Obama’s FY2013 budget proposal includes an extension of the Mortgage Forgiveness Debt Relief Act of 2007.
The Act ensures that homeowners who received principal reductions or other forms of debt forgiveness on their primary residences do not have to pay taxes on the amount forgiven.
Without the Mortgage Forgiveness Debt Relief Act, debt reduced through mortgage modifications or short sales qualifies as income to the borrower and is taxable. Under the act, up to $2 million in debt elimination can be tax-free.
In the Treasury’s Green Book, its summary explanation of the administration’s budget proposal, it calls for an extension of the tax break due to “the continued importance of facilitating home mortgage modifications.”
The administration is proposing an extension that would apply to any amounts forgiven before January 1, 2015.
At that point, the government would reassess the market and determine whether another extension is appropriate.
Home prices in the U.S. are expected to post a decline of 1.57 percent for the fourth quarter of 2011, after falling 0.4 percent through September, according to more than 100 economists and housing experts surveyed by Zillow.
Prices are forecast to decline until the market’s bottom is reached in late 2012 or early 2013. After 2013, the panelists expect a relatively steady annual appreciation rate of roughly 3 percent through 2016, which is slightly below appreciation rates experienced during the pre-bubble years.
“There is a consensus among the nation’s top housing experts that we have not yet reached a bottom and are instead working through a prolonged bottoming process,” commented Dr. Stan Humphries, Zillow’s chief economist.
According to Humphries, negative equity, unemployment, and low consumer confidence remain the key factors delaying a true recovery in the housing market.
Terry Loebs, founder of Pulsenomics LLC, the firm that conducts the survey for Zillow, says the latest results
suggest expectations for recovery are no longer eroding, as has been evident in past studies.
“This is encouraging,” Loebs said, “but the average survey data are still consistent with a sluggish recovery scenario where eventual price increases will be less than those thought of as normal during the years preceding the national housing bubble.”
Looking at the expected housing market performance through the five year period ending in 2016, there continues to be significant variation among the panelists regarding their individual home price forecasts.
The most optimistic quartile of panelists projects nearly 18.3 percent price growth over the next five years, while the most pessimistic quartile projects a 1.4 percent decline.
“Given the current economic climate and uncertainty around the government’s future role in housing, it’s not surprising to see such a wide dispersion in long-term forecasts,” Humphries said. “As the market starts to stabilize, we should see individual forecasts start to converge.”
In the December survey, the panelists also offered their views on last month’s increase to loan limits for Federal Housing Administration (FHA) mortgages, as well as their assessments of the likelihood that the FHA would require a federal government bailout within the next two years.
The panelists were almost equally split on the loan limit increase, with 51 percent opposed and 49 percent in favor of it. Twenty-eight percent of the 91 panelists who expressed a view indicated the likelihood of a bailout of the FHA by the federal government within the coming two years as “high” or “very high.”
I get that the GSEs need to have policies in place to handle bad loans. If a borrower stops paying their mortgage, abandons the home and does not cooperate with their lender, then foreclosure is the best option. But how about adding a little rationale to handling those loans where the borrower is doing everything they can to avoid foreclosure and work with the lender? We had a few instances over the past year where we actually had a reasonable market value offer on a property and the GSEs opted to not postpone the foreclosure sale date instead of approve the short sale and give us an extra few weeks to close. In EVERY case, the net proceeds from the short sale offer we had would have generated a higher “net” to the GSE than the foreclosure did. Unfortunately, there continues to be poor decision making within the ranks at the GSEs and loan servicers. Until this gets rectified, homeowners will continue to pay the price.
Representatives from both Fannie Mae and Freddie Mac upheld the companies’ practice of assessing penalties against servicers who fail to meet defined timelines for processing foreclosures.
Speaking to mortgage professionals at the Five Star MPact Conference in Dallas, Steve Clinton, Freddie Mac’s SVP of single-family operations, said “clearly the better outcome for both Fannie and Freddie is to keep the borrower in the home” with a loan modification offered early in the default process.
But as Edward Seiler, a director in Fannie Mae’s National Servicing Organization, acknowledged, sometimes servicers are faced with a difficult decision – sometimes “a borrower just shouldn’t be in that home,” Seiler said.
In such a situation, it’s critical that servicers complete the foreclosure process in a timely manner to clear bad loans from the pipeline and limit losses for the GSEs and taxpayers, according to the companies’ execs.
Rep. Elijah Cummings (D-Maryland) recently began inquiring about policies in place at Fannie and Freddie that fine servicers when they don’t complete a foreclosure action within the window of time established by the GSEs’ servicing guidelines.
