Foreclosure Starts Hit Highest Level Since January: LPS


Original Post Date: September 24, 2010

By: Carrie Bay

The August Mortgage Monitor report released Friday by Lender Processing Services, Inc. shows that foreclosure starts are continuing to accelerate, with the GSEs displaying more aggressive timelines on early stage delinquencies.

Last month, the Florida-based company tracked 282,528 newly initiated foreclosures. That’s 1 percent above the number of new foreclosure cases the previous month, 20 percent higher than a year ago, and the highest level recorded by LPS since January of this year, when there were 287,865.

As of August month end, there had been more than 2 million foreclosure starts so far this year, according to LPS market data. While delinquencies during that same time period dropped 5.1 percent as compared to a year ago, the company says “in the context of ‘normal market conditions,’ delinquencies remain at historically high levels.”

Breaking the trend of the last three months, agency (Fannie Mae and Freddie Mac) foreclosure starts declined slightly in August; however, portfolio foreclosure starts have accelerated. Late stage delinquencies dominate the GSEs’ new foreclosure cases.

According to LPS’ report, in January 2009, the percent of seriously delinquent loans that were current six months prior peaked at 2.92 percent; in August 2010 that rate was 1.65 percent. The report also shows that approximately 1.01 million loans that were current at the beginning of January are at least 60 days delinquent or in foreclosure as of the end of August – a month-over-month increase of 115,000 loans.

LPS data also shows refinance activity is picking up again as prepayment rates have been steadily increasing over the last two months and new originations hit 2010 highs.

As reported in LPS’ First Look release earlier this month, the nation’s total mortgage delinquency rate, including loans past due and those already in foreclosure, is 13.02 percent.

The total U.S. loan delinquency rate stands at 9.22 percent. The nation’s foreclosure inventory rate is 3.8 percent.

The states with the highest percentage of non-current loans include: Florida, Nevada, Mississippi, Georgia, and Illinois.

States with the lowest percentage of non-current home loans are: Montana, Wyoming, Arkansas, South Dakota, and North Dakota.

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Banks Pressed on Sour Home Loans


Original Post Date: September 23, 2010

By: Carrick Mollenkamp

Big U.S. banks are facing legal pressure to make up for losses tied to pools of soured low-end mortgage loans.

In the latest effort, a group of investors in 2,300 mortgage securities worth roughly $500 billion is seeking to force several banks that originated or are now servicing faulty subprime-mortgage loans to repurchase or modify them.

Some investors ‘had no idea that their money was being invested in mortgage-backed securities,’ says Talcott Franklin, a Dallas lawyer.

The move follows other similar efforts. Bond and mortgage insurers, hard hit in the housing crisis, have filed lawsuits accusing lenders and banks of sticking them with flawed loans marred by poor underwriting and faulty appraisals.

Federal Home Loan Banks in Pittsburgh, Seattle and San Francisco have sued Wall Street banks, seeking to force them to buy back mortgage-backed bonds. In July, the Federal Housing Finance Agency issued 64 subpoenas to obtain information about loans underpinning securities sold to mortgage giants Fannie Mae and Freddie Mac.

The banks and lenders are fighting these efforts, saying they aren’t responsible for the housing crash.

And the outcome is far from certain and could depend on potentially contentious negotiations and litigation that could drag out for years.

In any case, analysts say the efforts could force banks to disclose difficult-to-obtain information about the loans, such as how poorly they might have been originated or are being managed.

That data could be used to force banks to repurchase as much as $133 billion in souring home loans, according to Compass Point Research & Trading, a Washington, D.C., boutique investment bank.

The legal efforts focus on the contractual duties of lenders known as “representations and warranties,” which can at times require them to repurchase loans or modify them so borrowers can keep paying monthly mortgage bills, which maintains value for mortgage securities tied to the loans.

The Trustees’ Roles

At issue are the roles of trustees and loan servicers. Trustees are little-known administrators inside banks responsible for overseeing loan pools, or securitizations, on behalf of investors. Loan servicers handle day-to-day management of loans, including deciding how and whether to modify the terms of a loan. Both are charged with oversight of pools that hold thousands of loans.

If a trustee, for example, discovers that a borrower lied when getting a loan, the trustee or loan servicer is responsible for forcing the originating bank to repurchase the loan on behalf of mortgage investors. Trustees enforce warranties made by loan originators when they sell loans to a trust, and oversee loan-servicing firms.

