The Nation's Housing
Reporting and analysis of tax laws, mortgages and markets make for indispensable real estate coverage. Once a week.
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WASHINGTON -- Call it buried tax treasure for homeowners: Deep inside the behemoth 654-page bipartisan budget bill recently signed into law by President Trump are little-noticed extensions of key tax-code benefits that expired in 2016, but now can be used for upcoming 2017 tax filings.

Potentially the most popular is aimed at millions of buyers and owners who pay mortgage-insurance premiums on conventional, FHA and VA loans. Roughly 4.1 million owners took write-offs averaging more than $1,500 during 2015, the most recent year for which statistics are available. Mortgage-insurance industry officials predict that at least that many will be able to qualify for the benefit on their 2017 tax returns -- provided they learn the deduction has been revived for the year.

Mortgage insurance is designed to cover a portion or all of a lender’s risk of loss in the event of default on home loans where borrowers make less than a 20 percent down payment. The coverage is especially commonplace -- and important -- on mortgages made to first-time purchasers and to households with moderate or lower incomes. Fees are either folded into borrowers’ monthly payments or paid in a lump sum up front.

Congress first authorized tax deductions for mortgage-insurance premiums more than a decade ago, but legal authority for the write-offs lapsed at the end of 2016. The new budget bill provides for a retroactive extension for premiums paid during 2017, but it’s silent about future deductions, including for 2018.

To qualify for the benefit, borrowers must pass a couple of tests: The home securing the insured mortgage must have been their principal residence during the year rather than a second home or investment property. And their adjusted gross income must have totaled less than $100,000. Deductible amounts phase down to zero for taxpayers with incomes up to $110,000.

Another popular tax-code provision brought back to life retroactively for 2017 filings: Elimination of tax liability on mortgage debt forgiven by lenders in connection with short sales, foreclosures and loan modifications. Without this special exception to the law, financially distressed homeowners would otherwise be subject to the tax code’s traditional, harsh treatment of canceled debt: Any amounts forgiven are taxed as ordinary income, at regular marginal rates -- essentially hitting owners with prodigious tax bills at the very time they are least able to pay, following a foreclosure or short sale. If, for example, a lender wrote off $100,000 as part of a short-sale arrangement, the IRS could demand income taxes on that $100,000, despite the fact that the sellers had lost all their equity and were in bad financial shape already.

Originally passed by Congress during the housing crisis of the last decade, the special exception benefited thousands of owners who struggled with job losses, medical bills and other financial challenges during the Great Recession and the years following. Though foreclosures and short sales have declined steadily during the post-recession recovery, they are still a significant presence in the real estate market. According to ATTOM Data Solutions, lenders started the foreclosure process on nearly 384,000 properties during 2017. The amounts canceled by lenders often range into the tens of thousands or hundreds of thousands of dollars; some exceed $1 million.

Though Congress renewed the special housing exception to the debt-forgiveness rule multiple times, it expired at the end of 2016. But under the new budget-bill agreement extension, homeowners who had mortgage debt canceled by their lender during 2017 may be eligible for tax relief. IRS guidelines for the program are spelled out in the agency’s Publication 4681. Maximum eligible amounts of mortgage debt canceled range up to $2 million ($1 million if you’re married filing separately).

Other potentially useful expired tax benefits that were revived retroactively for 2017 under the budget agreement involve energy-conserving improvements made to your home. The new extension allows you to get a tax credit of 10 percent of what you spent on certain improvements such as insulation, energy-efficient windows and doors and roofs. The cost of installing the improvements cannot be included in the calculation of the credit amount.

You may also be eligible for a credit for high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel. Note that there are limits on the total credit you can claim. To qualify, you’ll need to have installed your “qualified improvements” in your principal residence -- no second homes allowed -- no later than Dec. 31, 2017.

Ken Harney’s email address is Harneycolumn@gmail.com.

(c) 2018, Washington Post Writers Group

WASHINGTON -- Could predatory lending practices affecting veterans also be inflating interest rates paid by thousands of unsuspecting home buyers using FHA loans?

The answer appears to be yes -- and the underlying abuses in home loans to veterans are prompting action by federal authorities and legislation on Capitol Hill.

Here’s what’s happening: According to officials, some lenders active in the Department of Veterans Affairs (VA) home-mortgage program have been inducing borrowers to refinance their loans frequently in order to generate fat fees for the lenders themselves, rather than benefiting veterans with lower costs or better loan terms.

