Real Estate Blog

Fitch Ratings and Standar & Poors (S&P) Ratings services both published their methodology and assumptions for evaluating residential mortgage-backed securities (RMBS) in November. Look for both services to issue updated ratings over the next few weeks.

Fitch Ratings has revised its surveillance methodology for U.S. sub-prime RMBS to reflect increased emphasis on ResiLogic, their loan-level and loss model. Going forward, ResiLogic will be used to guide collateral loss projections by estimating the frequency of foreclosure for all mortgage pools regardless of seasoning and the loss severity of pools seasoned less than 30 months. For pools seasoned more than 30 months, Fitch believes actual loss severity trends exhibited by the pools are the best indicator of future severity trends. This loan-level analysis will be used in conjunction with Fitch’s existing break loss analysis to determine each bond’s loss coverage ratio.

The ResiLogic stressed mortgage pool loss scenarios will also be used in determining targeted loss multiples at each rating category resulting in pool-specific category thresholds as opposed to using a static set of thresholds. Other adjustments to the methodology include:

• An adjustment to the ResiLogic derived default rates for performing loans to account for the actual performance of each transaction relative to original expectations.
• The use of historical loan-level loss severities on seasoned (greater than 30 months) pools.

Fitch is reviewing its rated transactions for 2005, 2006 and 2007 and will be releasing revised ratings soon. The current revised cumulative loss expectations for these years are 12 percent, 27 percent and 31 percent respectively. The Updated Surveillance Criteria for U.S. Subprime RMBS are available online at www.fitchratings.com.

Standard & Poor’s Rating Services also recently published the methodology and assumptions fo rating U.S. RMBS backed by non-performing or re-performing mortgage loans. Given the current market conditions and the stresses on lenders, borrowers, and the real estate industry, S&P aexpects the volume of transactions backed by non-performing or re-performing collateral submitted for review to increase.

Collateral for RMBS can be real property or loans. Loans which are more than 90 days delinquent are considered non-performing if the borrower has not exhibted consistent payment behavior. Re-performing loans are loans which have been delinquent more than 90 days in the past year but are currently less than 90 days delinquent or that are 90 days delinquent but the borrower is exhibiting consistent payment behavior. When assessing the expectations regarding the timing and liquidation values of non-performing loans the following factors are taken into account:

• The accuracy of a licensed real estate broker’s opinion of the property’s value (the so-called broker price opinion or BPO value.
• State foreclosure and REO time-line variations and expenses.
• Housing market conditions.

Re-performing loans are assessed using substantially credit analysis to estimate foreclosure frequency and loss severity. The analysis of the age of credit scores, treatment of arrearages and loan seasoning adjustments differ for re-performing loans.

S&P continues to update methodologies and assumptions for the analysis of non-performing and re-performing loans based upon performance trends and updated economic projections. In addition, S&P believes unique risks must be evaluated in proposed transaction structures with regard to liquidating trusts. The methodologies are published on the S&P web site at www2.standardandpoors.com.

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Ratings Services Release RMBS Rules

In the grips of a brutal financial crisis that continues to worsen despite all efforts by the governments across the world to stop it, and foreclosures continuing their unstoppable climb, there’s no question that things are pretty bad out there. Banks, in particular, have been given no reprieve at all by shareholders even as they tap into government provided funds to shore up their balance sheets and (supposedly) use that money to continue lending. With all of this chaos and hardship caused by an industry that lost sight of any sense of risk management and proper diversification, someone has to be responsible right? This wasn’t all one big mistake, obviously, someone was there to knowingly pull the trigger. The question is, two years into this crisis, who?

The answer, according to William Black, who was counsel to the Federal Home Loan Bank Board during the Savings and Loan Crisis and one of the men who blew the whistle on the “Keating Five” in 1989, says that while we know the lenders that were involved (looking at you IndyMac and Countrywide), we don’t have the investigative power or resources to know yet. The answer to why not is actually pretty straightforward, according to Black: “There is no poster child [for the housing scandal] because you need to investigate, and you need to bring cases and we haven’t done either against the major players.”

