Q: So who will be subject to the new tax? When is it effective?
The new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. The new Medicare tax on unearned income will take effect January 1, 2013. Proceeds from the tax will be allocated to shoring up the Medicare fund.
Q: Who is a “High Income” Taxpayer?
Those whose tax filing status is “single” will be subject to the new unearned income taxes if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return with AGI of more than $250,000 will also be subject to the new tax. (The AGI threshold for married filing separate returns is $125,000.)
Q: What is “unearned” net investment income?
Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business. The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.)
Q: Give me an example.
If AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000.
If this single individual had AGI if $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over $200,000.
Q: Will the 3.8% tax apply to any part of the gain on the sale of a principal residence?
The new Medicare tax would apply only to any gain realized that is more than the $250K/$500K existing primary home exclusion (known as the “taxable gain”), and only if the seller has AGI above the $200K/$250K AGI thresholds.
So, for example, if the taxable gain was $30,000 and a married couple had AGI (which would include the taxable gain) of $180,000, the 3.8% tax would not apply because AGI is less than $250,000. If that same couple had AGI of $290,000, then the application of the 3.8% tax would be subject to the same formula described above. The $30,000 taxable gain on the sale would be less than the $40,000 excess above $250,000 AGI, so the $30,000 gain would be subject to the new 3.8% tax.
California’s proposed Homeowner Bill of Rights, originally proposed by the state’s attorney general Kamala Harris and covered here has been modified extensively following what the Center for Responsible Lending (CRL) calls six weeks of intense negotiation with banks, legislators, the attorney general and consumer groups.
Among the changes reported by CRL is a narrowed scope for both the loans and servicers covered by the bill. The only loans to which the bill will now apply are first mortgages on owner occupied one-to-four family houses and only servicers who process more than 175 foreclosures per year will be subject to many of its requirements.
Earlier versions of the bill required the lender or servicer to record and provide evidence of all assignments as part of the chain of title to foreclose. The current version requires that only evidence of the last assignment be available to the borrower. The current bill also includes an express and comprehensive right to cure until the notice of trustee sale is filed. A servicer can avoid liability by curing a violation before the foreclosure sale.
Originally the bill provided post-sale minimum statutory damages of the greater of actual damages or $10,000; the new version allows only actual damages with triple damages or a minimum of $50,000 available only in cases of intentional reckless violations or willful misconduct.
Unlike the National Mortgage Settlement the California bill allows for multiple contact persons as long as they have the access and authority of a single point of contact. Prohibitions against dual tracking and false documents remain as in the original law, however the enforcement provisions sunset after five years.
CRL says that this Homeowner Bill of Rights remains critical for large number of borrowers, their communities, and the California housing market. It ensures that borrowers in owner-occupied homes applying for loan modifications get full and fair consideration for those modifications before the foreclosure process begins. This will allow the foreclosure process to move more quickly for those who do not qualify for home retention alternatives while preventing unnecessary foreclosures on borrowers who do.
CRL released a new study of California delinquencies with three principal findings.
First, loan modifications work well to keep borrowers in their homes. More than 80 percent of California homeowners who received modifications in 2010 stayed current and avoided re-default despite the continued recession. Only 2 percent of those modified loans ended in foreclosure.
Second, large numbers of borrowers remain at risk with nearly 700,000 California mortgages in some state of delinquency or foreclosures. This is one out of nine borrowers.
Third, middle class, African Americans, and Latinos are the hardest hit. The delinquency rates for African Americans and Latinos are 11.1 and 10.7 percent respectively while for Asians and whites the rates are 7 and 7.3 percent. Delinquencies are concentrated among middle class borrowers, those making between $42,000 and $120,000 annually.
“California policymakers will soon have the chance to extend key servicing reforms from the National Mortgage Settlement to all California borrowers, said Paul Leonard, CRL’s California Director. “Our legislators have an historic opportunity to overcome intense opposition from the big banks and ensure that all Californians get a fair shot at loan modifications.”
Excerpted from Robert Shiller’s editorial in thenytimes.com:
Traditionally, we think of eminent domain law as applying to land and buildings. For example, a government can use eminent domain to seize real estate along a proposed new highway route so the highway can be built in a nice straight line. It would be absurd to expect the government to bargain with each property owner to buy a strip of land along the proposed highway route and to have to redirect the highway around a farm whose owner refused to sell. That is common sense.