The lenders use baiting tactics reminiscent of the housing-boom era -- “teaser rates,” promises of zero payments for one or two months, refunds of escrows, switches from long-term fixed rates to short-term floating rates, and a grab-bag of bogus claims about saving money. In fact, many veterans have ended up paying more for their loans after the predatory refinancings, and some have found themselves left with little or no equity in their homes. Officials estimate that anywhere from 12,000 to 20,000 veterans have been affected by these marketing tactics during recent years.

All this may sound horrible, but it gets worse: Abuses in the VA mortgage-lending arena have spilled over onto borrowers in the much larger Federal Housing Administration (FHA) market, which primarily serves first-time home purchasers and others who lack significant cash for a down payment.

The linkage is via a little-publicized but exceptionally important agency, the Government National Mortgage Association or Ginnie Mae. Ginnie connects individual home buyers and refinancers using federal mortgage programs with deep-pocket investors around the world -- giant pension funds and banks, among others. Ginnie pools VA, FHA and U.S. Department of Agriculture rural housing loans into mortgage bonds, and provides a federal guarantee of timely payments to investors.

The inevitable result of the VA lenders’ predatory activities is an unusually high number of refinancings within the pools, which disrupts the expected long-term payment flows to investors. That, in turn, prompts investors to lower what they’ll pay for the bonds, and has the side effect of raising lenders’ interest-rate quotes to VA, FHA and rural home buyers and refinancers.

Michael Fratantoni, chief economist for the Mortgage Bankers Association, told me “it absolutely impacts interest rates” adversely when investors cut the prices they’ll pay for Ginnie Mae bonds. It sounds complicated, but the simple fact is this: If pension funds or banks are less enthusiastic about Ginnie’s bonds, individual borrowers sitting across from loan officers or making applications online end up paying higher interest rates on their government-backed loans.

Michael R. Bright, executive vice president and chief operating officer of Ginnie Mae, estimated in an interview last week that the abuses in VA refinancings have caused interest rates on FHA, VA and rural housing recently to be one-quarter of a percent to one-half of a percent higher than they otherwise would have been.

What does that mean in dollar terms to applicants? Steve Stamets, senior loan officer for The Mortgage Link Inc. in Rockville, Maryland, told me that on a $300,000 FHA loan, a half a percentage point rate increase could add more than $1,000 a year to a home buyer’s payments.

“It’s heinous,” said Ted Tozer, immediate past president of Ginnie Mae. “People don’t realize this affects all borrowers who are getting a [government-backed] home loan.” Given the fact that FHA alone insured 882,000 new single-family-home purchase loans in fiscal 2017, you can begin to grasp how many borrowers may have been overcharged on their mortgage interest.

What’s being done to end this scandal? Last week, Ginnie Mae announced that it has notified a small group of lenders who allegedly have been abusing veterans on refinancings that they face potential exclusion from Ginnie’s principal bond program if they don’t stop what they’ve been doing. That would effectively cut them off from their main source of institutional funding for loans -- a severe penalty. The agency did not identify specific lenders, but Bright told me the first penalties could be imposed as early as next month.

Meanwhile a bipartisan group of senators has introduced legislation that would block lenders from foisting rotten refi deals on VA borrowers. The “Protecting Veterans from Predatory Lending Act,” co-sponsored by Sens. Thom Tillis, R-N.C., and Elizabeth Warren, D-Mass. The legislation would require lenders to produce a “net tangible benefits” analysis -- demonstrating real savings to borrowers before initiating a refinancing and guaranteeing decreases in interest rates.

Ken Harney’s email address is harneycolumn@gmail.com.

(c) 2018, Washington Post Writers Group

WASHINGTON -- Were fears overblown that changes to the federal tax law would trigger plunging home values?

You might recall the scary predictions from the realty industry and some independent economists that began last fall: Cutting tax benefits for homeowners would inevitably lead to declines of 4 to 10 percent in home prices, and maybe even more for upper-bracket properties in high-tax areas.

So how are those dire warnings holding up? It’s still early in the game for hard statistical answers. But it’s not too early to gather anecdotal evidence on whether buyers -- citing higher tax burdens -- are pushing asking prices downward, or whether sellers are caving or resisting.

