The “New” Mortgage Insurance Deduction

From MGIC on the mortgage insurance deduction passed as part of the fiscal cliff deal

MI basics: tax-deductible MI

MI Tax Deductibility passed as part of the American Taxpayer Relief Act of 2012.

Borrower-paid MI premiums are tax-deductible through the year 2013. Borrowers should consult their tax advisors regarding MI tax deductibility. See disclaimer note below.

FAQs

Does the bill apply to MGIC mortgage insurance?

Yes, borrower-paid MI provided by MGIC qualifies for the deduction. This includes our Monthly, Single and Split Premium plans. There are varied opinions on the deductibility of lender-paid MI as the IRS has not yet clarified the deductibility. It is recommended that borrowers consult their tax advisors regarding the amount that is deductible.

What types of mortgage loans qualify for the MI tax deduction?

Loans used for “acquisition indebtedness” — that is, money borrowed to buy, build or substantially improve a residence — are eligible, as long as the debt is secured by the same residence.

This includes purchase loans and refinance loans, up to the original acquisition indebtedness. (Money borrowed against the equity in a home or when refinancing a home for any reason other than to buy, build or substantially improve a residence is called “equity indebtedness.”)

When refinancing a piggyback loan originally used to acquire a property, is the original loan amount considered the sum of the two mortgages or only the primary mortgage amount without the second lien included?

The original acquisition indebtedness is considered to be the sum of the two mortgages.

top

Is deductibility applicable for all loan types?

There is no differentiation among loan types.

What types of properties are eligible for tax deductibility?

The deduction applies to “qualified residences,” as defined in the Internal Revenue Code. Generally, that includes the borrower’s primary residence and a nonrental second home. As with mortgage interest, borrowers can deduct mortgage insurance premiums paid on both their primary residence and one other qualified residence each year. Investor loans are not eligible.

Who qualifies for this itemized deduction?

Households with adjusted gross incomes of $100,000 or less will be able to deduct 100% of their MI premiums. The deduction is reduced by 10% for each additional $1,000 of adjusted gross household income, phasing out after $109,000. (Details below.)

Married individuals filing separate returns who have adjusted gross incomes of $50,000 or less will be able to deduct 50% of their MI premiums. The deduction is reduced by 5% for each additional $500 of adjusted gross income, phasing out after $54,500. (Details below.)

The deduction is not restricted to first-time homebuyers.

 

Adjusted Gross Income Limits

Single OR Married, Filing Jointly	Allowable MI Premium Deduction	Married, Filing Separately	Allowable MI Premium Deduction
$0 – $100,000	100%	$0 – $50,000	50%
$100,000.01 – $101,000	90%	$50,000.01 – $50,500	45%
$101,000.01 – $102,000	80%	$50,500.01 – $51,000	40%
$102,000.01 – $103,000	70%	$51,000.01 – $51,500	35%
$103,000.01 – $104,000	60%	$51,500.01 – $52,000	30%
$104,000.01 – $105,000	50%	$52,000.01 – $52,500	25%
$105,000.01 – $106,000	40%	$52,500.01 – $53,000	20%
$106,000.01 – $107,000	30%	$53,000.01 – $53,500	15%
$107,000.01 – $108,000	20%	$53,500.01 – $54,000	10%
$108,000.01 – $109,000	10%	$54,000.01 – $54,500	5%

top

Is adjusted gross income calculated before or after deductions?

Adjusted gross income is calculated before itemized deductions, including the MI deduction.

How does the MI tax deduction work?

Borrowers who itemize deductions are able to reduce their overall taxable income in the same manner as mortgage interest.

Are borrower-paid, single premiums, which are paid up front in a lump sum, eligible for the deduction?

Yes, borrower-paid, single-premiums are eligible for the deduction under the new law. Borrowers should consult with a professional tax advisor to determine the amount of the MI premium eligible for the tax deduction.

top

If the single premium is financed, are both the mortgage insurance premium and the interest tax deductible?

We believe that if the loan is for acquisition indebtedness, both the interest attributable to the entire loan balance as well as the allocated portion of the mortgage insurance premium are tax deductible.

How would a premium refund issued during the tax year affect eligibility and the amount of the MI deduction?

Borrowers are only permitted to deduct that portion of their MI premium attributable to a tax year. If the MI is dropped, and a refund is paid, the amount refunded would reduce the amount of MI premium that could be attributable to that tax year and be deducted.