But some loan-servicing units reside inside the same banks that originated or underwrote the loans or securities. This sets up a potential conflict of interest because a loan-servicing arm would have to force another department or affiliate inside a bank to take back a problem loan.

In a letter to the trust departments of several large banks, Talcott Franklin, a Dallas lawyer representing the investors holding 2,300 mortgage bonds, claims the loan-servicing units too infrequently modify poor-performing home loans underpinning mortgage securities or replace them with better loans.

“This is of great concern to the pension funds, bank and credit-union depositors, mutual fund holders, 401(k) holders, endowments, state and local governments and taxpayers who depend on the performance of these investments,” the letter says.

U.S. Bancorp, Bank of America Corp., Bank of New York Mellon Corp., and Wells Fargo & Co. received the letter from Mr. Franklin, while Deutsche Bank AG didn’t, according to people familiar with the situation. The banks either declined to comment or didn’t return requests for comment on the letter.

In a statement, a spokeswoman for Wells Fargo said the bank has “an established track record of responding to all legitimate verified bondholder inquiries in a timely manner.”

A key first step in the legal fights is obtaining the loan files that will detail how the loans were originated and what is being done now to salvage investors’ money.

If the investor maneuver is successful in getting the loan information, “this will lead to similar actions taken by a larger set of bondholders,” said Chris Gamaitoni, a Compass Point senior analyst. “We believe that once loan files are acquired, that the breaches of reps and warranties will be relatively clear.”

In an Aug. 17 report, Compass Point said the litigation makes common claims: “A significant portion of the underlying loans failed to comply with the underwriting guidelines or other reps and warranties, and thus misrepresentations and material omissions were made in connection with the sale of” residential mortgage-bond securities.

In recent weeks, some of the banks have begun early-stage talks with Mr. Franklin to provide data about the loans underpinning the securities, such as loan documents and how the loan has been serviced. Separately, Mr. Franklin hopes to persuade the trustees to take increased steps to deal with souring loans, such as forcing loan sellers to repurchase the loans or requiring loan servicers to improve loan servicing.

In the past, complaints by mortgage-security investors went unheeded. But because Mr. Franklin now represents enough investors to meet certain legal thresholds—he, for example, represents 50% or more of the voting rights of 900 mortgage securities—his clients could fire a trustee, demand changes in the way a mortgage bond is managed or ultimately file a suit on behalf of a huge group of bondholders.

In the letter, Mr. Franklin said that in some trusts where the lender and servicer sit inside the same bank, the number of recent repurchases by the lender is zero, even though the default rate for the loan pool is 25%.

‘That’s Just Not Right’

Some investors “had no idea that their money was being invested in mortgage-backed securities,” said Mr. Franklin. “And yet somehow these people are now the ones being punished, and that’s just not right.”

To keep track of the securities his clients own and protect his clients’ confidential holdings, Mr. Franklin uses a software system he designed with a college friend, who consults on how to design large databases. Mr. Franklin calls it the “Tranche” program, a reference to the French word for slice or layer. Mortgage securities are chopped into tranches based on risk and return.

His clients’ information is coded and Mr. Franklin keeps a secret code book as a reference. Mr. Franklin said the system is important because it lets him know when his clients in a specific deal have amassed enough voting power.

In the other cases, bond insurer MBIA Inc. sued Credit Suisse Group in New York state court in December over a $900 million loan pool, a large portion of which MBIA agreed to cover. MBIA said it had relied on Credit Suisse to vet the quality of the loans.

In January, Ambac Assurance Corp., the bond-insurance unit of Ambac Financial Group Inc., sued a Credit Suisse unit in New York state court, alleging that it made “false and misleading” representations about home-equity lines of credit backing bonds that the insurer guaranteed in 2007.

A Credit Suisse spokesman said the claims are without merit and the bank will defend itself against the claims.

Separately, American International Group Inc. is analyzing mortgage deals it insured before it imploded in 2008. Chief Executive Robert Benmosche told investors in May that the company will take “appropriate action” if it finds it was harmed by the transactions.

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Housing: Stuck and Staying Stuck


Original Post Date: September 24, 2010

By: Nick Timiraos and Sara Murray

For months, home buyers and sellers have been stuck in a curious stalemate, with sellers reluctant to lower prices and buyers staying on the sidelines.

New data suggest the standoff eased slightly last month, as sales of existing, or previously owned, homes rose 7.6% from July’s extremely low levels, according to figures released Thursday by the National Association of Realtors.

