For those who have lost a home or defaulted on other debt, the salt in the wound might be the income liability associated with cancellation of debt.   As you may know, when you are relieved of debt, the IRS considers the amount to be taxable income.   And this is the time of year when those 1099C notices show up.

But if you were insolvent at the time, you may have an easy way out.  Here’s a good article for those facing an income tax liability due to cancellation of debt.

To read the news, you would think mortgage rates had suddenly fallen through the floor.   While the slide has been steady in recent weeks, owing to the Fed’s fat wallet and their promise to shill at the Treasury auctions, the decline is clearly not as dramatic as portrayed by the headline-hungry media.

Here’s what I mean.  These are the weekly national averages for 30 year fixed rates taken from Freddie Mac’s weekly Primary Mortgage Market Survey published each Thursday.

• March 26:  4.85%
• March 19:  4.98%
• March 12:  5.03%
• March 05:  5.15%
• February 26:  5.07%
• February 19:  5.04%
• February 12:  5.16%
• February 05:  5.25%
• January 29:  5.10%
• January 22:  5.12%
• January 15:  4.96%
• January 08:  5.01%

Hmmm….not so much.   Year to date, rates have fallen just 16 basis points, less than two tenths of one percent!  Not exactly the plunge describe in our own Sacramento Bee last week.

The details are common casualties of the hype, but remember, that’s where the devil lives.   For example, banks are not pricing the old “zero points” loans favorably these days.  Home owners  accustomed to eliminating points with a small increase in interest rate find that today the rate offered is 5.5% or higher.

If you are pulling cash out or your credit scores have fallen below 740, you’ll pay a higher rate as well.    Those buying duplexes and condos also pay higher rates.   And if you’re are an investor, rates and fees look nothing at all like the advertised rates.   These risk-base price adjustments have been implemented by Fannie Mae and Freddie Mac this year in reponse to the high mortgage default rates, and the effectively mean that only a narrow cross section of today’s borrowers have access to those really low rates.

And don’t pay attention to the rumors that the government is going to somehow push rates down to 4% or lower–I hear that one a lot lately–because it just isn’t going to happen.  The only reason rates aren’t rising already is that  a) the economy is deflating rather than inflating, and  b) the Fed is standing by to buy MBS and Treasury securities to keep rates in check.

The California State legislature recently approved a 90 day moratorium on foreclosures.  Exempted are banks with loan modification programs.  Although opponents vehemently denounced the new law as merely delaying the inevitable, the exemption could apply needed pressure on the banks to more actively modify loans.  Other critics argue that there are too many loopholes and that  having a loan modification program and actually doing loan modifications  are two different things.  Here are some details.  Here’s the SF Chronicle article.

With the First Time Home Buyer Tax Credit that was first passed last Fall, and the recent House and Senate versions that modified that further, some people are still confused about the details.  How much is the credit, when does the home have to be purchased, and can the tax credit still be taken for the 2008 tax year?

Here’s a good site where you can find quick answer to most questions.

Last week’s announcement by the Fed that it was committed to buying an additional $750b of mortgage-backed securities (MBS) and up to $300b of Treasuries had a brilliant one-day impact on mortgage rate. For the remainder of Wednesday, mortgage rates “plunged” (in the words of the Sacramento Bee) by one-quarter to one-half percent. Okay, we all define “plunge” differently perhaps.

But since then, we have given some of that back.  Today, Wall Street appears to like Geithner’s plan for the purchase of bank toxic assets because the stock market is rallying, nudging mortgage rates up slightly from Friday.

I recommend checking Freddie Mac’s Primary Mortgage Market Survey to cut through the advertising hype to see what mortgage rates are truly doing.  If someone is quoting something substantially different, there is more to the story.

The fed announced its intent to purchase an additional $750b of mortgage-backed securities AND $300b of 2 to 10 year Treasuries. Mortgage rates have responded positively but not dramatically. More to follow as we see rates today…..

The financial rumor mill has been churning out speculation that the Fed may start buying Treasury securities as a means of pushing mortgage rates lower.   Investors have long equated the risk associated with mortgage-backed securities (MBS) to that of longer term Treasuries, particularly the 10 yr T note.  So, the argument goes, pushing treasury yields lower will push mortgage rates down as well.

The fly in that ointment is that investors have recently learned a lesson:  mortgage-backed securities (MBSs) are a helluva lot riskier than Treasuries, and we’re not just talking about subprime MBSs.  Once the cycle got into full swing, even prime loans began defaulting at an alarming clip.  Couple that with derivatives cooked up by financial alchemists and rating agencies who dissembled Wall Street greed by stamping AAA ratings on the swill, and MBSs began to look more like Frankenstein than sweet old Uncle Sam. In fact, investors have been completely scared off.  The U.S. government is currently the only investor buying MBSs.

So the Fed buying Treasuries may push those yields down without having any effect on mortgage rates.  In fact, we’ve recently seen increases in “delivery fees” (read risk premiums) and Loan Level Price Adjustments (read risk premiums) as the market “prices in” the previously unforeseen risk.  All the internal pressures seem to me to be pressuring rates higher, and they are currently held in place only by the remaining $300b or so the Fed still has in its wallet to buy MBSs.   But what happens when that money runs out?  We print more?  Mortgage rates skyrocket?

Somebody help me here.  Got an opinion on this?  You see that “read comments” thingie below?  Click that and leave your thoughts.  I’m not an economist; maybe you are. Or maybe you have some knowledge or insight to share.  Let’s hear it!

