Great News! As you should know by now Montgomery County Maryland has increased the recordation tax on home purchases over $500k, and cash-out refi's with loan amounts over $500k. Clearly this won't be an issue since only rich people buy homes over $500k. Sure the median home price on all sales including condos is over $500k, but this is Montgomery County! We're rich man!

Here's how it works: You buy a home for $650k. The first $50k of consideration is exempt from recoding tax (principal residence) - the next $450k of consideration is taxed at a recordation rate of $6.90 per $1000 - the remaining $150k of consideration is taxed at a recordation rate of $10 per $1000. Now on a purchase you still have the 1.5% transfer tax so the total tax (recordation & transfer) would be $14,355. Now it's really not that much since the seller can pick up a portion of the tax, and the seller dosen't need that money anyway. See how easy that is.

Obviously the benefits of raising the recordation tax are unmistakable - motivate people to buy homes in this flourishing market, incent borrowers to draw equity for home improvements/debt consolidation/college education, and stimulate the local economy. Luckly they're doing this now since timing is everything. I should know, I've been watching this new show on TV where people make a killing in California "flipping houses." I think I may try my luck at flipping since there's no better time to start than the present. Wish me luck!

For refinances, the following three examples summarize the change:

Example

Existing Loan: $500,000

New Loan: $600,000

Cash out of $100,000 taxed at $10/thousand because the loan exceeded

$500,000.

Example

Existing Loan: $400,000

New Loan: $450,000

Cash out of $50,000 taxed at $6.90/thousand because loan is less than $500,000

Example

Existing Loan: $450,000

New Loan $700,000

Cash out of $250,000 is taxed at $6.90/thousand for the first $50,000 (until you reach the $500,000 point) then the remaining $200,000 is taxed at the rate of $10.00/thousand (as you have exceeded $500,000)

If you don't know by now, Maryland has altered the eligibility requirements for the Homestead Tax credit. This impacts every homeowner and should not be overlooked. The state is now requiring every "eligible" homeowner to apply for the credit. Why? Because many homes received a homestead tax credit when they weren't a primary residence - equating to millions of dollars in lost tax revenue for the state. Strangely, DC has been identifying homeowners that are receiving Homestead Credits on multiple properties for years and simply removing the credits. No notification, just remove the credits. It's not until the homeowner identifies their primary residence will the credit be reinstated to that property only. Maryland will turn DC's program on its head and require homeowners to apply, if they don't, they lose the credit. If someone is receiving multiple credits, they're required to be honest and designate a primary residence. The losers are the people who slip through the cracks - overlook the updated assessment and fail to register. Don't be a loser.

Below you can find the answers to most questions pertaining to the application process, including what happens if you don't apply.

Washington Post (12/14/07) P. D1; Cho, David
Senate legislation to revamp the Federal Housing Administration mortgage program has finally moved out of committee and is expected to be passed in the next couple of days when it comes up for a full floor vote. The bill would reduce the required down payment on FHA-insured mortgages to 1.5 percent from 3 percent and open the program to pricier housing markets by letting the agency insure mortgages up to $417,000. With nontraditional mortgage originations on the decline, the FHA anticipates a surge in applications to 1.4 million this year from close to 680,000 in 2006. The bill, intended to provide borrowers with a less risky alternative to subprime loans, will qualify hundreds of thousands of minority and low-income borrowers for low-cost, low-down-payment loans backed by the U.S. government.

Freddie Mac today matched a move by Fannie Mae last week in charging an additional fee of 0.25 percent for packaging mortgages into securities with a company guarantee. The increase, prompted by ``continued deterioration in the mortgage market,'' will apply to contracts with settlement dates on or after March 9, the company said in a statement on its Web site.

The increase ``is a broad tax on homeownership that ultimately will be passed along to consumers,'' National Association of Home Builders Chief Executive Officer Jerry Howard said in a Dec. 7 statement after the fee announcement. ``This is the exact opposite of what needs to be done'' to revive the housing market.