But while the housing market may have halted a slide that began in April after federal home-buyer tax credits expired, it still faces a long recovery, and buyers remain scarce. The August figures were the lowest for any month since 1997 except for July.

And while the number of unsold homes fell 0.6% in August to 3.98 million, it would still take 11.6 months at the current sales pace to clear the inventory. That’s the second highest figure since the realtors’ group began tracking the data in 1999, behind July’s 12.5 months.

“The only way to sell a home in this environment is to drop the price,” said John Burns, a housing consultant based in Irvine, Calif.

The housing numbers have prompted a debate among economists about how much further prices need to fall to resuscitate sales. Home prices are likely to fall another 2.2% this year, according to the consensus estimate of 114 economists and housing analysts surveyed this month by MacroMarkets LLC, a provider of hedging products.

The picture varies from region to region. Home prices in several Florida and Nevada markets are likely to fall at least another 5%, while parts of Texas and Oklahoma could post modest gains over the next year, said Eric Fox, vice president of statistical and economic modeling at Veros, a real-estate analytics firm in Santa Ana, Calif.

Nationally, prices in July fell by 0.5% on a seasonally adjusted basis following a 1.2% decline in June, according to figures this week from the Federal Housing Finance Agency. The S&P/Case-Shiller home-price index issues its report on July prices next week.

A house for sale in Hammond, La. Existing-home sales rose in August but the inventory of 3.98 million unsold homes would still take almost a year to clear at the current sales pace.

Consequently, sellers face a difficult decision: get off the market or cut the price. Sonja Brisson decided to get out. After listing her home for three months, she began interviewing prospective renters on Tuesday. Ms. Brisson, who is moving to live with her fiancé, will lose money renting her Seattle town home, but said it was better than competing with distressed sales going for 30% less than what she paid for her property.

Renting the home is “just a total crapshoot,” she said. “Nobody saw this coming, and nobody can see the end of it.”

Weak demand in the housing market comes amid other signs that the economy is improving, but at a painfully slow pace. An index of leading economic indicators, which aims to help predict where the economy is headed, rose 0.3% in August after increasing 0.1% in July, the Conference Board said Thursday.

Much of the lingering weakness in demand is linked to sluggish improvement in the job market. Some 465,000 people filed new claims for jobless benefits last week, up 12,000 from the week before, the Labor Department said Thursday.

Without jobs, families are still relying on tactics they employed during the recession—such as households doubling up—to make ends meet. That’s pulling down demand for housing and, in turn, prices and construction.

“As those jobs get created, people who have been doubling up will start moving out of those homes and demand will pick up,” said Patrick Newport, an IHS Global Insight economist. “As that happens—it’s going to happen very slowly—the glut will start coming down.”

The weak economy is just one reason why buyer psychology remains depressed. The housing market also faces a “shadow inventory” of four to five million potential foreclosures that have not yet come to market but could put pressure on prices if they do.

“Why do you rush out today to buy something when you think there are going to be millions more for sale soon,” said Michael Feder, chief executive of real-estate data firm Radar Logic Inc. The question, he said, is “how much lower do prices have to go to attract the buyers?”

Even investors, who have been active over the past year buying homes at what they believed were big discounts, are pulling back. “They think everything will be cheaper next year,” said Mr. Burns.

As prices fall, more sellers could find themselves in Patrick Minton’s shoes. He’s already dropped the price on his Seattle home to $400,000, which is less than what he owes. He’ll already have to pay transaction costs out of pocket.

Jobless Claims Increase

The home hasn’t received any offers, and he isn’t willing to cut the price any more unless his bank agrees to a short sale. Mr. Minton, a 42-year-old software developer, listed his home in July after getting divorced and said he’d stay if the bank would let him refinance at current rates. “It’s not the bank’s fault that the house isn’t worth what I paid for it, but unforeseen things have forced me into this position,” said

While 11 million borrowers are underwater, or owe more than their homes are worth, another 2.5 million will join them if prices decline just another 5%, according to CoreLogic Inc., a real-estate analytics firm.

“They’re between a rock and a hard place,” said Glenn Kelman, chief executive of Redfin Corp., a real-estate brokerage that operates in nine states. “They’d capitulate if the bank would let them.”

Leading Indicators Rise

That is suffocating the market because those sellers are also would-be buyers. “Right now, we have investors and first-timers in control of the market, and until that changes, we will never be on the mend,” said Mark Hanson, an independent housing analyst in Menlo Park, Calif.