To get answers, I contacted realty agents and economists who keep a close eye on consumer behavior in markets around the country. The consensus was summed up best by Ralph McLaughlin, chief economist of Trulia, a San Francisco company that tracks prices and local market trends in hundreds of communities. Price declines are nowhere in sight yet and cannot be totally ruled out, he said, but “we think the potential negative impacts (of the tax bill) will be muted by the likely fact that most households will actually have more money in their bank accounts at the end of the year because of the tax plan.”

That plus the ongoing shortages of inventories of homes for sale -- along with strong buyer demand, low unemployment and wage growth -- may offset whatever tax deduction concerns might otherwise be taking shape. Cheryl Young, senior economist at Trulia, cited the latest Standard & Poor’s Case Shiller index, which documented steadily rising prices in most markets.

“Early versions of the tax-reform bill in November threatened to put downward pressure on prices in expensive and high-tax areas as proposals on caps to the mortgage-interest tax deduction and state and local tax deductions ding demand,” according to Young. “But the proposals didn’t cause a ripple in November home prices.” In fact, prices in San Francisco, considered one of the most vulnerable cities for price declines of super-jumbo-sized mortgages and high taxes, rose by 9.1 percent year-over-year. Case Shiller’s 10-City index rose by 6.2 percent in November.

None of this is to suggest that the financial impacts of the tax law are being ignored by buyers and sellers. To the contrary, realty agents say clients, especially those preparing to enter the marketplace, followed the tax provisions carefully as they moved through Congress, and they have a good sense about what the changes mean to them in practical terms.

Noah Goldberg, an agent with Redfin in Jersey City, N.J., says clients “were waiting on the sidelines at the end of the year due to the uncertainty around tax reform.” But “now that (they’ve) had a chance to calculate the monthly costs, income taxes and deductions,” they’re streaming back. Some buyers have told Goldberg that the lower federal income taxes they’re likely to owe will offset the real estate deductions they’re likely to lose. So the net effect could be a wash.

Some sellers and buyers, however, are definitely factoring higher real estate taxes into their transaction equations -- either as a reason to price their properties more reasonably at the listing stage or to urge sellers to lower their price during negotiations. Chicago real estate broker Alexis Eldorrado says some sellers of upper-bracket properties have become more flexible on their initial asking prices, knowing full well that buyers may come in with Excel spreadsheets detailing how their tax bills are going up. Jill Eber, a Miami, Florida, broker, told me that tax law may actually be driving some owners from high-tax states to tax-friendlier Florida.

“We’re hearing from more people from New York, the Northeast and California than usual,” she told me in an interview, and some are specifically citing the tax bill as a reason for considering switching domiciles. What impact that might have on pricing isn’t yet clear, however.

In the Washington D.C. suburbs, the revised tax rules are changing some buyers’ and sellers’ behavior, say agents. Kris Paolini, a Redfin agent in Bethesda, Maryland, says some buyers “are trying to use taxes and the predictions that prices will fall as a negotiating point, but sellers aren’t buying it.”

Bottom line: The post-tax-bill real estate scene is still evolving, and any price declines aren’t visible yet, if indeed they are even coming. Other factors -- inventory pressures, growth in the broader economy and interest-rate changes -- could prove to be at least as important as taxes in influencing home prices as the year takes shape.

Ken Harney’s email address is harneycolumn@gmail.com.

(c) 2018, Washington Post Writers Group

About
Newspaper readers have a trusted friend in Kenneth Harney's award-winning real estate column, "The Nation's Housing." That's because week after week he focuses on the real issues faced by today's record number of homeowners -- complicated tax problems, the settlement fee thicket, credit scores and credit files – and guides readers to smart solutions.
Millions of readers have saved – and will save – money because of Harney's undeviating attention to the American housing consumer's best interests.
Over the years, Harney's columns have contributed to key pieces of housing reform on Capitol Hill and in federal agencies, including cancellation of private mortgage insurance premiums, better disclosures on refinancings, restrictions on private transfer fees, and prohibitions against loan transfer abuses and predatory mortgage servicing practices.
Personal
Harney lives in Chevy Chase, Maryland, with his wife Andrea. The couple has four grown children who live in Shanghai, San Francisco, New York, and Silver Spring, Maryland.
Professional Experience
Member of the Federal Reserve Board's Consumer Advisory Council
Member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination
President and chairman of the board of the National Association of Real Estate Editors
Continues to be a member of NAREE's board of directors