Note: MGIC cannot provide tax advice. Taxpayers should consult their tax advisor to ascertain if they are eligible to take this deduction. The answers to these questions are based on an interpretation of the language of the statute, the Joint Committee on Taxation’s Technical Explanation of the statutory language, and present law. The Internal Revenue Service (“IRS”) will issue guidance interpreting the new provision, and could reach different conclusions for some of the issues raised.

top

CFPB To Regulate Originations Including Flat Fee Proposal

 From: Ballard Spahr

The Consumer Financial Protection Bureau announced yesterday that it will propose residential mortgage loan origination standards this summer, with a goal of adopting final rules in January 2013. The standards will address the compensation of loan originators, the charging of discount points and origination points and fees, and uniform qualification requirements for individuals who are loan originators.

The proposal will implement a portion of the loan originator compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which are similar in some respects to a loan originator compensation rule adopted by the Fed in 2010 under the Truth in Lending Act.

Although the CFPB proposal will address the compensation of loan originators and certain other issues, it will not address the Dodd-Frank provisions that prohibit steering by loan originators. The CFPB plans to address the anti-steering provisions “at a later time.”

The important elements of the proposal under consideration by the CFPB are:

Originator Qualifications

Under the SAFE Act loan originator employees of depository institutions must be registered and loan originator employees of non-depository institutions must be licensed, and the requirements for licensing are more onerous. In particular, to obtain a license an originator must (1) not have a felony conviction, (2) demonstrate appropriate character, fitness and financial responsibility, (3) satisfy education requirements and (4) pass a test.

The CFPB is considering requirements that originators employed by depository institutions must meet character, fitness, and criminal background standards equivalent to the standards for obtaining a license, and that the depository institutions provide appropriate training to the originators commensurate with the size and mortgage lending activity of the institution.

Points and Fees

Dodd-Frank provides that a consumer may pay a loan originator’s compensation, but a creditor could not pay a loan originator’s compensation unless the consumer did not pay any loan originator compensation and also did not pay any upfront discount points, origination points or fees, other than bona fide third-party charges, except as permitted by a regulatory exception.

The CFPB is considering an exception under which a creditor could pay loan originator compensation as long as (1) the consumer does not pay any originator compensation, (2) if the consumer pays any discount points, the points must be bona fide (pursuant to standards that the CFPB is developing under the ability to repay requirements) and the creditor also must offer the option of a no discount point loan, (3) if the consumer pays any origination fees, the fees are “flat” and cannot vary with the size of the loan, and (4) any upfront fees paid to an affiliate of the creditor or loan originator are also “flat” and cannot vary with the size of the loan, except payments for title insurance which can vary based on the loan size.

The CFPB, thus, is considering an exception that would prohibit the common percentage-based loan origination fee in cases in which the creditor paid compensation to a loan originator. It is unclear if the CFPB understands that it is common practice for lenders to offer a range of rate and discount point combinations for a given loan.

Proxies

The existing loan originator compensation rule prohibits the compensation of a loan originator based on the terms or conditions of a loan, or on a proxy for the terms or conditions of a loan. The CFPB acknowledges the uncertainty created by the proxy restriction, and is considering establishing a test for whether a factor is such a proxy.

Under the test, a factor would be a proxy for a loan term or condition if (1) the factor substantially correlates with a loan term, and (2) the loan originator has discretion to use the factor to present a loan to the consumer with more costly or less advantageous term(s) than the term(s) of another loan available through the originator for which the consumer likely qualifies. It appears that further guidance will be needed for companies to better understand how to assess factors under the test.

Compensation Based on Profits

The Fed staff interpreted the existing loan originator compensation rule to prohibit the compensation of loan originators based on mortgage-related profits. The CFPB is considering proposals that would permit loan originators to be compensated based on mortgage business profits subject to various restrictions, but compensation to a loan originator based on profitability of the loans he or she originates would not be permitted. Consistent with guidance provided in Bulletin 2012-02.

The CFPB is considering an exception for various qualified retirement and related plans. The CFPB also is considering exceptions that would permit compensation through bonuses, or through qualified or non-qualified plan contributions, based on profits if the total mortgage revenue portion of the profits was limited, and/or both the number of loans made by an originator and the proportion of the originator’s loans as compared to the loans made by the company were below certain levels (no specific levels are proposed).

Pricing Concessions

Under the existing loan originator compensation rule, a loan originator may not reduce his or her compensation or pay for a borrower cost as a method of providing a pricing concession to the consumer. The CFPB is considering a proposal that would allow a loan originator to cover unanticipated increases in third party settlement charges, if the charges are not controlled by the originator, creditor or an affiliate of either, and the charges exceed or are in addition to amounts disclosed in the Good Faith Estimate.

