Short sales: taxes, 1099s, and relocation assistance

by Melissa Zavala in Housing News -   

taxes money Short sales: taxes, 1099s, and relocation assistance

It’s Tax Season

I always know when tax season is just around the corner because I see Lady Liberty or Uncle Sam spinning signs that invite me into a local tax preparer’s office. Now is also a time when lots of questions arise about short sales and income taxes. If you or any of your clients participated in a short sale in 2012, then there are a number of things you will want to know about short sales and tax return preparation.

Mortgage Forgiveness Debt Relief Act of 2007

I received a 1099-MISC from the short sale lender. Is the income noted on the 1099-MISC taxable?

The Mortgage Forgiveness Debt Relief Act of 2007 provides tax forgiveness for certain short sale sellers, and such forgiveness depends on the taxpayer’s specific situation. Taxpayers who sold their home in a short sale during 2012 should seek the advice of an accountant in order to learn whether this Relief Act applies to their unique tax position.

What if the Mortgage Forgiveness Debt Relief Act doesn’t apply to my short sale?

Because the Mortgage Forgiveness Debt Relief Act of 2007 does not apply to everyone (e.g. if the home sold is not a qualified principal residence or due to bankruptcy), it is vital that taxpayers seek the advice of an accountant in order to learn about any other tax laws that may come into play in order to provide tax relief.

Is Relocation Assistance Money Taxable?

I received an incentive from the short sale lender? Do I have to pay taxes on the incentive?

According to the Internal Revenue Service, “Cash for Keys Program income, which is taxable, is income from a financial institution, offered to taxpayers to expedite the foreclosure process. Report this as ‘other income’ on Form 1040, line 21. The taxpayer should receive Form 1099-MISC with the income in box 3.”

I received an incentive from the short sale lender, but I did not receive a 1099-MISC. How should I proceed?

I’d bet dollars to doughnuts that short sale sellers often don’t receive the 1099-MISC because the short sale lender doesn’t have a record of the taxpayer’s new address. Speak with an accountant about how to proceed in this situation.

Common Problems with Relocation Assistance

My real estate agent told me that I was supposed to get relocation assistance money. We closed, and I received a 1099-MISC. However, I never got any relocation assistance money. What should I do?

All relocation assistance money is documented on the final settlement statement (also called a HUD-1) and payable to short sale sellers through the settlement agent at closing. If there is no line item for relocation assistance on the settlement statement and no notation on the short sale approval letter from the lender, then the bank did not approve the short sale assistance.

If there is a line item for relocation assistance and the seller did not receive the funds, contact the settlement agent for more information. In many cases, with prior written authorization of the short sale seller and the short sale lender, relocation assistance money is used in order to pay off non-institutional liens and clear the title for closing.

On the settlement statement, it shows that the buyer is paying the relocation assistance and not the short sale lender. Why would I receive a 1099-MISC from the short sale lender if the buyer paid the money?

Since any real estate sale requires that buyer funds be used to pay seller costs, the relocation assistance shows as a debit to the buyer and a credit to the seller. Of course, this is a credit to the seller from the short sale lender who retains all of the remaining funds at closing.

Short Sale Documentation

No matter when the short sale closes, all short sale sellers should retain copies of the short sale approval letters from the lenders and a final settlement statement from the closing agent. In this way, any questions that come up (no matter how far in the future) can be addressed quickly and efficiently.

Courtesy of your Arcadia Real Estate Agent

4 reasons your home isn’t selling

Even in recovering markets, listings must be priced right and properly marketed


Inman News®

<a href="" target="_blank">Price reduced</a> image via Shutterstock.
Price reduced image via Shutterstock.

There’s a buzz in the air. The real estate market has improved and may be on the road to recovery.

But the improvement in the housing market is not treating all home sellers equally. Some well-priced listings in prime locations are selling within a couple of weeks. In other areas, it still takes months to sell, and prices haven’t fully stabilized.

There are several factors that could be keeping your home from selling. One is the state of the local housing market. Residential real estate is a local business. National trends, while informative, don’t necessarily apply to the state of the market in your neighborhood.

Other factors include: the list price; the condition of your property; or lack of broad marketing exposure.

HOUSE HUNTING TIP: Today’s buyers don’t overpay. They need to be convinced that the price you’re asking for your home is a fair market value.

The housing market is pulling out of the worst recession since the Great Depression. This is fresh in buyers’ minds. There are plenty of buyers who think this is the right time to buy, but they’re not inclined to make offers on overpriced listings.

Sellers often wonder why buyers won’t make an offer at a lower price if they think the list price is high. Buyers don’t want to waste their time making an offer if the seller is unrealistic. Making an offer takes a lot of time and emotional energy. Most buyers who have the wherewithal to buy a home don’t have time to waste.

There are “bottom feeders” who give sellers lowball offers below market value hoping to get lucky. These buyers also won’t pay over the asking price. They want a bargain. You can do better than that if you price your home right for the market.

Here are clues that your listing might be priced too high. You don’t receive any showings, or you receive showings but no repeat showings. Buyers usually look at a listing more than once before making an offer. Another possibility is that buyers look at your home and then buy another listing that is priced more in line with the market.