Cummings says internal records show the GSEs assessed $150 million in fines against servicers last year for not processing foreclosures fast enough.
“I am concerned that these penalties, at least some of which were ordered by the Federal Housing Finance Agency (FHFA), may have contributed to widespread abuses by mortgage servicing companies and law firms attempting to meet arbitrary deadlines to expedite foreclosures,” Cummings said in a letter sent last month to Edward DeMarco, acting director of FHFA.
Cummings cites a June 2010 report from FHFA’s Office of Conservatorship Operations which concluded that “servicers, attorneys, and other supporting personnel were overloaded with the volume of foreclosures … documentation problems were evident, and law firms … were not devoting the time necessary to their cases.”
Clinton and Seiler stress that the foreclosure timeline mandates come into play only after all loss mitigation options are exhausted.
“Our biggest problem was loans from a year and two years ago were just sitting there,” stagnant in the foreclosure pipeline, Clinton said.
Fannie Mae and Freddie Mac have synchronized their individual foreclosure timeline requirements with the coordinated Servicing Alignment Initiative that went into effect October 1.
Clinton notes that the timelines and penalties have been in place for some time, but with the newly enacted guidelines, the GSE have aligned their parameters in order to help simplify and standardize procedures for their servicers.
“We don’t want the money” from penalties, Clinton said, “we want the behavior,” in terms of servicer compliance with both foreclosure prevention and foreclosure processing procedures.
In today’s environment of mass default, Clinton says the industry needs mass loss mitigation – effective procedures, standardized evaluations, and timely resolutions.
Question: Why does it take so long to get a decision on my short sale offer?
Answer: A loaded question, to say the least. Response times can vary depending on institution, mortgage holder/investor, mortgage insurance company and the actual representative handling the file. Assuming the real estate agent is doing their job and the paperwork is complete and current, the main reason for it taking as long as it does to get a formal response on a short sale offer is generally due to the sheer volume of short sales being handled by these institutions. It is not uncommon for a short sale representative at one of the larger lending institutions to have between 300 and 500 active short sale files at one time. This not only makes the process inefficient, but also increases the likelihood of poor decision making and things falling through the cracks. As a result, consistent communication with the short sale "rep" is imperative.
Unfortunately, property depreciation is still occurring in a lot of markets. We are seeing more and more people pursuing a short sale in order to sell their homes. More specifically, we are seeing a growing number of those having to explore a short sale because they are relocating for employment reasons. They may be current on their payments, but their house is worth less than their mortgage balance and they do not have the financial resources to cover the shortfall.
Rising Negative Equity Puts More Than One in Four Underwater
After declining between the first and second quarters of this year, Zillow says negative equity rose again in the third, reclaiming all of the previous quarter’s decline and then some.
Zillow’s latest market analysis indicates 28.6 percent of American homeowners with a mortgage owed more on the loan than their home was worth as of the end of September. That’s up from 26.8 percent in the second quarter and 28.4 percent in the first quarter.
Dr. Stan Humphries, Zillow’s chief economist, explains that negative equity fell in the second quarter on the basis of sharp improvements in depreciation rates and flat foreclosure liquidation rates.
This quarter, however, Humphries points out that home values remained relatively flat while foreclosure rates slowed further. These two factors, he says, combined to increase negative equity.
While the pace of foreclosures has slowed, Zillow still describes liquidations as “high,” with nearly 9 out of every 10,000 homes going back to the bank through foreclosure.
Zillow’s third-quarter report shows that despite recent economic turmoil, home values in the United States remained almost unchanged from the second to the third quarters, declining just 0.2 percent.
Regionally, 105 out of 157 markets (67 percent) in Zillow’s study experienced quarterly declines. Only 26 markets saw appreciation on a quarterly basis.
Several markets, including Washington, D.C. and Fort Myers, Florida, saw declines in the third quarter after two consecutive quarters in positive territory.
However, Zillow says there are signs of stabilization in some of the hardest hit markets in Michigan. Ann Arbor, Grand Rapids, Detroit, and Lansing have all seen at least two quarters of appreciation.
The company’s national index is down 4.4 percent from the third quarter of 2010, registering a median home value of $171,500. Zillow says residential property values have fallen 28.8 percent since they peaked in June 2006.
With the steady drumbeat of negative economic news recently, Humphries says home values are holding up better than one might think.
Still, Humphries is sticking to his prediction that a true bottom in home values shouldn’t be expected until 2012 at the earliest, with negative equity and unemployment the two biggest factors preventing the market from stabilizing
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