The housing market is anything but stable. Decisions by banks, government regulators, the federal reserve, congress, and Treasury department officials have tremendous impact on house prices. For example, decisions at the federal reserve regarding interest rates have imbued the market with such high payment affordability that buyers can finance the still-inflated prices of the previous bubble. Banks decided early this year to slow the rate they took back properties at foreclose auctions thus reducing MLS inventory of REO significantly. Government regulators changed accounting rules in 2009 to allow banks to keep delinquent mortgage squatters in place with delayed millions of foreclosures for many years. The GSEs, now run by the Department of Treasury, are liquidating their portfolios and changing the rules on short sales (more on that today). And congress has enacted various bailout programs and recently approved a series of looser qualification standards which are bailing out speculators and HELOC abusers. Congress has also eliminated any tax consequences for those who took the free money and spent it, and they are discussing extending these benefits further.
The law spares homeowners who receive principal reductions on their mortgages from being hit with hefty federal income taxes on the amounts forgiven.
WASHINGTON — Here’s some encouraging news for financially stressed homeowners across the country: The Senate Finance Committee has approved a bipartisan bill that would extend the Mortgage Forgiveness Debt Relief Act through 2013.
No one should be surprised by this. This will be extended over and over again for years.
Why is this important? Several reasons: The debt relief law spares homeowners who receive principal reductions on their mortgages from being hit with hefty federal income taxes on the amounts forgiven. Without it, millions of owners who go through foreclosure or leave their homes following short sales would experience even more financial stress.
I have no problem with people who couldn’t pay off a purchase-money mortgage. These were victims of bad timing more than bad judgement. However, if HELOC abusers and serial refiancers get debt relief, they are getting a tax break of free money they received from a stupid lender. In other words, they are being rewarded for theft. That will create serious moral hazard issues going forward as more and more borrowers will opt to take totally free money in the future.
The law, which is set to expire Dec. 31, has also provided relief to thousands of people who have debt balances written off as part of loan-modification agreements and is crucial to the $25-billion federal-state robo-signing settlement with large banks. Some Capitol Hill analysts predicted that, along with a host of other special-interest tax benefits, an extension might have trouble making it through the partisan gantlet in an election year.
But the Senate committee managed to pull together enough votes Aug. 2 to pass the debt relief extension, after heavy lobbying by the National Assn. of Realtors and the National Assn. of Home Builders….
realtors and home builders desperately want to see any lingering tax consequences expunged because it will hinder the ability of these recycled buyers to get a home again in the future. Unfortunately, many of these people probably should not get a home again in the future.
Congress has other tax code market manipulations it’s extending.
The mortgage insurance deduction is another key housing benefit that made it into the Senate committee’s eleventh-hour extender bill. … Under a provision in the tax code that expired in December, certain borrowers could write off their mortgage insurance premiums on their federal income taxes, just as they do with mortgage interest. To qualify for a full deduction, borrowers could not have adjusted gross incomes greater than $100,000 ($50,000 for married taxpayers filing separate returns). …
The outlook for the extenders: Given the popularity of the housing deductions and credits, look for supporters to press the full Senate for early action in September to get these issues settled before election day. If there are serious objections in the Republican-controlled House, however, then all bets are off until the lame-duck session, when election losers as well as winners get to write federal tax policy.
Giving loanowners a tax break isn’t the only recent change in government policy. The Treasury department is making changes to wind down the GSE loan portfolios. This is a good move.
Analysts expect Fannie Mae and Freddie Mac to begin unloading more distressed mortgages from their portfolios after the Treasury Department accelerated their wind down.
Both government-sponsored enterprises will now be required to cut their retained portfolios by 15% annually over the next several years until hitting $250 billion. Treasury increased this from a 10% annual reduction. Fannie holds $672 billion and Freddie has $581 billion in their portfolios as of June, according to their latest monthly summary reports.
