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.
Tim Manni is the Managing Editor of HSH.com and the author of the site's daily blog, which concentrates on the latest developments in the mortgage and housing markets.