Point Banks

The Fed staff interpreted the existing loan originator compensation rule to prohibit various arrangements, often called “point banks,” under which a loan originator could apply credits to adjust the standard pricing on a loan. The CFPB is considering a proposal that would define point bank arrangements as “compensation” for purposes of the loan originator compensation provisions, and that would provide guidance on circumstances in which the awarding of points to originators would not violate the provisions.

The CFPB is considering an approach under which a creditor could contribute to a point bank if (1) the creditor does not base the amount of the contribution for a given transaction on the terms or conditions of the transaction, (2) the creditor does not change its contributions to the point bank over time based on terms or conditions of the originator’s loans, or on whether the originator overdraws the point bank, and (3) if the originator may overdraw the point bank, the creditor does not reduce the originator’s commission on a transaction when he or she does so.

Broker-Paid Compensation

The CFPB interprets the Dodd-Frank loan originator compensation provisions to prohibit a mortgage brokerage firm from paying compensation to a loan originator employee based on a specific loan transaction, such as a commission based on the loan amount, if the consumer pays compensation to the brokerage firm. The CFPB is considering an exemption that would permit a mortgage brokerage firm to pay compensation to a loan originator employee based on a specific transaction as long as the conditions noted above on upfront points and fees that would permit a creditor to pay originator compensation are met.

A summary of the issues being considered by the CFPB is set forth in outline to be used by a Small Business Review Panel being convened pursuant to the Small Business Regulatory Enforcement Fairness Act.

The CFPB also presents questions on which it seeks comments from small business representatives.

Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions. It is part of Ballard Spahr’s Consumer Financial Services Group, nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

More Changes “In The Wind” From FHA

With the increase in FHA insurance premiums, FHA is looking at further tightening of rules. However, they are also looking at what they have done to hurt the markets….for an update, we will be giving an FHA webinar next week

….Click Here  and select the free trial and you will registered automaticall.

Article from HousingWire…

The Federal Housing Administration may revise recent regulations some say are hurting purchases and refinances for condominiums. Last year, the FHA implemented several new restrictions on condo loans it would guarantee. At least half of the units must be owner-occupied for projects built longer than a year ago, and one investor can own no more than 10% of the units. The FHA also forbids refinancing for developments with more than 15% of the units more than 30 days past due. Rep. Robert Dold, R-Ill., questioned FHA Commissioner Carole Galante on the new restrictions at a House subcommittee hearing. Dold said those who cannot unload REO or rent space quickly are unnecessarily shut out of financing. “I will commit to you here that some of these I think we can make some adjustments. There are others where we have to walk an important line here to assure that FHA loans are stable and operating, because there is a concern about that for th FHA fund,” Galante said, referencing the fragile capital reserve accounts. The FHA endorsed more than $1.7 billion in condo loans from October to December, less than half of the $3.7 billion guaranteed in the same period the year before. Source: HousingWire

More Changes “In The Wind” From FHA

With the increase in FHA insurance premi

The Federal Housing Administration may revise recent regulations some say are hurting purchases and refinances for condominiums. Last year, the FHA implemented several new restrictions on condo loans it would guarantee. At least half of the units must be owner-occupied for projects built longer than a year ago, and one investor can own no more than 10% of the units. The FHA also forbids refinancing for developments with more than 15% of the units more than 30 days past due. Rep. Robert Dold, R-Ill., questioned FHA Commissioner Carole Galante on the new restrictions at a House subcommittee hearing. Dold said those who cannot unload REO or rent space quickly are unnecessarily shut out of financing. “I will commit to you here that some of these I think we can make some adjustments. There are others where we have to walk an important line here to assure that FHA loans are stable and operating, because there is a concern about that for th FHA fund,” Galante said, referencing the fragile capital reserve accounts. The FHA endorsed more than $1.7 billion in condo loans from October to December, less than half of the $3.7 billion guaranteed in the same period the year before. Source: HousingWire

Just How Large is the Shadow Inventory

The Wall Street Journal Takes a Stab At This Ever “Elusive” Number….

Note:  The housing “problem” will not go away until this inventory is at more normal levels…..

Call it what you will—the “shadow inventory,” the “distressed inventory,” the “foreclosure pipeline”—but if you ask five researchers how many houses or mortgages we should worry about, you’ll probably get at least five completely different answers. Given this, Developments examined these worrisome numbers and see how they stack up. Here’s a roundup of distress numbers, and how researchers arrived at them:LPS

Applied Analytics Number: 4 million loans. Explanation: This is the number of loans that have either been delinquent for 90 days or more or are in foreclosure. The latest report showed that the number of new loans entering delinquency was slowing, but the number of homes in foreclosure that have not been sold remains fairly flat, mainly because the foreclosure process has been bogged down by legal issues in many states. LPS doesn’t use the term “shadow inventory.”

