The State of the Union for the Mortgage Loan Process

This is the first in a series of commentary and helpful information regarding the current state of home mortgage financing. The industry has changed so dramatically in the last twenty-four months, I felt it would be helpful to explain in detail some of the changes that affect borrowers.

After the mortgage-back security debacle (MELTDOWN)-- in which subprime and stated income loans (that eventually went into default in large numbers) were packaged and sold in bulk to unsuspecting investors world-wide, sweeping changes have taken over the industry. These changes purport to be for the protection of the consumer.

A number of new laws have been enacted to change the way appraisals are performed, and the manner in which costs are incurred and disclosed to clients. In addition, mortgage originators are now required to register with a national database, and to be fingerprinted, vetted and tested.

INCOME DOCUMENTATION

There are no more “stated income” loans at this point in time-- although they may return to the marketplace at some point in the future. This is especially troublesome for those self-employed individuals who have habitually “expensed” much of their income in order to avoid taxation. Unfortunately they are not eligible for a new mortgage in most cases.

Underwriting guidelines governing loan-to-value, FICO scores, and debt-to-income ratios for all loans are much more conservative than in the recent past for obvious reasons. Unfortunately the pendulum seems to have swung a bit far in the conservative direction at present.

Virtually all lenders now require IRS transcripts of individual tax returns prior to underwriting approval. This ensures that income reported on the application and attending documentation is accurate in an attempt to avoid fraud.

As a result, it is standard practice now to collect full income documentation, to include two year’s federal tax returns with all schedules, W-2’s, 1099’s, and paystubs evidencing current employment. Also required are bank and asset/saving statements for at least one month, including all pages of the statements. On-line statements are not allowed unless they evidence the borrower name and address on them.

YES, it is back to “full documentation” in the loan world, just like the old days when I started in residential lending back in 1990.

Next time I will address HVCC, or the Home Valuation Code of Conduct, which governs the way appraisals are performed today. In my opinion this is the most detrimental change from the perspective of the client in any new mortgage transaction.

WHALE TAIL

Why the picture of the Whale's tail? Well, did you read about the woman who just completed a Stand-Up Paddle from Catalina to Dana Point Harbor? She had a whale swimming with her for over an hour during her 40 mile adventure!

I took my kayak out with Steve at Zuma Beach a few years ago, and just off Point Dume we came upon a mother whale with her baby, frolicking just off the point. It was an amazing and inspiring thing to see such large animals so close up. Very humbling.

US Tax Breaks

It’s that time of year again, and if you haven’t filed yet, here are some tips for tax breaks:

Home-buyer tax credit

Expires 4-30 (must be under sales contract) This affords first time homebuyers a credit of $8000 or $6500 for move-up homebuyers for a new primary residence. This credit is immediate and doesn’t require owing taxes to receive the refund.

Car-buyer Break

If you bought a car in ‘09 you can claim a deduction for the state and local sales taxes for up to $49,500 of purchase price.

Golf cart or Low Speed neighborhood vehicle

Yes ….that’s right… you can get a credit of up to $15,000 if you purchased one of these in ’09 or ’10. It must be a “qualified plug-in electric drive vehicle. “

Energy Credits

This is a direct dollar-for-dollar credit for moving to solar power, or buying an energy-efficient furnace, water heater, air conditioner or stove, or replacing windows…you can claim a credit up to 30% of the cost or a maximum of $1500.

College Credits

Available to those who pay college bills for themselves or a dependent, subject to maximum income levels of $90K for filing single, and $180k if filing jointly.

Jobless exemption

Up to $2400 in unemployment benefits are tax free.

Property tax deduction – without itemizing

You can claim a credit for property taxes by filling out Schedule L without itemizing deductions on your return.

Haiti Donations

If you made a donation to Haiti relief prior to March 1st of 2010, you can claim it as a charitable contribution on your ‘09 return.

Hope these help!

Help and Hope - Outreach Concern

The recent tragedy at an Orange County high school involving a student athlete was overwhelming for many in that school community, and throughout our county. It is hard to imagine what the family and friends experience in the face of such a devastating event. Outreach Concern stepped in, and provided on-site counseling.

Outreach Concern, based in Santa Ana, has been providing services to school districts for 16 years. They have been instrumental in grief counseling for many schools, but their primary focus is providing counseling services for at-risk students whose academic performance is being impacted, in order to allow faculty and administration to focus on academics.

Dr. Rick Capaldi, a client of mine, is both Executive and Clinical Director of Outreach Concern. I’d like to thank Rick and his staff for being there for those in need. www.outreachconcern.org

Post Script to Perils of Short Sales

The following information was kindly provided by a client of mine who is a tax professional.

