHA legislation. Now that the Senate Banking Committee has moved affirmatively in a very bipartisan way, we are increasingly optimistic about the prospects for an FHA bill. We would expect the process to be completed and signed by the President in the next 30 days or so barring some unforeseen circumstance.
That being said, there is still the Conference of House and Senate Committee leaders to reconcile differences in the two bills and there are several thorny issues. Probably the most controversial are two House proposals. They are: 1) creation of a housing trust from a portion of the FHA profits and 2) raising the FHA limits in high cost areas above $417,000.
Because of the nature of Senate rules (i.e. minority has considerable power), we would expect most controversial provisions to be resolved along the lines of the Senate bill although changes are possible. However, House Financial Services Chairman Frank is deeply committed to the housing trust found. Republicans are vehemently opposed to it. I cannot imagine that a disagreement over this provision will hold up a bill but we'll have to see. The other is mortgage limits in high cost areas. As we noted, the House proposes to raise them to as high as $730,000. While the Senate Republicans will oppose such a provision, events in the mortgage industry could result in some type of compromise.
We will, of course, follow this process through the remaining steps that hopefully will end at a bill signing ceremony by the President.
So, what does this mean for you?
•·With the increase of the FHA limits, we will be able to put more buyers in FHA mortgages (remember that FHA is not credit score driven, only credit history driven- unlike Freddie and Fannie products).
•· If the buyer investment $$ decreases, that will allow the buyer to be less out of pocket than before.
•· More lenders will start "practicing" on your buyers without any experience at all of FHA. Don't let non-FHA experienced loan officers practice on your clients- We ARE the FHA experts.... Let our knowledge work for you.
We will keep you informed of what changes are actually put in place and when it happens!
FHA REMINDERS
Seller can contribute up to 6% of the Sales Price.
No Termite Inspection Required.
No Non-Allowables required for the seller.
Buyer can currently be in a Chapter 13 Bankruptcy.
It is an assumable loan (important when rates go to 8% and they are at 6%).
Buyer can have Federal Tax Liens and not have to pay them off!
FHA is now using the standard Fannie Mae appraisal form- No more VC sheets
This passed the House and the Senate. Great news for first time home buyers, and this should open up the market for the new FHA SECURE program to people with higher loan amounts.
House Passes FHA Reform Bill
The House has passed a Federal Housing Administration reform bill by a 348-72 vote that raises the FHA loan limit to over $700,000 in high- cost areas and allows the FHA to reach more subprime borrowers by charging risk-based premiums. FHA Commissioner Brian Montgomery welcomed the House action despite concerns that the House bill (H.R.
1852) raises the FHA loan limits too high. The Bush administration proposed raising the FHA loan limit from $362,790 to the $417,000 conforming-loan limit in high-cost areas. But the House approved a bipartisan amendment by voice vote that raises the maximum FHA loan limit to 175% of the conforming loan limit, or $730,000, to address problems in the jumbo loan market. Commissioner Montgomery noted that the administration strongly opposes such a loan limit hike but said he expects the Senate bill to be more compatible with the administration's position. "We look forward to seeing what the Senate does, and we will try to work out those differences in conference committee," Mr. Montgomery told reporters.
By a 20-1 vote, the Senate Banking Committee has approved a Federal Housing Administration reform bill that would lower the FHA downpayment requirement to 1.5% and raise the FHA loan limit to $417,000 in high-cost areas. Reforming the FHA is going to be a "big help" in dealing with the mortgage crisis, committee Chairman Christopher J. Dodd said after the mark-up of the bill. The chairman also thanked several senators for not offering government-sponsored enterprise amendments during the mark-up session that would raise Fannie Mae's and Freddie Mac's loan limits and the caps on their mortgage portfolios. The chairman told reporters he plans to mark up a GSE reform bill this fall and will "resist" any GSE amendments when the FHA bill goes to the Senate floor. The FHA reform is silent on the issue of FHA risk-based mortgage insurance premiums. But Sens. Dodd and Wayne Allard, R-Colo., raised concerns about Department of Housing and Urban Development moves to issue a risk-based premium proposal.
"HUD seems to feel they have the authority to move forward on their own," Sen. Allard said. "At the very least, I think they need to consult with the Congress and seek out our consent."