But eminent domain law needn’t be restricted to real estate.
It could be applied to mortgages as well. Governments could seize underwater mortgages, paying investors fair market value for them. This is common sense too. The true fair market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.
Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores. After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.
The original mortgage holders, the investors in the new mortgages, the homeowners and the nation as a whole will generally be better off. There will surely be some who may not agree, like the holdout farmer opposing the highway, but eminent domain ought to be able to push ahead anyway.
San Bernardino County in California is working with a private company, Mortgage Resolution Partners, on the possibility of putting such a plan into action. We must hope this effort succeeds. If it works, it can be replicated all over the country.
But first we have to realize that much of our economic suffering takes the form of a collective action problem. We have to stop the wishful thinking that the problem will solve itself through a spontaneous rally in home prices. We need to summon our resources to exercise the authority that allows collective action.
Professor Koniak says the solution to this problem has been so slow in coming for a simple reason: “It’s the will that’s lacking! The will!”
Are government programs finally starting to solve the housing crisis? FromHW:
The number of refinanced Fannie Mae and Freddie Mac mortgages nearly doubled in the first quarter as the largest banks launched the expanded Home Affordable Refinance Program.
Servicers refinanced roughly 180,000 GSE loans in the first three months of 2012, nearly double the 93,000 completed in the fourth quarter, according to Federal Housing Finance Agency data. In March alone, servicers refinanced 80,000 borrowers under the program.
HARP launched in April 2009 to allow more borrowers who owe more on their mortgage than their home is worth to refinance. But few severely underwater borrowers could take advantage of historically low rates. The FHFA expanded the program last fall to remove the loan-to-value ceiling of 125% — the so-called HARP 2.0 — and to reduce upfront fees and eliminate repurchase risk if the original servicer on the loan completes the workout.
With the surge in the first quarter, total HARP refinancing now totals more than 1.2 million loans.
And more severely underwater borrowers are finally being included. More than 4,400 borrowers with LTVs above 125% refinanced through HARP in the first quarter. More than half of them were located in California, Florida and Arizona, states hardest hit by the foreclosure crisis.
Borrowers in the 105% to 125% range were often shut out as well, but that changed under the expanded program as well. In the first quarter, nearly 37,000 of these underwater borrowers refinanced, nearly triple the 13,000 in the previous quarter.
Lawmakers are considering another expansion of the program. Most of the HARP business is going to the largest banks because of the reduced repurchase risk, which is generating higher profits for these firms. Smaller lenders want in on the action and are busy lobbying Congress for more competition, specifically asking to remove repurchase risk for all lenders.
Gov. Jerry Brown’s plan to use more than $400 million from a national foreclosure settlement to help balance the state budget would put struggling homeowners at risk of criminal scams, California housing officials say.
“We are already hearing from three or four families a week who have been approached by scam artists,” said Javier Hernandez, a housing counselor at Neighborhood Housing Services of the East Bay, which is in the heart of Richmond’s hard-hit Iron Triangle.
Under the terms of the settlement – part of a national agreement to resolve allegations of wrongful foreclosures by Bank of America, Wells Fargo, JPMorgan Chase, Citibank and Ally Financial – troubled California borrowers are slated to receive about $17 billion in direct assistance over the next three years. That amount includes $12 billion in mortgage write-downs for borrowers who owe more on their homes than they are worth.
In addition to direct aid to homeowners, the state is slated to receive $410 million in direct payment from the banks. Attorney General Kamala Harris had slated that money for enforcement and assistance to local housing organizations, which would help borrowers navigate the often-complex procedures banks have set up to access the money.
Housing counselors said they had been counting on that pot of settlement money to confront the fraud.
“People are being told, ‘Oh, we can help you fill out the application to get you a principal reduction if you just give us a few thousand dollars,’ but there is no such thing,” said Josie Ramirez, executive director of HomeownershipSF, a coalition of organizations that provide housing counseling in San Francisco.
But when Brown announced his revision to the state budget earlier this month, he said he planned to redirect all of the state’s share toward reducing the deficit this year and next.
“The settlement money will really in effect replace some general fund money so we can use it for other things, but it will still be going for the purpose the lawsuit intended,” he told reporters.
