Relief from Falling Home Prices May Be Only Temporary, Say GSEs
By Brian Collins National Mortgage News August 2009

Two of the largest mortgage investors in the U.S. don't hold a very optimistic view of where house prices are headed this year.
Freddie Mac and Fannie Mae see prices headed down, despite a promising first half this year.
Freddie says prices actually increased 1.4% during the first half thanks to a 3.2% jump in prices during the second quarter.
But the government-sponsored enterprise views this as a fleeting rally that benefited from seasonal factors and temporary foreclosure suspensions as new loan modification programs were rolled out.
"We expect that when these temporary foreclosure suspensions are lifted and the seasonal peak in home sales has passed, there will likely be further downward pressure on home prices over the remainder of the year," Freddie says in its second-quarter securities filing.
Economic forecasters at Fannie Mae expect prices will fall by 7% to 12% this year after falling 10% in 2008. "Based on the observed home price trends in the first half of 2009, we expect future declines to be on the lower end of our range," the GSE says in its second-quarter securities filing.
Fannie says its 7% to 12% home price decline compares to 12% to 19% using the Standard & Poor's/Case-Shiller house price index.
[Since the GSEs have been placed in conservatorships, their economists are rarely seen or heard. But some of their commentary is showing up in their Securities and Exchange Commission filings.]
The two enterprises are well aware of the foreclosure problem and have sizable holdings of real estate owned. Fannie acquired 32,100 properties in the second quarter and has an REO inventory of 62,600 properties as of June 30. Freddie reported it had 22,000 REO at the end of the second quarter, down from 29,150 in the previous quarter.
One major lender that is liquidating a portfolio of subprime loans said its REO inventory declined in the second quarter because of backlogs in foreclosure proceedings by local governments.
The lender, HSBC Financial Corp., also reported an average total loss of 52% on sales of foreclosed properties.
"We continue to expect further increases in the level of foreclosures and single-family delinquency rates in 2009 and into 2010," Fannie says in its second-quarter report.
And Fannie has a right to be nervous with defaults spreading to its prime and alt-A portfolios. Overall, 3.9% of Fannie's mortgages are 90 days or more past due, up from 1.7% a year ago, while 2.9% of Freddie's single-family mortgages are seriously delinquent.
But the serious delinquency rate on Fannie's $270 billion alt-A portfolio hit 11.9% in the second quarter and 30% of those loans are underwater and have loan-to-value ratios that exceed 100%.
Meanwhile, the serious delinquency rate on Freddie's $172 billion alt-A portfolio hit 9.44% in the second quarter. Freddie reported that 34% of its alt-A loans have LTV ratios that exceed 100%.
Alt-A products include interest-only and payment-option ARMs, as well as stated-income loans and other loans with nontraditional features that were granted to borrowers with high FICO scores.
Wells Fargo senior economist Scott Anderson also expects the first-half increase in house prices will not carry over into the second half.
He expects home prices will decline 5% to 10% this year. "It may be closer to 5%," he says, since economic growth should turn positive in the third quarter. But Mr. Anderson is concerned about unemployment and foreclosures. "I still think we can't discount that threat," Mr. Anderson told NMN.
He noted that prices generally rise in the summer and tend to decline during the fall and winter months.
The recent uptick also reflects first-time buyers taking advantage of tax credits and buying by investors. "It is an improving story but it is a very tentative improvement," he said.
Looking past this year, the Wells Fargo economist also is concerned about the jumbo market and the overhang of higher-end homes priced above the $729,750 maximum conforming loan limit.
The valuations on those properties have not adjusted yet due to tight credit conditions that make it difficult to refinance or sell those properties.
According to the National Association of Realtors, there is a 20-month supply of homes on the market priced above $1 million, compared to a 6.6-month supply of homes priced below $200,000.
When the big homes start to sell, the adjustment will have a "huge impact on prices," Mr. Anderson said.