Let your real estate agent know that you want to hear feedback from buyers who have seen your home. If they like the house but not at the price you’re asking, that’s a clear indication that you should adjust the price if you want to sell.

Some sellers have false expectations about the current picked-up market. In some areas, the improved market means that homes are taking less time to sell, not that prices have increased.

In other markets, like Phoenix, prices have jumped approximately 25 percent from a year ago but are still way below where they were at the peak of the market. If prices dropped 50 percent in your area, they need to increase 100 percent to get back to where they were before the decline.

For instance, if your home was worth $100,000 in 2006 and dropped 50 percent in value and then increased 50 percent of the lower value, it would be worth $75,000. It needs to increase 100 percent ($50,000 plus $50,000) to recoup your loss.

The condition of your home will influence the market value. You need to lower the price to account for deferred maintenance or a dated decor, or take care of these issues so that you can present your home in move-in condition. You’ll then attract more buyers and sell for more.

It’s always possible that your home has not been properly marketed. Ask your listing agent to provide you with copies of all advertising. More than 88 percent of today’s homebuyers use the Internet to find a home.

THE CLOSING: Make sure your listing is receiving wide Internet exposure, including a lot of good-quality photographs.

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide.”

Courtesy of your Arcadia Real Estate Agent

Sales of New U.S. Homes Hover Near a Two-Year High

Purchases of new U.S. homes hovered in August near a two-year high, adding to signs that the housing market is on the way to recovery.

Ty Wright/Bloomberg
New home construction in Lancaster, Ohio.

Sales of New U.S. Homes Hovered in August Near Two-Year High

Sales of new homes, tabulated when contracts are signed, are considered a timelier barometer than purchases of previously owned dwellings, which are calculated when a contract closes. Photographer: Ty Wright/Bloomberg

Sales fell 0.3 percent to a 373,000 annual pace following a revised 374,000 rate in July that was higher than previously estimated and the strongest since April 2010, figures from the Commerce Department showed today in Washington. The median estimate of 71 economists surveyed by Bloomberg called for a rise to 380,000.

Record-low borrowing costs continue to attract buyers, lifting demand for homebuilders, while a drop in the supply of foreclosed homes is easing downward pressure on prices. Federal Reserve policy makers have targeted the housing market with further accommodation measures in order to spur growth and reduce unemployment.

“Builders are a little more optimistic about future sales and buyer traffic and the mortgage environment is favorable,” said Anika Khan, an economist at Wells Fargo Securities LLC inCharlotte, North Carolina. “New homes sales will continue to improve over the next few months and in the coming year.”

Stocks held earlier losses after the report. The Standard & Poor’s 500 Index fell 0.3 percent to 1,437.17 at 10:15 a.m. in New York amid concern Europe’s debt crisis is worsening. Treasury securities rose, sending the yield on the benchmark 10- year note down to 1.63 percent from 1.67 percent late yesterday.

Estimates of economists surveyed ranged from 360,000 to 400,000. July’s reading was previously reported as 372,000.

Regional Breakdown

Purchases fell in only one of four regions as demand in the South dropped 4.9 percent. Sales jumped 20 percent in the Northeast, rose 1.8 percent in the Midwest and 0.9 percent in the West.

The drop in sales in the South, where median prices are generally lower, paired with the surge in the Northeast, where property values tend to be higher, caused the median costs nationally to jump. The median price of all sales last month was $256,900, up 17 percent from August 2011. The 12-month advance was the biggest since December 2004. The 11 percent gain from July was the largest one-month increase in records going back to 1963.

Sales of new houses were up 28 percent from a year ago, today’s report from the Commerce Department showed

The supply of homes at the current sales rate held at 4.5 months. There were 141,000 new houses on the market at the end of August, matching July’s record low.

Record Low

A lack of supply may also be playing a role in limiting sales. The number of completed houses on the market dropped to a record-low 38,000 last month, today’s report showed.

Sales of new homes, tabulated when contracts are signed, are considered a timelier barometer than purchases of previously owned dwellings, which are calculated when a contract closes. Newly constructed houses accounted for 6.7 percent of the residential market in 2011, down from a high of 15 percent during the boom of the past decade.

Existing home sales rose more than forecast to a 4.82 million annual rate in August, a two-year high, from a 4.47 million pace the prior month, the National Association of Realtors reported last week.

The NAR figures also showed distressed sales, comprised of foreclosures and short sales, in which the lender agrees to a transaction for less than the balance of the mortgage, accounted for 22 percent of the total, the lowest since at least October 2008 when record keeping began.

Builder Outlook

Improving demand is bolstering homebuilders such as Miami- based Lennar Corp. (LEN) and allowing for longer-term construction strategies.

“Simply put, the housing market is recovering, not only are our sales margins and backlogs improving, but the beginnings of a sense of visibility are coming back to underwriting land acquisition and planning for the future,” Chief Executive Officer Stuart Miller said on a Sept. 24 earnings call.

“The home building business is beginning to revert to normal and that’s positive for the U.S. economy in general, which is in turn good for a sustained recovery in the housing market,” Miller said.