That’s because the FBI made a “strategic alliance” with the Mortgage Bankers Association which, as you might have guessed, served the major industry players. So while investigations were focused on individual mortgage brokers, major industry leaders were responsible for plenty of recurrences of fraud as well. So, as the article puts it: “In this case, the foxes truly were guarding the hen house”

What’s that mean for the future? There will undoubtedly be investigations and arrests and someone will be punished along the way, but it’s going to take time as the FBI ramps up investigations that they should have opened previously. It’ll be especially difficult for them to gather that evidence since these firms in many cases have already shut their doors, so the FBI can’t send in undercover agents to catch them in the act. The FBI will also need a lot of additional resources if we expect them to track these fraud cases down and prosecute those responsible. Unfortunately for all of us, however, plenty will still get away.

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Mortgage Fraud: Where Will the Hammer Fall?

Which is more unbelievable: that “How to Get Rich Quick in Real Estate” courses are still actively being marketed or that people might still be buying them?

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Who are they kidding? And who is falling for it?

Sure, money can be made in down markets, whether it’s real estate or the stock market. BUT not quickly. The individuals and organizations who will ultimately make money in depressed markets are those who can buy and hold properties or securities which will increase in value as the markets recover. Chances are, those individuals already have a solid understanding of the markets, know what properties are undervalued and therefore a good buy/investment and have the financial security to park money in long term investments. That is NOT the description of anyone responding to such SPAM, direct mail, telemarketing calls or other attempts to sell these types of courses.

Even more frightening, is that there are still people out there who have fallen for these pitches. Back in December 2007, Carleton Sheets was the 10th most popular term entered into online search engines, according to Transactional Marketing Partners (TMP). The last complaint about the program of the 146 listed on infomercialscams.com was posted N

Normally, unsolicted messages

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They Are Still Selling This Stuff?

Homeowners are not the only ones having difficulty paying their mortgages. Owners of commercial properties, from office buildings and industrial parks to malls and resorts to hospitals and medical buildings are all feeling the pressure. And as of Tuesday, the cracks are officially beginning to show.

Bloomberg reports that, according to RBS Greenwich data, delinquencies on debt backed by comercial real estate reached 0.78 in October. Further, payment on approximately 35 percent of all sub-prime mortgages backing bonds are 30 or more in arrears. Two large borrowers, Westin and Promenade, are about to default on $334 million in loans bundled into bonds. Both loans were made by J.P. Morgan Chase & Co.

These loans may be among the largest and first on the verge of default, but they are not the only one. Extrapolating on the level of enrivonmental site assesments (ESAs) which are the first step in most commerical real estate transactions, the commerical real estate market is slowing down. The number of ESAs conducted across the U.S. fell by 17 percent during the third quarter of 2008 compared to the same quarter in 2007, MarketWatch reports. The deepest decline occured in the West where ESA activity was off by 25 percent. The only region showing an increase in ESA activity was the Northeast with a gain of 11 percent. Unfortunately, the Northeast regional only accounts for about 4 percent of all ESA activity in the nation. Preliminary indications for October reveal a decline in ESA activity of 21 percent nationwide hinting that conditions will continue to worsen as the year ends.

At the local level, select metropolitan areas including Washington, DC, Boston, MA and California’s Inland Empire experienced increased ESA activity according to MarketWatch. Washington, DC also appears on Forbes‘ list of top five places to invest in commercial real estate in 2009.  Seattle, WA leads the list, which is based on a survey of 700 real estate professionals conducted by the Urban Land Institute, followed by San Francisco, CA, Washington, DC, New York, NY and Los Angeles, CA. The $209 million Westin loan is backed by hotel properties in Tucson, AZ and Hilton Head, SC while the Promenade Shops at Dos Lagos in Cornona, CA back another $125 loan. If either do default it is likely to have a chilling effect on the commercial real estate markets in those cities and possibly beyond.

Some fear defaulting on these two large loans will user in the next phase of the financial crisis. Up to this point the commercial mortgage-backed securities (CMBS) market has survived the credit crunch sweeping the nation with minimal delinquency rates.

“It’s pretty unheard-of for tow large loans to go this bad early on,” Richard Parkus, head of CMBS research at Deutsche Bank told the Wall Street Journal. “This has shaken the market up.”

As it should.

“It blows my mind how fast this has happened. We had thought commercial real estate would be ok because it wasn’t overbuilt,” the Associated Press (AP) quotes Robert Bach, chief economist at Grubb and Ellis as telling the panel at the company’s 2009 Real Estate Forecast.

Falling consumer confidence, higher unemployment rates and fewer people traveling are all beginning to take their toll on commercial real estate. Loans, like the Westin and Promenade loans, made at the height of the commercial real estate market with the presumption that they would continue generating increasing amounts of cash are not just having trouble meeting payments when they come due. They are also finding it difficult to refinance the loans or sell the properties. And even if consumers started spending again immediately the commercial real estate market, which lags about a year behind the consumer economic cycle, will continue to decline.

