A surprise on write-off’s cost

Feb 15, 2013 by Kenneth R. Harney

WASHINGTON — In the contentious debate over whether to reduce or eliminate the home-mortgage interest tax deduction — or leave it alone — one fact has been virtually unchallenged: The popular write-off used by millions of American owners costs the government massive amounts of revenue, somewhere in the range of $100 billion a year.

This adds to the federal deficit and debt, and has ranked the deduction high on the hit list of most tax reformers’ agendas, including the bipartisan Simpson-Bowles deficit commission’s plan. President Obama himself called for limiting it throughout his first term in office, and ran on a platform to pare down its costs in his re-election campaign. The compromise congressional tax package that ended the “fiscal cliff” crisis Jan. 2 also contained a limitation on the mortgage write-off, targeted at high-income taxpayers.

But hold on. How much does allowing owners to deduct the interest they pay on their home loans really cost the government? Congress’ technical experts on the subject have come up with new estimates that should figure into congressional deliberations expected later this year on overhauling the federal tax code. Their findings: The mortgage write-off costs tens of billions of dollars less than the government previously believed.

One day after the Internal Revenue Service released its latest instructions for homeowners on claiming the mortgage-interest write-off for the upcoming tax season, the nonpartisan Joint Committee on Taxation published revised estimates indicating that because of changes in the economy and tax legislation, the cost of the deduction for fiscal 2013 will be $69.7 billion.

That’s a dramatic reduction from the committee’s own earlier numbers. In a projection released in January 2010, it said the cost of the mortgage write-off in fiscal 2013 would hit an all-time high of $134.7 billion. Under the revised estimates, costs will slowly rise into the $70 billion-plus range over the coming several years and will only exceed $80 billion in fiscal 2017, when they hit $83.4 billion.

Sure, these are all eye-glazing, monstrous numbers. And there’s no question that mortgage write-offs can be criticized for being skewed toward wealthier owners, especially in higher-cost markets on the West and East Coasts. But the fact remains: There’s less fiscal meat here than previously advertised. The write-off is still a large and vulnerable target, but it’s not as costly as widely portrayed. You could even argue that if congressional tax reformers are looking for reductions in projected “tax expenditures” to reduce deficits, they just got a nice chunk via the revised estimates from the Joint Tax Committee, their own in-house technicians.

The same committee also just lowered its earlier estimates on local property tax write-offs by homeowners. Rather than the $30 billion cost for fiscal 2013 projected back in 2010, the updated estimate is now $27 billion. The only significant increase in the revised projections: Thanks in part to improvements in the housing market, capital gains exclusions — the $250,000 and $500,000 amounts that single and joint-filing homeowners respectively get to pocket tax-free on profits when they sell their primary homes — will cost the Treasury $23.8 billion in 2013, rather than the $19.8 billion estimated in 2010. In the curious world of tax subsidies, good news — in this case, home values — costs the government more.

Meanwhile, the IRS has released its latest instructions for owners seeking to take the mortgage-interest deduction in the coming tax-filing season. Among some noteworthy points:

FHA fees pack a bite

By Kenneth Harney

Posted: Friday, Feb. 08, 2013

Kenneth Harney, who lives in Washington, D.C., writes an award-winning column on housing and real estate.

If you want to buy a house with minimal cash by using an FHA-insured mortgage, here’s some sobering news: Thanks to an ongoing series of fee increases and underwriting tweaks – the most recent of which were announced Jan. 31 – FHA is getting steadily more expensive, and may not work for you.

FHA is the Federal Housing Administration, the largest source of low-down-payment mortgage money in the country. Its minimum down is just 3.5 percent, compared with anywhere from 5 percent to 20 percent or higher from conventional, nongovernment sources. For decades, FHA’s affordable financing has made homeownership possible for first-time buyers with modest incomes and credit history blemishes.

But in the wake of losses tied to bad loans insured during the housing bust years, FHA has been raising its loan insurance fees and backing more loans to applicants with higher credit scores. With the latest increases, things have gotten to the point where some lenders wonder whether the agency is trying to move away from its traditional customers.

Dennis C. Smith, broker and co-owner of Stratis Financial Corp. in Huntington Beach, Calif., is blunt: “I think FHA is putting itself out of business with the moves they’ve made in the past couple of years.”

While they wouldn’t agree with that assessment, FHA’s top officials readily admit that their priority is not growing market share but protecting the agency’s multibillion-dollar insurance fund reserves and cutting losses.

Starting April 1, FHA’s annual mortgage insurance premiums for most new loans will jump by one-tenth of a percentage point (10 basis points in lending parlance). This is on top of two previous increases since 2011. Other coming changes, but not scheduled to take effect until June 3, include: mandatory “manual” underwriting of applications by borrowers whose total household debt-to-income ratios exceed 43 percent and who have credit scores below 620; and mandatory 5 percent minimum down payments on FHA loans above $625,500 in high-cost areas such as California, metropolitan Washington, D.C., and others.