Toll Brothers Inc. (TOL), the largest U.S. luxury-home builder, reported a better-than-estimated profit and an increase in revenue for its third quarter ended July 31. The average price of the homes that the Horsham, Pennsylvania-based company delivered in the quarter climbed to $576,000 from $557,000 in the previous three months.

Revenue Climbs

KB Home (KBH) of Los Angeles reported on a Sept. 21 earnings call that third-quarter revenues increased 16 percent over the same period last year.

Borrowing costs continue to boost housing demand. The average rate on a 30-year fixed mortgage dropped to 3.49 percent in the week ended Sept. 20, matching a reading two months ago as the lowest in records dating to 1972, according to McLean, Virginia-based Freddie Mac.

Among other signs of progress, builders began work in August on the most one-family homes since April 2010, figures from the Commerce Department showed last week. The National Association of Home Builders/Wells Fargo index of builder confidence climbed in September to the highest level since June 2006.

Home prices in 20 U.S. cities climbed more than forecast in July from a year earlier, a report from S&P/Case-Shiller showed yesterday.

The Fed has committed to purchasing $40 billion of mortgage debt a month to lower borrowing costs, helping the housing market that Chairman Ben S. Bernanke called “one of the missing pistons in the engine.”

“Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing,” Bernanke said in a Sept. 13 press conference after the central bank announced the debt-buying plans.

To contact the reporters on this story: Michelle Jamrisko in Washington at

By Michelle Jamrisko - Sep 26, 2012 7:11 AM PT


Regulator Vows New Rules to Repair Mortgage Markets

In a move aimed at making it easier for consumers to get mortgages, the federal regulator for Fannie Mae and Freddie Mac FMCC -2.12% said Monday the mortgage giants would address a big controversy of the housing bust: who gets stuck with bad loans.

Fannie and Freddie have forced banks to repurchase billions of mortgages that have defaulted over the past few years. To protect themselves from facing similar demands, banks have raised their lending standards beyond what the two mortgage companies require, scrutinized appraisals, and demanded extensive documentation of a borrower’s income and assets.


ReutersA bank-owned home for sale in Encinitas, Calif., in a file photo from 2009.

To ease lenders’ concerns, the Federal Housing Finance Agency said on Monday it would issue guidance that would detail steps that could limit their risk of having to buy back defaulted mortgages in costly loan “put-backs.”

For example, banks will be released from having to buy back a loan under certain conditions if the mortgage has a record of on-time payments for the first 36 months, or for the first 12 months on loans that are part of an existing refinancing initiative. Those changes will take effect next year.

It isn’t clear how far the latest guidance will go toward making it easier for consumers to get a mortgage. While mortgage rates have fallen by a full percentage point over the last 18 months, demand for new loans remains nearly unchanged from one year ago.

“For the market to reclaim the strength it once had—and to provide a cornerstone for the mortgage market of the future—it is vital we consider ways to improve” the loan review process, Edward DeMarco, the acting director of the Federal Housing Finance Agency, told an industry conference Monday.

Fannie and Freddie don’t make loans, but instead acquire or guarantee those made by banks and other lenders. Those banks make certain “representations and warranties” to Fannie and Freddie when they sell loans, and the mortgage giants can force banks to take back any loans found to run afoul of those standards. Over the past year, banks have charged that Fannie and Freddie are putting back more loans that defaulted for reasons that had nothing to do with an underwriting defect.

Fannie and Freddie have asked that banks buy back nearly $75 billion in loans that lenders sold to the mortgage giants since 2005, according to Inside Mortgage Finance, an industry newsletter.

The new rules won’t have any impact on the current battle over who winds up with the bad loans made during the boom years.

In exchange for shielding banks against put-backs on certain loans, Fannie and Freddie will step up screening for potential loan defects of new mortgages. Officials said Monday that a more robust data-collection system implemented in recent years has made it possible to increasingly review loans as they are acquired, as opposed to reviewing them after they default.

Because buying back one bad loan can wipe out the profit on 30 or 40 good loans, lenders have become extremely cautious in approving mortgages. “If there’s a question at some point, it’s the safer move to deny” the loan, said Bob Walters, chief economist at Quicken Loans.

An April survey of senior loan officers by the Federal Reserve showed that the risk of put-backs had become a leading factor preventing banks from easing credit standards for mortgages, even as they have eased standards for other loans, such as cars and credit cards.

“Lenders have pulled back because they don’t know what their future exposure around repurchases is going to be…. Ultimately that has limited the availability of mortgage credit,” said Maria Fernandez, associate director for housing and regulatory policy at the FHFA.

The agency’s goal, she added, “is to be very clear with lenders what our expectations are so we can help facilitate more liquidity.”

Industry analysts said the impact of the new rules would rest largely on the details of the rules issued by Fannie and Freddie, and how they enforce those rules. “If you have written guidance from these quasi-government agencies what their terms are, they can’t really walk away from that,” said Laurence Platt, a banking-industry lawyer at K&L Gates in Washington.

