Coastal Real Estate and Lifestyles

Two bills are in process that will alter the real estate loan business - if passed…

Cancellation of Mortgage Debt - HR 3648 - Rengal bill

This updated bill would make it easier for a home seller to close on their home for less than the loan amount due.  It would take at least one nail out of the coffin of the homeowner faced with possible foreclosure.  Currently, if faced with having to sell his house for a loss, a homeowner is required to pay income tax on the difference.  There is an effort to get this bill passed before the end of this year and proposals to have it be retroactive to January 1, 2007.  Here’s an example from NAR’s website-Cancellation of Mortgage Debt Q&A:

“Assume a family purchased their home for $100,000, with a mortgage of $95,000. Later, they need to sell the home. They find that the value of homes in their area has declined and they can sell for only $89,000. At the time of the sale, the outstanding balance on a mortgage might be, for example, $92,000. Thus, there will not be enough cash at settlement to repay the lender the full balance of the mortgage. In some limited circumstances, a lender might forgive the amount of the balance that exceeds the purchase price ($3,000 in this example). “

For homeowners in our area, of course the numbers are much larger.  Those most affected in our area will be 1) established homeowners who over-refinanced and are now forced to sell due to unforeseen circumstances; 2) first time homebuyers who got into the market with a teaser loan, try but can’t continue to make payments at the higher rate and need to sell to get out from under the escalating debt; 3) those who used equity to purchase a second home, either here or somewhere else and need to sell.  None of us plan for a job loss, divorce, job transfer, or a medical emergency.  We may have the “Emergency Fund” to get us through 3-6 months, but in some of these cases it won’t be enough.  If a homeowner finds himself in this situation, he may find that either he can’t list the home to be competitive and cover the debt, or it’s not in his best interest to accept a lower offer price because of the tax consequences.  If the seller is able to complete the sale (the lender has agreed to accept less than the total loan amount), the seller is faced with having to declare that difference as taxable income.  The lender would provide the homeowner with a Form 1099.  This bill was originally proposed several years ago and has gone through several drafts. 

Mortgage Reform and Anti-Predatory Lending Act of 2007 - HR 3915 - Frank bill

This new bill is designed to reduce predatory lending practices and put in place greater accountability measures in the mortgage industry for consumer protection.  While on the surface it appears like a no brainer, there are such strong feelings on both sides of the fence that this bill clearly warrants further investigation.  This bill proposes: (my opinion/thoughts as of today will be next to each point.)

• A nationwide mortgage licensing system and registry; (seems like a good idea.)
• Prelicensing education from approved courses; passing a test that would be developed by the national registry; license renewal guidelines; (education and testing is good, but testing by the same organization that licenses?)
• To amend the Truth in Lending Act by inserting “anti steering” wording including the elimination of incentives in certain circumstances and yield spread premiums (YSP); (what impact would there be to eliminate ysp’s?  are ysp’s as bad as this bill makes them sound?  how much are they abused?)
• To amend the Truth in Lending Act by inserting a “defense to foreclosure” clause for the consumer against a judicial or non-judicial foreclosure attempt by the mortgage holder; (where’s the layman’s interpretation?)
• Require disclosures that specify current and future payment amounts for variable rate loans; (seems obvious)
• Prohibiting credit extension without regard to payment ability of the consumer.  Here is exact wording from the bill - this is important — “A creditor may not extend credit to a consumer under a high-cost mortgage unless a reasonable creditor would believe at the time the mortgage is closed that the consumer or consumers that are residing or will reside in the residence subject to the mortgage will be able to make the scheduled payments associated with the mortgage, based upon a consideration of current and expected income, current obligations, employment status, and other financial resources, other than equity in the residence.” (Section 302.2a) (this seems like a black hole - with wording like ‘reasonable’ and ‘believe’ and ‘consideration’; more research required)

To hear the actual testimony from Congressman Frank on this bill proposal, click here.  Thanks to the InmanBlog reference dated 11/2/07.  To view the 10/22/07 Press Release from the House Committee on Financial Services with links to the Bill and a section by section summary, click here.

I do believe the mortgage industry needs changes; I don’t yet know if this Bill as it currently is written accomplishes that.  I feel we are moving in the right direction, I just want to understand this more before I weigh in with more persuasive opinions.  We need more facts on the short and long term consequences of these proposals.  Homeowners need to understand these terms and then contact our local representatives.  I am interested to know what you think.

11/16/07 update:  House of Representatives approved this Bill with some modifications with a 291-127 vote.  Other modifications are in progress.  Contact your congressman to share your views while politicians work to refine the final wording.

 Resources:

Federal Reserve Education website
Thomas