$8000 Tax Credit category archives

Home Mortgage Interest Deduction -

Wikipedia defines it this way – A home mortgage interest deduction allows taxpayers who own their homes to reduce their taxable income by the interest paid on the loan which is secured by their principal residence.

Eliminating MORTGAGE INTEREST DEDUCTION which has been around since 1894 could be a fatal blow to the fragile Housing market

Let me ask you a question and please answer as honestly as you can.

Would you swim in a pool of hungry sharks? Would you stand in front of a charging bull? Would you jump from a bridge into shallow water? Would you play chicken with a freight train headed directly at you? You must be thinking these are trick questions huh? Follow along please….

Hypothetical here –> Let’s say the President put you in charge of ending the housing crisis. Would you eliminate the mortgage interest deduction allowed by the IRS since 1894?

Now that is a crazy thought isn’t it? Who in their right mind would want to eliminate the biggest deduction come tax time for millions of American Homeowners. Not to mention the effect it would have on a fragile housing sector where many experts predict foreclosures to rise, where property values continue to decline and strategic defaulters are no longer stereotyped. Come now,  who in the world would consider eliminating the mortgage interest deduction?

Why Would Home Prices Keep Declining?

Proposals from a White House commission to dramatically slash the federal budget deficit include ELIMINATING MORTGAGE INTEREST DEDUCTION. And to make matters worse, other cost cutting recommendations include Cuts in Social Security Benefits and Defense Spending.

The mortgage interest deduction is the largest tax break for millions of American Homeowners, reducing their tax bill by hundred or even thousands of dollars. And how do you think the housing market is taking this? The National Association of Realtors claims “the Mortgage Interest Deduction (MID)  is vital to the stability of the American housing market and economy”. To read the full press release from the NAR – click here. Bob Toll, Chairman of the National Association of Home Builders, calls the proposal “selfish“. Toll also thinks the odds of the proposal getting passed are “zero to negative five”. NAHB has launched a website which they say separates the myths about the MID from reality.

As a Mortgage Banker in Maryland, a State where property values in many parts of the state have taken a big hit, I believe eliminating this tax deduction to be similar as standing in front of a charging freight train. I realize recent statistics point to upward ticks in the economy but let me tell you something. Take it from someone who pulls credit, looks at income and has their finger on the pulse of home values every single day. If the housing market is getting any better, (I don’t really see it nor believe it), the overall health of housing values could be categorized as “fragile” at best.

The engine that drove home sales not too long ago, the housing Tax Credit for New Homebuyers, seems to be a complete 180 degree turn around from the proposed MID. I can understand why NAR and NAHB are up in arms regarding eliminating the Mortgage Interest Deduction.

Share your thoughts about the proposal and let us know how a change would effect you.

Along about this time last year, there was a lot of chatter in the news and financial channels about the end of the world.  Well, okay, not necessarily the WORLD, but at least the world of mortgages.  The Fed was putting a deadline on phasing out its purchases of mortgage-backed securities (MBS, the instruments lenders use to determine mortgage rates).  The government was ending its $8000 tax credit.  Rates were going to be 11% by spring.

You might have noticed that this didn’t happen.

Oh, most of it did.  The Fed did indeed stop buying MBS.  The government goosing of the purchase market did (eventually) cease.  And yet, rates did not rise.  Not at all.  In fact, they’ve kept falling steadily all year, to levels totally unimaginable by mortals.  Why?  And what does it mean for the future?

The why is fairly obvious.  While its true that the Fed did stop its purchasing of MBS, other entities have stepped up to fill the hole, and then some.  Lenders are not finding it difficult to collateralize their loans.  There is plenty of money out there in the financial system, and there has been for a while.  Falling rates are reflective of a market seeking a bottom.  So far, it isn’t finding one.  Comparatively, MBS are a great investment right now, which tells you how deep a financial hole we’re in.  But as long as the government is handing out money at below 1%, banks can plow that cash back into MBS and get 4% essentially guaranteed.