Amherst Securities. Number: 8.2 million and 10.3 million loans. Explanation: Laurie Goodman, a trusted authority on housing finance issues and managing director at bond-trader Amherst, recently presented this whopping estimate of loans “that may be subject to distressed sales over time.” Amherst divides the nation’s 55 million mortgages into five categories: non-performing loans; loans that were once delinquent but are now performing and likely to re-default; performing loans that are underwater by more than 20%; performing loans that are underwater by less than 20%; and performing loans with some equity in them. Amherst considers loans that are 60 days delinquent to be troubled – most other estimates start the clock on their definition of distress at 90 days.

Barclays Capital. Number: About 3 million loans. Explanation: Barclays Capital’s Chief Housing Economist Michael Gapen produced a report looking at loans delinquent for 90 days or more, foreclosures, and REO, or bank-repossessed properties. His report does not include 30-day or 60-day delinquencies. “If you included those categories…it would be a much larger number,” a spokesman for the bank says.

CoreLogic. Number: 1.6 million homes. Explanation: Sam Khater, an economist with CoreLogic, said that CoreLogic’s shadow estimate is so low because the company uses “roll-rate analysis” to predict how many of the 90-plus-day delinquent loans out there will “roll over” to REO, meaning, how many of the country’s seriously delinquent loans will be repossessed by the bank. Then, the company estimates how many loans, once the house is repossessed by the banks, will end up listed on public multiple-listing services (making them no longer “shadow” inventory), and removes those.

Capital Economics. Number: 4.3 million homes. Explanation: Capital Economics has estimated the number of homes “waiting in the wings [that] will eventually add to the supply of properties for sale” and “prevent a normalization in the visible inventory for several years yet.” Their number is comfortably middle-of-the-road. Their definition does not include REO inventory, and it admits that in the worst-case scenario, there could be a shadow inventory of 15.3 million, using the widest possible definition of the term.

Source: The Wall Street Journal

HUD Releases RESPA LO Compensation Guidelines

The Department of Housing and Urban Development’s RESPA Office published additional guidance on complying with the Real Estate Settlement Procedures Act in light of the Federal Reserve Board’s (FRB) loan officer compensation rule.

Scheduled to become effective April 1, 2011, the rule was designed to prevent mortgage brokers and loan officers from increasing their own compensation by raising consumer loan costs, such as by increasing the interest rate or points. Despite several politicians and trade groups request to delay the implementation of the rule, the Fed continues to move forward with the changes.

According to HUD, the guidance seeks to clarify RESPA requirements related to proper disclosure on the GFE and HUD-1 settlement statement. “This guidance does not address substantive issues related to restrictions on mortgage loan originator compensation that are within the jurisdiction of the FRB,” said HUD.

The guidance addresses the following:

1) Mortgage broker transactions where the broker is compensated indirectly from the lender by means other than an amount that is computed based on the interest rate, such as by a flat fee or an amount that is based on any other computation;

(2) No cost transactions where the credit for the interest rate chosen covers third party settlement charges;

(3) Using a credit/charge calculation prior to completing Block 2 on the GFE; and

(4) Payments by lenders to borrowers to correct tolerance violations in transactions involving a mortgage broker.

“The Department urges timely and effective communication among the lender, its loan officers, and mortgage brokers to establish policies and procedures to ensure accurate calculation of compensation and credits in compliance with RESPA, as well as under the FRB compensation rule and any other applicable federal or state statute,” said the agency.

From Reverse Mortgage Daily.  Get full guidelines here:

http://reversemortgagedaily.com/2011/03/22/hud-issues-guidance-to-comply-with-respa-and-fed-compensation-rule/

The Transition from Refi to Purchase

As rates have risen, we are moving from a refinance to purchase market.  That means all loan officers must change their focus.  Remember, everyone else is doing the same thing. What is your approach going to be?  Here are a few idea to help your production immediately….

Call your top 10 Realtors with these purpose(s) –  pick at least one purpose for each call. 

• See what prospects they have. Tell them you have a new program  and that program will get them off the fence with a pre-approval and ready to buy.   
• Ask them what prospects were rejected by other lenders and why?  Ask them if you could review their case with them.
• Offer to sit in a busy open house with them and help them by prequalifying prospects. Perhaps they are assigning a rookie to the house and could use an experienced person there. Or, find out what other marketing events they have planned (seminar, booth, networking meeting)—and offer to go with them. 
• Set up at least two lunches with Realtors every week for the next four weeks to drill down further on these goals.

