Leslie and I spent the day yesterday attending a continuing education class that focused on short sales, and were reminded that a major federal law is expiring at the end of the year that affects homeowners facing financial distress.

This temporary law (Mortgage Debt Relief Act of 2007) was meant to provide relief to homeowners who were foreclosed upon, or more commonly today, chose to do a short sale.

When debt is forgiven, that forgiven debt is counted as income and is generally taxable. So in layman’s terms, a homeowner who has a $500,000 mortgage but sells his home in a short sale, and his lender gets $400,000 (vice the $500k), that homeowner in the eyes of the IRS received a $100,000 gift which is taxable income. But the Mortgage Debt Relief Act waived that rule for homeowners who’ve suffered financial hardship in this economic downturn and been forced to do a short sale (or foreclosure).

But in less than 5 months, unless Congress acts, homeowners in financial distress will lose that IRS benefit.

With many short sales taking 5 months or longer to close, a lot of homeowners are going to be in for a big shock in January when presented with a huge 1099 and potentially no more relief from the IRS. Read the rest of this article »

Ultimately – it’s all for political show and virtually worthless. When the President announced the settlement, and I saw arrayed behind him a flank of bureaucrats and politicians, that’s what I thought – lots of thunder and fire, but ultimately not a lot of bang.

The politicians had to “do something” about the housing crisis and after over a year of negotiating, this is what we got:

People who lost their homes will get a check for maybe $1,500 – 2,000, but only if it was through one of the 5 banks. Underwater homeowners maybe can get $15,000 knocked off their loan balance through a loan mod, but again, only if their loan is with one of those 5 banks. Fannie Mae and Freddie Mac loans don’t qualify.

In reality, for troubled homeowners in Ventura County who were maybe looking to somehow save their homes through this “breakthrough settlement”, it doesn’t do much. Reducing a loan balance by $15k means a payment reduction of about $80 a month ($20k at 5% over 30 years = $80.52). Reducing it by $20k saves a little over $100 a month. Not to minimize those savings, but when a homeowner has payments of $2,500 to $3,000 a month (mortgage, taxes and insurance) on a home that’s $150,000 underwater or more, $100 a month isn’t going to save that home.

But all the politicians from the states involved (Kamala Harris of CA) and the federal government can add this settlement to their political resume. Ultimately, the banks escaped serious damage. This settlement is going to be slowly played out as the economy continues to improve, allowing the 5 banks to absorb these costs gradually over time.

Should “something” have been done with banks? Absolutely. Will this help the housing crisis in Ventura County? I don’t think so. I believe what ultimately will heal this mess is job creation and the continued building of consumer confidence. It will be “we the people” who will solve this and solve it we will.

Most people understand their home is their most important asset, emotionally and financially. More young people in their 20s and 30s will come into the market as they seek to have their own nest. Growing families will need to move into larger homes. As incomes become stronger and wage earners feel more confident in their job security, they’ll want to move up. It’s just the way things are.

So I admit I’m a cynic going into this political cycle. I just hope the public is too.

Yesterday the US Treasury stated Bank of America, Wells Fargo and JP Morgan Chase were not fulfilling the goals of the Making Home Affordable program (using taxpayer TARP money) and as needing “substantial improvement” in handling the flood of requests for loan modifications. Because of these shortcomings, the US Treasury is withholding financial incentive payments that were designed to encourage the large banks to aggressively tackle underwater loans through loan mods or HAFA short sales.

Well duh – any Realtor working in the trenches can share their horror stories about interminable delays, lost paperwork and multiple submissions of paperwork that has plagued the real estate business because of these issues! Despite all the talk bank leaders tell Congress that they’re “doing everything possible” to handle the tsunami of short sales and loan mods, it’s obvious they’re not doing enough to staff up their resources to handle these issues.

Recently I met with an individual who was concerned about the tax implications between a foreclosure vs. doing a short sale – and the potential of having to pay taxes on the short sale. I believe this individual felt there would be no (or maybe less) tax implications if the property were simply to go through the foreclosure process.

The first thing I said was I’m not a tax attorney or CPA so I can’t give tax advice, and all tax implications must be discussed with your tax adviser. But having said that, here are the general federal and California rules, forms, etc, pertaining to this issue. Read the rest of this article »

The closely divided Senate Banking and Financial Institutions committee voted 3-3 yesterday afternoon. Because of the tie, the bill failed to pass.

Proponents of the measure argue on a micro scale for the individual homeowner who is deeply underwater, maybe trying to get a loan mod and/or is facing foreclosure. Opponents of the measure argue on a macro scale that the measure merely delays the inevitable cleansing of financially weak homeowners who can’t afford their homes, thus delaying an increasingly stubborn housing recovery.

As usual, there is merit in both positions.But for now, it would appear the current process of dual-track will continue.