The Tax Implications of Foreclosures

Foreclosure Tax Basics
A foreclosure transaction occurs when a mortgage lender repossesses a borrower’s property and then sells it to pay off the debt. In most cases, however, a foreclosure will only happen when the mortgage debt exceeds the property's fair market value, or FMV. In this situation, the federal income tax rules treat the foreclosure as a sale for the FMV amount.

Therefore, a tax gain will result if the property’s FMV exceeds its tax basis. (The tax basis of a principal residence usually equals the original cost of the property, plus the cost of any improvements.) On the other hand, a tax loss will result if the property’s FMV is less than the tax basis.

If a mortgage lender also forgives some or all of the debt against your property in conjunction with or after the foreclosure transaction, you have cancellation of debt (COD) income. That income is taxable unless an exception applies.

Remember: Just because your property is foreclosed doesn’t necessarily mean the lender will forgive any of the unpaid mortgage balance (the so-called deficiency). When there is no forgiveness, there is no COD income. That said, mortgage lenders in these tough economic times sometimes will forgive all or part of the deficiency, so COD income can be fairly common these days.

Don't Forget the Home Sale Gain Exclusion Break
Another thing to consider is whether or not you qualify for the federal home sale gain exclusion break, which allows an unmarried person to exclude (pay no tax on) a gain of up to $250,000 while married joint filers can exclude up to a $500,000 gain. To qualify, you generally must have: (1) owned the home for at least two years during the five-year period ending on the foreclosure date and (2) used the home as your principal residence for at least two years during the five-year period ending on that date.

The Bottom Line
Probably the most important thing to understand about a principal residence foreclosure is that the mortgage lender will not necessarily forgive any of the unpaid balance that remains after the property is sold. However, in the current environment, some forgiveness would not be unusual. Also, keep in mind that you may not know for quite a while after the foreclosure whether anything will be forgiven.

Tax-wise, the most important thing to understand is that a foreclosure can potentially result in a taxable gain, and it might result in some taxable COD income, too.

Fortunately, with a principal residence foreclosure, an otherwise-taxable gain can often be excluded for federal purposes thanks to the home sale gain exclusion break (state income tax results can vary). Also, some or all of the COD income may be tax-free thanks to favorable tax-law exceptions. However when no exception applies, the COD income is fully taxable.

Mortgage approvals rise in May

The number of mortgages being approved rose by 15.8% year-on-year during May, reaching 31,162 in total, according to new statistics from the British Bankers' Association (BBA).

This figure marks a continuation of a trend seen during the last six months, with the number of house purchase loan approvals, along with their average value, increasing steadily.

However, the BBA indicated that the mortgage market as a whole was still struggling, with net new lending standing at £2.3bn for May, the weakest monthly increase since early 2001.

Net new lending stood at £2.5bn in April.

"Steady monthly increases since last November have seen the number of loans approved for house purchase recover to levels seen in early 2008, although gross and net mortgage lending show a subdued wider mortgage picture," said BBA statistics director, David Dooks.

"However, unlike much of the mortgage market, the high street banks are still seeing lending growth and improved mortgage availability is reflected in higher average loan approval values."

Have Mortgage Delinquencies Hit Rock Bottom?

It is baffling just how many homeowners are going belly-up in their loans, especially considering that there are copious mechanisms in place to save those who are facing foreclosure or even see themselves nearing the road to foreclosure. The foregoing not withstanding, there is a school of thought that suggest that mortgage delinquencies have not yet hit rock bottom. Economists state that seven out of 100 homeowners are currently delinquent on their mortgage loans.

What makes matters is the number of those who are barely hanging on to their homes and who are being laid off, overtaken by consumer debt, and also fell victim to the lure of easy equity when they could ill afford to take out any money from their homes. Now upside down in their loans, there is no chance of refinancing and rescue is available only by qualifying for one of the government programs. Perhaps it is the notion that homeowners are finally seeking help that makes the Mortgage Banker’s Association comment on a decline in new foreclosure filings.

