Thursday, August 28, 2008
Plano Market
Tuesday, August 19, 2008
Housing Rescue Bill
Who's eligible?
Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 31% of their gross monthly income on mortgage debt to be eligible for the program.
They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage - and attest that they are not deliberately defaulting just to obtain lower payments.
Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it's to pay for necessary upkeep on the home.
To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home's appraised value at the time.
How does the refinancing process work?
This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home's current value. In areas where prices have plummeted by as much as 20%, that will mean a substantial loss for the lender.
But lenders won't sign off on a workout unless they think that they'll lose less money on that than they would by allowing a home to go through the costly foreclosure process.
Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home's current value, as well as examine and verify income statements, bank accounts, job histories and credit scores.
Based on that new appraised home value, the FHA lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90% of the home's market value.
If the original lender agrees to the write-down, the new lender buys the old loan and takes over the reworked mortgage.
As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally, it pays the FHA an up-front premium equal to 3% of the mortgage principal.
What does it cost?
There should be little up-front costs for borrowers to bear. Loan origination fees will vary by lender, but these can usually be paid by the borrower over the life of the loan in the form of a slightly higher interest rate.
However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually.
Borrowers also agree to share any profits from future home-price appreciation with the FHA. To do that, they'll pay a "3% exit fee" of the mortgage principal to the FHA when they resell or refinance.
Plus, they'll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs.
After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.
What will I save?
Savings depend on what borrowers are paying for their present loan and where they live, but for most people it will be substantial, even after factoring in the FHA fees.
In areas that have sustained huge price drops, such as
Additionally, the FHA loans carry reasonable interest rates, which are fixed for the life of the loan, as opposed to a subprime adjustable-rate mortgage that can jump higher every six months.
Source: http://money.cnn.com/2008/07/23/real_estate/housing_rescue_guide/
Tuesday, August 12, 2008
Timeline of Housing Bubble
Timeline of Housing Bubble From Wikipedia
Timeline 2007
- February–: 2007 Subprime mortgage financial crisis Subprime industry collapse; more than 25 subprime lenders declaring bankruptcy, announcing significant losses, or putting themselves up for sale.
- April 2: New Century Financial, largest
- July 19: Dow Jones Industrial Average closes above 14,000 for the first time in its history.[12]
- August: worldwide "credit crunch" as subprime mortgage backed securities are discovered in portfolios of banks and hedge funds around the world, from BNP Paribas to Bank of China. Many lenders stop offering home equity loans and "stated income" loans. Federal Reserve injects about $100B into the money supply for banks to borrow at a low rate.
- August 6: American Home Mortgage files for chapter 11 bankruptcy.
- August 16: Countrywide Financial Corporation, the biggest
- August 17: Federal Reserve lowers the discount rate by 50 basis points to 5.75% from 6.25%.
- August 31: President Bush announces a limited bailout of
- September 1–3: Fed Economic Symposium in
- September 14: A run on the bank forms at the United Kingdom's Northern Rock bank precipitated by liquidity problems related to the subprime crisis.[21]
Timeline 2008
- 2008: Home sales continue to fall. Fears of a
- January 2–21: January 2008 stock market downturn
- March 14–18: Dropping valuations of mortgage securities caused by skyrocketing default and foreclosure rates forces margin calls to the Wall Street bank Bear Stearns for debts the bank used to leverage mortgage issuances, and threatens BSC with bankruptcy and causes worldwide market jitters. In a weekend deal brokered by U.S. Treasury secretary Paulson and Fed chairman Ben Bernanke, JPMorgan bank agrees to purchase BSC for $2 per share, compared to their 2007 high of nearly $170, in exchange for the Federal Reserve Bank agreeing to accept BSC's devalued mortgage back securities as collateral for public loans at the newly created Term Securities Lending Facility (TSLF), effectively providing a mechanism to bail out Wall Street banks threatened with insolvency.[41]
- March 1–June 18: 406 people were arrested for mortgage fraud in an FBI sting across the
http://en.wikipedia.org/wiki/Timeline_of_the_United_States_housing_bubble
Thursday, August 7, 2008
Fannie and Freddie are Passing the Buck
Likely looking to build its capital base, Fannie Mae (FNM: 11.54 -15.15%) on Monday announced that it was doubling its so-called adverse market delivery charge on all loans it purchases from 25 to 50 basis points — a fee that HW’s sources said is likely to be passed on to consumers by already-strapped lenders, with some caveats. The new fee structure will become effective October 1, and applies to all loans sold to the GSE.
Fannie’s adverse market fee, and a similar fee levied by sister GSE Freddie Mac (FRE: 6.75 -16.04%) (called a market condition delivery fee), have come under fire from various industry groups since they were first introduced last year.
Fed, ECB, and BOE Leave Rates Unchanged
The Federal Reserve held the line on Tuesday–leaving the Fed Funds Rate at 2.00% for the third straight meeting. The decision, however, was anything but cut-and-dry. Earlier in the week, the Personal Consumption Expenditure data indicated that inflation climbed 0.8% overall in June, which is the highest inflation jump in 27 years. In addition, the report indicated that inflation now sits at 2.3%–above the Fed's desired range of 1-2%. Although the Fed ultimately left interest rates unchanged, inflation obviously remains a concern and the recent rise may lead to an interest rate hike by the Fed in the near future.
