DallasLoanGuy’s - Texas Home Loan Weblog

When is the effective date of this legislation?      January 1,2007.

Does this legislation apply to purchases, refinances and rehabilitation loans?

We do not have a clear answer to this question at this time. Yes, to purchases, but maybe on refinances and rehabilitation loans. Check with a tax advisor.

Will this legislation impact conventional and government loans?

To the best of our knowledge, it applies to both loan types. The legislation mentions both VA and rural housing as eligible. Confusing because neither VA or RHS charge mortgage insurance!  VA has a funding fee.

Are all borrowers eligible under this legislation?

No.  The legislation limits the full deductibility to borrowers with an adjusted gross income of $100,000 or less. In the case of a married individual filing a separate return, the AGI maximum is $50,000. The deduction is gradually phased out for borrowers with AGIs up to $109,000.  For each $1000 that the borrower’s AGI exceeds $100,000, the amount treated as “interest” will be reduced by 10%.  Because we will never know what the borrower’s AGI will be at the time of application or funding, it is even more important not to advise or guide a borrower on any deductibility issues.

Will this deductibility last as long as the MI is on the loan, assuming the borrower’s income stays at or below the required AGI?

No….at least as the legislation stands today. In fact, the legislation specifically states that unless this legislation is extended, it will expire December 31,2007.

What about the upfront premiums paid by the borrower?

We need to remember that on conventional loans, very few borrowers select this option today. However, on FHA loans, we do see this option, which raises several questions. The biggest question: Is the upfront premium considered a premium to cover the expected life of the loan?  If so, it would not be a surprise if the IRS indicated that any deduction should be spread over the life of the loan. However, as noted above, this legislation, as currently written, is only for the year 2007. We’ve got a “Catch 22″.  If a borrower pays an upfront premium on a conventional loan, it would raise the issue of financing the premium, getting a deduction for the interest paid and also applying for the upfront fee. Some feel this sort of double deduction would be frowned on by the IRS.  Again, not for us to say.  Encourage all borrowers to ask a tax advisor.

How will Wells Fargo communicate the mortgage insurance paid by the borrower?

Wells Fargo will report what is paid. All deductibility issues will be between the borrower and the IRS. The legislation requires taxpayers to itemize their tax return in order to take advantage of the legislation.  Wells Fargo’s servicing team will send out the normal yearly tax statement including what the borrower paid in interest and mortgage insurance. It has not been established how upfront mortgage insurance premiums will be reported.

Information provided by Jackie Little at Wells Fargo as a tool, only, and is not meant to be used to influence a borrower toward any product, program or interest rate

A new CRL study reveals that millions of American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market. The �??Losing Ground�?� study is the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006. CRL finds that despite low interest rates and a favorable economic environment during the past several years, the subprime market has experienced high foreclosure rates, and we project that one out of five (19.4%) subprime loans issued during 2005-2006 will fail. The report discusses a number of factors that drive subprime foreclosures�??these include adjustable rate mortgages with steep built-in rate and payment increases, prepayment penalties, limited income documentation, and no escrow for taxes and insurance. We also determine that these features cause a higher risk of default regardless of the borrower�??s credit score. Our study also finds that recent high appreciation in many areas has masked problems in the subprime market, and that the cooling housing market will cause failure rates to rise sharply in many major markets. California, Arizona, Nevada, and greater Washington DC will be especially hard hit. Also in this report, we project lifetime foreclosure rates for 2006-originated subprime loans in each MSA in the United States.