At the same time, banks face new regulation in the coming year that could keep them in a defensive position. One provision of the Dodd-Frank financial-overhaul law, for example, carries potentially steep penalties if banks don’t properly ensure a borrower has the capacity to repay a loan.

Some large banks are also facing subpoenas from federal prosecutors as part of an effort by the FHFA’s inspector general to determine whether the U.S. could recoup money from banks that sold defaulted loans to Fannie and Freddie, according to people familiar with the investigation.

“It’s one step forward, two steps back,” said Mr. Platt. “You have a bunch of different legs that aren’t walking in unison.”



FHA’s Mortgage Delinquencies Soar

Closer to a bailout? FHA’s mortgage delinquencies soar

By Tami Luhby @CNNMoney July 9, 2012: 12:38 PM ET

Delinquencies and foreclosures of FHA-backed mortgages are soaring, putting further strain on the housing agency's finances and making a taxpayer bailout more likely.Delinquencies and foreclosures of FHA-backed mortgages are soaring, putting further strain on the housing agency’s finances and making a taxpayer bailout more likely.

NEW YORK (CNNMoney) — The mortgage market appears to finally be stabilizing — as long as you ignore loans backed by the Federal Housing Administration.

Increasingly, FHA-insured loans are falling into foreclosure or serious delinquency, moving in the opposite direction of loans guaranteed by Fannie Mae and Freddie Mac or those held by banks, which are all showing signs of improvement.

And taxpayers could ultimately be on the hook for FHA’s growing number of troubled mortgages. The agency’s finances are already on shaky ground, and additional losses from loans going sour could prompt the need for a federal bailout, experts said.

“We can’t escape this one,” said Joseph Gyourko, a real estate professor at the University of Pennsylvania’s Wharton School. “This is an arm of the U.S. government.”

The share of government-guaranteed loans, a majority of which are backed by FHA, that were 90 days or more delinquent soared nearly 27% during the year ending March 31. Foreclosures jumped nearly 17%, according to a report published recently by federal regulators.

At the same time, bank loans saw a dramatic improvement, with delinquencies shrinking by 39% and foreclosures declining by nearly 10%. Fannie and Freddie’s portfolio also improved as delinquencies dropped by nearly 15% and foreclosures slid by more than 6%, the quarterly report issued by the Office of the Comptroller of the Currency said.

FHA has also had a tougher time successfully modifying loans. More than 48% of government-guaranteed mortgages re-defaulted 12 months after modification, compared to 36.2% of loans overall, the report said.

FHA’s risky borrowers: FHA doesn’t make loans, but it backstops lenders if borrowers stop paying. With this guarantee in place, banks are more likely to offer mortgages to borrowers with lower credit scores or incomes.

FHA-backed loans made up more than 29% of the market for home purchases in the first quarter of 2012, according to Inside Mortgage Finance, an industry publication.

Housing experts have been warning for years that many FHA-insured loans are not sustainable, especially in these troubled times. That’s particularly concerning because FHA’s share of the market has swelled in recent years as lenders pulled back on providing mortgages that weren’t backed by the government.

One of the main critiques of FHA loans is that they require very low downpayments — a minimum of 3.5%. In an environment where home prices are declining, borrowers can quickly slip underwater and owe more than their property is worth.

“These are very risky loans,” said Ed Pinto, resident fellow at the American Enterprise Institute, a conservative think tank. And loans made in the past three years are “moving into the beginning of the peak delinquency period and they are very big books of business.”

Unless the economy improves significantly over the next few years, FHA will experience even more delinquencies, said Guy Cecala, publisher of Inside Mortgage Finance.

Little room for failure: The dramatic jump in delinquencies comes despite the agency’s efforts to improve the quality of the loans it insures.

Over the past several years, soaring defaults have been eating away atFHA’s emergency reserves, which cover losses on the mortgages it insures. In fiscal 2009, the reserve fund dropped to 0.53% of FHA’s insurance guarantees, well below the 2% ratio mandated by Congress. By late last year, it had fallen to 0.24%.

FHA pledged to shore up its standards and its finances in 2009. The agency has since increased its insurance premiumsestablished minimum credit scores for borrowers, required larger downpayments from those with credit scores below 580 and banned sellers from assisting borrowers with the downpayment. It also created an office of risk management and cracked down on lenders with questionable underwriting processes.

Despite the emergency fund’s diminishing reserves, FHA maintains that its efforts are working. The loans insured starting in 2009 are much higher quality and should lower delinquency levels over time, an FHA official said.

“We expect the new books will continue with their better performance, primarily because of the steps that were put in place,” he said. “And we are benefiting from having more high-credit borrowers.”

Still, FHA watchers warn that the agency doesn’t have much of a cushion against these rising delinquencies and foreclosures. And if the losses grow too great, the agency could need a taxpayer-funded bailout.

The FHA says that its reserves should be restored by 2014 barring a second recession, but outside experts aren’t so sure.

