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President Bush signed into law new legislation designed to help homeowners in deep mortgage trouble. Here are some of the highlights:
Homeowners with Private Mortgage Insurance (PMI)
There was some good news for homeowners with private mortgage insurance. Congress voted to extend the deductibility of PMI premiums until Jan. 1, 2010.
Only homeowners with adjusted gross incomes below $100,000 are eligible for a full deduction (it phases out between $100,000 and $110,000), and only mortgages for primary residences originated after 2006 are eligible. A PMI trade association estimates this tax break will result in an average $350 annual savings for homeowners eligible for the deduction.
Another piece of the legislation provides tax relief for surviving spouses. If a surviving spouse opts to sell a primary residence within two years of the death of the other spouse, the surviving spouse is eligible for a $500,000 capital gains exclusion, rather than the old $250,000 exclusion that applies to individuals. This is big for those in Marin where property values are extremely high and capital gains have accrued for many years.
Debt forgiven but not forgotten:
The most significant change under the new law is tax relief for people who sell their home for less than the remaining balance on their mortgage. Under the old law, even if the lender agreed to "forgive" the difference between the home sale price and the mortgage balance, the IRS wasn't so lenient. Tax regulations required lenders to report the amount that was forgiven as gross income received by the seller, in effect handing sellers a tax bill on income they never actually received. For example, if you sold your home for $1,500,000 but your remaining mortgage balance was $1,550,000, you would have had a tax bill on the $50,000 difference that your lender forgave.
The new law eliminated the tax until Jan. 1, 2010. If you're forced to sell a home you can no longer afford, and your
lender agrees to forgive any unpaid mortgage balance, you no longer have to worry about a hefty tax bill as well. (This
tax break is retroactive to Jan. 1, 2007.)
Voluntary Mortgage Relief
Washington is preparing a voluntary relief program for the mortgage-stressed. The HOPE NOW alliance, which features Treasury secretary Henry Paulson as a lead flag bearer, announced a plan in early December that should be up and running soon. The plan allows some subprime mortgage holders to refinance, or lets them lock in their current interest rate for five more years -- a deal that has been dubbed a "tease freeze."
Here are some limitation to the plan: First, it's voluntary, lenders are encouraged to offer the relief programs but not required. The plan comes not straight from the White House or Treasury Department, but from the American Securitization Forum, a consortium of money managers (read: hedge funds and Wall Street firms sitting with the distressed debt), as well as all sorts of mortgage lenders and servicers.
The group's primary motivation is to help investors holding the mortgage debt, not the actual homeowners with the exploding mortgages. Moreover, the eligibility rules will make it tough for many people to quality for help.
Some facts to the Five Year Freeze Rules
The full rundown of the HOPE NOW plan is available here, but here are the major points that determine if you're eligible for a five-year freeze:
1. If your mortgage has already reset, you are not eligible
2. Only adjustable rate mortgages made between Jan. 1, 2005, and July 31, 2007, are eligible. (Option-only loans aren't eligible.)
3. If your lender happened to keep the loan on his books rather than sell it into a securitization pool you are not eligible -- only securitized loans are eligible for this plan. Looks like a bail out for investors.
4. Your interest rate must reset between Jan. 1, 2008, and July 31, 2010, and the new payment must be at least 10 percent higher than your current payment.
5. Meet all the above criteria and get your restructure started before the initial reset and you may qualify except for the following:
6. Only subprime adjustable rate mortgages are eligible. What qualifies as subprime? You must have a FICO credit score below 660. If you have a higher score, the lender will look at your income to determine eligibility.
You MUST be up to date with your mortgage payments. If you're currently more than 30 days behind on a payment, or if you've been 60 days late more than once in the past 12 months, you won't qualify for the 5-year freeze program.
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