FHA also announced that as of June 3, it is rescinding its popular policy of canceling mortgage insurance premium charges for borrowers once their loan balance declines to 78 percent of the original amount. This will force FHA customers to pay premiums for as long as they keep their loans, and is in stark contrast to the private mortgage insurance market, where homeowners can request cancellation of premium payments once their loans hit the 78 percent mark.

“That stinks,” said Steve Stamets, a mortgage officer with Apex Home Loans in Rockville, Md. “It’s just a money grab” that will cause creditworthy borrowers to avoid FHA and seek out low-down-payment alternatives through Fannie Mae and Freddie Mac, using private mortgage insurance.

Already, said Stamets, FHA is the more expensive option for many borrowers who have good credit but don’t want to make hefty down payments. With FHA’s new fees, for example, Stamets estimates that an applicant with a 720 FICO score making a 3.5 percent down payment on a $250,000 fixed rate 30-year FHA mortgage will pay $144.66 more a month than a borrower with the same credit score on a conventional loan of the same amount with a 5 percent down payment and private mortgage insurance. Even with a 680 credit score, the conventional loan is cheaper by $85 a month – based on FHA’s new fee levels, said Stamets, and those monthly premium payments can be canceled at the 78 percent loan-to-value level whereas FHA will keep charging them for the life of the mortgage.

Steven R. Maizes, managing director of mortgage banking for Mortgage Capital Partners Inc. in Los Angeles, says FHA’s new fees and policies are likely to cost the agency valuable, low-risk business on refinancings. Maizes recently ran a spreadsheet analysis for a client with a $460,000 FHA loan at 5 percent. Even with a 1.5-point rate reduction, the added fees caused the monthly payment to decrease by just $97.11.

“If you couple that small saving with the fact that the mortgage insurance payment can never go away,” he said, refinancing an existing FHA loan for a creditworthy borrower into a new FHA loan will be tough to justify.

Bottom line for you: Make sure your loan officer runs the numbers comparing FHA with privately insured conventional alternatives. You may not want to be saddled indefinitely with higher payments – and no right to cancel.

Read more here: http://www.charlotteobserver.com/2013/02/08/3839913/fha-fees-pack-a-bite.htm l#storylink=cpy

Caught in a reverse nightmare

By Kenneth Harney

Posted: Friday, Feb. 01, 2013

The federal Department of Housing and Urban Development has a birthday gift for 91-year-old widow Jeanette Ogle that should cause any senior to think twice before signing up for a government-insured reverse mortgage.

Later this month, on Ogle’s 92nd birthday, her home in Lake Havasu City, Ariz., is scheduled for foreclosure – not because she did something wrong. Instead, she is expected to lose her house because during a refinancing in 2007, only her husband’s name was included on the reverse mortgage documents prepared by a loan broker. This was despite the fact that both her husband’s and her names were clearly listed as co-borrowers in the documents for the mortgage being refinanced, Ogle says, and the longtime married couple wanted no change in that status.

But under a controversial policy that is drawing national scrutiny and at least one major lawsuit, HUD – the agency that runs the reverse mortgage program – now insists that when a spouse dies, and the surviving spouse’s name is not on the loan documents, the full mortgage balance becomes due and payable. If a relative or the surviving spouse cannot purchase the house and pay off the debt, the loan may be subject to a foreclosure sale.

Ogle, whose husband, John, died in 2010, says she cannot imagine why she is facing foreclosure. “We did everything we were supposed to do,” she says. “I signed every piece of paper, we followed the rules.” Jeanette and John assumed that the loan they initially took out in 2004 would allow them to do what advertisements for reverse mortgages consistently promise: stay in their home indefinitely, with some extra money for living expenses.

But it’s not turning out that way.

“I just don’t understand why they are doing this to me,” she said in an interview. “I don’t want to lose my home.”

HUD’s reverse mortgage program, run through the Federal Housing Administration (FHA), has been big business. Promoted on TV by pitchmen such as Hollywood’s Robert Wagner and former Sen. Fred Thompson, there were 582,000 loans outstanding nationwide as of November 2011, according to the Consumer Financial Protection Bureau, which issued a critical evaluation of the program last year. Reverse mortgages are restricted to seniors 62 years or older. The program allows homeowners to tap into equity and pull out money for use in their retirement years. As long as they pay their property taxes and hazard insurance, generally they don’t have to repay any of the money until they move out, die or sell the house.

