Just read a thought-provoking December 19, 2011 opinion piece in The New Yorker by James Surowieck that compares American Airlines “very smart” bankruptcy to underwater homeowners considering a “strategic default.”

Read more at http://www.newyorker.com/talk/financial/2011/12/19/111219ta_talk_surowiecki

Living By Default

by James Surowieck

“….The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe forty or fifty per cent more than the value of their homes. In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month….It’s also possible that a wave of strategic defaults—a De-Occupy Your House movement—would get banks to take mortgage modification more seriously, which would be all for the better. The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead.”

Yesterday the U. S. Department of Housing (HUD) issued a press release clarifying the status of the up to $8,000 federal tax credit in use with Federal Housing Administration (FHA) loans.

Here are some of the new guidelines for homeowners using the $8,000 tax credit:

• State Housing Finance Agencies and certain non-profits can "monetize" the tax credit up to the full amount of the tax credit (depending on the amount of the mortgage) to allow borrowers to immediately (rather than waiting for their federal tax refund check) apply the funds toward their down payments.

• Buyers financing through these state and non-profit organizations will be able to use the tax credit for their down payments via a short-term loan provided by the HFA or non-profit. In addition to the borrower’s own cash investment, FHA allows parents, employers and other governmental entities to contribute towards the down payment. (Remember that individuals can gift up to $13,000 per person per year tax-free.)

• Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5% of appraised value or their closing costs, which can help buyers achieve a lower interest rate. Buyers cannot use the tax credit amount as part of their 3.5% down payment, but can use any or all of the funds as additional down payment.

In light of these changes, what does this mean for the first-time buyers you are working with? The news is brand new – have you told them yet through your many marketing methods?

In addition, the National Association of Home Builders predicts that the tax credit will fuel 160,000 home sales in the U. S. What portion of the 160K homes that are sold by November 30 will you have a part in?

Remember the date: the first time home buyer tax credit applies to purchases closed/settled on or before November 30, 2009. Don’t lose the opportunity to inform your buyers and get their business before time runs out for this federal tax credit.

After shopping rates and fees with three lenders, we made a Good Faith Estimate chart of fees (all the rates were identical) to guide our decision. Doing that comparison we learned two things about the costs of refinancing with the same lender who holds your mortgage now.  One pro, one con.

1. Pro: Because our current loan was taken out after 2005 (in fact in 2007), we do NOT have to pay county/city/state transfer taxes (stamps) if we refinance with the same lender.  This saves us about $1400 at closing.  (Thus we went with our current lender, whose fees were slightly higher than other lenders but the transfer tax savings tipped the decision to our current lender.)
2. Con: Now that we are refinancing with the same lender, however, we CANNOT deduct the outstanding points from the first loan this year (with a different lender we would get the tax break of deducting as interest the non-amortized points from the previous refinance).  Instead, the refinance points this time are added to the outstanding points charged on the first refinancing and the combined total is deducted over the life of the 30-year loan.  Thus, we miss out on the tax deduction in 2009 on the outstanding points from the first loan ($4,900 x 33% = $1,617) because we used our current lender.

In the end, the pros and the cons wash each other out. Yet, after all the refi’s we’ve done over the years (this is our eighth) there is always something new to be learned about the process.