The budget, Brown said, is “a pretzel palace of incredible complexity.”
A week later, Brown’s move was endorsed by the nonpartisan Legislative Analyst’s Office. With a $15.7 billion shortfall now projected for this year, the office urged lawmakers to ignore the possibility that shifting the money might be illegal.
“We believe the magnitude of the additional budget year savings justifies any legal risk associated with offsetting General Fund costs less directly related to the settlement,” its report said.
But not everyone in Sacramento has signed on to the change. In an interview, Sen. Mark Leno, D-San Francisco, chairman of the Senate Budget and Fiscal Review Committee, called Brown’s proposal “disturbing.”
Leno said he would be working with other members of the budget committee to find ways to restore the funding, but added that with such a large deficit, “our choices are few and difficult, but I’m going to be doing what I can to see if we can’t keep the money for its intended purpose.”
Between 2001 and 2006 the US housing market experienced a “housing bubble” wherein the prices of single-family homes increased an average of 12 percent each year. This increase was accompanied by mortgage debt that more than doubled from $5.1 trillion in 2000 to $11.2 trillion by June 2008. In about the same time frame Fannie Mae’s mortgage-related assets and guarantees went from 1.3 trillion to $3.1 trillion and Freddie Mac’s from $1 trillion to $2.2 trillion (representing annual increases of approximately 11 percent for each GSE.) Then, starting in 2007 home prices began to plummet and defaults to rise. After more than doubling over six years, home prices fell by 27 percent between 2006 and 2008.
The GSEs had grown rapidly with only a thin capital cushion to provide protection against losses. The capital they were required to hold met regulatory standards but fell well below the capital levels maintained by many large financial institutions so they were not prepared to manage the sharp decline in housing prices. In 2007, with prices down an average of 9 percent, the GSEs businesses began to feel increasing stress and by the next year rates of seriously delinquent mortgages they either owned or guaranteed exceeded any levels of the previous decade.
Gains, Losses, and the Use of Funds
Fannie Mae lost $5 billion in the second half of 2007 and another $4.5 billion in the first half of 2008 and Freddie Mac lost $3.7 billion and $1 billion. Then the collapse of the MBS market in the Fall of 2008 resulted in even larger losses. During 2008 the two GSEs had combined losses of more than $100 billion. For some perspective, over the 37 year history of the two companies (1971-2008) they earned $95 billion less than they lost in 2008 alone. During the next three years ending in Q3 2011 the GSEs lost another $251 billion. “In other words, the losses incurred during the conservatorships are more than double the cumulative net income the GSEs reported as public companies.”
On September 6, 2008, FHFA in concert with the Department of the Treasury put the GSEs into conservatorship citing concerns about their financial conditions, their ability to raise capital and to continue funding themselves, and the critical importance of each company to the residential mortgage market. At the same time Treasury entered into an agreement to provide the GSEs with cash sufficient to eliminate what deficits they might occur in exchange for ownership of the GSEs senior preferred stock. Since that time Treasury has made equity investments in the GSEs every quarter and, by the end of 2011 the cumulative amount was $185 billion.
Initially the Treasury’s investment was capped at $200 billion, subsequently increased to $400 billion and increased again to $400 billion over the amount actually drawn as of December 31, 2012. As a condition o this support the GSEs agreed to pay to Treasury quarterly dividends at an annual rate of 10 percent on Treasury’s outstanding investment.
According to OIG, these dividend obligations, exacerbated by the 10 percent annual rate, are so large that the GSEs have yet to earn enough to pay them annually so Treasury has had to advance additional sums to pay the dividends. At the end of 2011, Treasury’s $185 billion investment in the GSEs included $32 billion to pay its own dividends. At present the required annual payment from the GSEs is $19.2 billion. The two, in their best year, earned a total of $14 billion, so they have never in their history earned enough to cover the required dividend on Treasury’s current investment.
When Jennifer Anderson’s family could no longer afford their mortgage and lost their home, she expected many years to pass before they would again become property owners.
But less than two years later, in March, they purchased a $297,000 house outside Phoenix, Arizona, after qualifying for a loan backed by the U.S. government.
They joined a small but growing number of Americans who are making a surprisingly quick return to homeownership after defaulting on their loans or being forced into short sales that cost their banks money.