The housing market will eventually need more buyers like Robert Gifford, who spent six months with his wife scouring their Beacon Hill neighborhood in southeast Seattle before pulling the trigger on a sale in July.

When it came time to sell their smaller home this month, they didn’t dawdle. They cut the listing price by around 10% to $334,000, and it quickly went to contract.

“We didn’t want to become an involuntary landlord,” said the 31-year-old engineer.

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Fannie Mae Announces New Buyer and Seller Incentives for REOs


Original Post Date: September 23, 2010

By: Carrie Bay

With the foreclosure crisis still raging, the nation’s largest mortgage financier has amassed a hefty portfolio of repossessed homes. Fannie Mae took back 68,838 foreclosed properties in the second quarter alone. In the first quarter of this year, the company added 61,929 new REOs to its inventory.

According to Fannie Mae’s latest quarterly report, as of June 30, 2010, the company was holding 129,310 single-family REO properties. In an effort to increase sales of its foreclosed inventory and get these properties – and the costs associated with carrying them – off its books, Fannie Mae is offering additional incentives to buyers and sellers of its REO homes.

On Thursday, the GSE announced a seller assistance incentive for properties listed on the company’s REO website, Fannie is also expanding the initiative to offer an incentive to real estate agents and brokers.

Qualified homebuyers who will be owner-occupants can receive up to 3.5 percent of the final sales price that can be used toward closing cost assistance, including a home warranty, if available. In addition, selling agents representing owner-occupants will receive a $1,500 bonus.

Eligible offers must be submitted on or after September 23, 2010, and must close by December 31, 2010. The sale must close within 60 days of the offer being accepted.

“More than eighty-seven thousand families have purchased HomePath properties in the first half of 2010-nearly double the number of Fannie Mae foreclosed properties sold in the first half of 2009,” said Terry Edwards, EVP of Fannie Mae’s Credit Portfolio Management. “We continue to look for ways to stabilize neighborhoods and offer incentives to qualified buyers who will occupy these properties over the long-term and help support their communities.”

HomePath properties are owned by Fannie Mae and include a wide selection of homes, including single-family homes, condominiums, and town houses. HomePath properties may also be eligible for special HomePath Mortgage and HomePath Renovation Mortgage financing.

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Home loan demand, housing prices fall


Original Post Date: September 22, 2010

By: Reuters

Washington —

U.S. demand for home loans fell for a third straight week last week, while prices for single-family homes retreated further in July as the housing market struggles for balance with less government support.

Loan applications to buy homes fell 3.3%, the Mortgage Bankers Assn. said Wednesday. A second report showed the Federal Housing Finance Agency’s house price index dropped 0.5% after falling 1.2% in June.

The housing market, the main catalyst of the worst recession since the 1930s, has hit a soft patch since the end of a popular home buyer tax credit in April, posing a threat to the fragile economic recovery.

Although much of the housing market weakness has been blamed on the expiration of the tax credit, analysts said stubbornly high unemployment also was sapping demand for homes.

“We fear that a more longer-lasting slide is underway. High unemployment, heavy indebtedness and widespread negative equity are weighing on housing demand,” said Paul Dales, a U.S. economist at Capital Economics in Toronto.

Although the recession ended in June 2009, the pace of economic growth has been too sluggish to bring down a 9.6% nationwide unemployment rate.

With jobs scarce, homeowners are losing their houses, causing an oversupply that is weighing on prices.

A report Tuesday showed groundbreaking for new homes rose 10.5% last month, the biggest jump since November, offering some hope the market was stabilizing.

“I think we are at minimum near bottom and we may be at bottom,” David Stevens, head of the U.S. Federal Housing Administration, told a congressional panel Wednesday. The FHA, which provides federal guarantees on loans, is one of the government’s main props for the sector.

But near-record-low mortgage rates are doing little to stimulate demand with lending standards still tight. The Mortgage Bankers Assn.’s index measuring both purchase and refinancing applications last week fell 1.4%.

Analysts expect data later this week to show home sales bouncing back from July’s decline, but caution that housing will struggle without significant labor market improvement.

“In the absence of a rapid employment growth, and factoring in all the potential excess housing supply from foreclosures and looming delinquencies, housing prices will likely remain under pressure and continue trending lower throughout this year and next,” said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

The National Assn. of Realtors will release its August report on sales of previously owned homes Thursday and the government will reveal August sales of new single-family homes Friday. Both reports are expected to show sales rebounding after steep drops in July.

