Jumbo loan delinquencies move higher

This piece from the LA Times regarding jumbo loans is sobering and illustrates that everyone is affected. A “Jumbo” is defined as a loan amount over the conforming limit as set by Freddie Mac and Fannie Mae. In our region currently, that ceiling is a loan of over $729,750.00.

I get the same question constantly in regards to my real estate business, “How are things going, is it picking up?” The delivery is usually cautiously empathetic and concerned. “Is the worst over” is another common query and my standard answer to that is, if I could answer that question I’d be worth a billion dollars.

The truth is that no one knows and anyone who claims they do is selling something… There are so many factors that will determine how things go ultimately and frankly if our government would spend half the energy (focused on finding real solutions) that they devote to undermining each other, we’d be on a faster road to recovery.

Living in the “now”

Pursuant to the topic of the article, following are the local numbers. Properties sold for $750,000.00 or more in the combined South Bay market are up 103% for January 2010 compared to January 2009. Pending sales are also up 73% vs. Jan. 2009 even though inventory is down 32% as most non-distressed sellers are choosing to wait.

That said, ‘pre-foreclosure’ activity on the Palos Verdes Peninsula (90274 and 90275) in this price range is, I’m sure at record levels with 138 homes either showing as NOD (notice of default), scheduled for auction or REO (bank owned). The combined beach cities; Hollywood Riviera, Redondo, Hermosa and Manhattan Beach show 144 properties in these categories.

Prime jumbo loan delinquencies still rising, report shows
LA Times by Alejandro Lazo
February 8, 2010

People who hold jumbo loans on pricey U.S. properties continued to struggle in January as more Americans lose their jobs and property values have plummeted, according to a report released Monday.

Jumbo loans were popular — and often necessary to afford homes in pricey areas like Southern California — during the heady years of the boom.

Jumbo loans are generally defined as being above certain conforming limits set by mortgage titans Freddie Mac and Fannie Mae. (The conforming limit for single-family homes was $417,000 from 2006 to 2008 but was increased temporarily by federal lawmakers in early 2008 to $729,750 in certain high-cost areas, including Los Angeles County.)

Overall, delinquencies of 60 days or more on prime jumbo loans that were packaged into securities and sold to investors rose to 9.6% in January, up from 9.2% in December and 3.7% a year earlier, according to the report by the Fitch Ratings agency in New York.

California, which comprises 44% of the market, saw its delinquency rate rise to 11.3% in January from 10.8% in December and 4.1% a year earlier.

“The deterioration in performance is really the combination of two things going on: rising unemployment that took place throughout 2009 as well as our estimate that about a third of all jumbo loans that are current are underwater in terms of the value, so [borrowers] owe more on their properties than they are worth,” Fitch managing director Vincent Barberio said. “As more of these loans become delinquent, they ultimately will come into foreclosure.”

Prime jumbo loan delinquencies began to rise in the second quarter of 2007, but accelerated in 2009 and nearly tripled over the course of the year, Fitch said. The five states with the highest volume of prime jumbo loans outstanding are California, New York, Florida, Virginia and New Jersey.


Short Sales – Foreclosure: Tax implications

An important piece of the Short Sales – Foreclosure scenario that often gets overlooked are the tax implications of reduced or cancelled debt. The information and especially the links to the IRS website are a must read for anyone contemplating a distressed sale or loan modification.

As always, be sure to contact an accountant or attorney to verify that you understand completely what liability, if any you will have upon successfully selling or modifying.

Home Foreclosure and Debt Cancellation
Information provided by the Law Office of Gregory T. Royston

Update Dec. 11, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

The amount excluded reduces the taxpayer’s cost basis in the home. More details

Further information, including detailed examples, can also be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

The questions and answers, below, are based on the law prior to the passage of the Mortgage Forgiveness Debt Relief Act of 2007.

1. What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

2. Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situation where cancellation of debt is not taxable as income involve:

Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.

Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.

Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.

3. I lost my home through foreclosure. Are there tax consequences?

There are two possible consequences you must consider:

Taxable cancellation of debt income (Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans).

A reportable gain from the disposition of the home, because foreclosures are treated like sales for tax purposes.(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income).

4. I lost money on the foreclosure of my home. Can I claim a loss on my tax return?

No. Losses from the sale or foreclosure of personal property are not deductible.

5. Can you provide examples?

A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000.

6. I don’t agree with the information on the Form 1099-C. What should I do?

Contact the lender. The lender should issue a corrected form if the information is determined to be incorrect. Retain all records related to the purchase of your home and all related debt.

7. I received a notice from the IRS on this. What should I do?

The IRS urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.

8. Where else can I go to get tax help?

If you are having difficulty resolving a tax problem (such as one involving an IRS bill, letter or notice) through normal IRS channels, the Taxpayer Advocate Service may be able to help. For more information, you can also call the TAS toll-free case intake line at 1-877-777-4778, TTY/TDD 1-800-829-4059.

In some cases, you may qualify for free or low-cost assistance from a Low Income Taxpayer Clinic (LITC). LITCs are independent organizations that represent low income taxpayers in tax disputes with the IRS. Find information on an LITCs in your area.

Related Items:

Publication 523: Selling Your Home
Publication 544: Sales and Other Dispositions of Assets
Publication 908: Bankruptcy Tax Guide
Form 1040: U.S. Individual Income Tax Return
Form 1040: Schedule D, Capital Gains and Losses
Form 1099-C: Cancellation of Debt
Form 9465: Installment Agreement Request