“It’ll be awhile,” Bach told the AP. “Defaults on these loans could continue for several years.”

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Default Risk: Not Just for Homeonwners Anymore

A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

“People have begun to feel like a Christian Scientist with appendicitis.” — Tom Lehrer

It is difficult to believe but earlier this year people were still debating whether or not we were in a recession. The debate broke down along the lines of, “We haven’t met the technical definition of a recession” vs. “If it smells, like a duck, quacks like a duck and looks like a duck then it’s a duck.”

One of the reasons for the debate was because there are so many different definitions of a recession.

The standard definition used by idiots and journalists (like me!) is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

Idiots and economists (like them!) don’t like this because it leaves out the unemployment rate and consumer confidence as indicators. “By using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.” Sadly, that’s not going to be an issue this time around.

National Bureau of Economic Research (NBER) says a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales.” A recession runs from when business activity has reached its peak and starts to fall until business activity has bottomed out. When business activity picks up again is called an expansionary period. I like this definition because it would let us say that a depression is the period from the end of the recession until the start of the expansionary period. If there’s no gap between the two then there’s no depression.

Like so many other things that we take for granted today, the “recession” idea was invented as a response to (more…)

Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

At the end of October (see Fed Implode-o-Meter October 31), it looked like the Fed had spent about $3.8 trillion in the year to date. Not even three weeks later, that figure is now up to $4.28 trillion. According to CNBC, “To put it in perspective that’s . . . more than what was spent on WW II.” Funny choice of comparison; the Iraq war, the longest-running conflict in the history of the US, has also cost more and the final tab won’t be in for years. Anyway . . .

So, where’s all the money going? Here’s a list (hat tip to CNBC) of what has been made public:

The Telegraph UK quotes Paul Volcker, former chairman of the US Federal Reserve and short-list candidate for Treasury Secretary, as saying, “. . . it is already too late to avoid a severe downturn even if the credit markets stabilize over coming months. I don’t think anybody thinks we’re going to get through this recession in a hurry. The economic slump has begun to metastasize after a shocking collapse in output over the past two months . . . normal monetary policy is not able to get money flowing. The trouble is that even with all this [government] protection, the market is not moving.” Further, he said “What this crisis reveals is a broken financial system like no other in my lifetime,” he told a conference at Lombard Street Research in London. Mr. Volker is 81 years old. Normal monetary policy can’t restart economic activity because credit is contracting at a faster pace than new money is coming into the system. Fractional reserve lending can’t work unless banks lend.

Through all of this, the Fed is still taking as collateral illiquid, mark-to-model assets, presumably at notional value, from the banks. In return, the banks receive brand-new treasuries that, in principle, could be lent out. At this point, most, or probably all, of the Fed’s general collateral is comprised of toxic waste. Currently, the Fed does not even have enough reserves to cover dollars in circulation.
Good thing we’re only talking about Monopoly money. If it were real money we’d be in big trouble.

There are a number of grass-roots efforts trying to put an end to the Fed’s out-of-control borrowing. One of them, End the Fed.us is having a meet-up on November 22 in 39 cities. Mish of Global Economic Trend Analysis is putting together another email, fax, and phone-call campaign to stop further auto company bailouts. Chances are slim that the brakes will be put on before the end of the year.

However, with a new administration coming in, 2009 could be another story.

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Fed Implode-o-Meter Update

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

Thus far, all indications seem to lead us to believe that the Federal Reserve can solve economic problems by throwing massive amounts of money at it. From lowering interest rates from 1 percent from 4.25 percent this year, to putting billions of dollars into the commercial paper markets in order to stimulating lending, to the $700 billion financial bailout that’s constantly shifted from a package aimed squarely at aiding struggling financial institutions to helping out consumer debt firms as well. With all of this money being tossed around and historic, unprecedented actions taken place, is there anything at all left that the Federal Reserve can do to stop us from going into a recession? According to Kansas City Federal Reserve President Thomas Hoenig, no, no there is not.

“The Fed has done about as much as it can do, we might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively.” If Hoenig is right on the mark with that statement, and the recession continues to worsen, then there isn’t much more that the Fed can do to help us out of it. If and when it comes to it, we’re just going to have to suck it up and continue to tighten the belt.