Here are a couple of important notes regarding Cancellation of Debt (COD):

1. The Mortgage Forgiveness Debt Relief Act of 2007, only applies to “Qualified Principal Residence Indebtedness”, not to second or vacation homes, investment property or rentals. Further, the debt must have been used for the purchase or substantial improvement of the residence – not to pay off credit cards, start a business, take a vacation, buy a car, etc.

2. Those not qualifying for forgiveness of COD, can generally avoid paying tax by filing under the Insolvency clause, or one of the other eight exceptions.

3. Different elections can be made on the Federal return and the California return, which helps in the non-conformity issue.

Bottom line, very complex area; individuals with this problem should see a qualified professional tax preparer.

K.E. Noland, EA, President
Enterprise Management Corp. CFO TO GO®
17461 Irvine Blvd., Suite M, Tustin, CA 92780
Tel: (714) 505-1925 / Fax: (714) 505-9691
ken@companycfo.com / www.companycfo.com

The Perils of Short Sales

Just under 50% of the closed sales in Orange County presently are “short sales” which means the homeowner sold their home for less than the balance due on their mortgage. In such cases, the bank must approve the sale price since they are taking a loss, and the homeowner/seller may end up receiving a 1099 for the unpaid portion of the mortgage which needs to be provided with your tax returns. The federal Mortgage Forgiveness Debt Relief Act of 2007 provided an exception for homeowners who lost their home in foreclosure or a short sale, or had their loan balance reduced in a modification. (gee, I don’t know of anyone who got a balance reduction!)

You still have to report the forgiven debt on your tax return, but it’s typically not included in your income for federal tax purposes if it was your primary residence, the debt was less than $2 million (that lets most people out) and it was forgiven in years ‘07 through ’12. The bad news is California hasn’t updated their law to conform with the federal law after January 1, 2009, so you may owe taxes to the state unless this is resolved. See http://tinyurl.com/yhx89zw to see if you may receive relief prior to filing April 15th if this affects you.

One final note: A short sale will normally appear on your credit report as such, and have a negative effect on FICO scores and also prohibit mortgage financing for a period of at least two years. So proceed with caution.

Mortgage Update...and GO BLUE News

Home loan rates have been fairly stable the last few weeks, ranging from the mid-4’s to low 5’s depending on a number of specific loan factors. Rates are definitely expected to rise by the end of this month due to the termination of the government’s buying program of mortgage-backed securities. This program basically generates demand for Fannie Mae and Freddie Mac pooled mortgage securities, which in turn, maintains rates at a lower level. Once the buying stops, most experts expect demand to wane, and prices to drop, thereby causing a rise in interest rates for home loans.

Also be aware that the deadline for the Tax Credit for homebuyers is rapidly approaching – to qualify you must be under contract by April 30th and close by June 30th. This program is widely credited for the current housing demand.

The University of Michigan Women’s Water Polo Team was here in Orange County last weekend for the annual UCI Invitational Water Polo Tournament. The event is one of the premier tournaments of the women’s collegiate polo season. This year, the Michigan Wolverines, currently ranked 8th in the nation, finished the tournament in 8th place. After a strong start, they lost their leading scorer to an injury and struggled in their remaining games. Michigan has completed the season in the top ten the last two years; and participated in the NCAA championships four of the last eight years.

Oh, did I forget to mention my daughter Katie is the Assistant Coach? Katie, who captained the Cal Bears her junior and senior years at Berkeley, is in her third season coaching at Michigan…and bought a condo in Ann Arbor last year. Yes, she earned the first-time homebuyer tax credit. She’s adjusted to the cold and snow nicely. But I remember the first time she called me and said, “Mom, it is snowing, and I fishtailed twice in the parking lot when I left to go out tonight…so I decided to stay home.” Good call.

Summers are especially nice in Ann Arbor, which has a thriving downtown filled with the typical college town restaurants, galleries, bars and boutiques! Every spring they host a parade of outrageous giant-size papier-mâché puppet creations called the FestiFools parade. I attended last year with Katie. What a blast! This year it is April 11th.


The puppets are created by students and community members who perform on downtown’s State Street, to the back beat of GROOVE, a percussion ensemble from the University. These huge handmade puppets represent everything from crazy dancing eggplants to dinosaurs and famous people. FestiFools is all about the three F’s: Fun, Free and Foolish! www.festifools.org

Ann Arbor is also home to the annual Top of the Park Music Festival, which runs for three weeks at the end of June, and an Art Fair in mid-July. The Art Fair attracts over 500,000 visitors annually, and was founded in 1960. It has been recognized as a top art fair in the nation many times…I hope to get back to visit one of their fun events this year.