Unfortunately, investors are not buying the good news, especially since the drop in foreclosures could be the loans currently on hold while awaiting a decision to see if homeowners are eligible to participate in any one of the governmental programs. Thus, there is a good chance that the actual number of halted foreclosures may be unduly watering down the foreclosure rates, seeing that not all halted foreclosures will actually result in saved loans. In these cases, the halted foreclosures may buy some time, but eventually become foreclosures nonetheless.

With the upset in the housing market, the upset in the employment numbers does not bring any good news. As a matter of fact, states that are considered ground zero for the mortgage meltdown – Nevada, Florida, Michigan, and California – also report skyrocketing unemployment as well as projected job losses that are yet to hit the ailing economies of these states. Speculations are rampant that further economic downturns are likely to happen. When this occurs, the next wave of foreclosures is going to continue dragging down the markets locally but also nationally.

As such, it is a safe bet that mortgage delinquencies have not yet hit rock bottom, and may actually still be in the mid stages of their freefalls. This is especially true considering that other forms of mortgages are now beginning to also join the subprime mortgages in their foreclosures. With so many consumers living from paycheck to paycheck, even the loss of only one or two such paychecks can hail fiscal disaster for the consumer, and by extension for the lender who holds the mortgage papers.

Although not saying so loudly, investors are leery to once again jump headfirst into the mortgage market and not even the government incentives are sufficient to have them change their minds. This of course begs the question what it will take to once again make them comfortable to invest in the housing market. Some speculate that only governmental coercion could accomplish this feat, while other hope that a slowdown in foreclosures will be enough for the more daring ones to once again infuse cash into the housing market.

More fixed-rate mortgages go up

More big lenders have increased the cost of their fixed-rate mortgages for new borrowers.

The Abbey, the UK's second biggest mortgage lender, has put up the cost of its fixed-rate deals by between 0.25% and 0.5%.

Lloyds banking group has also made some of its fixed-rate deals more expensive.

The trend started last week when the Nationwide building society raised the cost of all its fixed-rate home loans by up to 0.86%.

The main factor behind the changes has been the increasing cost of swap rates.

These are the fixed rates at which banks and building societies borrow money from each other, for specified periods of time, to fund these particular mortgage deals.

"Swap rates have increased substantially in May and June and in particular last week," said Nici Audhlam-Gardiner, director of mortgages for the Abbey and the Alliance & Leicester, both run by the Spanish bank Santander.

"Following competitor moves and further swap rate increases, it has become necessary to increase the rates on some of the deals we offer," she added.

Going up

Other lenders which have taken similar steps recently are the Woolwich (part of Barclays), Northern Rock, Cheltenham & Gloucester (part of Lloyds) and the Halifax (also now part of Lloyds).

Fixed-rate deals have become very popular again in the past few months.

During April 69% of all new home loans were at fixed-rates, according to the Council of Mortgage Lenders (CML).

With the Bank of England's Bank rate still at a record low of just 0.5%, the expectation is that the official cost of borrowing can only go up when it is next changed. Some suggest therefore it may now be a good time to fix the cost of a home loan.

"People thinking of taking out a fixed-rate should not delay, but should move as quickly as possible," said Melanie Bien, of mortgage brokers Savills Private Finance.

"I think rates will go higher still."

According to the financial information service Moneyfacts, the average cost of a two-year fixed-rate loan, for someone with a 25% deposit, is currently 4.28%.

For borrowers who can only put down a 10% deposit the average rate is higher at 6.06%.

A Mortgage Modification While Unemployed Is Not Impossible

Some homeowners think that getting mortgage modification while unemployed is impossible. This couldn’t be further from the case. While it is true that you will have a more difficult time being approved for a mortgage modification while unemployed, many lenders do accept homeowners who currently do not have a job.

Unemployment is no rarity in today’s economic climate, and lenders are coming to cope with that.

Even someone who used to have a very stable position in their company is at risk at layoffs these days. Homeowners from all walks of life with homes that range in value from $60,000 dollars to $700,000 dollars are having problems sending in that monthly check to their mortgage lenders. Families who were having trouble before are facing impending foreclosure while those who were secure are now having trouble making ends meet.

If you are currently unemployed, it’s important to highlight your possible financial possibilities in the near future and how you are planning to handle your mortgage after the modification.