“However, it should be noted that the GSEs are currently reducing their investment portfolio at least this much,” said analyst Sarah Hu of RBS Securities.
Freddie is already below its target for 2012, but Fannie still has to trim $20 billion this year, according to JPMorgan Chase ($38.04 0%) analysts (click on the graph below to expand).
This move tells me the government is serious about reducing the market footprint of the GSEs. That is great news, IMO.
More than half of the GSE portfolios are made up of delinquent loans and other mortgages securitized into private-label bonds.
The GSEs could sell more of these loans into rental programs, or they could bundle up previously modified mortgages on their books. Fannie has already started urging attorneys to foreclose faster after all possible options are exhausted, which could clear out more nonperforming mortgages.
When it is determined that “all possible options are exhausted,” the GSEs will ramp up their foreclosure efforts and push out the squatters. The major banks will likely follow suit. Amend-extend-pretend will someday end.
It does place more pressure on Congress to get moving on housing finance reform sooner rather than later. Mortgage industry trade groups used the Treasury action Friday to renew their call to do so gently.The government finances more than 90% of the mortgage market.
“We support efforts to protect the taxpayers, but want to emphasize the importance of ensuring continued liquidity that will provide the affordable mortgage financing necessary to support the housing market. It is critical that the transition of Fannie Mae and Freddie Mac’s role in financing real estate does not limit the availability, or increase the cost, of financing,” said Mortgage Bankers Association David Stevens.
There is no way to wind down a huge government subsidy program without causing an increase in cost or a limit on availability. To even suggest such a thing is laughable. The only real question is how much will a GSE wind down cause costs to go up and availability to be limited.
Short sales get easier
In an effort to deal with the huge volume of delinquent loans on their books, the GSEs are making it easier for loanowners to complete short sales.
WASHINGTON (MarketWatch) — U.S. homeowners with collapsed property values could have an easier time selling their homes for less than the outstanding mortgage amount under changes rolled out by a federal housing regulator.
The Federal Housing Finance Agency, along with the mortgage-finance giants it regulates, Fannie Maeand Freddie Mac on Tuesday announced a set of steps to make these “short sales” easier to obtain.
Since the housing market went bust starting around six years ago, home buyers, sellers and real estate agents have been frustrated by the slow pace of negotiating these often-complicated transactions.
Under the changes, which are effective Nov. 1, homeowners with missed mortgage payments and serious financial problems will need to submit fewer documents to be approved for a short sale.
Previously, document requirements were intended to prevent short sales by people who had assets and simply didn’t want to pay the bills. The duress requirements prevented many strategic short sales (and probably encouraged more strategic defaults). Eliminating these barriers is a real sign the GSEs want more borrowers to complete short sales.
In addition, homeowners will be eligible to be considered for a short sale even if they have not missed any mortgage payments.
This will be a big improvement. People don’t have to become delinquent to sell their underwater homes. This should result in fewer strategic defaults.
Lenders will be permitted to go ahead with those sales without Fannie and Freddie’s approval if the borrower is experiencing a financial hardship such as a death in the family, divorce, job loss or job relocation of more than 50 miles.
That last provision is huge. One of the biggest problems with a quarter or more of the population being underwater is a lack of mobility. Our economy thrives on the ability of workers to move to where demand exists for their services. The housing bust severely curtained this mobility.
The guidelines demonstrate the regulator’s “commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities,” Edward DeMarco, the housing agency’s acting director, said in a statement.
The changes also are designed to get prevent holders of home equity loans and other second mortgages from blocking these transactions by demanding more money. The holders of those loans will now get a maximum payment of up to $6,000.
I recently reported how Second mortgages hold short sellers hostage. To help loanowners negotiate with the banking terrorists, the GSEs are going to pay them off. This is an indirect bailout of second mortgage holders by the US taxpayer. That $6,000 is going to a bank, and it is coming from the US Treasury. The fact that a loan owner and the GSEs are involved is smoke and mirrors.