Let's get one thing straight, you don't need to cry about the bailout because there isn't one. Let me re-phrase that, people aren't being bailed out. Look closely and you will see that the program implemented is solely to protect the lender from borrowers walking away from an upside down position. The plan will "help" the credit challenged homeowner who owes more on their house than it's worth. It will hopefully prevent them from walking away from a no equity deal. I like the concept of releasing the plan as a government bailout...pretty savvy. It provides the program needed credibility and motivates borrowers to actively inquire about their situation.

Here's the dummy version of the "bail-out" plan:

FICO of less than 660

3 year ARM's (or less) originated between 1/05 and 7/31/07

Prove you can't afford adjustment

97% LTV or worse

Owner occupied

Current on the mortgage

That's the meat of the plan. So where's the bailout? Who is being bailed out? It's still the lenders discretion whether they freeze the rate. In most of these cases the borrower already has a higher rate, they have no equity in their home, yet they continue to pay their mortgage. Freeze that rate! The rate is already above prime- limit the risk and freeze that rate! Buy time. Let the market firm...Pllllleeeease firm.

What's the alternative? Let the rate adjust and foreclose? Hope that they can pay the higher payment? The risk far outweighs the reward so it's only logical to keep the stream of payments coming in, wait for a better day. What is gained by foreclosure? Is the mortgage really a secured debt if the home is worth less than the mortgage? What are you securing it against, negative equity? Hope Now Alliance is a cooperative effort between consolers, investors, and lenders hoping the borrowers don't walk away from their homes now. If they do, we'll pay more than you can imagine.

"President George W. Bush is expected to outline on Thursday a plan to freeze mortgage rates for five years for many U.S. homeowners facing sharp increases in their monthly payments, industry sources said on Wednesday." I'll wait to hear the details prior to commenting. Based on what is being reported, it appears the borrower will have to qualify for the freeze.

"Under current Montgomery County law, a seller is not obliged to disclose the property taxes that a prospective buyer would pay on a home. Instead, listings for homes on the market - whether in the Multiple Listing Service or in fliers at open houses - display the taxes most recently assessed to the seller."

I wrote about this subject last month here and it was covered again in the article above two weeks ago. Last week a local agent wrote a letter to the editor suggesting that "The problem at hand is caused by government abdicating its responsibility for assessing property value. The council should focus on creating a way for the necessary information to be readily available to sellers, buyers and real estate professionals so that full disclosure of property tax information is possible."

I'm not sure the government is the answer since the county is already providing a website that can be accessed by anyone with a computer. When a home is sold, the phase in homestead credits are no longer credits available to the purchaser. The buyer will be responsible for the entire tax bill. Take the time and see what the payment will be without the credits so you can factor the increase into your budget. It would be great for the seller/agent to provide true numbers, but it can't hurt to do your part and check things out.

Maryland Department of Assessments and Taxation
Real Property Data Search

Welcome to the Montgomery County
Property Tax Account Information and Bill Payment System

According to the Commerce Department sales are up! Woo-Hoo! I know what you're thinking because I'm thinking the same thing. Let's put this into perspective.

First of all this is a month to month stat. If only 100,000 homes were sold in October and November reported 200,000 homes sold, new home sales would be up 100%. The number isn't good but that percentage is great! There is a larger problem with this number, they're not actual numbers, just an estimate. Normally the trend is to "revise" after more data is in. A good example is prior to the most recent rate cut, the employment report showed a loss in new jobs. After more data was gathered the loss was revised to a gain. The job loss (estimate that was revised to a gain) was the catalyst for the rate cut that in turn gave the green light for equities to run. Funny how things work.

Take a look:

"Sales increased 4.8% to a seasonally adjusted annual rate of 770,000 from a revised 735,000 in August, an 11-year low. Previously, Aug. sales had been reported at a 795,000 pace."

So Aug numbers were originally 795,000 sales, right?