But another part of the why is QE (quantitative easing).  That’s a fancy term for “the government flooding the system with money”.  We’ve been trying this as a tool to restart the stalled economy for… oh…about three years now.  My crystal ball tells me it isn’t working, but then I’m just a mortgage guy, not a Harvard PhD in Economics.  One way to quantitatively ease, the normal way, is to reduce the Fed rate.  This is the rate at which the Fed will loan money to its member banks.  That rate was 5.25% as recently as August of 2007.  Now it is between .25% and zero.

That makes all that money coming from the Fed very cheap, which means banks borrow a lot more if it.  How much money would you borrow if the interest rate was 0%?  And that recapitalizes banks, which is supposed to make them lend the money to us.  But they don’t, because right now you and I are a very bad credit risk.  Much safer to buy treasuries and MBS.

The solution? Apparently it is MORE quantitative easing! (QEII).  Since the Fed rate is already as close to zero as it can really get, the situation is more complicated.  Now the Fed has to buy the bonds directly from the banks and the treasury themselves, instead of lending the money to the banks and having them buy the bonds.  This should result in lower bond yields and even lower interest rates.

Yes, I said even lower.  Excited about your 5% interest rate?  Well, you should be.  But now 4% is coming into play.  Last year this time, we’d have said that was impossible, yet here we are.  Is 3% also impossible?  I think so.  But I’ve been warning of skyrocketing interest rates for about five years now, so I’m admitting right now I have no idea.  Certainly all the pronouncements of rates going up any minute ought to be taken with a sizeable grain of salt.

Eventually, the shocks of the foreclosure mess, the subprime crisis, waning consumer purchasing power and exploding deficits will likely create a clear path for the money wizards of Washington to follow.  Until then, however, consult your mortgage professional about the best way to get more of your money to stay in your bank, instead of your lender’s.  From a rate standpoint, things have never been better.  And we may not be done yet.

Photo Credit: Alan M Hughes Via Attribution License on Flickr.Com

Since the bursting of the housing bubble, we’ve seen the mortgage industry flood to government-backed mortgages as a source for home lending, and it makes sense.

Government backed mortgages were created during the Great Depression to help the housing market.  Lenders didn’t have money to lend, the housing market was in decline and nobody trusted the banks that were holding their deposits.  Sound familiar?

FHA loans were the first government backed mortgage introduced in 1934 as one of the many government solutions to the Great Depression.  It is the only government backed mortgage that is available to the entire marketplace (VA loans are for qualified military veterans while USDA loans have an income limit and are for designated “Rural” areas only).  FHA has seen a 500%+ increase in market share from 2006 to 2010 from 3.77% to 19.73%.  The funding for these programs have become more limited, with FHA announcing problems with funding in late 2009 and USDA mortgage funds reported low funds before the end for the first quarter (funds are now available).

The government knows the importance of these loan programs.  Their very existence of FHA was to help the housing market during the worst economy in our country’s history.

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So much for those extra three months.

A legislative measure that included an extension of the closing deadline for buyers using the first-timer credit failed to pass the Senate on Thursday. The amendment would have pushed back the deadline from June 30 to September 30. Instead, thousands of buyers — more than 180,000, according to the National Association of Realtors — may not be able to close their deals in time to utilize the $8,000 tax credit or its companion $6,500 tax credit for existing homeowners.

U.S. Senate officials are apparently looking into potential fixes, according to CNBC reporter Diana Olick. But, as of now, the initial June 30 deadline remains intact.

That means the only extension in effect is the one governing purchases by active-duty military members who were serving abroad on extended duty during the last 18 months. Those who qualify have until April 30, 2011, to purchase a home and until June 30, 2011, to close.

Image: Zoutedrop

Okay, so I was wrong. At least I wasn’t the only one.