Unfortunately that certainly isn’t the answer that automakers in the U.S. want to hear. Talks between congressional Democrats and the Bush administration seemed to be bottoming out recently. Democrats in the Senate insisted that they’ll try and allocate a portion of the bailout to pay for loans to the industry, but talks have been ground out to a stalemate, and they don’t have the votes to do so without that support. Republicans, for their part, believe that the $25 billion loan should actually come from a loan program previously approved to help them develop more fuel-efficient vehicles.

That could change when Obama takes office, however. The Bush administration recently told top lawmakers that half of the $700 billion bailout fund will not go anywhere before Obama takes office. Treasury Secretary Henry Paulson will leave $350 billion left over for when Obama takes office and his administration will be able to decide how the rest of it should be spent. You can be sure that this could change the state of negotiations to have that portion of the bailout.

With the second largest economy in the world heading into an official recession as well, it’s probably best to start preparing yourself now. If things continue to get worse, there won’t be much that the Fed, or anyone, will be able to do to stop it from running it’s course.

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Federal Reserve Out of Firepower

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

I guess it’s not all that surprising given the increasing number of foreclosures across the nation over the past few months, but the FDIC officially came out with detailed plans as to how the government will come to the rescue of delinquent borrowers. The announcement was made earlier today by FDIC Chairwoman Shella Bair, and caught a number of experts off guard.

Apparently, the proposal is built upon 2 crucial points. The first is that housing payments on delinquent borrowers two months or more late would be reduced to 31% of gross monthly income. How do they intend to do that? By setting mortgage rates lower for awhile…possibly as low as 3% for five years. Loan terms are also likely to be extended to as long as 40 years (so you’ll be dead before you actually own your home…?). In addition, the FDIC will “encourage” servicers to participate as well, as the government would share 50% of the losses if the borrower they help still doesn’t pay up and ends up defaulting anyhow.. is this really what it’s come to? The FDIC will also start paying servicers who process mortgages $1,000 for reworking loan terms to keep homeowners in their homes and to prevent additional foreclosures. The cost? An estimated $24.4 billion, which will come from the $700 billion bailout program that Congress approved in the previous month. The FDIC also released a statement Friday stressing the importance of reducing foreclosures: “It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.”

So..if delinquent homeowners are getting a piece of the bailout, what about everyone who happens to pay their mortgage on time and live within their means? Will they get a check in the mail to say hey thanks for doing a good job with your finances..sorry you have to eat trillions of dollars in debt over the coming years? The bailout’s focus has been constantly expanding, and there’s been no shortage of people and organizations lining up for their “share.” The mayors of Philadelphia, Phoenix, and San Jose among others have already requested that cities be added to the bailout list as well.

So that means for the bailout candidates list we have banks, delinquent home owners, credit car companies, failing U.S. Automakers, insurance companies, and cities (I’m sure I missed some).

Everyone except the average taxpayer.

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FDIC Unveils Homeowner Help

A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

In a time of economic crisis, where every moment brings more bad/alarming news, what does it mean that the government is essentially in a holding pattern for the next two months?

Many people are concerned this will mean a continuation of the Paulson strategy of throwing good money after bad. (”Am I the only one worried that by the time Obama is sworn in on January 20th, the Paulson Treasury will have run through almost a trillion dollars to little or no effect?“) Currently there are attempts to qualify GM as a bank so it can get a cut of the bailout money (LOL!!!). A similar request by GE makes more sense to me because GE is a well-run company. Several large cities are also making requests for funds. Personally, I’d give funds to Wasilla before I’d hand a dime to GM.

Still others think that Paulson and the Congress will take this moment to do nothing — and that’s a good thing. Oklahoma Sen. Jim Inhofe thinks this is such a good thing that he wants to legislate a freeze on the remaining bailout cash. (Inhofe’s willingness to rip Paulson a new one is a great indicator of how the Bushies are closer to dead-duck instead of merely being lame: Senator Inhofe suggests Paulson “may have given the [bailout] money to his friends.”)

The last major outbreak of government stasis — when Gingrich et al. shut down the government and kept passing level-funding resolutions for all departments — certainly resulted in a lot of good things. It got us our long-departed budget surplus. It got us the truly amusing Monica-gate (remember when we thought that stuff was important? Ahh, the good old days.) And it showed us exactly what a wiener Gingrich was. A bipartisan win! Of course times were different then. We weren’t in two wars and a “recession”. Tax revenues were rolling in and not spending them meant putting money in the bank.

