Guest Commentary By...

More About The Mortgage Meltdown

Category: Guest Commentary, CIN RSS, Focus On Homepage, SOS - Commentary & Insights BY: REVEREND TOM GOODHUE – EXECUTIVE DIRECTOR, LONG ISLAND (NY) COUNCIL OF CHURCHES

The November and December issues of the LICC newsletter -- The Prelude (available at www.liccny.org) -- addressed possible solutions to the mortgage mess. There has been some progress in recent weeks. A number of banks are reaching out to borrowers before their adjustable rate mortgages readjust to higher rates to see if they may need help in refinancing or modifying their loans. President George W. Bush signed into law the “Mortgage Forgiveness Debt Relief Act of 2007,” which was summarized by Wells Fargo Bank:

Elimination of the “phantom tax” on foreclosures, short sales or other discharges of debt on a primary residence. Consider this scenario: A property is worth $250,000, and the mortgage balance is $300,000. Under the old rules, if a lender forgave the $50,000 difference as part of a foreclosure, short sale, refinance or loan modification, the borrower had to claim the $50,000 as income and pay federal income taxes on that amount. The new law eliminates this “phantom tax,” and the forgiven debt is no longer treated as taxable income to the borrower as long as certain requirements are met, such as the discharged mortgage balance must be on the taxpayer’s principal residence.

Extension of the tax deduction for mortgage insurance premiums. The same rules apply as before in terms of the income limitations etc., and these rules are covered in the taxation section of the CMPS curriculum.

Raising the capital gains exclusion to $500,000 from $250,000 for an unmarried individual who sells their primary residence within 2 years of the time their spouse has died. This new guideline applies to sales after December 31, 2007, and provides relief for widows and widowers by giving them a 2 year window from the time their spouse has died to sell their home and receive the $500,000 exclusion. Of course, the same rules apply as before, where the individual(s) need to have lived in the home as their primary residence for 2 out of the last 5 years.

As many analysts have observed, this law helps some people caught in the mortgage meltdown -- but not everyone who needs and deserves help. Since there is more than enough blame in this crisis to go around, it will probably take a number of steps at the local, state, and federal level to repair trust in borrowing, prevent future lending abuse, and help those who have been victimized by unscrupulous lenders.

Several interesting ideas have been floated recently:

US Senator Christopher Dodd (D-Connecticut) has proposed a tough bill to prevent predatory lending, the “Homeownership Preservation and Protection Act,” which would  eliminate prepayment penalties and create a “good faith and fair dealing” duty for all lenders, including brokers, loan servicers, and appraisers. Non-traditional products, such as “option” Adjustable Rate Mortgages are included in the protections of the bill.

US Senator Charles Schumer (D-New York) and others have introduced legislation that would provide $300 to HUD-certified nonprofits for foreclosure prevention and intervention work -- an important step to keep good agencies such as the Long Island Housing Partnership from being overwhelmed in the rising tide of defaults—and to regulate mortgage brokers and loan originators under the “Truth in Lending Act,” which seems only fair since the depository banks that now have the greatest scrutiny are the lenders who are generally least to blame for the current crisis.

Professors Michael Barr, Sendil Mullainathan, and Eldar Shafir proposed recently (see The New York Times issue of December 26, 2007) that a simple way to avoid getting a bad deal is to make a 30-year, fixed-rate mortgage the loan that everyone automatically gets “unless they choose to opt out in favor of another option, after honest and comprehensible disclosures from brokers or lenders about the risks of the alternative mortgages.” An opt-out mortgage system would mean borrowers would be more likely to get straightforward loans they could understand.

Breaking news on the mortgage mess:

The Mortgage Bankers Association (MBA) reported recently that 54,000 home owners modified their loans in the third quarter of 2007, approximately 13,000 of which were on subprime loans. This is a much higher number than Moody’s found in September 2007, when they reported that most subprime-loan servicers this year had modified only about one (1) percent of their adjustable-rate mortgages (ARMs) that had reset to higher rates by the end of July. "Loan modification" includes interest-rate adjustments or changes in the length of the loan. The term also includes write downs of loans, which are reductions in the total amount that a borrower has to pay. Unfortunately, 384,000 borrowers began the process of foreclosure in the third quarter. (This news comes from www.CommunityInvestmentNetwork.com, a great source of information on these issues.)