Last month I wrote about how the expiration of the $8000 and $6500 tax credits for new home buying wouldn’t have much impact on the housing market. Those expired, for the uninitiated, on April 30, and since then sales on new homes have dropped to their lowest levels in history. So that wasn’t one of those really good predictions, and I’m sorry, and I admit I was wrong.

Pundits are saying that the drop is caused by buyers moving their purchases forward to take advantage of the tax credit, so that sales just moved from May to April. That surely took place. But at least here in my shop, there were a good number of people that couldn’t get the deal done in time, and who still are in the process of buying. That should have put some shims under the falling market.

So I have a different explanation for why what happened…happened. See, it wasn’t so much about the money. Markets are really smart. They compensate pretty fast for price-altering events like tax credits and artificial purchase incentives (see “Clunkers, Cash for”). When someone offers $8000 as an incentive for you to purchase a home, then the seller of that home adjusts his price upward to meet the new reality that you have more cash to spend, so most of the $8000 does you no good at all. As an aside, this is what the eggheads call “inflation”.

That did happen in this case, though not by anything like $8000 worth. No, the spike in home buying was not caused by the cash incentive as a dollar amount; rather, it was caused by the application of that dollar amount. As in, the $8000 was not a reduction in the price of the home; it was a boost in cash for down payment and closing costs. Yes, I know the government specifically said that the credit could not be used as a down payment. But, humans being what they are, and being waaaaaaay smarter than the government, they got “gifts” to cover the down payment and closing costs, then repaid those “gifts” with the tax credits. Voila! A temporary reinstatement of the zero-down loan programs the government killed last year.

The reason we’re in the economic mess we’re in is really quite simple: we borrowed too much money, and nobody saved a nickel. Now we can’t make the payments on the things we bought, so they’re being repossessed and foreclosed on. For a business, that means money is drying up and that means firings and layoffs. That exacerbates the personal financial problems, which means people stop spending, which further reduces the money for business, and around and around the mulberry bush.

If you have no cash, you can’t buy a home, because there are no zero-down programs outside of USDA Rural – which, not coincidentally, ran out of money 6 months before the end of the fiscal year – and Veterans’ Administration. But this program made it possible to fudge that, and brought a lot more buyers into the game. Until it ran out.

If you parsed the data, and nobody will actually give it to you so you can do this, but what you would find almost immediately is that the large majority of those tax credits were claimed by people whose down payments were smaller than the $8000 credit. Personally, I would bet that almost half of the loans that closed on which the credit applied were closed with gifts as the means of down payment. Perhaps all of those gifts were legitimate. I hope so.

Then, of course, the gravy train reached the terminus and everyone had to get off. Immediately, home sales dropped off a cliff. This doesn’t happen in market conditions where nothing hinky is going on. The market simply adjusts – prices fall, in this case – and people move on. Really, folks, the $8000 is not a big deal. It represents a payment increase of only about $40/mo for a borrower at today’s rates. That might have a small depressive effect on the market, but nothing like what we’re seeing.

Conclusion: the $8000 credit had the impact it did because it filled a market niche where there is huge demand, and that is the niche for 100% loans. The loss of the credit has taken out a very large part of the borrowing pool, those people that cannot come up with $7000-10,000 to put down on a house. Until something fills that gap again, don’t expect a huge market rebound.

About 200,000 home buyers can step back and take a breath.

The Senate last week voted to push back the closing deadline for first-time buyers hoping to capitalize on the landmark $8,000 tax credit. Originally, buyers had to ink a purchase agreement by April 30 and close on the home by June 30 in order to qualify for the credit. Now, an amendment to a major piece of employment legislation would give buyers an extra three months to close — the new, extended deadline is Sept. 30.

The measure was sponsored by Sen. Harry Reid, D-Nevada, whose home state has been the epicenter of the foreclosure crisis. More than 180,000 home buyers were in jeopardy of missing the initial June 30 deadline, according to estimates from the National Association of Realtors. The bill must now be approved by the House and signed by the president before taking effect.