This time it is difficult to see maintaining the status quo as a good thing. Despite swearing that he wouldn’t reat this money as a blank check and just spend it on whatever he wanted to, Mr. Paulson has done just that. Even so, doing nothing is probably a bigger risk. Taking minimal action was how we wound up with the Great Depression, after all.

Fortunately, the Bushies and the GOP are against bailing out the auto industry. Also, I am not particularly worried about the proposed bailout of the auto industry in this rump session. If Congress even manages to pass the clearly needed extension on unemployment, it will be nothing short of a miracle. Sadly, my hopes diminish with the next congress.

What is clear is that it is time to shorten the time from the end of an election to when the new regime takes over. We’ve done it before. Originally inauguration day was March 4th. It clearly needs to be moved up to at least Jan. 1.

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Nothing happens until the new prez takes over. Good or bad?

The Federal Home Loan Bank (FHLB) system was established in 1932 to fill the need for a stable funding source for residential mortgages created by the undermining of the American banking system during the Great Depression. Today, the 12 Federal Home Loan Banks and their members are the largest source of residential mortgage financing in the country. Yet until this year, no one had taken a hard look at how membership in the FHLB system affected commercial bank risk.

“Although our findings suggest that the cumulative impact of FHLB membership and advances on bank risk is modest, we caution that our sample period was one of robust economic growth, and that serious moral-hazard problems could arise in bank leverage ratios revert to historical norms,” explains Tim Yeager, associate professor of finance at the university of Arkansas’ Sam M. Walton College of Business and co-author of the study which was published in the Journal of Banking and Finance. “The increasing reliance on these advances is a potential safety and soundness concern because access to them can undermine market discipline, and the FDIC [Federal Deposit Insurance Corp.] cannot raise premiums sufficiently to deter risk-taking.”

Yeager and his colleagues, Dusan Stojanovic at the Federal Reserve Bank of Chicago and Mark Vaughn at the Federal Reserve Bank of Richmond, VA, found that liquidity and leverage risk were modestly higher for FLB members than for non-members. Credit risk and overall risk of bank failure were unaffected byFHLB membership. FHLB members were exposed to less interest rate risk, which measures the effect of variable interest rates on bank earnings or equity, than non-members.

“Although the evidence fails to produce a ’smoking gun’ the worrisome incentives embedded in FHLB advances should give policymakers pause,” Yeager said. “We argue that bank supervisors should remian vigilant, and only careful monitoring by state and federal supervisors can prevent distressed banks from responding to the moral-hazard incentives associated with FHLB funding and underpriced deposit insurance.”

Commercial banks have turned to FHLB advances to help close the gap between loans and deposits since the early 1990’s when legislation opened the system, previously restricted to thrifts whose focus was on accepting deposits and orginating home mortgages, to commercial banks and credit unions. Researchers suggest future legislation or regulation may impose usage restrictions on advances similar to those used on brokered deposits on a capital charge on institutions having large amounts of collateralized obligations. The FDIC recently announced that it will be FHLB advances into account when setting deposit insurance premiums in 2009.

The issue of bank risk, whether associated with FHLB membership or not, should not greatly worry insured depositors. Uninsured depositors and those wishing to ascertain the health of their bank should monitor the risk levels of their financial institutions. Detailed information on specific banks can be found on the FDIC web site at fdic.gov. According to Yeager, if a bank’s core capital is below 5 percent and has been falling over time, the bank’s solvency may be an issue.

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Is the Federal Home Loan Bank System Hiding Risk ?

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

From its inception, the primary focus of the $700 billion bailout package was on businesses or, more importantly, banks and financial institutions. The plan was aimed at providing financial support to a system that had ceased to function properly, with credit markets freezing up and firms gasping for the additional capital they needed with no one willing to give it to them. Of course once the government gave them that capital it’s been having a hard time persuading them to lend it out again. Still, it appears that the Treasury is ready to broaden the bailout’s goals and provide assistance to an entirely new demographic: Consumer debt.

Treasury Secretary Henry Paulson came out today to let us know that Uncle Sam would not only be bailing out banks and other troubled lenders, but is going to (attempt) some rescuing of consumer debt firms as well. This “second stage” of the bailout, as it’s being called, officials are hoping to bring in some private money as well, which would give the bailout efforts more weight. In a surprising change in focus, Paulson said that the government will no longer be planning to buy troubled mortgage assets, which was its original intention, but will continue to examine ways to help homeowners so that they can somehow stem the tsunami of foreclosures that’s appeared in recent months to be gaining momentum.