“They are doing very badly … there’s no two ways about it,” said Andrew Caplin, a New York University economics professor who has studied the agency. “Over the next five years, there won’t be enough of an economic recovery to fix FHA’s finances. Not a chance.” To top of page


How the West is winning on home prices: Clear Capital

How the West is winning on home prices: Clear Capital
By Jessica Huseman

• July 10, 2012 • 8:14am

Quarterly home values in June improved nationally, continuing a positive trend from the spring. National prices rebounded with quarterly and yearly gains of 1.7%, according to Clear Capital, which forecast continued growth through the remainder of the year.

National home prices picked up notable momentum over last month’s marginal gains of 0.1%, the Trukee, Calif.-based data and valuation company said. It predicted additional growth of 2.5% forecasted through the end of the year.

“June home price trends provided further evidence that housing has turned the corner, with the momentum of the recovery picking up speed,” said  Alex Villacorta, director of research and analytics at Clear Capital.

Clear Capital uses a rolling quarter measure, which compares the most recent four months to the previous three months. The rolling quarters have no fixed start date and can be used to generate indices as data flows in to reduce multimonth lag time.

The West came in with the highest gains, showing quarter-over-quarter growth of 3.5% — an increase of 0.8% over May and annual price gains of 4.1%. Clear Capital expects the trend to continue through 2012 with an additional 5.75% growth over the next two quarters.

While the recovery generally began in the lower-priced segments, growth spread across all price tiers in the West, which the report calls an “important step in the progression of this recovery.”

In the quarter, low-tier gains in the West hit 3.6% (sales less than $140,000), mid-tier gains reached 3.1% (homes selling between $140,000 and $347,000) and top-tier gains climbed to 3.2%. This led the West to push ahead of the South, the next closest region, by 2%.

The South continued to grow in June, pushing up 1.5% over the rolling quarter, slightly above May’s 1.2% gain.

The Midwest saw the largest increase over last month in quarterly home prices, rising 1.2% compared to May’s quarterly losses of 2%. It was the only region not posting year-over-year gains, with a loss of 0.6%.

Home prices in the Northeast rose 2.3% over the last year. The South experienced a smaller price hike of 1.5% over the last year and during the quarter, an improvement over the annual growth of 0.9% shown in last month’s report.

The top 50 metro markets also posted gains in June, with the large majority of markets seeing quarterly gains and only seven seeing slides. Of those markets that posted losses, only four saw declines larger than 1%.

The report indicates more good news out of Phoenix, which has been showing consistent signs of strength for the past 10 months. Clear Capital reported quarterly growth of 8.7% in Phoenix with annual gains of 20.4%.

Seattle, where prices rose 8.4% over the quarter, could see prices rise 14.4% annually once final numbers of 2012 are in, while Phoenix prices could rise by 10.4% annually.

Atlanta is not positioned to do as well. It sustained the largest declines of all the MSAs. However, the anticipated losses of 3.2% seem mild in comparison to Atlanta’s total declines of 53.5% from peak prices in 2006.


Buffett Extends Real-Estate Bet With ResCap Pursuit: Mortgages

By Noah Buhayar and Dakin Campbell - Jun 18, 2012 11:26 AM PM

Buffett Bets Big on Housing with $3.8B ResCap Bid

Warren Buffett, whose prediction last year of a housing recovery was premature, is raising his bet on a rebound with his $3.85 billion bid for a mortgage business and loan portfolio from bankrupt Residential Capital LLC.

Berkshire Hathaway Chairman Warren Buffett

Berkshire Hathaway Inc. Chairman Warren Buffett. Photographer: Andrew Harrer/Bloomberg

The offer “certainly indicates that he thinks the worst is behind us,” Jeff Matthews, author of “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett,” said in a phone interview. “Yes, he’s been wrong about housing before. But if you look at any credit metric, if you look at any of the banks and what’s happening in their loan portfolios, it’s getting better.”

Foreclosure filings in the U.S. have fallen on an annual basis for 20 straight months, according to RealtyTrac Inc., and home prices jumped 1.8 percent in March, the biggest monthly increase in at least two decades, as record-low mortgage ratesand a dwindling inventory of properties available for sale strengthened demand.

Buffett’s Berkshire Hathaway Inc. (BRK/A) has prepared for a turnaround by buying a brickmaker, expanding its real estate brokerage and wagering on commercial property through a company jointly owned with Leucadia National Corp. (LUK) The venture, called Berkadia Commercial Mortgage LLC, was formed from a loan- servicing and mortgage business purchased out of bankruptcy in 2009 and once owned by ResCap’s parent.

Berkshire was little changed today at $123,656 as of 2:15 p.m. in New York trading. It’s risen 7.8 percent this year.

Auction Approval

Ally Financial Inc. (ALLY), a Detroit-based auto lender majority owned by U.S. taxpayers, put its ResCap unit into bankruptcy last month to distance itself from the mortgage lenders’ losses and help repay its 2008 bailout following the U.S. housing crash and subsequent credit crisis.

U.S. Bankruptcy Court Judge Martin Glenn is considering approving auctions for the assets at a hearing today in Manhattan. Berkshire said in a June 11 court filing that it’s seeking to replaceFortress Investment Group LLC (FIG)’s Nationstar Mortgage Holdings Inc. as the stalking-horse, or initial, bidder at an auction for ResCap’s mortgage business. Berkshire has also proposed replacing Ally as the first bidder for the lender’s loan portfolio.