The deadline extension also applies to the program’s counterpart, a $6,500 tax credit for existing home buyers.

However, it does not appear to have any bearing on the other major extension already in place — that’s the one for active-duty military who were serving outside the U.S. while the tax credit was in place. Those who served at least 90 days on extended duty have until April 30, 2011, to purchase and until June 30, 2011, to close. There are exceptions for service members who fell short of the 90-day mark because of medical issues.

Military members must also meet the tax credit program’s basic criteria. Qualified borrowers can combine the savings and buying power of a VA loan with the tax credit to create a tremendous one-two punch.

Image: Zoutedrop

There are multiple resources that experts use to determine the health of the housing market.  They use price indexes, new home sales, existing home sales and available inventory. 

However, there is one important piece of information that is not typically evaluated but is an essential piece of the puzzle.  How much can people afford?

HOW MANY BUYERS ARE BUYING AT THEIR LIMIT?

This poll shows the results from multiple loan officers across the country.  Each loan officer was asked how many of their buyers are at their buying limit.  A whopping 81% of the loan officers said that 50-100% of their buyers could not afford more.  92% of the loan officers state that at least 1/4 of all their buyers are buying at their limit or higher. 

Read the rest of this entry »

Time is winding down for prospective homeowners to take advantage of the $8,000 tax credit for first-time buyers.

The landmark program is set to expire at the month’s end. It’s certainly possible to get under contract on a home within 30 days, but folks who are on the fence about purchasing need to commit to the process immediately.

Also, remember that it’s a two-part deal — you must ink a sales contract by April 30 and close by June 30. There’s one notable exception, and that’s for members of the Armed Forces who are serving on extended duty outside the United States.

Those serving outside the U.S. have an extra year to take advantage of the tax credit. They must sign a sales contract by April 30, 2011, and close by June 30, 2011.

In terms of program requirements, there are a few major points to bear in mind:

• First-time buyers (or their spouses) cannot have owned a home in the last three years.
• Individuals can’t have annual income above $125,000; married couples who file jointly can’t have an income that exceeds $225,000 per year.
• You can’t  claim the tax credit if your purchase price is greater than $800,000.
• There’s also a $6,500 tax credit for those who have lived in their current residence for five out of the last eight years. The deadlines, income levels and purchase price maximum are the same.

The Internal Revenue Service has some key information about the tax credit.

Image: Neubie

I don’t know about you…But I would…

That has been the average return on the additional closing costs associated with a renovation 203K loans that I have closed in the last quarter.  By no means am I saying that buying a home is a can’t miss investment…but if you are in the market for a home it would be wise to find the best way to invest your down payment and closing costs.  The perception of renovation lending is that the closing costs are much higher on a 203K renovation loan than a standard FHA loan.

The additional Fees you will pay on a 203K loan are as follows:

• Supplimental Origination Fee (1.5% of the Renoivation Cost)
• Draw Inspections ($150-$250 per inspection-usually 3-5 Inspections)
• Title Run Downs ($50-$100 some lenders require these for each draws others just for the final draw)
• Hud 203K Consultant fee (This will range between $0-$1,500 depending on the size of the Project)

Over the last quarter on average my 203K loans have had additional closing costs of about $2,500 and they have after improved appraised values of more then $29,000 in equity.  It’s equity not cash so it’s not like you will be able to run out furnish your home with the equity…but If you work with the right realtor that helps you find that diamond in the rough…you may have the opportunity to refinance after the work is complete and eliminate PMI.  No one can guarantee that will happen but I know it has happened.  My average loan size is $280,000…Monthly Mortgage Insurance on that loan amount is $128 per month.  For some that cash flow  increase makes refinancing worth while…Not to mention you aren’t spending your weekends and free time scraping wall paper and painting rooms and dropping ridiculous amounts of money at Home Depot…on the Honey Do List!