As expected, the European Central Bank and the Bank of England left their benchmark interest rates unchanged today (Thursday 8/7/08) at 4.25% and 5% respectively. Inflation remains stubbornly high in these regions, so both the ECB and Bank of England are unable to hike rates and fight inflation because they are up against similar pressures we are seeing here in the
FAQ about the First-Time Home Buyer Tax Credit
Frequently Asked Questions
About the First-Time Home Buyer Tax Credit
The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009. The following questions and answers provide basic information about the tax credit.
1. Who is eligible to claim the $7,500 tax credit?
First time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after April 9, 2008 and before July 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs.
2. What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit.
3. What types of homes will qualify for the tax credit?
Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses, and condominiums.
4. Instead of buying a new home from a home builder, I have hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after April 9, 2008 and before July 1, 2009.
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
5. What is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.
6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $7,500 are available for some taxpayers whose MAGI exceeds the phaseout limits. The credit becomes totally unavailable for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.
7. Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $7,500 by 0.5. The result is $3,750.
Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,625.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
8. Does the credit amount differ based on tax filing status?
No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as "married filing separately" (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.
9. Are there any circumstances for which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?
In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500. For most first-time home buyers, this means the credit will equal $7,500. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.
10. I heard that the tax credit is refundable. What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that taxpayer qualified for the $7,500 home buyer tax credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed).
11. What is the difference between a tax credit and a tax deduction?
A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer’s tax liability would be reduced by $1,125 (15 percent of $7,500), or lowered from $7,500 to $6,375.
12. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
No. The tax credit cannot be combined with the MRB home buyer program.
13. I live in the
No. You can claim only one.
14. I am not a
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.
15. Does the credit have to be paid back to the government? If so, what are the payback provisions?
Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.
16. Why must the money be repaid?
Congress’s intent was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales. The repayment requirement reduces the effect on the Federal Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices.
17. Because the money must be repaid, isn’t the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?
Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.
18. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
19. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
Wednesday, August 6, 2008
Social Secuirty - Sooner or Later?
Cash in on Social Security sooner or later?
Over the course of your working lifetime, with every paycheck you should’ve dutifully paid taxes toward Social Security. When the time comes to retire, will you file for your benefits as soon as possible — age 62 under current guidelines — or will you wait until you are 65 to receive full benefits? You also have the option to wait longer than your full retirement age to receive an even bigger check. The question is when does it make sense to start taking benefits?
For years, the typical retirement age was 65, and there was no debate about the merits of waiting to take your Social Security. In anticipation of the millions of baby boomers entering retirement, the government has pushed the age of full retirement out. Americans born in 1959 or later don’t qualify for full benefits until age 66 — and the full retirement age might continue to creep upward as a means to stave off the impending shortage in the federal government’s coffers.
In general, the longer you wait to file for benefits, the bigger your monthly Social Security check will be. Conversely, if you take money out sooner, you’ll get less. How much less? Well, if your full retirement age is 66 and you decide to take benefits beginning at age 62 (“early” retirement), your benefits will be reduced by 25 percent.
Still, if you choose to wait until full retirement age or beyond to receive benefits, you need to consider how long it will take you to catch up to the amount you would have received, cumulatively, had you started taking benefits at a younger age. This is called the “breakeven point.” If you delay your benefits (up to age 70), you may not reach your breakeven point until your 79th birthday. That may be fine if you live to be 90 but is not so swell if you don’t reach age 75. Assuming you are in good health and have a healthy family history, you could save money in your retirement years by waiting until age 70 to cash in on your Social Security benefits.
There are other factors beyond the breakeven point that will influence what age is optimal for you to begin receiving your Social Security payout. If you need the money now because you don’t have sufficient investments, savings or other sources of income to live on, you may have no real choice. Or if you are in poor health, it also may not make sense to wait to receive your benefits.
You could increase your future monthly Social Security payment by continuing to work beyond age 62 without claiming benefits. That’s because the amount of your check is based on the average of your highest earning years. If you can bump up your income, the overall calculation of your average income will result in a plumper check. On the other hand, if you continue to work between age 62 and your full retirement age and file for Social Security, the benefits you receive may be taxed and thus reduced.
Your marital status factors into the decision of what age you choose to receive your benefits. For married couples, there’s a potential advantage for the lower-earning spouse if the higher wage earner postpones benefits. That’s because the lower wage earner may be eligible to receive up to 40 percent of the spouse’s benefit in retirement and the full benefit if he or she is widowed. Age difference can also affect the best time for each spouse to initiate benefits.
To be sure, you’ll want to look at your projected benefits (and your spouse’s) and speak with your financial advisor before making a decision to request your benefits. Review your Social Security statement (you can request one at ssa.gov) to determine the benefits you would receive if you were to begin collecting at age 62, at your full retirement age or decide to postpone your benefits until a later age. Talk to your financial advisor and your accountant to get their professional opinions on the value of waiting versus claiming benefits sooner. What makes sense for one retiree may not be the best choice for another.
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This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.
Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.
© 2008 Ameriprise Financial, Inc. All rights reserved.
File # 76796
8/08