The economic stimulus package put together in the House or Representatives includes a provision that would allow government-sponsored Fannie Mae and  Freddie Mac to buy mortgages up to 75 percent more expensive than the current $417,000 limit. At this writing (January 31), the Senate and White House have yet to sign off on the proposed stimulus plan and it is possible that the jumbo threshold will not be raised that high. Raising the limit on how much people can borrow without needing a more-expensive “jumbo loan” will allow a larger pool of borrowers to find lower rates when buying a new home or refinancing an existing mortgage. This move will certainly help revive lagging home sales, particularly for homes priced over $450,000, and will benefit homebuyers who have good credit, have some money to put down and can meet the new, tougher standards for getting a loan, but it will not do much for homeowners who already are struggling to pay their mortgage.

And if the higher borrowing limits make it easier to treat your home like an ATM, taking out equity and still racking up huge credit card balances, it will only part fools from their money all the quicker. And if banks need new computer programs to assess underwriting risks for larger loans, this could delay many loans. As one of Goodhue’s Laws states, “every solution creates a new problem.”
 

NOW IS A GREAT TIME TO BUY A HOME!

Housing prices have eased a little lately and mortgage rates are expected to come down considerably in coming weeks. There are also, finally, a number of new affordable/workforce/next-generation homes being built on Long Island (New York). A growing number of these are “smart growth” projects, too, which make the most sense for many buyers. According to the Long Island Index report released last week, nearly half of young adults in our region would consider an apartment, condo, or townhouse in a local downtown -- and a majority of those 50 and older would prefer to live in this sort of neighborhood where they can walk easily to stores and be less dependent upon cars. The good news is that villages such as Patchogue are now creating exactly this sort of housing at affordable prices.

The sub prime mortgage meltdown has frightened many potential borrowers, but nearly no one who got an affordable home through the Long Island Housing Partnership or went to the organization for mortgage counseling and then bought a home on the open market has run into trouble with their loans. If you have good credit and are shopping for a home you can afford rather than a McMansion, this is a great time to buy.
 

More News from the Long Island Council of Churches –

Offered Finance Seminars

The LICC is presenting a personal finance seminar in both English and Spanish on Saturday, Feb. 9, 2008 at 10:00 a.m. at Christ Lutheran Church/ Iglesia Luterana De Cristo, 61 North Grove Street in Freeport (516-378-1258). There will be simultaneous seminars in two rooms, one in Spanish and one in English, then gathering for coffee, goodies, and informal conversation. All are invited.

The LICC offers seminars on how to manage your money well--and not get ripped off on loans. Our presentations usually run an hour to 90 minutes, and we will tailor it to the needs of your audience. We can do shorter programs, for example, for a college class, campus ministry group, or youth group and their parents. They could be a great addition to your congregation’s stewardship campaign, helping people to think faithfully about our stewardship of all our resources. We would also be glad to do presentations for religious leaders on how to manage a congregation’s money more effectively, reduce expenses, and encourage planned gifts.

The LICC will arrange speakers, educational materials, and other freebies. There is no charge for this program. Thanks to grants from Astoria Federal Savings, Bank of America, Bank of New York, Citibank, Washington Mutual, Greenpoint Bank Foundation, JPMorgan Chase, Ridgewood Savings Bank, and Wells Fargo Home Mortgage for making it possible for the Long Island Council of Churches to provide this free program.

We have speakers who can handle a variety of languages. If you would like to have such a seminar, call 516-565-0290, ext. 206, fax 516-565-0291, or e-mail licchemp@aol.com. Each presentation is shaped around the needs of the audience and we are prepared to address a wide variety of topics. Here are some we have dealt with recently that might be of interest to students and their parents:

• How to shop for a good loan
• How to get a good deal on checking and savings accounts and other financial services
• How to manage credit cards and other forms of credit
• How to “repair” a bad credit history
• How to reduce expenses on things you think are essential.
• How to convert a loan you already have into a better deal.
• How to talk with your kids (or your parents) about how they manage their money.

---