Call all previous prospects you did not close (including previous customers that were looking to refi) in the past six months.   Make ___ calls per day.

• If they did not do business with you, did they close somewhere else? If they did not act, are they still planning to act?  If the did close or are not planning to act—would they recommend you to somewhere else?  Feel free to use “guilt” as a weapon.
• If you could not qualify them, has their financial situation changed?   If the reason you could not qualify them is their credit score and they are less than 75 points away—if you can show them a way to get their credit score up—are they still serious about buying or refinancing?   Recommend a company that will work on their score and/or help them lower their debts – don’t do work yourself.    If you don’t have one–email me at success@hershmangroup.com
• Call your most referred Title/Closing/Escrow/Attorney company and ask them to introduce you to a real estate agent that either does not have a close relationship with a loan officer or their loan officer’s bank is doing a poor job from a service perspective.  

We are going into tax season. 

• Call three accountants or financial planners you already know and find out who they are recommending could use more tax breaks by purchasing a house. 
• Use these referrals to leverage more business from Realtors.

It is marrying season!  Go display at a bridal fair. Did you know that 50% of marriages result in a home purchase or listing within 12 months?

Hold an event for your top referral sources. Realtors, financial planners, even customers.  Choices?

• Hold a barbeque at your home or in your association clubhouse.   Call it a special thank you or a networking mixer.  You could even just order pizza and have some libations.
• Hold a seminar for referral sources that are in business.  Topic:  maximum sphere marketing.    If big enough bring in outside speaker.
• Get invited to three Realtor sales meetings. Possible topics: Maximum sphere marketing and  the three economic reasons for home ownership.  Not an expert in these? Email me at success@hershmangroup.com
• Whatever event you choose—make sure you have at least one partner/sponsor to help cover the cost and help market it.  Such as a title company. 

Housing Forecast

Although home sales may not improve as much as expected in 2011 because of rising rates, Freddie Mac Chief Economist Frank Nothaft still estimates a 10% increase from last year as housing and the overall economy pushes through to recovery. In his economic outlook for 2011, Nothaft predicts home sales will reach an annual rate of 5.7 million by the fourth quarter. At the end of the third quarter in 2010, the market was on an annual rate of 3.9 million home sales. After the homebuyer tax credit expired in April, home sales plummeted by 27% in July, according to National Association of Realtors data. Nothaft predicts rates will reach as high as 5.5% by the end of the year. But he said with prices falling as much as 30% from their peak in 2007, affordability is still very high. Unemployment should reach below 9% by the end of 2011, consumer spending is improving, and other factors could overwhelm the disappearance of 4% home loan rates, Nothaft said. “More robust growth of jobs and incomes should offset much of the impact of the rise in rates, and help make 2011 a year of recovery for the housing market, as well as the economy overall,” he said. Source: HousingWire

Quote of the Day

Quote of the Day: When one door of happiness closes, another opens, but often we look so long at the closed door that we do not see the one that has been opened for us. Helen Keller. These days a lot of doors are closing. Keep your eyes open for the new door.

Economic Commentary

$100 Oil and What It Could Mean

In the past two weeks we presented a debate regarding the strength of the real estate market during this coming year. However, we left one major factor out of the equation. That is the price of oil. Late last month, oil crossed over the $90 per barrel mark and that means gas at the pumps also crossed over the $3.00 per gallon level. Certainly higher gas prices represent bad news for the consumer. But, what would the price of oil have to do with real estate? Higher oil prices right now are indicative of higher demand caused by a recovering economy. The same recovering economy that will help the real estate market. In this sense, a strong market for oil is good news for the fortunes of real estate. However, all the news is not good.

If oil indeed does approach $100 this year as many analysts are predicting and gas prices start approaching $3.50 per gallon, this will have a negative effect upon consumer spending. The consumer will have to spend more of their available dollars on gas and other energy-based expenditures such as utilities. This would give the consumer less money to spend elsewhere. The result? Higher energy prices may be a result a stronger economy, but they can also slow an economy down. Furthermore, higher energy prices contribute to higher inflation which can then cause higher rates, causing another drag upon economic growth. Oil prices can even affect the pattern of real estate growth, making long commutes more expensive and favoring real estate that is closer in to population centers. Are higher oil prices a certainty? Most analysts believe oil will continue to advance as long as the economic recovery does not stall. If they are right, we need a gradual, orderly advance so as not to adversely affect the pace of economic growth this year. The latest employment statistics, including a recent jump in first-time claims for unemployment, advances evidence of continued slow growth. Of course, jobs data can be extremely volatile from month-to-month.