Paulson noted that “Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions, “Second, the important markets for securitizing credit outside of the banking system also need support,” he said. “Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.”

What this means is that the Treasury will not be aiming efforts at loosening up another important aspect of our economy: consumer spending. These consumer finance companies that he mentioned are the ones who provide us with car loans, student loans, and credit cards. Much like investors don’t want securities that are backed by mortgages anymore, they’ve lumped investments backed by other loans into that pack as well, and so firms like American Express are having some trouble getting the funding they desperately need.

The thinking is that by providing them with capital, they’ll once again begin lending out to consumers, which should get us to spend more and help support the economy. Then again that was the idea when they bailed out the banks, too, and getting them to start lending again has been much akin to pulling teeth. As a result there’s been a good amount of criticism that these banks are using the money for their own purposes rather than helping struggling homeowners and the overall economy. What’s stopping consumer lending firms from doing the same?

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Bailout Efforts Shift To Consumer Debt

Congress gave some struggling homeowners a gift last December. On December 20, congress enacted the Mortgage Forgiveness Debt Relief Act of 2007 allowing homeowners whose mortgage debt has been partially or fully forgiven to claim special federal income tax relief.

Normally, debt forgiveness generates taxable income. Under the Mortgage Forgiveness Debt Relief Act, however, debt forgiven in 2007, 2008 or 2009 may qualify for tax relief. The Emergency Economic Stabilization Act of 2008, also called the “bailout bill”, extends that relief through 2012, according to Boston.com, the online face of the Boston Globe.

Relief is available only for debt forgiveness granted on the taxpayer’s principal residence. Taxpayers may exclude mortgage debt forgiveness if the total principal balance of their loan was less than $2 million. The debt forgiveness limit for married persons filing separate returns is $1 million. In addition, the debt must have been used to buy, build or improve the residence as well as being secured by it. Refinancing debt less than or equal to the amount of the mortgage principal prior to refinancing is also eligible for relief.

Not all forgiven mortgage debt qualifies for relief un the Mortgage Forgiveness Debt Relief Act. Debt that does not qualify under the Act may still qualify for exclusion for income taxes under the insolvency exclusion, if the debt was discharged in a Title 11 bankruptcy, if the debt is qualified farm indebtedness or if it is qualified real property business indebtedness.

Taxpayers whose debt is forgiven during 2008 should recieve a year-end statement (Form 1099-C) from their lender after January 1, 2009. This form must show the amount of debt forgiven and fair market value of any property given up through foreclosure.

To claim relief for debt forgiven in connection with foreclosure or reduced through mortgage restructuring, taxpayers must complete the relevant portions of Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attaching it and Form 1099-C to their 2008 federal tax return. Taxpayers reorting forgiveness as a result of foreclosure on their principal residence need only complete lines 1e and 2 on Form 982. Taxpayers reporting forgiveness resulting from the modification of mortgage terms while retaining ownership of the residence need to complete lines 1e, 2 and 10b. More information about the Mortgage Forgiveness Debt Relief Act can be found on the Internal Revenue Service (IRS) web site at irs.gov and in the instructions on Form 982.

Remember, just because the federal government offers taxpayers mortgage forgiveness debt relief doesn’t mean individual states are. Taxpayers need to consult their tax preparer/advisor or state tax law to determine what, if any, relief is available at the state level.

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Tax Relief for Mortgage Debt Forgiveness

Is American International Group, Inc.’s (AIG) hosting of a conference for independent financial planners a sign that the company is rising from the ashes with the help of a newly announced bailout from the U.S. Treasury and Federal Reserve or just the latest in a string of high-profile and expensive mistakes?

Two months ago, the U.S. government and American taxpayers saved AIG from collapse by loaning the company a record $85 billion. AIG executives used the money to go on the now infamous hunting trip. Not long after that, the company paid more than $400,00 to send top-performing insurance agents on a week-long retreat. So it is understandable that people - the media, taxpayers, politicians, regulators - view AIG’s hosting of a $343,000 conference in Phoenix, Arizona with some skepticism.