If you receive unemployment checks, your chances are higher to be approved that someone who is not. In some cases you get the same chances as someone with a job, depending on your debt to income ratio. If you bring in enough through unemployment and do not have many expenses, your chances for approval are significantly higher than otherwise.

Your best chance for getting mortgage modification while unemployed is for you to state your case in your hardship letter. The hardship letter tells the lender what is going on with you right now and why you can’t pay your mortgage at the current interest rate. And on top of that, you let the lender know your plans for getting out of your financial troubles and how you’re going to handle the payments once the modification is approved.

Lenders are looking for homeowners who are going to be able to pay the new mortgage rate after loan modification. Even if you’re unemployed, the lender will still consider you if you show that you have a real intent to get back on your feet and work with them.

Some lenders, like Citibank, are even reaching out to homeowners who have lost their jobs and attempting to work with them towards lower interest rates to keep them in their homes. Foreclosure doesn’t help anybody, and lenders know that more than anyone else.

Do you want to know how to get a mortgage modification while unemployed? Show you’re confident you’ll be on your own two feet again and tell your lender that you will do anything to stay in your home. It may just work.


By: Lindsy Emery

Regulator Says Mortgage Aimed at Elderly May Be Risky

By Margaret Chadbourn

June 8 (Bloomberg) -- Comptroller of the Currency John Dugan said a type of mortgage sold to older homeowners may pose the same risk as subprime loans, and that his agency was slow to act as rising foreclosures led the market to collapse.

“We all could have sounded the alarm earlier about risks that were developing in the subprime mortgage market,” Dugan said at an industry conference in Orlando, Florida, as he raised concerns about so-called reverse mortgages. “It is imperative that our consumer protection standards be robust.”

Congress stepped up efforts to curb predatory lending practices and halt foreclosures after the subprime mortgage market collapse in 2007. Lawmakers passed a $700 billion package that was signed into law in October and sought to shore up the financial system and halt the record pace of foreclosures.

“While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages - and that should set off alarm bells,” Dugan said at the American Bankers Association conference on compliance issues. “Now is the time to get out in front of this issue - before real problems develop.”

A combination of job losses, lower pension benefits and declining values in retirement accounts will increase demand for reverse mortgages as homeowners older than 62 seek to increase their income by using the equity in their homes, he said. The loans are often attractive to lenders because insurance from the Federal Housing Administration limits their losses, he said.

Guidelines

Dugan said OCC will release guidelines on reverse mortgages, which let a homeowner borrow without having to make payments until they die, sell the home or fail to pay taxes. Regulators should establish more rules for borrowers and lenders, including requiring escrows for taxes on reverse mortgages, he said.

Risks that contributed to the collapse of the subprime- mortgage market also are a concern in the sale of reverse mortgages, Dugan said. Complex lending products have the potential to result in “skewed incentives” for servicers that are underwriting reverse mortgages, and the product is “fraught with consumer compliance concerns,” he said.

Dugan, who regulates more than 1,500 banks including units at Citigroup Inc. and Bank of America Corp., said the agency needs to be on “constant alert to emerging risks” and remain vigilant on regulatory compliance. He said lenders contributed to the worsening economy by using loose underwriting standards and failing to adequately protect consumers.

The Department of Housing and Urban Development has estimated borrowers with lines of credit often withdraw at least 60 percent of their funds once the loan is approved, Dugan said. HUD pledged to develop programs that give financial counseling to consumers, including those with reverse loans, he said.

Insurance deals need to cover valuable possessions

New research shows that two-thirds of respondents have a potentially valuable collection of items but many are unaware of how much it is worth.

Findings from Halifax Home Insurance revealed that 47% said they do not know how much their items could be worth while a further one in 10 have no home contents insurance in place.

Additionally, 38% think their valuables are covered but are not certain about the policy details.

David Rochester, head of underwriting at Halifax Home Insurance, said: "Although in many cases collectables are unique and irreplaceable, most people would at least want to recoup any financial loss in the event of them being stolen or damaged.

"We'd recommend anyone who has a potentially valuable collection to get it valued by an expert every two years and ensure they obtain a dated copy of the valuation certificate."