The policy change on surviving spouses that has snagged Jeanette Ogle was not adopted until late 2008, more than a year after the Ogles’ refinancing. That change has been challenged in a federal lawsuit filed by AARP, the seniors advocacy group. On behalf of two widows and one widower – Ogle was not a plaintiff – who were threatened with foreclosure, AARP charged that HUD disregarded clear statutory language that allows surviving spouses to remain in their homes even if their name is not on the documents. In an appellate court ruling last month, U.S. Circuit Judge Laurence H. Silberman said that the court was “somewhat puzzled as to how HUD can justify a regulation that seems contrary to the governing statute.”

HUD had no comment on that ruling, which sent the case back to a lower court, and refused to discuss Jeanette Ogle’s pending foreclosure. So did Ogle’s loan servicer, Reverse Mortgage Solutions, Inc. of Spring, Texas, which initiated the foreclosure action. Fannie Mae, the federally regulated mortgage investor that owns Ogle’s loan, said the foreclosure would have to proceed because the mortgage is insured by FHA and that agency’s rules effectively require it, given the absence of Ogle’s name on the documents.

Andrew Wilson, a Fannie Mae spokesman, says the company has a document purportedly signed by the Ogles acknowledging that their refinanced mortgage lists only John Ogle as the borrower. Jeanette Ogle says she has no recollection of signing anything of the sort. “Why would we?” she asked in an interview. Wilson says that whatever the facts, Fannie Mae is “sympathetic” toward Ogle’s plight, and will seek to delay any post-foreclosure eviction.

Jean Constantine-Davis, AARP’s senior attorney on the surviving spouse suit, called Ogle’s circumstances “pretty horrible,” and said HUD’s “current regulation has been devastating on surviving spouses.” AARP’s suit alleged that there are “hundreds” of elderly victims of the policy.

Ogle’s son, Robert, has asked the Arizona state attorney general’s office to intervene and investigate how his mother’s name was left off the mortgage. But in the meantime, the clock is ticking toward Jeanette Ogle’s foreclosure. And her 92nd birthday.

Read more here: http://www.charlotteobserver.com/2013/02/01/3825495_caught-in-a-reverse-nigh tmare.html#storylink=cpy

For CFPB, Parsing Which Rules Stay, and Which May Go

By Kate Berry

JAN 28, 2013 5:17pm ET

Richard Cordray’s recess appointment to the Consumer Financial Protection Bureau may ultimately be invalidated, but legal experts say several recent mortgage regulations approved on his watch may still be upheld.

But questions remain whether other rules that apply primarily to nonbanks, such as payday lenders and credit reporting agencies will hold up because, absent a permanent director, the CFPB would have no authority to create or enforce them, attorneys and industry consultants say.

The uncertainty stems from a court ruling Friday that invalidated President Obama’s appointments of three new members to the National Labor Relations Board while the Senate was on its winter break. On that day, Jan. 4, 2012, Obama also named Cordray the director if the CFPB, and many Washington insiders expect that Republicans who opposed Cordray’s nomination in the first place will use the NLRB ruling to challenge his appointment.

Apart from whether Cordray’s appointment would stick – most experts believe that will ultimately be decided by the Supreme Court – there are real questions about whether the myriad rules the CFPB has written in the last year would remain valid. Of particular concern are rules relating to mortgage lending, servicing, and loan officer compensation, all of which were released in the last two weeks.

Several lawyers say the recent mortgage rules will not be overturned even if it turns out that Cordray’s recess appointment was unconstitutional. Ray Natter, a partner at the law firm Barnett Sivon & Natter, says it is unlikely that a court would invalidate the so-called qualified mortgage rule, which would essentially ban lenders from making the riskiest loans, out of “fear of the chaos that would result.”

Moreover, even if the court were to void the existing qualified mortgage rule, the Treasury secretary could step in and assert the authority to issue a new rule because, under the Dodd-Frank Act, it has the authority to carry out certain CFPB functions.

“In this situation, the court would have discretion to fashion remedies that it feels are appropriate including looking at the public good and fairness,” Natter says. “The fact that voiding the final QM regulation may cause significant disruption in the mortgage markets will weigh in favor of maintaining the validity of the final QM rule.”

Some analysts think the Treasury secretary could step in as acting director of the CFPB and re-propose all the bureau’s prior rules, essentially creating a new rule-writing process. But starting from scratch could create more uncertainty and cause nonbanks in particular to drastically curtail their lending, according to David Stevens, the president and chief executive of the Mortgage Bankers Association.

“The last thing the industry needs right now is a new round of uncertainty,” says Stevens. “Cordray has proven himself to be an effective director and they have put out rule-makings that the industry is working to implement, and if they were suddenly overturned and the industry found itself in non-compliance, it could cause severe repercussions.”

Still, Treasury’s CFPB authority only goes so far; under Dodd-Frank, it has limited jurisdiction over non-depository institutions. If Cordray is determined to be only the bureau’s acting director, then the bureau would not have authority over certain areas including: prohibiting unfair, deceptive or abusive acts; prescribing rules and model disclosure forms; and supervising non-depository institutions.