In the 12 months to July, the Federal Housing Finance Agency’s house price index fell 3.3%. It is down 13.8% from its April 2007 peak.

“The big downward adjustment in prices is already behind us, but a second downward leg will still undermine the wider economic recovery,” said Capital Economics’ Dales.

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Existing Home Sales Rise


Original Post Date: September 23, 2010

By: Darrell A. Hughes and Jeff Bater

Sales of previously owned U.S. homes rose 7.6% in August, bouncing off a record low as the housing sector fights to recover without government support.

Separately, the number of U.S. workers filing new claims for jobless benefits rose by more than economists expected last week in yet another reminder of continued weakness in the labor market.

Existing-home sales increased to an annual rate of 4.13 million, the National Association of Realtors said Thursday.

Inventories of used homes decreased by 0.6% at the end of August to 3.98 million available for sale. That represented an 11.6-month supply at the current sales pace, compared with a 12.5-month supply in July.

Economists surveyed by Dow Jones Newswires had expected existing home sales to climb by 7.0% to an annual rate of 4.10 million.

The median price for an existing home was $178,600 in August, up 0.8% from August 2009.

The report was the second this week giving a sign of stability for the beaten-down housing sector. The Commerce Department said housing starts in August rose a better-than-expected 10.5%. Still, the gain in starts was driven partly by apartment construction, a sign demand for housing could be shifting from purchases of houses to apartment rentals. Analysts say recovery of the housing sector will take a long time.

“The housing market is trying to recover on its own power without the home buyer tax credit,” NAR chief economist Lawrence Yun said.

The U.S. housing market plunged after the end of a government tax credit for first-time buyers. The subsidy supported a troubled sector trying to recover along with the overall economy from the longest recession since the Great Depression.

The tax credits offered certain buyers up to $8,000 to sign a contract by April 30. Deals originally needed to close by June 30, but lawmakers pushed that deadline to Sept. 30.

Still, sales of existing homes fell in May, June, and July. Mortgage rates are low but unemployment is high, scaring off would-be buyers.

Despite attractive home prices, Yun expect soft sales in September and October. The housing recovery “will likely be slow and gradual because of lingering economic uncertainty,” Yun said.

The realtors adjusted their existing home sales figures for July upward, saying sales rose to a 3.84 million annual rate. Originally, the NAR estimated a sales rate for July of 3.83 million, the lowest on record. Records go back to 1999.

Year over year, existing home sales were down 19.0% from an annual rate of 5.10 million in August 2009.

In August, existing home sales increased across all regions. Sales in the West posted the largest gain, rising 13.8%. Northeast

Sales were up by 7.9% in the Northeast, 5.2% in the South, and 5.0% in the Midwest.

Jobless Claims Increase

Initial unemployment claims increased by 12,000 to 465,000 in the week ended Sept. 18, the Labor Department said in its weekly report Thursday. New claims for the previous week, ended Sept. 11, were revised upward to 453,000 from 450,000. Economists surveyed by Dow Jones Newswires had expected new claims would rise by only 3,000. But in a more positive sign, the four-week moving average, which aims to smooth volatility in the data, fell by 3,250 to 463,250.

This latest rise in jobless claims comes as Federal Reserve officials weigh taking further actions to help stimulate the economy amid concern about low levels of inflation and continued high joblessness. In a statement earlier this week, the Federal Open Market Committee said that household spending remains constrained due to “high unemployment, modest income growth, lower housing wealth and tight credit.” The FOMC members added that they were “prepared to provide additional accommodation if needed to support the economic recovery.”

A Labor Department economist Thursday said a rise in claims is generally expected in the reporting week after a federal holiday, but this year the filings went up by a little more than anticipated.

In the Labor Department’s claims report Thursday, the number of continuing claims — those drawn by workers for more than one week in the week ended Sept. 11 — fell by 48,000 to 4,489,000 from the preceding week’s revised level of 4,537,000. Continuing claims are reported with a one-week lag.

The unemployment rate for workers with unemployment insurance for the week ended Sept. 11 was 3.5%, a 0.1 percentage point decrease from the prior week’s revised rate of 3.6%.

The report’s state-by-state breakdown of new claims for the week ended Sept. 11 shows that the largest increase in claims took place in Florida, which saw a rise of 2,755 claims due to layoffs in the construction, service, manufacturing and agricultural industries.