Bond traders are not idiots.

I’ve blogged about this before.  People that invest in the bond and stock markets tend not to be completely stupid, in my experience.  They do listen to CNBC.  They do read the paper.  They’re not unaware of what’s going on in the markets.

Everyone knows, for instance, that the Fed is going to phase out its purchase of mortgage-backed securities (MBS – it is these securities that lenders use to set their mortgage interest rates).  Everyone knows that this phase-out is set to occur on or about the end of March.  Today, Fed Chairman Ben Bernanke announced that the phase-out would be dependent on “the markets”, by which he presumably meant the homebuying markets as well as the bond and stock markets.  In today’s testimony he gave no indication that there would be a dramatic, one-day-we’re-buying-the-next-we-aren’t cessation, and in fact he reaffirmed that the Fed would still be willing to buy MBS to keep interest rates low.  But he also left intact the plan to stop buying, and sooner rather than later.

So…why aren’t we seeing a dramatic selloff in bonds?  Are traders deaf?  Are they insane?  I mean, if Toyota were to have a huge recall of its cars (I know, like that would ever happen) and suddenly start bleeding money, its stock would fall like a rock.  Oh.  Wait.

Similarly, if one knew ahead of time that a dramatic decrease in the available purchase demand was in the offing, wouldn’t one be selling ahead of a price decline?  Well?

Unless something weird happened in the last five minutes while I’ve been writing this, I think we have three things at work here that are currently more powerful than anything the Fed does, at least as regards the bond market, and, by extension, mortgage interest rates.

1. The homebuyer credits.  Uncle Sam has decided that handing over fistfuls of cash to people in exchange for them buying houses is a good idea.  At least, it’s a good idea for another couple of months (see full details on the homebuyer tax credits here).  That is, no question, stimulating demand for housing and for mortgages.  That is firming home prices, and that firming holds out hope that there won’t be an eventual half of all homes in foreclosure (the best predictor of impending foreclosure is home equity – the more, the better).  As fewer homes are in foreclosure, the mortgages that back those securities have more value, meaning that MBS are worth more.
2. The economy sucks.  Yeah, yeah, GDP is roaring ahead by 6%.  Whatever.  Anyone believe that number?  Anyone?  Bueller?  Look, until people start being hired, and the hemorrhaging in the job market stops, no increase in nominal GDP – even assuming, for a moment, that the government figures didn’t begin with “once upon a time” – there is not going to be enough strength in the “recovery” to have any measurable impact on anything.  Bad economy=bad for stocks=good for bonds.
3. And finally, the big one – we all know that Bernanke isn’t really in control of anything.  What year is this again?  Oh, right, it’s 2010.  Let’s see…even numbered year…ratcheting up of commercials…huge increase in bloviation from Washington…AH!  That’s it!  It’s an election year.  The party in power is reeling from a series of straight jabs to the jaw along the once-reliable East Coast, and that increases the pressure on the DC elites to make sure the economy isn’t getting observably worse coming into November.  Think the Fed will be increasing interest rates in the late summer?  Pardon me, I’m going to have to get some supplementary oxygen from laughing so hard.  Traders know who is really calling the shots in the financial system, and it isn’t Tim Geithner, nor is it Ben Bernanke.  Any serious fiscal responsibility will have to wait at least a year.

Result?  No big selloff in bonds at this point.  No big moves in any direction.  Traders are waiting for #3 to move before they do.  Another stimulus (this time, it’s Stimulus III – The Jobs Bill) is possible, even likely, and that will change things.  There is a gigantic overhaul of the entire financial system stalled in Congress right now, but it could get legs again now that health care appears too politically toxic.  That also would dramatically change things.

Not being a prophet, I can’t tell you what will happen in April.  Perhaps we’re in for a (long-overdue) spike in interest rates.  But me?  I’m not betting that way.  And neither is Wall Street.