It was revised DOWN to 735,000.

Sept numbers were reported at 770,000, UP from August by a whole 4.8%? But wasn't the August number originally 795,000? Isn't that 25,000 less than was reported last month? But sales are up?

It's always good to understand that what you see and what you get aren't always the same thing. Look at the bright side, homes are still selling, just fewer than intially reported. I may revise my views next month.

I recently had a borrower who was provided a good faith estimate from another lender with a lower payment than I provided but identical terms. I reviewed his good faith estimate and I noticed immediately that the loan officer had not taken into consideration that the new tax bill would not initially include state and county Homestead tax credits.

What is the Homestead Credit? :

"The Homestead Credit limits the increase in taxable assessments each year to a fixed percentage. Every county and municipality in Maryland is required to limit taxable assessment increases to 10% or less each year. The credit is calculated based on the 10% limit for purposes of the State property tax, and 10% or less (as determined by local governments) for purposes of local taxation. In other words, the homeowner pays no property tax on the market value increase which is above the limit."

The Homestead Credit applies only to the principal residence of the property owner and is based on the total market value for the dwelling and land associated with the dwelling.

Example: You buy a home that was assessed at $200k and three years later it's assessed for $400k. Because of the Homestead credit, your tax will not jump up based on a $400k assessment but rather phase in 10% annually. Let's assume you decide to sell the home a year after it's assessed, the person buying your home will be required to pay the entire tax bill based on the $400k assessment and won't have the advantage of a phase in period

Having and understanding the correct tax bill is just as important as understanding the impact of an interest rate change. In both cases it will affect your final monthly payment. To put this in context, the borrower wanted a 30 year fixed principal and interest loan on $300k. The difference between 6.25% and 6.875% on $300k is only $123 a month. The difference in what he thought his taxes would be and what they actually were was $127 a month...

...or a total monthly payment increase from $2223.00 to $2350.00.

Take the time and make sure you understand what you're required to pay, not what the existing owners are currently paying. Get with your agent or request a copy of the tax bill so you understand and have proper expectations of what your true monthly payment will be.

Here's a link to the Montgomery County Property Tax Account Information and Bill Payment System:

https://www.montgomerycountymd.gov/apps/tax/index.asp

Below are a few FAQ's about tax credits pertaining to property tax bills that can be viewed on the link provided:

http://www.dat.state.md.us/sdatweb/real.html

Q: What is the Homeowners' Tax Credit Program?

A: The Homeowners' Tax Credit Program is a State property tax relief program that allows a property tax credit to households whose total gross income is below a standard set by law. This program provides property tax credits for homeowners of all ages depending on their incomes. In addition to the State's program, local governments can now supplement the amount subsidized by the State.

A: The Homestead Property Tax Credit, commonly referred to as the Assessment Cap, is a program for homeowners who qualify that limits the taxation of large annual assessment increases on a property owner's principal residence. For State tax purposes any annual assessment increase for a home or homesite that is greater than 10% is not taxed. Counties and municipalities may limit assessment increases for local tax purposes to less than 10% annually.

A: Each county and municipality is required to limit taxable assessment increases to 10% or less over the prior year's taxable assessment. The lower the percentage set by a local government, the greater the savings to the property owner. If, for example a county sets a 4% assessment cap, the local tax bill will increase by no more than 4% over the previous year's tax bill if the county uses the same tax rate. If the county uses the Constant Yield Tax Rate, your tax bill will be even less.

A: It is the property tax rate calculated by the Department of Assessments and Taxation that each local government must use to generate the same revenue as the previous year. If the local government wishes to raise the tax rate above the Constant Yield Tax Rate, it must advertise its intent to do so and conduct a public hearing to justify a tax rate increase.

A: Your tax bill is based on the spending needs of your local county or municipal government. An increase in the assessment does not necessarily cause an increase in taxes. Your tax bill is a direct result of your local subdivision's budgetary needs.