For homeowners in trouble, a tough decision to make

The time is limited for homeowners who want to ensure they aren’t hit with a big tax bill because they had to walk away from a mortgage obligation.

At the height of the housing crisis, when foreclosures across the country began a troubling increase, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007, designed to provide at least some consolation to folks who had lost their homes.  

But it gets complicated.
If you borrow money and the lender then cancels or forgives the debt, you generally have to include the canceled amount as income for tax purposes. As the IRS explains, you aren’t taxed on borrowed money because you have an obligation to repay it. However, if the debt is wiped out, the lender is then required to report the amount of canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
You can imagine the frustration that many people had with this seemingly unfair tax rule. They had lost their homes and then discovered in a “you’ve-got-to-be-kidding-me” moment that they owed taxes on the forgiven debt.

That’s where the mortgage debt relief act comes in. It allows people to exclude income from the discharge of debt on their principal place of residence. In addition to foreclosure, debt reduced because of a mortgage restructuring also qualifies for relief under the new law.

As always, there’s a catch.
The law says that only debt forgiven in calendar years 2007 through 2012 is eligible. Up to $2 million of forgiven debt qualifies for this exclusion ($1 million if married filing separately). To get the relief, debt must have been used to buy, build or substantially improve a principal residence and be secured by that residence. So if you refinanced and took money out of the house to pay off credit card debt, you won’t receive the exclusion. Debt forgiven on second homes, rental property, business property, credit cards or car loans also does not qualify for the tax relief.

If you’re clinging to your house but it’s looking as though you won’t be able to hang on, the best time to get out from under the mortgage is before the debt relief law sunsets. This is particularly true if you are thinking about a short sale. That’s when the lender allows the borrower to sell the house for less than what is owed. Often, the borrower can negotiate to have the remaining balance on the mortgage forgiven.

Some states have made it easier for folks to go through the short-sale process. For example, a new law in California says that if lenders agree to a short sale — whether they hold a first or second lien — they have to forgive all outstanding loan balances.

The tax rule has become particularly important as more homes are sold through short sales, which accounted for 12 percent of all housing sales in the second quarter, up from 10 percent for the same period last year, according to RealtyTrac.

However, here’s the problem if you wait too long to start the process: Short sales are being dragged out for months. Talk to real estate professionals and many might suggest the term short sale be changed to “long sale.” I’ve seen several people who wanted to buy a home through a short sale walk away because the transaction was moving too slowly.

Pre-foreclosures sold in the second quarter took an average of 245 days to sell after receiving the initial foreclosure notice, according to RealtyTrac.

In a survey released earlier this year, 71.9 percent of real estate agents interviewed reported that a short sale could take four to nine months to complete, according to Equi-Trax Asset Solutions, a company that provides property valuations. Almost 10 percent of short-sale transactions require more than 10 months to complete.

When agents are asked to select ways to make short sales easier, 57.6 percent think lenders should move faster to close the transactions.

A short-sale survey conducted by the California Association of Realtors found similar results. More than three-fourths (77 percent) of California real estate agents reported closing short-sale transactions as “difficult” or “extremely difficult,” the group said.

You shouldn’t rush into a short sale or let your home go to foreclosure just to avoid a tax debt. But the impending end of the favorable tax rule on forgiven mortgage debt should be one of the things to consider if you conclude you can’t afford to keep your house.

California Clawing Its Way Back

California experienced a small rebound in its real estate market in August, outperforming July and August 2010, and just a ten thousand homes shy of hitting the average number of sales on record for the month according to statistics provided by DataQuick. The average price of homes has dropped in the state and more than half of the sales are comprised of distressed homes that were short sales or in foreclosure, but good news is welcome in a state that has been battered by the slumping sales in the U.S. housing market. 


An estimated 37,734 new and resale houses and condos were sold in California last month. That was up 8.8 percent from 34,695 in July, and up 10.2 percent from 34,239 for August 2010. An increase from July to August is normal for the season.

California sales for the month of August have varied from a low of 29,764 in 1992 to a high of 73,285 in 2005, while the average is 48,344. DataQuick's statistics go back to 1988.
The median price paid for a California home last month was $249,000, down 1.2 percent from $252,000 in July, and down 4.2 percent from $260,000 for August a year ago. The year-over-year decrease was the 11th in a row after 11 months of increases. The bottom of the current cycle was $221,000 in April 2009, while the peak was $484,000 in early 2007.

Distressed property sales continued to make up more than half of California's resale market last month.
Of the existing homes sold last month, 34.6 percent were properties that had been foreclosed on during the past year. That was up from a revised 34.5 percent in July and down from 35.6 percent in August a year ago. The all-time high was in February 2009 at 58.5 percent.