California had the largest decrease in claims with a fall of 10,754 due to a shorter work week and fewer layoffs in the service industry.

A Labor Department economist said Thursday that the latest claims figures contain estimates for Nebraska.

Leading Indicators Rise

The index of leading economic indicators rose more than expected in August. However, the pace suggests a weak but continuing recovery going forward.

The leading index increased 0.3% last month, after rising an unrevised 0.1% in July, the Conference Board said Thursday.

Economists surveyed by Dow Jones Newswires had expected a gain of 0.2% in the August index.

“While the recession officially ended in June 2009, the recent pace of growth has been disappointingly slow, fueling concerns that the economic recovery could fade and the U.S. could slide back into recession,” says Ken Goldstein, economist at the board. “However, the latest data from the U.S. LEI suggest little change in economic conditions over the next few months. Expect more of the same–a weak economy with little forward momentum through 2010 and early 2011.”

Thursday’s leading index report was released a short while after government data showed new jobless claims unexpectedly jumped 12,000 to 465,000 in the Sept. 18 week.

In August, seven of the 10 leading indicators increased. The most positive indicators were the interest rate spread and the real money supply.

The coincident index was unchanged in August after rising a revised 0.1% that was first reported as 0.2%.

The lagging index rose 0.2% last month after rising an unrevised 0.4%.

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Big Shock: Americans Like the Mortgage Interest Deduction


Original Post Date: September 22, 2010

By: Dawn Dakota

As pain from the housing crash drags on, the nation’s leaders are struggling to fix the broken housing model. The mortgage interest-rate deduction, long used as a way to encourage homeownership, could be in trouble. Ideas being thrown around include capping income limits for recipients or the amount of the qualifying mortgage. There’s even a slim chance the deduction could eventually go away.

As we’ve reported, the deduction for owner-occupied homes is estimated to cost the government some $100 billion a year, making it the largest government subsidy for housing and one of the most expensive tax deductions. Mark Zandi, a well-known economist, has suggested that the housing industry push to limit it.

But the bulk of Americans want the deduction to stick around, according to a nationwide survey of likely voters commissioned by the National Association of Home Builders. (We can’t say there’s much surprise there.) The survey released Wednesday found that 79% of respondents – both owners and renters – believe the federal government should provide tax incentives to promote homeownership.

“These poll results show strong national voter support for keeping the mortgage interest deduction that cuts across gender, age, partisan, ideological, educational and regional lines,” says Neil Newhouse, a partner at Public Opinion Strategies, which conducted the survey. “In fact, voters overwhelmingly say they would be less likely to vote for a candidate for Congress who supported either eliminating or reducing the home mortgage interest deduction.”

The NAHB issues politicians a warning: “As the midterm elections draw near, voters are sending a resounding message to Congress and the Administration: Don’t meddle with the mortgage interest deduction or other tax incentives that support home ownership,” says Chairman Bob Jones, a home builder from Bloomfield Hills, Mich.

Public Opinion Strategies conducted the survey from Sept. 9 through 12. It included 800 likely voters and has a margin of error of 3.6%.

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What to Know About Home-Sale Tax Rules


Original Post Date:

By: Tom Herman

Q: What are the chances that Congress will ease the rules on how long you have to own your home and live in it in order to qualify for the most favorable capital-gains tax treatment when you sell it?

—K.M., Prior Lake, Minn.

A: Slim to none. Naturally, anything is possible if Congress ever decides to overhaul the entire tax system. But don’t count on that happening any time soon.

Even if lawmakers do consider major tax-law changes after the November elections or next year, don’t expect them to ease the home-sale rules. I haven’t heard any significant discussion of this issue among congressional leaders in many years.

Here is how the basic rules work: In the late 1990s, then-President Bill Clinton signed legislation that officials said at the time would eliminate capital-gains taxes for most people who sell their primary home for a profit. That legislation generally allowed most sellers to exclude a gain of as much as $500,000 (if married and filing jointly) or as much as $250,000 (if single).

To qualify for the full exclusion, you typically must have owned the home — and used it as your primary residence — for at least two of the five years prior to the sale. For more details, see IRS Publication 523 (“Selling Your Home”) on the Internal Revenue Service website (

But don’t assume you’re out of luck if you can’t meet the ownership and use tests I mention above. You still might be eligible for a partial exclusion that could greatly reduce — or even eliminate — capital-gains taxes on the sale of your primary home.