For some time now consumers and industry professionals alike have been pondering an unknown:  how much credit damage will result from a short sale or foreclosure?   Opinions vary widely and we’ve yet to see a large enough sample to draw any conclusions.  In what amounts to a stronger sentence imposed on those who have lost a home, Fannie Mae recently increased the amount of time required after a foreclosure before one can obtain a new conventional loan.  That change signaled that lenders might be cracking down harder on foreclosures.

However, my Spidey sense has been tingling, and I believe that we’re going to have to do exactly the opposite in order to help speed the recovery along.   Sidelining foreclosed homeowners for five years will just prolong the agony.  My theory is that at some point, the industry must recognize that foreclosures today tell a different story than they did previously, and we need to find a way to bring worthy consumers back into the market sooner to help kick real estate back into gear.

When I spotted this article today, it gave me hope.

How Will Foreclosure Effect Credit Scores?

The amount of damage to a credit score caused by foreclosure, deed in lieu or a short sale during 2008 and 2009 may be mitigated by the slower economic times, say some credit and legal experts.

FICO may have to adjust its credit scores to lessen the impact of a foreclosure in the last two years, says Todd J. Zywicki, a professor of law at George Mason University.

”It just seems obvious that a foreclosure in 2008 or 2009 doesn’t have as much information value as a foreclosure five years ago,” he says. ”To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that.”

One of the country’s largest credit unions Golden 1 has already figured out a way to lend to people with a foreclosure on their record by offering a mortgage repair loan specifically for those who have lost a home to foreclosure and who want to buy a new one.

BECU, another large credit union based in Washington State, is about to present a program to fellow lenders, ”How to Lend to the Newly Credit Impaired.”

Source: The New York Times, Ron Lieber (03/14/2009)

For homeowners waiting to find out if they qualify for a mortgage refinance or modification under the Obama plan announced last week, here is the first place to look.  Click the “self assessment” tools to guide you through the options and see if you might qualify either to refinance or to secure a loan modification.  There are then instructions for gathering up the required documentation and contacting the appropriate people.

Jim Wasserman of the Sacramento Bee had an article in the Sacramento Bee this morning that provides some excellent resources, including phone numbers to lenders other than Fannie & Freddie.  I can’t seem to link to the article anymore, so I’ve pasted it in for reference below.

Surviving Recession: Mortgage relief program has homeowners hopeful

By Jim Wasserman
Published Friday, March 6, 2009

Mortgage lending institutions reported high call volumes Thursday and thousands of Internet inquiries from struggling borrowers eager to find relief in President Obama’s $275 billion housing rescue plan.

“Within minutes of the plan being announced, there were 3,000 hits on our Web site,” said Eileen Fitzpatrick, a spokeswoman for federal mortgage giant Freddie Mac.

“As I understand it, the phones are ringing this morning,” Jay Brinkmann, chief economist of the Mortgage Bankers Association, told reporters during a conference call early Thursday.

Read the rest of this entry »

You’re a shrewd home buyer.  You’ve waited for prices to fall and the competition to evaporate.  Now you’ve got the deal, and the price is half of what the seller paid for it.  You’ve won!

It’s true, you have made a smart purchase, and I’m not saying that patience hasn’t paid off.  But there is a strange little quirk having to do with property taxes that you need to be aware of, and it’s more painful if you have a loan that requires impounds for property taxes.

A Little Nostalgia

Remember back when homes were appreciating?  Your property taxes were always a bit higher than the last owner’s. Why?  Well, because property taxes are reassessed on sale and rise correspondingly.  Now, property values are falling and so should property taxes, right?  Eventually.  Property taxes are established a year at a time, and your purchase does not immediately alter the tax amount.  It takes the tax assessor’s office awhile to catch up and issue the Supplemental Tax bills with which new homeowners are familiar.

With all the property tax appeals submitted by homeowners whose values have fallen, California recently announced that until they are able to complete the reevaluation–and that could take up to a year–new homeowners must continue to pay the previously established property tax amount.  In many cases here in the Sacramento area, that’s several hundred dollars more per month than it will ultimately be.

The Effect on Qualifying

Following that ripple out to the edge of the pond, several things become evident.  First, lenders are starting to require that borrowers qualify with the higher tax payment in their debt ratios.  Second, if you have a loan that requires impounds for taxes and insurance–FHA, VA, and conventional loans with less than 20% down–both your prepaid closing costs and your actual monthly payment will also be higher.

To be sure, this will ultimately correct itself.  But it can cause some unpleasant hardship in the interim.  In extreme cases, it can result in foreclosure.  I recently spoke with a retired gentleman who is losing his home because his lender had raised his payment from $1300 to $1900 to compensate for incorrectly calculated property taxes.  He couldn’t make the higher payment and the lender, refusing to work with him, had started the foreclosure process.

An Ounce of Prevention

To correct for this problem, I have recently started using the seller’s current property taxes in my loan calculations.  Despite this, the escrow officers often reinstate the incorrect numbers at the close of escrow.  So, keep an eye on this to make sure you can temporarily afford the higher payments, and make sure your loan officer knows enough to plan for this so that your loan isn’t declined at the last minute because your debt ratios suddenly went tilt.

“You only have to do a very few things right in your life so long as you don’t do too many things wrong,”  -Warren Buffett