Short sales -- transactions where the sale price fell short of what was owed on the property -- made up an estimated 17.8 percent of resales last month. That was up from 17.3 percent in July and down from 18.0 percent a year earlier. Two years ago short sales made up an estimated 14.3 percent of the resale market.
The typical mortgage payment that home buyers committed themselves to paying last month was $982, the lowest on record. That was down from $1,027 in July, and down from $1,045 in August 2010. Adjusted for inflation, last month's mortgage payment was 56.1 percent below the spring 1989 peak of the prior real estate cycle. It was 64.4 percent below the current cycle's peak in June 2006.

DataQuick Information Systems monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
Indicators of market distress continue to move in different directions. Foreclosure activity increased last month. Financing with multiple mortgages is low, down payment sizes are stable, cash and non-owner occupied buying is flat at a high level, DataQuick reported.

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California Still Has Plenty of Homes Worth Less Than Mortgages

Nearly one in four homes in Virginia with a mortgage attached to it is “under water” – with the property owner owing more than the home currently is worth – according to new figures from the second quarter of the year. Virginia’s rate of 23.3 percent is nearly a full percentage point higher than the national average, according to new statistics released by CoreLogic, a California firm that tracks real estate data and trends.

In addition to the homeowners in Virginia whose mortgages exceed the current value of their properties, an additional 6.1 percent are in the “near-negative” category, where property values are within 5 percent of the amount owed on the mortgage. That rate, too, is higher than the national average.

The situation was worse in the Washington metropolitan area: Counting the District of Columbia and Maryland suburbs in addition to Northern Virginia, nearly 290,000 residential properties with a mortgage – 28.3 percent – were in a negative-equity condition in the second quarter, with an additional 5.5 percent approaching that situation.

It is, analysts say, a situation that must continue to show improvement in order for the housing market nationally and at the local level to return to health.“High negative equity is holding back refinancing and sales activity, and is a major impediment to the housing-market recovery,” said Mark Fleming, chief economist of CoreLogic.

“The hardest-hit markets have improved over the past year, primarily as a result of foreclosures,” Fleming said. “But nationally, the level of mortgage debt remains high relative to home prices.”
Local rates may be higher than the national average, but are nowhere near the rates in some parts of the country, where the real estate bubble has hit the hardest:

* In Nevada, 60.4 percent of homeowners with mortgages had negative equity in the second quarter, down from 68 percent a year before due largely to homes being foreclosed on. An additional 4.9 percent are in the near-negative category. The value of homes of Nevada homeowners with mortgages is currently $100.8 billion, but the total owed to lenders is $113.6 billion – the only state where the ratio tops 100 percent.

* In Arizona, 48.7 percent of homeowners with mortgages are under water, with another 4.8 percent close to that mark. Arizonans with mortgages own properties valued at $248 billion and have debt of $231.4 billion, or 93.1 percent.

* In Florida, 45.1 percent of homeowners with mortgages have negative equity, with an additional 4.3 percent approaching it. The total value of their properties is $819.3 billion, with 87.8 percent of that tied up in mortgage debt.

* In California, the largest state in terms of property values, homeowners with mortgages own a collective $2.8 trillion in homes, with $1.96 trillion of that – or 70 percent – tied up in mortgages. California ranks fifth nationally in the percentage of homeowners under water, behind Nevada, Arizona, Florida and Michigan.

* In Virginia, homeowners with mortgages own a collective $426.8 billion in residential real estate, and owe just under $305 billion to lenders – a ratio of 71.7 percent. Nationally, the rate is 69.8 percent, representing $12.6 trillion in property value and $8.8 trillion in mortgage debt.
Figures represent data through May, and include 48 million properties with a mortgage, about 85 percent of all mortgages in the U.S.

CoreLogic also found that homeowners with negative equity tend to be saddled with higher-interest mortgages.

4 Home Buying Lessons We Should Never Forget

Reasonably enough, Americans hate almost everything about the real estate recession. Underwater owners hate that they can neither sell nor refinance, distressed homeowners and consumer advocates hate robo-signing, and just about everyone hates plummeting home values. They even strike fear in the hearts of the buyers who are taking advantage of them. 

So, it might surprise you to hear that there is a list — true, a short list — of real estate trends the recession has triggered that we hope will stick around.

