When a home is foreclosed on, sold via short-sale, or a home owner receives a modification loan, the amount of money forgiven is taxable because it can be considered income (albeit unrealized).  That credit on your tax report can hurt to the tune of about $1500 to $3500 per $10,000.  Therefore if you lose your home to foreclosure and it as worth $150,000, you could conceivably owe $22,500 to $52,500 in taxes.

However through the Mortgage Debt Relief Act of 2007, this tax debt was forgiven for millions of people.  Unfortunately this is due to expire at the end of 2012 so could be big trouble for people already in financial trouble. According to DS News.com, it may be extended.

“Obama did include it in his budget, to extend it to 2014,” said Mark Luscombe, a principal analyst for tax research firm CCH, in a statement. “Congress….. might decide it’s not as crucial as extending the tax breaks that already expired at the end of last year.”

That doesn’t mean Congress won’t eventually act to extend the relief, Luscombe said.

If Congress acts, the tax relief could be extended to January 1, 2015.

One of every three applicants for a mortgage are turned down by lenders, according to msn.realestate.com.  There is plenty of money available to loan and homes that are perfectly priced for affordability, but lenders are still saying “No thank you” to would-be buyers.

Banks and the federal government have tightened lending requirements. Each blames the other for the difficulties consumers have getting financing. It’s all a reaction to the big mortgage circus a few years back, when government regulators were lax, banks were handing out easy money and borrowers racked up debts they couldn’t pay.

The riskiest loans, made from 2004 to 2007, still haunt banks: The federal government now owns many of them and is forcing banks to buy some back.

Evidently when the government buys so many loans, their restrictions are greater so in order to sell lenders must meet those requirements.

While the majority of people who are upside-down on their homes, behind on their mortgage payments, or who’ve lost their homes will not benefit from the massive settlement, some will be helped.

Today 49 states and federal officials settled with some of the nation’s biggest banks to the tune of $25 billion.  However we are still in the dark about whether you, me, and our neighbors will be helped.  According to MSNBC,

The settlement largely affects borrowers whose loans are serviced by five big banks: Bank of America, Citi, JPMorgan Chase, Wells Fargo, and Ally/GMAC. Loans owned by government-owned mortgage giants Fannie Mae and Freddie Mac are not affected. Borrowers from Oklahoma also will not be eligible because officials from that state did not join the settlement.

There are a lot of people in this nation tonight crossing their fingers that relief is coming. Unfortunately it will take many nights of crossed fingers before they get their answer.

New mortgage lending policies are now being developed to classify mortgages and set the standards on who qualifies.  While the intent is to develop rules “in the spirit” of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, what essentially happens is it becomes even more difficult for regular people to qualify for a home loan.  From Real Trends,

However, the lower default rates, moving from QM to QRM come at a cost—the number of potential borrowers who would be excluded from the market. This is where real estate professionals and their customers really get whacked.

Items of concern include the elimination of 8.55 million qualified loans of the 19 million analyzed.   Also excluded are minorities and low income buyers, “Even at a 3% down payment, 25% of low-income buyers would be excluded, and at 10% down payment, 50% would be excluded.”

Scary stuff coming around the bend.  Looks like a lot of houses will sit empty.

I have a confession to make here.  My husband’s job was outsourced to India two years ago and he has yet to find another job. Fortunately my own work life has improved so we have managed to stay in our home. We have, however, because of the displaced worker issue requested to modify our mortgage.  We have been trying to do this for a year and a half.  We fax our papers every two months (or more if they ask) showing paycheck receipts.  We  call Wells Fargo every week.  And still… nothing.

This is why as I read the article about the new task force investigating mortgage fraud, I feel a little sense of relief.

After a year of talks aimed at a settlement with five big banks — Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC) — attorneys general in all 50 states this week have been are poring over the 100-page draft of a the $25 billion deal requiring bankers to commit to modify problem loans that they have been slow to do until now. Under the proposed terms, the banks would also agree to follow strict foreclosure guidelines and procedures and contribute as much as $5 billion to foreclosure relief programs.

I don’t believe for a minute that it will help my husband and me – Mr. & Mrs. Joe Average – but it does give me a sense of satisfaction that perhaps SOMEONE will be helped.