For example, you may qualify for a partial exclusion if you had to sell your home because of “a change in place of employment” or if you moved for “health” reasons. IRS Publication 523 has other examples.

Here is what the IRS says it means on the health issue: “The sale of your main home is because of health if your primary reason for the sale is: To obtain, provide or facilitate the diagnosis, cure, mitigation or treatment of disease, illness or injury of a qualified individual,” or to “obtain or provide medical or personal care for a qualified individual suffering from a disease, illness or injury.”

Conversely, the IRS says the sale of your home isn’t because of health if the sale “merely benefits a qualified individual’s general health or well being.”

You also might qualify for a partial exclusion if you had to sell for certain “unforeseen circumstances,” such as “natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible.”

—Send your questions to us at and include your name, address and telephone number. Questions may be edited; we regret that we cannot answer every letter.

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Low rates make 15-year mortgages feasible for many refinancers


Original Post Date: September 17, 2010

By: E. Scott Reckard

Dave Richards wants to retire in 15 years — and he doesn’t want to still be paying his mortgage when he starts taking it easy.

So last month the 43-year-old Thousand Oaks resident, taking advantage of record low interest rates, refinanced his 30-year mortgage with a 15-year loan.

“The payment is more per month, but I’m comfortable with that,” said Richards, president of a Westlake Village company that arranges sales of small businesses. “It’s worth it to be able to retire at 58 with a zero mortgage.”

As homeowners rush to refinance their mortgages, an increasing number are opting for a 15-year term. They’re not only moving up the date on which they’ll own their property free and clear, but also benefiting from a lower rate than those available on 30-year loans.

This week the rates offered by lenders on 15-year fixed-rate loans averaged 3.82%, Freddie Mac reported Thursday. That was down slightly from 3.83% last week and the lowest in the 19 years that the mortgage finance giant has tracked such loans.

The average rate on 30-year fixed-rate loans was 4.37%, up a bit from its record low of 4.32% two weeks ago, according to Freddie Mac’s weekly survey.

For many people, another reason to choose a 15-year term is that they’ve lost confidence in their other investments, such as stocks and bonds, said Stevenson Ranch mortgage banker Fred Arnold, who refinanced Richards’ loan.

“If their retirement income and savings fall short, they at least can count on their mortgage being paid off earlier,” he said.

Baby boomers nearing retirement, who may recall 16% mortgage rates when inflation peaked in the early 1980s, are especially drawn to the 15-year loans, said Brad Blackwell, national sales manager at Wells Fargo Home Mortgage.

“They’re thinking … ‘I like the fact that there’s a ‘3’ at the front of the interest rate,’ ” Blackwell said.

Of the mortgage applications received these days by Wells Fargo, 22% are for 15-year loans. That’s up from 15% late last year. With home sales depressed, the vast majority of mortgages being taken out these days are replacing existing loans, not financing a home purchase.

The recent boom in refinancing follows an even larger surge in 2009 that began when rates for 30-year loans dipped below 5% in the spring.

These days, lenders say, many borrowers are also choosing to pay down their loan balances when they refinance.

Some people take that step, increasing their home equity, because they won’t qualify for a mortgage otherwise. For others, a higher level of equity can mean a lower interest rate, especially if reducing the loan amount means not needing a “jumbo” mortgage. Jumbo loans carry higher rates because Fannie and Freddie won’t buy them.

The jumbo cutoff, which varies by region, is $729,750 in Southern California.

According to Freddie Mac, 22% of homeowners who refinanced their mortgages in the second quarter lowered their principal balance by paying cash at the closing. That was up from 19% in the first quarter, and was the third-highest “cash-in” level since Freddie Mac began tracking it in 1985.

Marsha Lenyk, president of Award Mortgage in San Diego, said one of her refinancers recently brought $125,000 in cash to the table when he refinanced into a 15-year loan. Doing so meant he could pay off his home-equity credit line as well as the 30-year primary mortgage.

The borrower wanted to rid himself of the credit-line debt because it had a variable interest rate that he knew would eventually rise, she said.

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Debate might give new life to mortgage cramdown legislation


Original Post Date: September 19, 2010

By: Lew Sichelman

Reporting From Washington —

If there is a term that strikes fear in the hearts of residential lenders everywhere, it is “cramdown.”

Lenders dread the judicial procedure that erases a portion of a borrower’s mortgage because the house, which is the underlying security or collateral for the loan, is worth less than what is owed on it.