The billionaire’s Omaha, Nebraska-based firm, which is a ResCap bondholder, offered to match Fortress’s price of about $2.4 billion for the mortgage operations. It’s also proposing fees that are about $60 million lower than Nationstar’s if it’s outbid. Berkshire said it’s prepared to pay $1.45 billion for the loan portfolio, compared with Ally’s $1.4 billion for a sale outside the bankruptcy plan backed by the car lender.

‘Real Offer’

At the hearing today, Glenn asked ResCap’s lawyers to explain why an affiliate of Fortress deserves to be the lead bidder when Berkshire’s offer has a lower breakup fee. ResCap, Berkshire and Nationstar will return to court later today to argue about who should be named the first bidder for a court- supervised auction of ResCap’s mortgage-servicing unit.

The judge can either accept Nationstar as the stalking horse for the mortgage unit, name Berkshire in its place, or refuse to grant any company the protections, such as the breakup fee, that come with being the initial bidder.

Buffett has “come out with what appears to be a very real offer to buy the assets,” said John McKenna, a managing director at Miller Buckfire & Co., a New York-based financial advisory firm. “The court will ferret out whether it is a tactic or a legitimate interest in acquiring the assets.” A buyer can’t “just show up and feign interest in order to generate a better return.”

Stalking Horse

Nationstar said Berkshire’s request shouldn’t be granted because it may discourage potential investors in future bankruptcies from devoting the time and money required to be a stalking-horse, according to a June 14 court document. Susan Fitzpatrick, a ResCap spokeswoman, Fortress’s Gordon Runte and Ally’s Gina Proia declined to comment. Buffett didn’t respond to a request for comment sent to an assistant.

ResCap rejected Buffett’s offer to be the initial bidder and asked the court to approve the Nationstar and Ally proposal on June 14. Should Glenn approve ResCap’s plan, Berkshire still could bid in the auctions. It wouldn’t have the advantages given to the stalking horse, including any breakup fee.

The court will probably affirm Nationstar as the initial bidder for the mortgage assets, beginning a three-month auction process, Douglas Harter, a Credit Suisse Group AG analyst, wrote in a June 13 note after meeting with the firm’s management. He said he expects other bidders to emerge.

Funding Advantage

Acquiring ResCap’s mortgage business would give Berkshire contracts to service loans, a function Berkadia provides for commercial real-estate investors. It would also give Buffett another platform to originate mortgages, which his firm already does for buyers of its Clayton unit’s pre-fabricated homes.

Berkshire, which holds the second-highest credit rating from Standard & Poor’s, can access funding cheaper than almost any company in the U.S. It sold $750 million of five-year bonds paying a 1.6 percent coupon last month.

ResCap, once among the largest subprime mortgage originators, reduced its assets to $15.7 billion in the first quarter from more than $130 billion in 2006. The firm is the fifth-largest U.S. mortgage servicer, handling the billing and collections on about $369 billion mortgages in the first quarter, according to Inside Mortgage Finance, a trade journal.

Lenders Retreat

Some of the largest home lenders including Bank of America Corp. (BAC) have retreated from servicing and underwriting loans as new international rules designed to avert another financial crisis force banks to raise capital. That’s creating an opportunity for investors like Buffett to scoop up assets at discounted prices and benefit from the rebound in housing, said David Lykken, the managing partner of consultant Mortgage Banking Solutions.

Since the collapse of the housing market, investors have been asking, “When’s the time to catch this falling knife?” he said. If Berkshire wins the auction for the loan portfolio, the firm may be able to increase the assets’ value by modifying some of the mortgages, he said.

Buffett has said the real-estate market will rebound because a growing number of households will need properties while supply has dropped after builders retreated following the collapse. U.S. housing starts have plunged about two-thirds since 2006 and property prices are more than 35 percent below their peak that year.

Market Rebound

“Housing will come back — you can be sure of that,” Buffett wrote in a February letter to Berkshire shareholders. “Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in- laws can quickly lose its allure.”

Berkshire is the largest investor in Wells Fargo & Co. (WFC), the biggest U.S. home-loan originator, and has a preferred stake in Bank of America, the fourth-largest U.S. mortgage lender. Buffett’s firm also has subsidiaries that make carpet, building insulation and roofing materials. Its subsidiary Acme Brick Co. last year bought Montgomery, Alabama-based Jenkins Brick Co.

The HomeServices of America Inc. unit has struck deals to acquire real-estate brokerages inConnecticutOregon and the state of Washington this year on the expectation that home sales will rebound as banks liquidate seized properties after settling foreclosure-misconduct claims. The housing market is “starting to show a pulse,” HomeServices Chief Executive Officer Ron Peltier said in an April interview.

$1 Offer

Berkshire attempted to buy ResCap for $1 before the bankruptcy last month, the mortgage lender said in a June 14 court document. “Neither ResCap entering into bankruptcy nor a sale of ResCap’s mortgage production platform is in the best interests of Ally, the U.S. Treasury, Berkshire and other significant stakeholders in both Ally and ResCap,” Berkshire said in a May 3 letter, according to the filing.