“We didn’t really expect it,” said Anderson, 40. “We were resigned to the fact that we were going to be in a rental property for a while.”
Financial problems arose after she lost her job as a customer service representative for a health insurance company and her husband’s hours at an automaker were cut. To make matters worse, they used up her retirement savings trying to keep their home.
Data is not available, but interviews with more than 30 lenders, builders, Realtors and consumers suggest that a growing number of Americans are getting back into the housing market, even though they went through a foreclosure, bankruptcy or short sale in recent years.
“Most are not ashamed or bashful about what happened because so many people were forced into that reality in the last six years,” says Graham Epperson, vice president of sales in Arizona for the PulteGroup, a leading U.S. homebuilder.
About half of the $410 million flowing into California’s coffers from the national mortgage settlement with major banks will be pumped into the state’s housing counselors and legal services agencies that help struggling homeowners.
The funding is part of the plans disclosed Friday by state Atty. Gen. Kamala D. Harris for distributing the cash.
Harris, who helped negotiate the agreement with the nation’s five biggest banks, said she also plans to spend the rest of the money on reaching out to and educating homeowners stuck in the hardest-hit parts of the state; on further investigations and oversight of the settlement funds; and on helping borrowers who can’t stay in their homes.
“Homeowners who receive meaningful counseling are far more likely to avoid foreclosure,” said Shum Preston, a spokesman for Harris.
The cash the state received is part of $3.5 billion in total cash payments made to 49 states in the overall settlement with five of the nation’s biggest banks. The global settlement of accusations that the banks improperly or fraudulently foreclosed on homeowners provides $25 billion in aid to struggling borrowers.
“There are over half a million California households currently in the foreclosure pipeline, so we understand the importance of getting these funds into the communities where they’re needed and to the homeowners most affected by this crisis,” Preston said.
Community organizer Peggy Mears at the Alliance of Californians for Community Empowerment said funds need to go to African American and Latino families first because they were the hardest hit by the foreclosure crisis.
Mears said the money needed to go toward helping homeowners, not to filling the state’s budget deficit, as it has in other states.
“We need the highest levels of accountability for this money,” she said. “This settlement was for homeowners who were dealing with the foreclosure crisis.”
Housing counseling agencies across the U.S. have struggled in the face of the crisis, just as demand for their services has gone up.
The tough economy and a more competitive environment for nonprofits have hit counselors who provide foreclosure counseling, said Anna Lisa Biason, director of fund development for Neighborhood Housing Services of Orange County.
FHFA’s REO-to-Rental Initiative, Burns said, is meant to complement the primary disposition strategies used by the GSEs and is intended as a pilot. Its goals are fairly limited:
To gauge investor appetite for scattered site single-family rental housing and their price sensitivity;
To determine whether disposing of properties in bulk presents an opportunity for well-capitalized investors to partner with regional and local property management companies and other community organizations to create appropriate economies of scale while providing civic-minded approaches that can stabilize and improve market conditions;
To assess whether the model can be replicated to make it a worthwhile addition to the standard retail and small-bulk sales strategies of the GSEs and other financial institutions with large inventories of REO.
Burns addressed what she said were misconceptions regarding FHFA’s intent and goals for the rental pilot. First, it is highly targeted and focused only on markets that provide an opportunity to correct a fundamental supply-demand imbalance. “This type of intervention would be highly inappropriate on a national scale and the program was never intended to be offered nationally,” she said. Second, the pilot will not result in severely discounted sales. If the properties cannot be sold at close to what they would bring through retail execution then they will not be sold.
Because there are so many uncertainties, the pilot is initially limited to Fannie Mae properties because of its greater concentration of homes in the selected markets and because it seemed most reasonable to expand the capabilities of only one company to executive the program and meet the significant legal and operational challenges involved.
Also because of the uncertain outcomes the first pool of properties includes a large number of properties that are already rented to tenants who were in place when the properties were conveyed to Fannie Mae. This will minimize the time that properties are held off the market and help to test one of the key objectives of the pilot – to determine investor appetite for this asset class.
@mikesimonsen @Milehighmilede1 Probably worth noting that according to our latest report at @Attomdata, 90% of borrowers in foreclosure have positive equity - many have more than 25% equity. During the last cycle most borrowers in foreclosure were underwater on their mortgages. Big difference.