From http://www.fha.gov/press/2007-08-31release.cfm
BUSH ADMINISTRATION TO HELP NEARLY ONE-QUARTER OF A MILLION HOMEOWNERS REFINANCE, KEEP THEIR HOMES FHA to implement new "FHASecure" refinancing product
WASHINGTON - President George W. Bush today announced that HUD's Federal Housing Administration (FHA) will help an estimated 240,000 families avoid foreclosure by enhancing its refinancing program effective immediately. Under the new FHASecure plan, FHA will allow families with strong credit histories who had been making timely mortgage payments before their loans reset-but are now in default-to qualify for refinancing.
In addition, FHA will implement risk-based premiums that match the borrower's credit profile with the insurance premium they pay-i.e., riskier borrowers pay more. This common-sense, risk-based pricing structure will begin on January 1, 2008.
"Many hard-working American families who were able to make their mortgage payments under the initial teaser terms of the exotic loan are now struggling to make ends meet because their rates have doubled or tripled," said HUD Secretary Alphonso Jackson. "FHASecure will bring stability to the housing market and give eligible families who were in good financial standing before their loans reset a chance to keep their homes."
The combination of FHASecure and risk-based premium pricing will permit FHA to return to the role it was originally designed to play, bringing stability to the real estate market by helping break today's cycle of foreclosures and price depreciation and creating much needed liquidity in the now-constricted mortgage market.
FHA has recently experienced a substantial increase in the number of conventional borrowers refinancing into FHA products. With FHASecure, it can help even more. The number of these refinancing transactions has tripled since the start of 2006. FHA's transactions are projected to surpass 100,000 loans by the end of the fiscal year. To date, these figures do not include refinances for delinquent borrowers.
The FHASecure initiativewill operate under the same safe guidelines as the FHA's existing mortgage insurance program without affecting FHA's financial health. Eligible homeowners will be required to meet strict underwriting guidelines and pay a mortgage insurance premium, which offsets the risk to FHA's insurance fund at no cost to the taxpayer.
The risk-based insurance premium structure will further expand FHA's reach to additional underserved borrowers, particularly minorities and first-time homebuyers who have been disproportionately lured into exotic mortgages, and enhance the FHA's overall risk management. The move to risk-based premiums ensures that FHA remains on solid financial footing as a self-financed agency for the long-term.
FHASecure, like all FHA products, will be underwritten to ensure the borrowers have the ability to repay the loan, will require escrow for taxes and insurance, and will continue to offer unprecedented foreclosure prevention assistance. The FHA has never permitted and will not include pre-payment penalties or teaser rates that are common in exotic mortgages and have caused much of the current market troubles.
To qualify for FHASecure, eligible homeowners must meet the following five criteria:
A history of on-time mortgage payments before the borrower's teaser rates expired and loans reset;
Interest rates must have or will reset between June 2005 and December 2009;
Three percent cash or equity in the home;
A sustained history of employment; and
Sufficient income to make the mortgage payment.
"FHASecure is designed for families who are good borrowers but were steered into high-cost loans with teaser rates," said Assistant Secretary for Housing-FHA Commissioner Brian Montgomery. "These homeowners, many of whom are minorities, need a safe, affordable mortgage product that will help build wealth. All FHA borrowers pay mortgage insurance premiums to offset claims to the FHA insurance fund and ultimately prevent risk to the taxpayer."
FHASecure will also bring much-needed liquidity to the mortgage market. FHA anticipates more lenders will offer FHA-insured loans, pool them, and securitize them with the Government National Mortgage Association (Ginnie Mae), which has the full faith and credit of the U.S. government. This guarantee makes Ginnie Mae's mortgage-backed securities the safest on the market and helps to channel greater capital into the housing market, benefiting U.S. homeowners.
Since its inception in 1934, FHA has helped almost 35 million people become homeowners, making it the largest insurer of mortgages in the world. The 109th Congress introduced the Expanding American Homeownership Act in June 2006 which would enable FHA to be a safe option for more underserved low- and moderate-income and minority families so they can achieve the American Dream of homeownership. Today, President Bush also urged Congress to quickly pass the Administration's FHA modernization proposal to help more families in need.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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