Frustrated Sellers as Short Sale Deals Collapse
By Stephanie Armour, USA TODAY 8.5.09

Scores of homeowners who thought they'd cut a deal with their banks to sell their houses for less than their unpaid mortgages are seeing those agreements fall apart months later, contributing to the mounting foreclosures that threaten the housing market's recovery.

The sales of homes for less than the amount owed the bank, known as "short sales," have been widely viewed as an alternative that could help slow the foreclosure epidemic. In theory, delinquent homeowners escape a mortgage they cannot afford, and lenders, although taking a loss, avoid the even costlier process of completing a foreclosure.

Instead, many homeowners are watching potential buyers walk away as months pass while they deal with lenders' lengthy delays, lost documents and unreturned calls, according to the National Association of Realtors (NAR). Not all the snafus are lenders' fault; inexperienced real estate agents who fail to turn in complete paperwork also are causing holdups, as are severely under priced homes.

The problems have become such a kink in the market's recovery that banks and the federal government are launching new efforts this month to simplify and speed up the short-sale process.
Just 23% of short-sale offers that homeowners receive from potential buyers actually close, according to a February study of 1,300 real estate agents by Campbell Communications. More than 90% of agents cited a slow response from the lender as the reason short sales were lost.
"The delays are quite extensive and a real problem. It's a serious issue," says Mark Zandi of Moody's Economy.com. "You're seeing a lot of short sales go bust, and it's contributing to the crisis because it's one of the reasons foreclosures continue to mount."

Jorge DeMattos, 45, just completed the short sale on his home in Pembroke Pines, Fla. — a process he and his real estate agent, Edward Goldfarb, say took 17 months and eight separate offers.
DeMattos began pursuing a short sale after he was laid off two years ago and his income plunged from $46,000 to $26,000 a year.

Chase Bank, his mortgage servicer, rejected the first offer, which was $14,000 over what was then fair market value, according to Goldfarb.
On the next seven offers, the bank took months to respond. Each prospective buyer got tired of waiting and canceled the contract. The eighth offer, accepted in May, was $24,000 less than the first one that Chase rejected in February 2008, Goldfarb says.

"Chase made it very difficult. I had to stop paying the mortgage. It was so frustrating," says DeMattos, who now lives with his sister in Kissimmee, Fla. "We would put the paperwork in, and they would never give a definite answer. Buyers waited for months."
DeMattos says he owed $355,000 on his mortgage. The short-sale price was $225,000.
Christine Holevas, a Chase spokeswoman, says earlier offers on the home weren't accepted because they were significantly below the appraised value and the homeowner didn't send in updated financial information.

No longer uncommon
Short sales once were extremely rare. But now, with unemployment climbing and home values down, more homeowners are pursuing short sales when they can't afford their mortgage. About 11% of all sales transactions in June are such short sales, according to the NAR.
Some delays stem from agents who fail to prepare buyers and sellers for the length of time it takes to get a short sale approved or who supply incomplete information to banks.

But many short sales are faltering, largely because some lenders may lack the internal staffing, expertise and systems to process such sales in a timely fashion. And short sales can be complex, especially if they involve home-equity lines of credit or other second liens held by different lenders, who also must agree to take less than the amount they're owed from a home's sale.
Several lenders acknowledge that banks have been part of the problem, in part because most have done so few short sales in the past that they've faced a steep learning curve.

"About half of short sales never close. We see it as a big lost opportunity, and we need to improve the rate we close them," says David Sunlin, vice president in charge of short sales at Bank of America.
Uncompleted short sales that go to foreclosure are costlier for lenders and homeowners. For lenders, a short sale may save as much as 30% of the expense incurred by going to foreclosure.
For homeowners, a foreclosure wreaks longer-lasting damage to their credit records. A homeowner who has gone through a short sale typically can get a new home loan in one to three years, according to the NAR. A foreclosure usually means it takes seven.