The survey also showed that 19% of people said they were keeping these collections in the hope that they will increase in value in the future.

Rate standstill prompts advice to fix home loans

BORROWERS were advised yesterday to lock in to a fixed rate mortgage after comments from the European Central Bank were interpreted as signalling an end to the current cycle of rate cuts.

Economist Austin Hughes of KBC Bank said it was now likely eurozone rates would not go below their current level of 1pc even if the first hike in interest rates seems far away.

Comments from ECB president Jean-Claude Trichet yesterday indicated that central bankers believe the worst is over for Euorpean economies, but that the turnaround would be slow.

Mortgage

Mortgage adviser Karl Deeter of Irish Mortgage Brokers warned that some fixed rate mortgages have already started to rise.

In March, before the ECB dropped its main rate to 1pc, homeowners could get a five-year fixed rate of 3.6pc from AIB, but now that has crept up to 3.69pc.

"Profit margins are moving upwards while the ECB's base rate moved down. Already that means you'll pay just over €20 per month more on a €300,000 mortgage."

Mr Deeter said the danger of a return to inflation was evident. Any rise in inflation would spark the ECB to start pushing up rates.

Commodity prices, such as gold, copper and oil, were all rising. These were all signs that inflation is coming, Mr Deeter said.

Frank Conway of Irish Mortgae Brokers said the cycle of interest rate rises appears to have run its course.

Mr Conway said that with fixed rate so low, the argument for fixing has never been stronger.

"For consumers who have experienced savage wage cuts (in the private sector) as well as increased taxation by way of income and pension levies, fixed-rate mortgages can provide excellent insulation against rising mortgage repayments.

"They also become a great budgeting tool for homeowners who need to manage their day-to-day finances," Mr Conway said.

The Professional Insurance Brokers' Association (PIBA) said consumers should consider fixing, but not at any price.

Its chief executive Diarmuid Kelly said some short-term fixed rates may not be optimal if interest rates rise substantially within the next two years.

"PIBA would caution against such short-term fixed rates, as they may not represent value taking account of likely medium term economic realities.

"The kind of stimulus packages being injected into the US and belatedly European economies are likely to lead to increased inflation to which the natural economic response will be increased interest rates.

"For an extra payment of €96.14 per month on a loan of €190,000 a person can avail of a five-year fixed rate rather than a two-year fixed rate giving them security against upsurging interest rates after this deflationary period," he said.

Months later, flood recovery still ongoing

TUMWATER, Wash. -- Most of the Tumwater Fish Hatchery is back up and running, but not all.

The Deschutes River backed up so high in January that the water level rose up to 6 feet, filling a huge space near the fish ponds with gravel, sand and other debris.

Crews have been dredging out the buildup, but their work isn't done. Part of the lower fish ladder still needs work.

The gushing waters also wiped out a safety fence where people can stand to get a good look at the falls, and will cost close to $3,000 to replace it.

"These are a bunch of small projects where that we're working," said Willie Nunn of FEMA.

The damages were small by FEMA standards, but large to most counties that don't have tens of thousands of dollars to spare for repairs. Thirty three of the state's 39 counties have ongoing repair projects.

FEMA works closely with the state to make sure each of those projects is getting done since they involve community infrastructure. But they also work closely with homeowners to make sure they're getting the help they need.

"If they feel that something's missing they need to call back, they need to let us know. They need to let the state know. Because if we don't don't know, we can't help," said Nunn.

Now, FEMA and the state are pushing to prevent the damages from recurring in future storms.

"If you've been flooded, you may qualify or be eligible for a mitigation grant that would elevate your home so that we can turn around and prevent the flooding in the future," said Kurt Hardin of the state Department of Emergency Management.

Studies indicate each dollar spent to prevent damage saves taxpayers $4 in repairs.

And residents shouldn't skip flood insurance, even if they don't live in a flood-prone area. Over the course of a 30-year mortgage, a homeowner's risk of flooding is one in four while the risk of fire is just one in ten. And one third of all flood insurance claims are by residents who live in low-risk communities.

"If a water main breaks and they get flooded, they may not be eligible for any assistance except flood insurance," said Hardin.