The skepticism is deserved. Especially since the bailout increased to more than $150 billion on Monday. The solution, outlined in a public statement from AIG distributed to the media on Monday includes:

• The purchase of $40 billion in newly issued AIG perpetual preferred shares and warrants to purchase the equivalent of 2 percent of outstanding AIG common stock by the U.S. Treasury Department. The perpetual preferred stock carries a 10 percent coupon with cumulative dividends. Proceeds from the sale of the preferred and common stock will be used to pay down the credit issued by the Federal Reserve Bank of New York (FRBNY).
• The existing FRBNY credit will be revised to reflect a total commitment of $60 billion, an interest rate of LIBOR (London Interbank Offered Rate) plus 3 percent annually, a 0.75 percent fee on undrawn commitments and a 5-year loan term.
• AIG will transfer mortgage-backed securities to a newly created financing entity capitalized with $1billion in subordinated funding from AIG and up to $22.5 bilion in senior funding from FRGNY.
• The purchase of approximately $70 billion in Multi-Sector CDO exposure by a second financing entity created by AIG and FRBNY.

“Today’s actions send a strong signal to our policy holders, business partners and counterparties that AIG is on the road to recovery,” Edward M. Liddy, AIG Chairman and CEO said in a statement. “Our comprehensive plan addresses the liquidity issues that threatened AIG, and gives us the financial flexibility to complete our structuring process successfully for the benefit of all our constituencies.”

Comparatively, the $23,000 that the Arizona Republic reports as the total cost AIG said it incurred for the Phoenix conference barely registers. Even if AIG picked up the full cost of the conference, it’s only slightly more than 0.2 percent of 1 percent of the total bailout cost so far. In addition, the company reports that financial planners like those attending the conference generated almost $200 million in revenues this year, as of September 30.

After being exposed by local then national media, Larry Roth told the Arizona Republic “Our success in enlisting product sponsors to pay for the vast majority of costs, while charging financial planners a registration fee and for their travel, has resulted in minimal cost to AIG.”

Liddy concurs, saying “We conducted a top-to-bottom review of all expenses of the Phoenix meeting in advance and found that it was consistent with my October 10th directive [to reduce expenses, conserve cash and cancel all nonessential conferences and meetings, unnecessary travel and excessive overhead]. This conference was approved because it provides the kind of communication we must conduct with the people who sell our products if we are to be successful and repay the U.S. taxpayer.”

Minimal cost is not free. The public is understandably skeptical of AIG’s explanations given their past behavior. There are some indications, however that this explanation has some truth to it.

Phoenix is the headquarters of AIG Financial Advisors (AIGFA) minimizing travel costs for AIG employees. Nearly 2,000 independent, fee-based financial advisers are affiliated with AIGFA, a registered broker-dealer and member of financial Industry Regulatory Authority (FINRA). On of the responsibilities of a registered-broker dealer under National Association of Securities Dealers (NASD) Rule 1120, Continuing Education Requirements, is providing registered covered persons with formal product- and regulatory-related training.

The goal of the bailout was to allow AIG to survive. Some conferences and formal training are part of doing business for a financial company. If AIG is to continue operations, let alone begin rebuilding itself or repaying taxapyers, they are going to have to spend some money to do it. but they have only themselves to blame if the public uses past experience to judge the company’s present and future actions for some time to come.

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Past Haunts AIG as Bailout Solution Announced

A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

On this Veterans Day 2008, there are 23.4 million military veterans alive in America. Of those, The U.S. Department of Veterans Affairs estimates that on a typical night about 154,000 veterans are homeless at some time during the year. About 2,000 of those are people who served in Afghanistan and Iraq.

While this is a long-term problem, it will get worse as vets return from the current conflagrations to an economy that’s figuring out how far down “the pits” are. Vets face a unique set of challenges when they come home. In the best case scenario they are merely adjusting to a life without a constant threat to their lives and safety. That is really no small thing.

If you are in the National Guard or the Reserves, that best-case scenario also involves going back into the work force after a year or more away and at a time when most companies are laying people off. These problems are only compounded if you are self-employed or run your own business. In addition to that, most in the Guard and Reserves have been receiving substantially lower wages while they were on active duty and have had to spend out of whatever savings they’ve had to support their families.

And, like I said, that’s the best case scenario. In addition to any physical wounds, a huge number of vets have to contend with mental health issues – from post-traumatic stress disorder to addiction to sadly much more. All of which were acquired on behalf of us.

Whether or not you supported the George Bush Desert Classic (full disclosure: I was against it from before the start and I have a brother in the Reserves who’s already done a year in Iraq), the truth is we owe all of these soldiers, sailors, marines and airmen. Maybe you wish we only had to send troops to “good wars,” as we now call World War II. The fault for whether or not to fight in this war lies not with the troops but with the generals, our leaders and the people who elect them – i.e., you and me. So we owe these people who did what we corporately decided needed to be done.