Borrowers are expected to pay their mortgage during the short-sale process, but not all can afford to. That leads to abandoned properties that may sit vacant and deteriorate for months. In other cases, homeowners unable to make their payments may stay put and pay nothing, in some cases for up to a year, until the lenders' review-and-approval process plays out.
Large numbers of uncompleted short sales are especially troublesome, because other efforts to stem foreclosures have been less effective than expected. The Obama administration's housing rescue plan, which includes getting banks to rework home loans into more affordable mortgages, has made such slow progress that representatives from 25 major mortgage servicers were called to Washington, D.C., last month to discuss improving the efforts.

Short sales are moving into the national spotlight now as:
•Mortgage servicers ramp up their programs. Bank of America has begun trying to slash the turnaround time on short sales from up to 90 days after a buyer submits an application to just a week. In a typical short sale, a buyer makes an offer, then the bank conducts appraisals to determine the price it will accept. Setting that price can take so long that would-be buyers may walk away. To try to avoid such delays, Bank of America has begun doing appraisals and determining a minimum price it will accept before a home goes up for sale.
Meanwhile, Wells Fargo has created a real estate agent education guide that explains the process, has increased staffing and has set up procedures to handle short-sale requests and explain the process to homeowners. The bank says it has cut its average turnaround time from offer to approval from up to 90 days to about 30.
•The U.S. government is getting more involved. The Treasury Department soon will detail a plan to streamline short sales by providing standardized documentation and cash incentives to lenders and a moving allowance to homeowners.
Treasury has said that servicers have opted to pursue foreclosures instead of short sales because of the complexity and time required to complete the discounted home sales.
Borrowers who complete a short sale will be eligible for $1,500 to help with relocation expenses. Second-lien holders will get up to $1,000 to relinquish their claims in such transactions.
Eligible homeowners can be accepted through Dec. 31, 2012, but the short-sale program is for those unable to get mortgage modifications from their banks.
"We realized we couldn't reach everyone with a modification. For us, that wasn't the end of the story," says Michael Barr, Treasury assistant secretary for financial institutions. "The alternative is to significantly speed up short sales."
No authoritative figures on short sales' completion times are available, but some research indicates the problem is worsening.
A survey in March 2008 by Campbell Communications found that the average time for a mortgage servicer to respond to an offer to buy a short-sale property was 4.5 weeks. Campbell's follow-up survey in February found that the average response time had doubled to nine weeks.
A third survey in June found the response time was 9.5 weeks. The surveys were sponsored by Inside Mortgage Finance, an industry publication.
"The foot-dragging means it's taking six weeks to six months," says Lawrence Yun, chief economist with the NAR. "There are big delays. The review process is taking way too long."
'We had a learning curve'
Lenders say the approval process takes time because there are so many parties involved. Some bank officials say they've been learning as they go.
"We had a learning curve," says David Knight, senior vice president for Default Retention Operations, Wells Fargo Home Mortgage. "Any stakeholder has a right to disapprove the sale. Realtors out there were used to regular sales. Now, all of a sudden, the servicer and Realtor have had to learn a lot."
Some real estate groups also are trying to improve the process. Re/Max International Chairman David Liniger says his company is aggressively working to train agents on handling short sales and other so-called distressed properties. Instead of eight weeks to close a short sale, trained agents can get them done in two to four weeks, he says.
Within the real estate industry, hopes are rising that short sales will become a shorter process.
"It's horrible the amount of time it's taking to do these sales," says Valerie Torelli, who owns Torelli Realty in Costa Mesa, Calif. "It happens all the time that short sales fail and then go to foreclosure. A seller doesn't make payments for a year and then just walks away. It's unbelievable."