Buffett’s firm proposed taking on ResCap’s potential liabilities, such as mounting litigation costs, according to three people familiar with the matter who requested anonymity because talks were private. Berkshire wanted to avoid a ResCap bankruptcy because it held unsecured debt, the people said. Ally rejected the proposal after deciding that a bankruptcy filing and sale better protected the company from future liabilities, the people said.

Debt Investments

Buffett’s firm invested in ResCap’s secured and unsecured bonds more than two years ago, according to a June 4 court filing, in which Berkshire called for a probe of the mortgage lender’s pre-bankruptcy deals. Prices for three of ResCap’s unsecured bonds climbed after the document was filed, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Two days later, Berkshire had sold its unsecured debt, which had a face value of more than $500 million, according to court documents. Berkshire said in a court filing it holds more than $900 million in ResCap’s junior secured bonds. ResCap’s 9.625 percent junior secured notes, which Berkshire’s General Re unit owned as of Dec. 31, added 0.3 cent to 95.3 cents on the dollar at 1:48 p.m. in New York, according to Trace. They’ve risen from 56.9 cents in November.

To contact the reporters on this story: Noah Buhayar in New York at; Dakin Campbell in San Francisco at

Why Your Bank Wants You to Refinance


By Karen Weise on June 18, 2012

Nearly 80 percent of all mortgage applications are for refinancing now, according to the Mortgage Bankers Association, a near-record level. Why is the figure so high? Two reasons. First, demand for refinancings is up because homeowners want to take advantage of thehistoric low interest rates to reduce their monthly payments. Second, there are still very few new purchases as the housing market tries to recover. “When rates go down, it doesn’t spur homebuying, it spurs refinancing,” says Guy Cecala, publisher of Inside Mortgage Finance.

The Mortgage Bankers Association says nearly 30 percent of refinancings are part of the federal program HARP 2.0, designed to let borrowers who are current on their mortgages refi even if they owe more than their home is worth. Under HARP 2.0, borrowers don’t have to go through a new application process if they refinance with the bank that already services the mortgage, and if the loan is guaranteed by Fannie Mae or Freddie Mac, explains Cecala.

Lenders have an added incentive to offer refinancings to existing customers—Fannie Mae and Freddie Mac don’t require lenders to vouch for the quality of the new mortgages, making it less likely that the lenders will be forced to buy back soured loans. That incentive has lenders scouring the databases of their customers to find borrowers who are eligible for the program, says Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington.

HARP refinances could lower monthly payments by 26 percent, estimate economists at the Federal Reserve Bank of New York. The White House bills refinancing as part of its effort to “heal the housing market.” When HARP 2.0 was announced last fall, the housing data firm CoreLogic explained that the program would have “little direct and immediate benefit” to distressed borrowers and housing markets. Instead, CoreLogic said, the benefit of lowering monthly payments for borrowers is more like an economic stimulus “on the order of several billion dollars.” Of course, the economy can use all the help it can get—whatever form it takes.

Weise is a reporter for Bloomberg Businessweek.


Homeowner Aid Boosts Big Banks


A government program that helps struggling homeowners take advantage of low interest rates to cut monthly mortgage payments is providing an unexpected revenue boost to large banks such as Wells Fargo WFC +0.43% & Co. and J.P. Morgan ChaseJPM -0.91% & Co.

[refinance]European Pressphoto AgencyHUD Secretary Shaun Donovan says there is ‘essentially a monopoly on refinancings’ among the largest banks.

Banks that collect those payments, known as mortgage servicers, could get as much as $12 billion in revenue this year refinancing mortgages under the federal Home Affordable Refinance Program, or HARP, according to data compiled by Nomura Holdings Inc.

A government program that helps struggling homeowners take advantage of low interest rates to cut monthly mortgage payments is providing an unexpected revenue boost to large banks. Christian Berthelsen has details on The News Hub. Photo: Reuters.

Borrowers who refinance mortgages through HARP, on the other hand, stand to save between $2.5 billion and $5 billion this year, according to an analysis by The Wall Street Journal of Nomura’s figures.

The contrast is the latest illustration of the competing demands policy makers must juggle when they devise responses to the housing bust, now in its sixth year. Federal officials last year revised the HARP program in a bid to encourage banks to refinance borrowers who were current on their payments but owed more than their properties were worth.

The revisions have driven a sharp increase in refinancings, following years in which the program fell short of government projections. But some critics, including members of the Obama administration, say the changes risk making HARP a giveaway to big banks.


That is because the new HARP rules make it easier for borrowers to refinance their loans with existing lenders. That, the critics say, allows large lenders to charge a captive customer base above-market interest rates on the refinanced loans. Borrowers refinancing through their existing lender make up about 75% of HARP refinancings, according to government figures.

“There’s essentially a monopoly on refinancing,” Housing and Urban Development Secretary Shaun Donovan said at a Senate hearing last month. For borrowers, Mr. Donovan said, “Whoever holds their current loan, whoever is the servicer, they can charge them—and we’re seeing this—very high fees.”