With the “Occupy Wall Street” movement in full swing, people are protesting the power that major banks and multinational corporations have over the democratic process.  Protesters maintain that Wall Street played a huge role in creating an economic collapse that has caused the greatest recession in generations.

It appears that perhaps their theories are not too far off, as evidenced by the charges brought against former executives of Fannie Mae and Freddie Mac by the Securities & Exchange Commission.  From CNN Money,

The suit claims that the executives knowingly approved of misleading statements, downplayed the size of their holdings of subprime loans and falsely claimed that their risky investments were minimal and manageable.

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” SEC enforcement chief Robert Khuzami said in a statement. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books.”

While I would never wish trouble on anyone, when someone commits fraud they should face consequences. Not only should regular people be watching the outcome, but I anticipate the world will watch as well.

Depending on your place in life, depending on how you look at the stats, you may be getting a good amount for your mortgage interest deduction.  Or maybe not.  From RealTrends,

For example, if the cutoff for where middle class ends and upper class begins is $100,000, then the group of people making over $100,000 represent 41 percent of people who claim a mortgage interest deduction, and they get 82 percent of the total benefit. Maybe it’s not surprising to anyone, but they also pay about 82 percent of all taxes. So, you would think, OK, the most benefit goes to people who make the most money (and probably have the more expensive homes and mortgages), and pay the most taxes. Fair, I guess.

Click through to the article for the other side of the story.

In a conversation several days ago, one friend described how she was told to cheat in order to be approved for a mortgage loan when she bought her house.  She felt very uncomfortable following her lender’s instructions on the “declared income” loan she acquired.   Another friend said, “I can beat that!”  In detail she described how her real estate agent FILLED OUT a new FALSIFIED tax return and said, “These never get audited.”

As a Realtor, I was horrified and appalled to hear that this agent – who was very well known in my local area – actually FILLED OUT a fake tax return herself!  She went on to call the lender who was her best friend and asked for instructions on certain parts!

This is why it is now so hard to find a mortgage.  There were not enough checks and balances in place to stop this kind of fraud.  And there were lenders who blindly turned their eye from the criminal activity.

Now the party is over and it is time to pay the band.  The U.S. government through Fannie Mae and Freddie Mac is set to sue some of the big banks over their negligence in not performing due diligence in the home loans they packaged to the Feds.  According to MSNBC.com,

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

If *I* have heard so readily about cases of falsified mortgages, then there is no excuse for the banks to have allowed them to go through without question.  Sad how these crooks have helped bring the U.S. economy to its knees.

The drop in the credit score of the United States sent a shock wave throughout the world.  People with money invested in the stock market felt the repercussions almost immediately as the market dropped faster than a roller coaster headed south.

However according to Bryan Robertson of Los Altos, California, there is a silver lining,

* Lower energy prices: Gas, oil, etc will all drop because a weekend economy means less spending on things like driving. This means lower utility bills and more money for borrowers to save or spend.
* Lower food prices: The cost of farming and shipping food will drop as energy prices drop. This could reduce the monthly grocery bill which means more money available to stay in existing homes or homebuyers to save.
* Interest rates will stay low allowing buyers to obtain excellent 30 year loans or further reduce the cost of a loan modification. It all depends on what your mortgage is tied to. An ARM is usually tied to short-term, more volative interest rate moves and could go up.

I hope Bryan’s crystal ball is working!

Photo by Katrina Tulaio.

Fannie Mae has tens of thousands of homes it has to have ready for the market.  I exaggerate when I say “parade ready” because there’s always something when you show a foreclosure – maybe the fresh paint thinly disguises another smell? Or the frayed carpet just is not quite right?

Meanwhile, the cost that Fannie Mae bears to get homes ready to sell is staggering.  According to Real Trends,

Fannie racked up $488 million in the first quarter of this year for holding costs (insurance, taxes, and maintenance); valuation adjustments for changes in market value; gains/loss when the property is sold; legal fees; eviction costs; weatherization so the pipes don’t freeze; cost to secure the property and more.

Fannie doesn’t have a lot of options, since they want (need?) to stabilize neighborhoods so that there is some potential residual value in the home. They don’t want to have the neighborhood go into decline, putting more downward pressure on overall house prices. In 2010, Fannie did “fixes” for 87,000 homes.

The total cost? About $1.8 billion.  That’s some major cash.