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Senate Passes Tax Bill That Includes Key Mortgage Deductions

by Brian Collins

The Senate approved a bill late Tuesday that would retroactively extend over 50 expiring tax provisions for one year, including one that shields distressed homeowners from paying taxes on any mortgage debt forgiven in a short sale.

The Senate approved the bill 76 to 16, which extends the provisions until Dec. 30 of this year (the one-year extension is retroactive). The House passed the bill 387 to 46 on Dec. 3.

At one point, House and Senate lawmakers were close to a deal on a two-year extension. But the White House objected because key business tax provisions were given permanent status while others affecting low- and moderate-income households would still have had to be extended each year.

"In my view, any agreement on permanent tax policies must be balanced between support for businesses and support for working families. A deal that only makes corporate policies permanent — or one sharply skewed in that direction — would have failed the test of fairness," said Sen. Ron Wyden, chairman of the Senate Finance Committee.

Under the bill, homeowners can deduct the cost of mortgage insurance premiums on their 2014 tax forms. This tax break covers private mortgage insurance premiums as well as premiums paid on Federal Housing Administration, Department of Veterans Affairs and Rural Housing Service guaranteed loans. The U.S. Mortgage Insurers welcomed the extension.

"USMI commends passage by Congress last night of a one year extension of vital homeowner tax relief. We are especially pleased that the legislation includes the tax-deductible treatment of mortgage insurance premiums for low and moderate income borrowers. We look forward to working with Congress towards permanent enactment of this important tax relief for homeowners," according to the private mortgage companies.

About 3.6 million taxpayers claimed the mortgage insurance deduction in 2009, according to analysts at Compass Point Research and Trading LLC.

The bill also ensures underwater borrowers that sold their homes in a short sale in 2014 will not be penalized.

Prior to the housing bust, troubled homeowners had to pay taxes on any mortgage debt that was canceled or forgiven by a lender. The amount of forgiven mortgage debt was treated as ordinary income and taxed accordingly.

The "Mortgage Forgiveness Debt Relief Act is crucial to foreclosure mitigation efforts such as principal forgiveness and short sales," said Isaac Boltansky, an analyst with Compass Point.

In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act so that distressed borrowers would not be penalized for doing a short sale. Congress extended this tax relief in 2009 and 2012, but failed to pass a tax extender bill at the end of 2013.

Since 2008, more than 800,000 distressed homeowners have taken advantage of this tax break, according to Rep. Charles Rangel, D-N.Y., an original sponsor of the debt forgiveness bill in 2007.

Short sales have been declining over the past few years due to an improving economy, lower foreclosures and the uncertainty over the tax consequences of a short sale or deed in lieu transaction, where the homeowner simply signs over the deed to the house to the bank and vacates the property.

Fannie Mae and Freddie Mac servicers completed 27,800 short sales during the first eight months of this year, compared to 87,740 in 2013 and 125,232 in 2012.

Boltansky noted that the retroactive reauthorization for 2014 also gives Federal Housing Finance Agency Director Mel Watt a shield to resist Democratic pressure to permit principal reductions on Fannie and Freddie loans.

Watt "will have additional political cover to reject calls to embrace the principal reduction through HAMP as the tax consequences could limit borrower participation" he wrote in a Dec. 2 report.

Property Tax Hikes Compound Mortgage Market's Woes

by Bonnie Sinnock

Housing counselors say they are increasingly concerned about the toll rising property taxes are taking on consumers' ability to get mortgage financing and borrowers' ability to make payments.

As it is, many loan applicants are having difficulty meeting the 43% debt-to-income limit in the Consumer Financial Protection Bureau's definition of a qualified mortgage. Higher property taxes only make it tougher. And while historical property taxes are factored into underwriting and loan terms, tax hikes that can increase the size of a monthly payment are an unknown that tends to creep up on borrowers.

"They don't go into a home thinking their property tax is going to increase," says Stephen Lewis, president and chief executive of the Mansfield, Texas, counseling agency Making Acceptable Homeowners.


Nationwide, state and local property tax collections per capita have increased each year since 2006, when they were $1,208, according to the Tax Foundation's Center for State Tax Policy, a nonpartisan research organization in Washington. By 2010 they had risen by more than $200 to $1,434.

Consumers purchasing their first home are particularly susceptible to property tax payment shock, says Lyman Stone, an economist at the center.

"I think first-time homeowners can be very surprised. It's not withheld like your income tax, or on your receipt like a sales tax. You just get a bill," he says. "So I think it can be very shocking to first-time homeowners, especially if you are in a somewhat higher tax area."

The tax burden "is a growing topic among housing counselors now that home prices are increasing and municipalities are struggling with revenue," says Douglas Robinson, a spokesman for NeighborWorks America, a Washington, D.C.-based national network of more than 240 community development and affordable housing organizations.

The 43% DTI ratio is one of the criteria loans must meet for lenders to enjoy extra protection from legal liability under the CFPB's rule requiring them to assess applicants' ability to repay mortgages. Higher taxes can help municipalities generate much-needed revenue, but they challenge borrowers' ability to get financing under the new rules, says Lewis, who has previously worked in mortgage underwriting and servicing.

"Consumers are really hitting that threshold of that 43%, and so when property values increase, or let's say the tax-assessed value increases on that property, then customers are actually exceeding that 43% threshold," he says. "That increases a level of concern about default and foreclosures for the lender that the customers are unaware of."

Defaults resulting from property tax increases could also get lenders in legal trouble, says Ari Karen, an attorney in the Bethesda, Md.-based office of law firm Offit Kurman. A borrower could later claim that failing to inform the borrower of the future risk was a deceptive act under the Truth in Lending Act, he says.

Rather than change the DTI limit or other underwriting standards, Lewis says, he would like to see counselors make more borrowers aware of the possibility that their tax bill may rise. This can be a challenge, he admits.

"Customers generally want to get more money for the house. They don't care about the educational aspect," Lewis says. "They don't necessarily care about the ramifications. It's all about, 'What can I get for the house?'"

However, those who get homeownership counseling tend to a little more open to the message, he says.

"They go into an education program if they want to be honest and transparent about their situation," he says.

Getting a national sense of property tax trends is challenging because the wide variation in how the different regional public entities in charge of them handle them, says Stone. But generally, data available to date from the Tax Foundation, and other reports of home price appreciation, suggest property taxes aren't going to stop increasing any time soon.

Whether this is increasing default risk depends on the regional taxation authorities' property tax policies, says Ben Graboske, a senior vice president in the real estate and financial services division of the Irvine, Calif.-based data provider CoreLogic. "It's absolutely the case in places like Texas and Florida," he says.

Texas' Tarrington County, for example, where the majority of Mansfield is located, had one of the higher amounts of median taxes paid in 2010, at around $3,100. The U.S. median was close to $2,000 that year.

A notable example of property tax risk has been in the federally-insured reverse mortgage market. The inability on the part of some seniors to pay taxes and insurance caused default risk to rise in the recent past, putting a dent in the FHA's finances and leading to reform in that sector.

Recent data on traditional "forward" mortgages suggests delinquencies are declining. But some have questioned whether this trend is more the product of a shift in the holders of servicing rights than an actual improvement. Also, recent data suggests an increase in loan modification activity. Property tax increases are frequently mentioned in hardship letters filed in connection with modification, says Lewis.

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