The Obama administration and some mortgage-industry participants say this arrangement leaves the lion’s share of refinancing activity with giant banks. Among the biggest beneficiaries: Wells Fargo, which held a third of the market as of March, and J.P. Morgan, with more than 10%, according to Inside Mortgage Finance. U.S. BancorpUSB +0.09% Bank of America Corp.BAC -1.22% and Citigroup Inc. C -2.12% rounded out the top five, which together hold 58% of the market.

Banks have been charging HARP borrowers as much as 0.53 percentage point more than the market rate on the refinanced mortgages, according to Amherst Securities. Officials at the Federal Housing Finance Agency, the independent regulator that runs the program, said the premium is far smaller, around 0.1 percentage point on average, for Fannie Mae borrowers.

A Wells Fargo spokeswoman said the bank’s rates are “competitive with our traditional refinancing loan options.” A J.P. Morgan spokeswoman declined to comment on the rates it is charging borrowers but said “demand from customers has exceeded our expectations.” A Bank of America spokeswoman said, “We offer market-driven pricing for both HARP and traditional refinances.” A spokesman for Citi said the bank is offering market rates. A U.S. Bancorp spokesman couldn’t be reached for comment.

The administration is pressing lawmakers to make it easier for consumers to refinance with different lenders. A senior administration official said the administration tried to get the FHFA to change the policy last year but was unable to do so.

The FHFA, which oversees Fannie Mae and Freddie Mac, which finance the lion’s share of home mortgages, defends the program’s structure. Officials there say that any lack of competition is a problem felt in the overall mortgage market, which has shrunk for years with the collapse of many nonbank lenders and the retreat of large banks such as Bank of America, and not a result of HARP.

“We feel very comfortable that lenders are offering borrowers the HARP product at the going market rate,” said Meg Burns, the FHFA’s senior associate director for housing policy.

Wells Fargo Chief Financial Officer Timothy Sloan told analysts in an April 13 conference call that HARP refinancings made up 15% of new mortgages during the first quarter. At J.P. Morgan, Chief Executive James Dimon told analysts on a conference call April 13 that profit margins “were several hundred million [dollars] higher than what we would call normal for a whole bunch of different reasons, including HARP” and mortgage-industry dynamics such as supply and demand.

Banks also can reap gains as the mortgages are securitized and sold, because of reduced risk that borrowers will repay their mortgages early. Margins on the sale of securitized mortgages averaged 2.1 percentage points higher in the first quarter this year than last year among the top five servicers, an analysis of data from investment bank Keefe, Bruyette & Woods shows.

The original HARP, rolled out in 2009, blocked borrowers from refinancing if they owed more than 125% of their home’s value. Fewer than 900,000 borrowers had used the program when President Barack Obama announced changes last fall. The revamped program removed that loan-to-value cap and made other tweaks.

Mortgage rates have hit the lowest levels on record, sinking to an average of 3.71% for a 30-year fixed rate loan last week, according to Freddie Mac.

Nomura analyst Glenn Schorr said in a research note that most borrowers seeking HARP loans are paying interest rates of 5%-6%. Those borrowers, he said, “would certainly prefer a 3.75% mortgage, but they will happily take a 4%, 4.25% or even a 4.5% loan as well.”


Mortgage rates keep plunging: 15-year dips below 3%

By Jessica Dickler @CNNMoney May 31, 2012: 12:45 PM ET

NEW YORK (CNNMoney) — Mortgage rates continued to plunge to new lows this week, with interest rates on the 15-year fixed rate mortgage dipping below 3% for the first time on record.

The 30-year fixed mortgage, the most popular mortgage product, fell by 0.03 percentage points to 3.75%, setting yet another record for the fifth week in a row, according to a weekly survey by Freddie Mac. Last year, 30-year loans averaged 4.55%. The new low can save borrowers about $47 a month for every $100,000 borrowed. Over a 30-year term, that comes to $16,756.

Rates on the 15-year fixed mortgage, which is popular among those looking to refinance, fell to 2.97% — the first time it has dropped below 3% since Freddie Mac began tracking the weekly data. Down from 3.74% a year ago, the new 15-year rate would lower borrowing costs to $689 a month for every $100,000 borrowed, a $37 savings compared to last year.

The continued slide in mortgage rates is, in part, due to ongoingeconomic turmoil in Europe, according to Freddie Mac’s chief economist, Frank Nothaft.

“Market concerns over tensions in the Eurozone led to a decline in long-term Treasury bond yields helping to bring fixed mortgage rates to new record lows this week,” he said.

Rates are almost half what they were at the peak of the housing bubble in mid-2006. At the time, the average interest rate was about 6.75% for a 30-year loan.

Meanwhile, home prices have hit new post-bubble lows, according to the most recent S&P/Case-Shiller home price index of 20 major markets. Home prices have not been this low since mid-2002.

Much lower home prices, along with affordable mortgages, should help to bolster the housing market, but don’t expect a vigorous recovery to follow, said Mike Larson, a housing market analyst for Weiss Research.

“The less you have to pay for a house the better that is but it’s not a cure all,” he said. “Despite lower interest rates, there is still a weak economy and weak job market. That’s not good for underlying housing demand.”