Actually, the word is a euphemism for forcing a ruling upon a creditor, as in “crammed down” the lender’s throat.

The proper term is “bifurcation,” meaning that in a bankruptcy proceeding the loan is split into a secured claim equal to the current appraised value of the property and an unsecured claim equal to the difference between the unpaid balance and the home’s present value. Generally, the borrower is required to continue to pay on the secured portion, while the difference is treated like any other unsecured debt.

But whatever you call the concept, mortgage companies hate it even more than workouts or loan modifications.

At least they get to control the process in a typical loan mod. But with a cramdown, they are at the mercy of a judge who may more likely favor a down-and-out borrower over a big-time corporation.

That’s the way lenders tend to look at cramdowns, anyway.

Because borrowers would still be liable for an amount equal to what their places are now worth on the open market, the lenders would receive what they would have had the homes foreclosed — and maybe more. So what’s the big deal?

A research paper from two economists at the Federal Reserve Bank of Cleveland contends that if what happened during the agricultural lending crisis of the 1980s is any indication, the actual negative effect of cramdowns is only minor.

Back then, farming was going full-bore and the average price of farmland nationally was rising rapidly. Then the bottom fell out, and many farmers who had borrowed heavily to acquire additional acreage found themselves owing more to their mortgage companies than their properties were worth.

The story sounds familiar. “Farm loan-underwriting standards eased, and a speculative lending boom ensued. Lenders began to rely less heavily on the ability of borrowers to service their debt from operating cash flows, and more on the continued appreciation of the underlying collateral — the farmland — for repayment,” says the study by Thomas Fitzpatrick and James Thomson.

“But when demand for farm goods began to fall, farm real estate prices also fell precipitously. As farmers’ cash flows decreased … many farmers saw their interest rates increase and found that they could not make payments and were underwater on their mortgages.”

Like many troubled homeowners now, some financially strapped farmers in the early 1980s found themselves in danger of losing their primary residences with little prospect for relief under bankruptcy options available at the time. So Congress enacted legislation establishing Chapter 12 of the Bankruptcy Code, which allows judges to reduce — in what was then called a stripdown.— the debt that farmers owed on their homes.

But the effect was not nearly as dire as the banking community had told lawmakers it would be, the Cleveland Fed economists say. Chapter 12 “did not change the cost and availability of farm credit dramatically,” they explain.

That’s not what residential lenders are telling Congress these days whenever the discussion turns to allowing judges the authority to independently modify mortgages on all principal residences to their current value. (Mortgages on commercial properties, second homes and vacation homes already can be judicially modified.)

The Mortgage Bankers Assn., for example, says giving judges “free rein to rewrite loan contracts without economic restraint” would drive up the cost of financing for future borrowers by as much as 2 full percentage points.

Because lenders and mortgage investors would no longer be certain their loans would be truly secure, the MBA contends, they would be forced to require larger down payments and charge higher interest rates. “At a time when the mortgage market is experiencing a serious credit crunch, [cramdowns] will increase costs to consumers, further destabilize the mortgage market and hurt the overall economy,” the MBA claims.

But economists Fitzpatrick and Thomson also note that “what was most interesting about Chapter 12 is that it worked without working.” That is, rather than inducing a flood of bankruptcy filings, the simple prospect of a judge’s unilaterally changing the terms of their loans led many farm lenders to institute loan modifications of their own volition.

Not so, counters John Blanchfield, senior vice president at the American Bankers Assn., who takes exception to many of Fitzpatrick and Thomson’s findings.

Not only is the “attempt to use the Chapter 12 experience as a road map to solve the current mortgage crisis based on a limited and flawed retelling of history,” wrote the director of the ABA Center for Agriculture and Rural Banking in a letter last month to the two economists; it was destructive to banks and harmed farmers “who needed credit after it was enacted.”

What is perhaps most interesting about this debate is that Congress is not currently considering cramdown legislation. But maybe the discussion will bring the concept back to life. After all, the Obama administration backs bankruptcy reform, and major lender Citigroup and consumer groups have said they are on board.

Various bills are in the hopper, most notably a perennial one by Sen. Richard J. Durbin (D-Ill.), who chairs the Appropriation Committee’s financial services and general government subcommittee, and the House last year passed cramdown legislation, 234 to 199.

The Senate, however, has shown little interest in the measure, and when the Wall Street reform bill offered cramdown language in the summer, the House soundly rejected it. But stay tuned. You never know when cramdowns will resurface again.

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