 

Lost jobs forcing more out of homes
By Brad Heath, USA TODAY 7.16.09

WASHINGTON — The nation's foreclosure crisis — once largely confined to only a few corners of the country — is spreading to new areas as the economy teeters. The foreclosure rates in 40 of the nation's counties that have the most households have already doubled from last year, a USA TODAY analysis of data from the listing firm RealtyTrac shows.
Most were in areas far removed from the avalanche of bad mortgages and lost homes that have hammered the U.S. housing market. Among the new areas: Boise and Green Bay, Wis.
"The ripple effect is just broadening out to cover a lot more places," says Susan Wachter, who studies real estate and finance at the University of Pennsylvania's Wharton School.
Unlike the foreclosure wave that began in 2007 and was driven by risky subprime loans, the latest increases are the result of the recession, which brought a sharp rise in unemployment across the country, Wachter and others say.
"What we're seeing now are people who are being impacted by the slowdown," says Deputy Housing and Urban Development Secretary Ron Sims.
Nationwide, RealtyTrac says the number of default notices, auctions and repossessions was nearly 18% higher last month than in May 2008, though it dropped slightly from April.
That growth is most pronounced in areas far from the crisis' epicenter. The 40 counties where foreclosures increased most rapidly are scattered from Hawaii to tiny York, S.C. Rates there have not reached the proportions seen in hard-hit states such as California or Florida; around Green Bay, for example, RealtyTrac recorded a monthly average of one foreclosure action — which includes default notices, auctions and repossessions — for every 458 homes, compared with one foreclosure for every 178 homes around Los Angeles.
Because of high unemployment, homeowners and buyers aren't seeing a quick end to the crisis, says Dan Rowe, a real estate broker in Boise. The number of foreclosure actions there has more than doubled this year to an average of more than 770 a month, from 350 last year, according to RealtyTrac. The foreclosure rate there now rivals Los Angeles'.
USA TODAY examined foreclosure filings through April in the 500 counties that have the most households. President Obama in March said his administration would spend up to $75 billion to help borrowers struggling with expensive mortgages or debts that exceed the value of their homes.
The administration concedes that will do little for those at risk of losing their homes because of the recession. "When people don't have any income," Sims says, "then it becomes really, really tough."

IRS Debt Cancellation Good Until 2013

To see this online, go to http://www.irs.gov/individuals/article/0,,id=179414,00.html
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012 (Ending Jan 1, 2013). Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
• Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
• Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
• Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
• Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
These exceptions are discussed in detail in Publication 4681.

What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing
separately.

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

Where can I get this form?
If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

How do I know or find out how much debt was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.

If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.

I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.

If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt?
Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was canceled in a title 11 bankruptcy case. An exclusion is also available for the cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a Midwestern disaster area. See Form 982 for details.

If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?
Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Will I receive notification of cancellation of debt from my lender?
Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.

What if I disagree with the amount in box 2?
Contact your lender to work out any discrepancies and have the lender issue a corrected Form 1099-C.

How do I report the forgiveness of debt that is excluded from gross income?
(1) Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.

(2) File Form 982 with your tax return.

My student loan was cancelled; will this result in taxable income?
In some cases, yes. Your student loan cancellation will not result in taxable income if you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation.

Are there other conditions I should know about to exclude the cancellation of student debt?
Yes, your student loan must have been made by:
(a) the federal government, or a state or local government or subdivision;

(b) a tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are considered public employees; or

(c) a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization.
Can I exclude cancellation of credit card debt?
In some cases, yes. Nonbusiness credit card debt cancellation can be excluded from income if the cancellation occurred in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See the examples in Publication 4681.

How do I know if I was insolvent?
You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.

How should I report the information and items needed to prove insolvency?
Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation. You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.

To claim this exclusion, you must attach Form 982 to your federal income tax return. Check box 1b on Form 982, and, on line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately prior to the cancellation. You must also reduce your tax attributes in Part II of Form 982.

My car was repossessed and I received a 1099-C; can I exclude this amount on my tax return?
Only if the cancellation happened in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See Publication 4681 for examples.

Are there any publications I can read for more information?
Yes.
(1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues.

(2) See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov.
To see this online, go to http://www.irs.gov/individuals/article/0,,id=179414,00.html