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Wednesday, December 03, 2008

Don't Forget: There Is A 3 Year Moratorium On Tax Liability For Debt Forgiveness

The Mortgage Forgiveness Debt Relief Act of 2007On December 27, 2007, President Bush signed the Mortgage Forgiveness Debt Relief Act[1] of 2007 (HR 3648) into law.

This law established a 3 year moratorium that prevents any debt forgiven by a lender from being counted as income by the Internal Revenue Service (IRS). Basically, if a homeowner negotiates a short sale or any other type of debt forgiveness with a lender, the homeowner will not be liable for any taxes on the forgiven debt.

For example, if a homeowner in foreclosure gets a bank to agree to take $400,000 for an original loan amount of $500,000, then the homeowner will not have to pay any taxes on the forgiven $100,000 ($500,000 minus the $400,000).

The Mortgage Debt Relief act also extends the private mortgage insurance deductions through 2010. The deduction for private mortgage insurance allows families with an adjusted gross income of $109,000 or less to deduct all or some of their premium payments.

As it stands, the Mortgage Forgiveness Debt Relief Act only applies to a primary residence. So second homes and investment properties are out. Still, even with a second home or an investment property you may not have to pay any tax on the forgiven debt, so long as you can prove to the IRS that you were insolvent at the time. Which may or may not be tough to do.

With the Mortgage Forgiveness Debt Relief Act of 2007, as long as it’s your primary residence, you don’t have to prove anything to the IRS.

If a short sale is the best option, then this is the time to negotiate one.

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Wednesday, December 19, 2007

The Fed's Plan for Dealing with The Mortgage Problem

The Federal Reserve has released it's plan on how to tackle the problems in the American mortgage industry. Here's how I feel about certain bullet points from the Fed's press release:

  • Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan.

  • Creditors would be required to verify the income and assets they rely upon in making a loan.

It's a real shame that Alt-A mortgages were abused. I was hoping this financing option would be available to me when I'm ready to buy, since I am self-employed and have undulating income. The way it looks now, ALT-A loans may eventually disappear from the market forever.

FYI: With stated income mortgages, you provide the lender with your social security number so that they can check your credit score, but the lender doesn't require hard proof of income, like a 2 years of tax returns or payment stubs. A stated income home loan is a type of Alt-A mortgage.

  • Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase.

Weak! The Fed should simply ban all mortgage prepayment penalties and be done with them. This is one (of many) reason why I like credit unions much more than banks: a federally chartered credit union cannot charge prepayment penalties, ever. The Federal Credit Union Act of 1934 prohibits federally chartered credit unions from assessing prepayment penalties of any type on any loan.

A credit union is a financial institution that's owned by its members. When compared to credit unions, banks tend to offer more services, and they tend approve loans and credit card applications more readily. But credit unions almost always have better interest rates on loans, better yields on savings and certificates of deposit, and reasonable fee schedules. Also, with credit unions, the terms and conditions attached to loans and credit cards are invariably more consumer-friendly.

I like the idea of benefiting from both worlds: I keep my savings in a credit union, and my business checking account with a large bank.

  • Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans. The consumer’s written agreement with the broker must occur before the consumer applies for the loan or pays any fees.
This will definitely help. During the height of the mortgage origination frenzy, mortgage brokers would target subprime borrowers with loans that would likely go into foreclosure, so as to make big money with premium spreads.

  • Creditors and mortgage brokers would be prohibited from coercing a real estate appraiser to misstate a home’s value
Fraudulent appraisals were a big part of the problem, and lots of guilty appraisers won't be prosecuted due to lack of evidence. This proposed rule would certainly help to keep appraisers honest.

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Tuesday, November 27, 2007

My Neighbors Are Slobs

I'm still renting, because I like my place, I'm paying a fair price in rent and I have a very ambitious goal of buying my home with cash when I am ready. Very ambitious.

In case I'm not able to save up enough, my backup plan was to get a "no documentation" (or "no doc") mortgage from a reputable bank. With a no doc mortgage, the borrower generally has a very good credit score, and is only required to present the lender with a social security number and details about the property in question. These loans are often called "liar loans" because certain folks who go for them don't make enough money to afford the mortgage.

But I'm not interested in a no doc because I don't make enough. I like the idea of the no doc mortgage because I have a high credit score and, because I'm self-employed, my income fluctuates.

Of course, with all the fallout from the subprime mess, no doc loans have all but dried up. I've come across a couple of lenders still offering no doc loans, but I wouldn't borrow from the ones I found in my most recent and cursory search. These lenders weren't offering loans from the back of an old van, but they still had some shadiness about them (sales pitches that were akin to those cheesy, late-night infomercials.)

One thing I hate about renting, which had me daydreaming about owning my own place today, is the fact that I can't control who ends up renting the townhouse next to mine. Of course, even if I owned my own home, I wouldn't be able to control who ends up living next to me, but the turnover in my apartment complex is very high (the complex owners raise the rent every year, and based on conversations I've had with former tenants, I think most people don't bother trying to negotiate the rent increase.)

Up until the beginning of 2007, I was lucky because the folks who rented the space next to me were OK. But about 7 months ago, a bunch of slobs moved in. I think it's five adults and a preadolescent boy living in that place, and all of them smoke (the kid doesn't smoke, obviously, but he gets to enjoy unfiltered cancer gases when he's home. Sweet!) They often leave their cigarette butts everywhere. They have lots of friends visiting, and they all seem to be smokers as well. The butts are annoying, but not as annoying as this:

my neighbor's garbage

The hillbillies next door sometimes leave plastic bags full of trash outside, uncovered and unprotected, so the cats and raccoons get into it late at night and leave a disgusting mess. Soooo lame, especially because the dumpster is no more than 15-20 paces from their front door. This kind of despicable laziness just boils my blood.

I've spoken to them about it in the past. They apologize and tell me that they'll clean it up, and about half the time they don't bother keeping their promise.

So about two weeks ago, I started throwing cups filled with undiluted bleach on their side, on top of the mess, on the ground and on their door. That swimming pool smell of bleach doesn't bother me one bit -- it's the smell of clean, the smell of germs dying -- but it got to them. They asked me if I was throwing the bleach, and I denied it. I told them that I thought I saw some of the complex's groundskeepers doing something near their door. They haven't left trash outside since.

Do I feel guilty about throwing bleach and denying it? Heck no! I should tell them that I threw the bleach so they can retaliate? I don't think so. All is fine now. No more trash everywhere, and they get to grow up a little.

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