Andrew J. Pincus, a partner with Mayer Brown LLP who represents the U.S. Chamber of Commerce, says the Obama administration now faces a conundrum.

“If we’re now in the world where there’s no CFPB director, and the power is vested in the Treasury secretary, there’s a strong argument that the rules would be invalid because they were signed by Cordray,” Pincus says. “They could have the Treasury secretary go back and sign them, but the Treasury secretary only has the power to exercise authority over banks.”

Alan Kaplinsky, a partner with Ballard Spahr, says the NLRB ruling could potentially roll back the clock to Jan. 3, 2012, when the CFPB was operating under an acting director and, as a result, the bureau could not issue any new rules against nonbanks.

“There will be doubt over the things the CFPB can do with respect to nonbanks,” Kaplinsky says.

Others say whatever happens, the CFPB’s past rules are unlikely to be invalidated by any court.

“Even if the Supreme Court rules that the appointment was unconstitutional, it does not mean that everything Cordray did as CFPB director is illegal,” wrote Jaret Seiberg, at Gugghenheim Securities, in a research note. “The courts have the ability to rule that prior decisions remain in effect because Cordray was acting in good faith. So the Qualified Mortgage rule, the servicing rule and enforcement actions are likely to stand regardless of the outcome.”

IRS to simplify deduction process for home offices

By Kenneth R. Harney

Posted 01/25/2013 5:16AM

WASHINGTON – If you’re one of the millions of homeowners and renters who work or run a business from the place you live, here’s some good news on taxes: The Internal Revenue Service wants to make it easier for you to file for deductions on the business-related use of your home.

Rather than the complicated 43-line form you now have to fill out to claim a write-off – the instructions alone take up four pages of text and involve computations ranging from depreciation to utility bill expense allocations – the IRS has come up with a much simpler option: What it calls a “safe harbor” method that allows you to measure the square footage of your business space and apply for a deduction.

The move comes at a time when the use of homes for work is soaring, thanks to technologies such as high-speed Internet and Skype. Last October the Census Bureau estimated that as of 2010, the last year when data were available, 13.4 million Americans were making some type of business use of their homes, and that home businesses employed nearly 10 percent of all workers. During the same year, the IRS says 3.4 million taxpayers filed for the home office deduction. The sheer size of the gap raises the question: Are millions of people declining to seek write-offs for which they’re qualified?

Kristie Arslan, president and CEO of the National Association for the Self-Employed, thinks so. The IRS rules for home offices have been “cumbersome and time consuming,” she said, “. and year after year hard-earned dollars were left on the table.” Otherwise qualified business owners and entrepreneurs were daunted by the record-keeping and paperwork required. They also worried that they could be exposed to an audit by the IRS if they made mistakes in filing.

The new IRS option plan, which will be available for 2013 and beyond, allows owners and employees who work from home to deduct $5 per square foot of home office space per year, up to a maximum allowable space of 300 square feet. The write-off is capped at $1,500 per year, but the hassle factor is negligible.

Here’s how it works. The Internal Revenue Code permits you to deduct expenses for a home office that is used “exclusively” and on a “regular basis” as your principal place of business “for any trade or business,” or as a place to meet with clients or customers. Provided you qualify on these threshold tests, the code allows you to deduct mortgage interest, property taxes, rent, utilities, hazard insurance and other expenses based on the percentage of the total space of the home that is attributable to your business use.

Though this method can produce sizable deductions, critics have long argued that the computations for some of the allowable items – depreciation on the house you own is one – can be tricky and require significant record-keeping and time expenditures to get it exactly right. Plus the IRS has acknowledged that the presence of a home office deduction on a taxpayer’s filing may increase that taxpayer’s potential for being selected for audit.

The new streamlined approach essentially boils everything down to just one measurement: How much square footage that qualifies for business purpose treatment are you using? Multiply that number by $5 per square foot and you’ve got your deduction amount. As long as this does not exceed $1,500, you can use the new short form write-off. If the total is more than $1,500, you can use the more complicated option, which is spelled out in IRS Form 8829 and available at IRS.gov.

The pros and cons of the new option? Abe Schneier, senior technical manager for taxation at the American Institute of Certified Public Accountants, says it should be a money-saver for small-scale enterprises and startups. “Anybody who’s going to start a new business working from home will probably find this a great advantage,” he said in an interview.

On the other hand, owners whose operations require large amounts of space and who have sizable utilities, insurance and other expenses probably will want to stick with the traditional method – complicated though it can be – because it can yield them much higher write-offs.

So take a look at how much time you’re spending on business work in your home, review the basic rules outlined in IRS publication 587, “Business Use of Your Home,” and go with the smarter option for your situation.