by Calculated Risk on 4/11/2014 09:42:00 PM

CR Note: Historically the IRS has considered debt forgiveness (like short sales) as taxable income. In 2007, Congress passed a measure to exempt most forgiven mortgage debt from being considered taxable income (this helped increase short sale activity). This measure expired on Dec 31, 2013. However, according to a letter from the IRS:

"[I]f a property owner cannot be held personally liable for the difference between the loan balance and the sales price, we would consider the obligation as a nonrecourse obligation. In this situation, the owner would not treat the cancelled debt as income."

So in states that passed anti-deficiency provisions (like California), this means many loans will be considered nonrecourse by the IRS (and forgiven debt will not be taxed).

However, in many other states, forgiven debt will be taxed.  There is little opposition to extending the debt relief act, and extending it would probably be helpful - especially in judicial foreclosure states (like New Jersey) where housing is still struggling to recover.

Note2: I looked for an update today after reading Dina ElBoghdady's article at the WaPo: Distressed homeowners seeking mortgage relief could get stuck with a big tax bill

This was written in February from Laurie Goodman and Ellen Seidman at the Urban Institute: The Mortgage Forgiveness Debt Relief Act Has Expired—Renewal Could Benefit Millions

Under the federal tax code, when a lender forgives part or all of a mortgage, the borrower must count that forgiveness as taxable income. Congress wisely recognized that this tax rule would discourage the forgiveness of debt as a tool to reduce foreclosures and add insult to injury for borrowers already struggling to pay their bills, many of whom had just lost their home. So in 2007, it passed the Mortgage Debt Forgiveness Act (the Act), which excludes this forgiveness from taxable income.

On December 31, 2013, the Mortgage Forgiveness Debt Relief Act expired.1 Unless Congress extends it, housing debt that has been forgiven or written off after 2013—through short sales, foreclosures, or loan modifications that include principal forgiveness—will generally be treated as taxable income. A bill that would extend the Act for two years has been introduced by Representative Bill Foster (D-IL), and many analysts predict that the Act will eventually be renewed. In the meantime, however, uncertainty over its renewal has made it increasingly difficult for lenders and borrowers alike to take actions that will be beneficial to both parties. We calculate this uncertainty will affect up to 2 million borrowers who are seriously delinquent or in foreclosure, many of whom will lose their homes, and as many as 1.4 million more who could potentially benefit from loan modifications that include principal reductions.

The case for rapid resolution is made more poignant by the fact that failure to do so contradicts other public policy initiatives. Last July, the U.S. Department of the Treasury extended the Home Affordable Modification Program (HAMP) for two years, until year-end 2015. HAMP loan modifications may include principal reduction, a technique that has proven especially effective in keeping homeowners in their homes. With the expiration of the Act, borrowers receiving principal reductions risk being taxed on the forgiven debt, sharply reducing the utility of the modification. Just as important, the large settlements between government regulators, lenders, and servicers are increasingly including commitments by institutions to provide significant sums of debt forgiveness. In the 2012 settlement between the State Attorneys General, the Department of Justice, and the nation’s five largest lenders, $10 billion of the $25 billion settlement was set aside for principal forgiveness. The actions under this settlement have been substantially completed but it has set the template for others to follow. In November 2013, JPMorgan Chase reached a $13 billion settlement with regulators over soured mortgage securities sold prior to the 2008 crisis; $4 billion of the settlement was set aside for consumer relief, which will take various forms, including principal reduction loan modifications. In December 2013, Ocwen reached a $2.2 billion settlement, with $2 billion to be used for principal reduction modifications. We can expect to see a series of additional settlements in the coming year, with much of the restitution in the form of principal reduction.

The timing of the expiration of the Mortgage Forgiveness Debt Relief Act is thus particularly unfortunate because it undermines the effectiveness of an increasingly utilized tool to reduce foreclosures. In this paper we describe the implications of the Act’s expiration and call for its rapid reenactment.

by Calculated Risk on 4/11/2014 03:30:00 PM

From Nick Timiraos at the WSJ: Fewer Foreclosures Could Mean Fewer Homes for Sale

In a report Friday, her firm Zelman & Associates said it now expected a 5% drop in sales of previously owned homes for 2014 to a seasonally adjusted annual level of 4.8 million units. At the start of the year, the firm had forecast nearly a 6% gain from last year, to 5.4 million from last year’s 5.1 million units.
...
Ms. Zelman isn’t changing her forecasts for new home sales, which are forecast to hit 505,000 units this year, up 17% from last year. ... recent data, including a proprietary survey her firm also released Friday, point to a pick-up in new-home orders since last fall ...

This is a reminder that a decline in existing home sales isn't "bad news" for the overall economy, and  what matters most for jobs and the economy are new home sales.   This updated Zelman forecast fits with my view of a decline in existing home sales this year, but a solid increase in new home sales.

by Calculated Risk on 4/11/2014 12:08:00 PM

In addition to Case-Shiller, CoreLogic, I'm also watching the FNC, Zillow and several other house price indexes.

FNC released their February index data today. FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 0.5% from January to February (Composite 100 index, not seasonally adjusted). The other RPIs (10-MSA, 20-MSA, 30-MSA) increased between 0.7% and 0.8% in February. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales).

Since these indexes are NSA, this is a strong month-to-month increase.

The year-over-year change continued to increase in February, with the 100-MSA composite up 9.0% compared to February 2013.  In January, the year-over-year increase was 8.9%.  The index is still down 22.8% from the peak in 2006.

Click on graph for larger image.

This graph shows the year-over-year change based on the FNC index (four composites) through February 2014. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.

There is still no clear evidence of a slowdown in price increases yet.

The February Case-Shiller index will be released on Tuesday, April 29th.

by Calculated Risk on 4/11/2014 09:55:00 AM

Click on graph for larger image.

The preliminary Reuters / University of Michigan consumer sentiment index for April was at 82.6, up from 80.0 in March.

This was above the consensus forecast of 81.0. Sentiment has generally been improving following the recession - with plenty of ups and downs - and a big spike down when Congress threatened to "not pay the bills" in 2011, and another smaller spike down last October and November due to the government shutdown.

I expect to see sentiment at post-recession highs very soon.

by Calculated Risk on 4/10/2014 08:56:00 PM

For amusement: Years ago, whenever there was a market sell-off, my friend Tak Hallus (Stephen Robinett) would shout at his TV tuned to CNBC "Bring out the bears!".

This was because CNBC would usually bring on the bears whenever there was a sell-off, and bulls whenever the market rallied.

Today was no exception with Marc Faber on CNBC:

"This year, for sure—maybe from a higher diving board—the S&P will drop 20 percent," Faber said, adding: "I think, rather, 30 percent"

And Faber from August 8, 2013:

Faber expect to see stocks end the year "maybe 20 percent [lower], maybe more!"

And from October 24, 2012:

"I believe globally we are faced with slowing economies and disappointing corporate profits, and I will not be surprised to see the Dow Jones, the S&P, the major indices, down from the recent highs by say, 20 percent," Faber said...

Since the market is up 30% since his 2012 prediction, shouldn't he be expecting a 50% decline now?

Friday:
• At 8:30 AM ET, the Producer Price Index for March from the BLS. The consensus is for a 0.1% increase in prices.

• At 9:55 AM, the Reuter's/University of Michigan's Consumer sentiment index (preliminary for April). The consensus is for a reading of 81.0, up from 80.0 in March.