There has been plenty of press coverage (but still not enough) about the failings in the Vets medical-care system. While some steps have been taken to address their fiscal issues as well, more needs to be done

The VA has long provided support for vets to get mortgages.

From 1944, when VA began helping veterans purchase homes under the original GI Bill, through December 2007, more than 18.4 million VA home loan guaranties have been issued, with a total value of $967 billion. VA ended fiscal year 2008 with almost 2.1 million active home loans, reflecting amortized loans totaling $220.8 billion. In fiscal year 2007, VA guaranteed 179,000 loans valued at $36.1 billion.  During fiscal year 2008, VA’s programs for specially adapted housing helped 550 disabled veterans with grants totaling more than $24.6 million.

While the VA has never guaranteed subprime mortgages, wnder the Veterans’ Benefits Improvement Act of 2008, the department is providing more help to veterans who currently have subprime loans.

• Veterans who wish to refinance their subprime or conventional mortgage may now do so for up to 100 percent of the value of the property. The maximum amount for these refinancing loans has been raised from $144,000 to $729,750.
• Further, some states are also offering programs to help. In Massachusetts, the Home for the Brave loan program offers veterans 100 percent financing with no down payment on a single-family home or condominium.

That is a start. We must increase aid and support to the families of veterans and that support must continue once the deployment is over. The truth is if we want to truly help with financial issues we must also address the health-care issues as well. It is unfair to expect someone to deal with their fiscal health when they are already have physical and mental-health problems as well.

BTW, U.S. Vets has a great website that is loaded with ways for vets and their families to get help.

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Mortgage crisis poses extra problems for military personnel

Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

This meme—government confiscation of retirement accounts— is rapidly gaining credence. On November 4, Carolina Journal Online reported that Democrats have been meeting to discuss transferring currently-voluntary private retirement accounts to eventually-mandatory government administered retirement accounts that would produce a guaranteed rate of return. Further, the now tax-advantaged plans would lose tax incentives and deductibility.

On the surface, this doesn’t look very appealing. However, there are two ways to look at this plan: 1) protection of retirement accounts to the tune of a guaranteed 3% per annum; or 2) confiscation of retirement accounts to the tune of loss of control and, effectively, loss of ownership.

As currently being discussed, the plan would entail transferring private retirement plans, such as IRAs and 401ks that are invested in stocks and bonds, into government retirement accounts (GRAs). These new accounts would be invested in newly-created government bonds yielding 3%, adjusted for inflation.

Further, the current tax-advantaged, voluntary plan would become a mandatory savings of 5% of wages with no tax deduction for either the employee or employer. These accounts would be administered by the Social Security Administration. Actually, the money would not be invested in government bonds, per se, but would earn “pension credits.” The wage earner would continue to pay into Social Security and Medicare. To make this more palatable, the transfer price might be calculated at market prices pre the recent cliff dive, assuming that it would be put into effect this year.

But wait a minute, there’s another way to look at this proposal. In her report, Ghilarducci said that “GRAs would guarantee a fixed 3% annual rate of return (vs. the volatility of returns in the capital markets, which have devastated savings this year). In place of tax breaks workers now receive for contributions and thus, effectively, a lower tax rate, workers would receive a $600 annual contribution from the government, inflation-adjusted. For low-income workers whose annual contributions are less than $600, the government would deposit whatever amount it would take to equal the minimum $600 for all participants. Lauding GRAs as a way to effectively increase retirement savings, Ghilarducci wrote that “savings incentives are unequal for rich and poor families because tax deferrals provide a much larger carrot to wealthy families than to middle-class families — and none whatsoever for families too poor to owe taxes.”

For more information, see: US Congress Committee on Education and Labor hearing on October 7, 2008 “Saving Retirement in the Face of America’s Credit Crises: Short Term and Long Term Solutions” (PDF) testimony of Economics Professor Teresa Ghilarducci on “The Impact of the Financial Crisis on Workers’ Retirement Security.”

This proposal is similar to Argentina’s recently announced plan and we don’t hear any crying down there. Rock throwing and other expressions of civil unrest, but not crying; and a stock market crash; and money escaping the country; and, what else, oh yeah, increased likelihood of sovereign default.
Buck up, Americans, this is what you can do for your country.

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Confiscation of Your Retirement Account