1. Buying for less than you are approved for. A few years ago, mortgage money was easy to come by, and the norm was to buy at or very near the maximum price you were approved for. The theory was that with prices on the rise, it made sense to buy as much house as you could, as soon as you could. Even if you didn’t need the space, you wanted to get as much appreciation as you could for your home buying dollar. Clearly, those tides have dramatically turned, and many home buyers are buying very conservatively when it comes to price. It has become very commonplace for buyers to tell their agents and mortgage brokers how much (or how little, rather) they are willing to spend, regardless of whether their income, assets and credit qualify them for a much higher price range. And buyers now stick within their self-imposed financial bounds when they make offers on homes. In addition to aspiring to a mortgage payment that is sustainable, even in the face of a temporary job loss, buyers are also conscious of the energy and maintenance costs associated with buying “too much” home for their needs.


2. Buying for the long-term. At the peak of the market, people bought homes and took on adjustable rate mortgages (ARMs) with very short-term introductory payments they could just barely afford, expecting to be able to flip that house in sometimes as little as three or four months at a steep profit. We all know how that turned out. And as a result, today’s buyers seem much more committed to their homes, most buying with the expectation that they might need to stay put in those homes for at least seven to 10 years before they can break even. For some, this means they buy in a great school district even before they have kids, and they make sure they have enough space for the family they plan to have five or 10 years in the future. For others, this means not buying at all because their job or career requires mobility. The harder hit your area was by the foreclosure crisis, the longer you should expect it to take break even; conversely, in areas like San Francisco and Manhattan, a shorter, 5-year rule might make sense.

3. Saving up, keeping a steady income, and polishing credit before buying. Obviously, buyers have to do a lot more work to qualify for a mortgage today than they did when subprime lending obliterated all good sense in mortgage lending. Today’s lending guidelines require that buyers document ample, consistent income to afford the mortgage payment, document a strong credit history and put their own skin in the game in the form of down payment money. Are these standards too tight? Arguably. But what no one can dispute is that the buyers who are tightening their belts to save for down payments, taking on mortgages that fall reasonably within their monthly income, and doing the work of paying every bill on time every time — or even paying debt down or off — in order to qualify for a mortgage on today’s market are creating strong financial habits in the process. And those habits will stand them in good stead throughout their tenure as homeowners.


4. Reading your loan docs. Before you roll your eyes, understand this — foreclosed homeowners tend to fall into two categories: those who had crazy ARMs that reset to insane payments they could never afford without refinancing, and those that lost their jobs and couldn’t make the payments as a result. Some fall into both. But the fact is, the first group is full of folks who claim to have never read or understood their loan documents before signing them. Many of those buying into today’s volatile market got the memo and are meticulously scrutinizing the line items and terms of their notes, deeds of trusts and loan disclosures — and they ask questions when they don’t understand. Fancy that!

We’re happy to see most of these buyer-behavior trends and hopeful they will become the norm and stay there — even after home values have recovered.

Coming loan changes could squeeze high-priced home markets

Starting Oct. 1, Fannie Mae and Freddie Mac will cut the size of loans they buy from lenders. That will force many future borrowers into more expensive and harder-to-get jumbo loans.

The Freddie and Fannie limits, which are generally $417,000 for single-family homes nationwide, were raised in 2008 in some high-cost housing markets to stimulate the economy. In many areas, the limits rose to $729,750 and next month they'll fall to $625,500. Limits will drop more sharply in some areas and less in others. 

Major lenders, including Bank of America, Wells Fargoand JPMorgan Chase, have stopped taking new applications for affected loans so that those in process close by the deadline.

Meanwhile, borrowers with offers on homes — who need loans at the current limits — are "panicked to close loans" by the deadline, says Pamela Liebman, CEO of the Corcoran Group, a residential real estate brokerage company in New York City.

Some lenders are "buried" given the rush to close deals before the changes and the mini-refinance boom driven by low rates, says Dean Rizzi of Guarantee Mortgage in San Francisco. He has 10 home buyers who need loans to close before the deadline.

With jumbos, borrowers could see a 4.5% interest rate, for example, go to about 5%. Down payments of 20% will be the norm, says Quicken Loans economist Robert Walters.

Bank of America says it will close its deals in time. It stopped taking new applications for loans affected by the changes in mid-July, spokesman Terry Francisco says. Borrowers starting the loan process now are probably "out of luck" if they want loan terms based on current limits, says LendingTree economist Cameron Findlay.

The changes will affect 2% of the nation's homes, but more in some areas, the National Association of Home Builders estimates.

Liebman expects 10% of New York City's market to be affected — largely the $800,000 to $1 million starter home market. The new loan requirements will "pull a lot of buyers out of the market," she says.

Some buyers may lack needed down payments and others may have to consider less costly homes, says Beth Peerce, president of the California Association of Realtors.

Lobbying efforts to get Congress to extend the higher limits "are not looking great," Peerce says.