By now most of us are aware of the term "fiscal cliff." The term
refers to the economic mayhem that is expected if tax increases,
spending cuts and the budget deficit rules go into effect in
January 2013.
But while a fiscal cliff threatens the economy as a whole, real
estate has its own fiscal cliff that's quickly approaching. And
unless certain rules, laws and programs are extended, we could see
a huge falloff in the recovery of the housing market.
Potential borrowers might want to get their transactions
completed in front of those changes, since they might push rates
and fees higher in their respective wakes.
Here are five items with approaching expirations that could
seriously threaten the strides we've made so far:
- Expiration of the mortgage interest deduction
- Expiration of the Mortgage Debt Forgiveness Act
- Tax-deductible mortgage insurance
- Expiration of Operation Twist
- Foreclosure reviews
No. 1: The mortgage interest deduction.
Not that anyone purchases a home solely to claim the deduction, but
the tax break certainly makes homeownership more attractive,
affordable, and according to some, a stabilizing factor for housing
markets.
But the long-considered cornerstone of American homeownership is
in jeopardy as the government still hasn't voted to extend the tax
break. A mounting national deficit is the main reason the deduction
could be allowed to expire. Presently, interest on loans of up to
$1,000,000 can be deducted, including primary and secondary
homes.
"I believe the deduction won't be eliminated, but scaled back to
coincide with the current conforming loan limits for high-cost
areas," says Keith Gumbinger, vice president of HSH.com. "So rather
than a million dollar maximum limit, the total might be scaled back
to $625,500, for example. Interest accrued on mortgage debt in
excess of that figure would no longer be deductible."
No. 2: The Mortgage Forgiveness Debt Relief Act and Debt
Cancellation.
Short sellers beware: The tax break that allows mortgage debt to be
forgiven is also staring down the barrel of expiration.
If this law is allowed to expire on Dec. 31, unpaid mortgage
debt will be
treated as taxable income by the IRS
, a huge financial burden for struggling homeowners who have
recently engaged in a short sale or those who were planning to in
the near future. The desirability of short sales could all but
disappear if this law is not extended.
"If not extended, this has the potential of immediately reducing
home sales by as much as 20 percent," said Dave Liniger, RE/MAX
co-founder and chairman, in
an open letter to President Obama and Governor
Romney
. "Troubled homeowners who meet the qualifications for a loan
modification or short sale are not likely to pursue either of these
options if the remaining mortgage balance is considered taxable
income."
No. 3: Mortgage insurance.
Mortgage insurance
is required for all FHA and conventional mortgages that have down
payments less than 20 percent of the purchase price. Homeowners who
are refinancing may be surprised to find out that they too need to
pay mortgage insurance if they have less than 20 percent equity in
their home.
While mortgage insurance is currently tax deductible, it's set
to expire at the turn of 2012. Unless it is renewed or revived by
Congress, you will no longer be able to deduct it going forward.
This will mean a fair-sized tax increase for many homeowners.
The IRS allows homeowners who pay mortgage insurance in
connection with a home acquisition to deduct the premiums from
their taxes along with their mortgage interest payments. In order
to be tax-deductible, the mortgage insurance contract must have
been issued after 2006.
For complete details about taxes and mortgage insurance, check
IRS Publication 936
.
No. 4: Operation Twist.
The Federal Reserve's Operation Twist is scheduled to come to a
close at the end of the year. Operation Twist is a money-recycling
program in which the Fed has bought longer-term Treasury bonds
while selling shorter-term bonds in order to hold down rates.
While it sounds technical, the program is essentially an effort
is to lower long-term interest rates, including mortgage rates.
No. 5: Independent foreclosure reviews.
Originally slated to end on July 31, consumers now have until the
end of this year to submit a request for a foreclosure review at
http://www.independentforeclosurereview.com. To request a
foreclosure review, you must log on and first check your
eligibility. You must be a customer of one of the participating
servicers. If you are, your next steps are to fill out and submit a
"Request for Review Complaint Form." Forms must be sent online or
postmarked before Dec. 31. For general questions or for help
completing the form, call
1-877-465-0428.
The five items above aren't the only issues threatening the real
estate market as we come to the turn of the year. A nearly
insolvent FHA and a still-undetermined definition of what a
"Qualified Residential Mortgage" should be are bound to also have a
profound influence on the mortgage market moving forward.