Earlier this year, the housing regulator said mortgage companies would have to respond to a short sale offer within 30 days of receiving it, setting out formalized timelines that are designed to speed up short sales.
The speedier decisions on short sales are likely a response to the California Homeowners Bill of Rights. That change in government policy that manipulates the housing market bans dual track foreclosures. Within the foreclosure process, there is a 90-day redemption period where the loanowner can pursue loan modifications or short sales. Speeding the response time on short sales will prevent loanowners from gaming the system to delay a foreclosure in California.
A manipulated market is a dangerous one
Prior to the collapse of the housing bubble, the government’s footprint in housing was much smaller. The GSEs and the FHA had a much smaller market share, and the GSEs were private corporations. Government regulators didn’t bail out failed homeowners or give them tax breaks. The federal reserve didn’t buy mortgage backed securities to manipulate mortgage rates. And the list goes on. We will know when the housing market has reached a point of real stability when all this attention and manipulation ends. Until then, there are still serious risks of financial loss associated with home ownership.
At least this Ponzi improved his property
The former owner of today’s featured property was a Ponzi with a history of HELOC abuse, but in 2005 — perhaps in an effort to increase the value and accelerate the mortgage equity withdrawal — the owner rebuilt the property. Of course, he then refinanced it and removed any newly-created equity. Apparently, while he was quadrupling his mortgage, his income wasn’t keeping up.
- This property was purchased in 1993 for $435,000. I don’t have his original mortgage information, but safe to say, it was less than $435,000.
- On 8/3/1999 he obtained a stand-alone second for $76,006
- On 2/14/2002 he refinanced with a $621,250 first mortgage.
- On 8/28/2002 he obtained a $100,000 HELOC.
- On 6/6/2003 he refinanced with a $650,000 first mortgage.
- On 10/10/2003 he opened a $62,000 HELOC.
- On 7/27/2004 he refinanced with a $952,250 first mortgage.
- On 11/1/2005 he got a construction loan for $1,650,000.
- On 1/31/2007 he obtained a $500,000 HELOC.
- On 6/15/2007 he refinanced with a $1,987,500 first mortgage and obtained a $350,000 HELOC.
- Assuming he maxed out his HELOC, the total property debt was $2,337,500, and the total mortgage equity withdrawal was just shy of $2,000,000.
- He was also allowed to squat in the luxury he created for two years without making any payments.
You have to imagine guys like this serve as role models for Ponzis everywhere.
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Proprietary OC Housing News home purchase analysis
$1,445,000 …….. Asking Price
$435,000 ………. Purchase Price
4/6/1993 ………. Purchase Date
$1,010,000 ………. Gross Gain (Loss)
($34,800) ………… Commissions and Costs at 8%
$975,200 ………. Net Gain (Loss)
232.2% ………. Gross Percent Change
224.2% ………. Net Percent Change
6.2% ………… Annual Appreciation
Cost of Home Ownership
$1,445,000 …….. Asking Price
$289,000 ………… 20% Down Conventional
4.16% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,156,000 …….. Mortgage
$309,006 ………. Income Requirement
$5,626 ………… Monthly Mortgage Payment
$1,252 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$361 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$743 ………… Homeowners Association Fees
$7,983 ………. Monthly Cash Outlays
($1,321) ………. Tax Savings
($1,619) ………. Equity Hidden in Payment
$427 ………….. Lost Income to Down Payment
$201 ………….. Maintenance and Replacement Reserves
$5,670 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$15,950 ………… Furnishing and Move In at 1% + $1,500
$15,950 ………… Closing Costs at 1% + $1,500
$11,560 ………… Interest Points
$289,000 ………… Down Payment
$332,460 ………. Total Cash Costs
$86,900 ………. Emergency Cash Reserves
$419,360 ………. Total Savings Needed
The property above is available for sale on the MLS.Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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