Lynne French – Real Answers
Q. We are in the middle of a short sale. A tax forgiveness measure was supposed to expire on December 31, 2012. Did it expire? If so, I heard I will be taxed on the forgiven amount as ordinary income. If this is the case should I let the bank foreclose instead? Would I be taxed on the forgiven amount in a foreclosure?
A. The measure you are referring to is called the "Mortgage Forgiveness Debt Relief Act of 2007." This measure could pertain to short sales, foreclosures, deeds in lieu of a foreclosure or modifications. Your tax professional would determine how this would affect you in each situation. Technically it did expire for 24 hours but then was extended for 1 year. I have no idea if it will be extended again. So you seem to be safe for now, but please confer with your tax professional.
Industry experts expected the bill to be extended. It had bipartisan support in the house and the senate. Congress didn't seem to feel it was a high priority within the "fiscal cliff" negotiations so the extension actually was allowed to expire briefly, causing much anxiety for people like you. The National Association of Realtors and others lobbied hard to keep it in the forefront. Forty-one state attorneys general appealed to the House and Senate for the extension.
Not to extend it at this point made no sense. It would have hurt the very people that the short sale or loan modification was supposed to help. How could people who can't afford their mortgage be able to afford this huge tax bill?
Some home owners who are paying their mortgages on time have suggested this tax forgiveness is unfair to them. Perhaps it is, but anything that will help keep the housing market improving is good for the economy.
Q. Our swimming pool is about 30 years old. It could use a facelift. We don't use it much anymore and are considering filling it in and maybe planting a lawn there versus replastering. How would these alternatives affect our property value? We might sell our home in 5 to 10 years.
A. A sparkling, inviting pool can add value to your property. If it is not spectacular an appraiser won't add much value for it. Many buyers definitely want a house with a pool. Most of those want one that is in near perfect shape. They might be willing to do some repairs but any repairs needed on the pool will lower the amount they would be willing to pay for your home. There is the other buyer who absolutely does not want a pool. Perhaps they had one in the past and don't want to deal with the expense and the upkeep. And there is the other buyer who is ambivalent whether there is a pool or not. They would not buy a house with a pool that needs a lot of work though.
How large is your lot? If the pool takes up most of the yard, it won't be appealing to most buyers. People usually want the yard to be a recreation center.
What I would suggest you do is compare the cost of filling in the pool and landscaping the area with the cost of replastering and repairing or replacing anything else that is needed. Also factor in the maintenance cost of each. If you are still going to live in your house for 5 to 10 years, which type of yard would you enjoy having? Your quality of life is very important.
I have noticed one truth in Real Estate. If there are things about your home that you value and enjoy, it is not hard to find a buyer who will also value and enjoy your improvements.
Q. What is something new that makes an area desirable?
A. The California Association of Realtors put out “One Cool Thing” which is the Walkability Index. It is a new measure of the desirability of an area. This is the proximity of amenities such as restaurants and shops, and community hubs such as schools, parks and libraries. Walk scores range from 0 to 100, and any rating above 70 is considered “very walkable.” You can check a walk score in a specific city or neighborhood at www.walkscore.com. I am proud to say that Clayton has been named “Most Walkable City” in the past. And it has been named in Money Magazine’s Top 100 “Best Places to Live” three times since 2007. Each time they cited the extensive walking trails.
LYNNE FRENCH – REAL ANSWERS
Q. How is the problem with the fiscal cliff going to affect the real estate recovery and interest rates?
A. The so-called “fiscal cliff” is a combination of tax increases and massive government spending cuts that will hit the U.S. economy in 2013 unless Congress takes action before the end of the year. Most economists see the result of the fiscal cliff as something that will hurt the U.S. economy, with too many tax increases and spending cuts. I discussed this with one of my mortgage advisors, Jay Voorhees. He reminded me, first of all, that when stock prices go up, bond prices go down. And when bond prices go down, rates go up. With the fiscal cliff, such a threat to economic growth actually reduces interest rates. If an actual compromise is reached in Congress to avoid the fiscal cliff, stocks will rally and bond prices will drop. As he said, when bond prices drop, rates will go up. Voorhees says that the increases in stock prices and interest rates will be temporary though because the Fed will continue to buy up bonds in what they call their QE111 program, which is a pledge to keep interest rates down. So if nothing is done about the fiscal cliff, rates will probably go down. If something is done about the fiscal cliff, rates will probably go up, but only temporarily. It will help the real estate recovery because people will feel the confidence they need to make a move. I say this as long as they don’t mess with the mortgage interest deduction.
Q. We are almost ready to move into our new house. What are some moving tips?
A. It is never too soon to start planning the move. To-do lists are great so you don’t forget something critical. This is a great time to sort and get rid of things that you really don’t need. It feels good to start fresh with a lighter load.
When packing your boxes, put heavy items in smaller boxes. Try to keep all boxes under 40 pounds. Color-code the boxes for each room and label them on all sides. That way you won’t have to move boxes to see the label. Wrap every fragile item separately and use a packing material such as bubble wrap. You can purchase these at moving stores.
Back up your computer files before moving your computer.
Decide what items you are going to move on your own. You might want to carry valuables, breakables and items with sentimental value with you; also, items that the movers won’t take, like plants. Keep a bag with you that has necessities for that day such as snacks, tissue, medications, etc. Keep all documents pertaining to the move with you including the movers’ name and contact information in your phone or phonebook. Try to make arrangements for your children and pets to be away on moving day. This will spare them the stress of the move. When the movers arrive, inspect all boxes and furniture right away.
Send your question and look for your answer in a future column. Email Lynne@LynneFrench.com. French is the broker/owner of Windermere Lynne French & Associates and a Clayton resident. For any real estate needs or questions, contact her at 672-878 7or stop in at 6200 Center Street, Clayton.
Q. The real estate terms that you and others use have me confused: Freddie Mac, Fannie Mae, FHA etc. Could you define them? How do I know what type of a loan I have on my house?
A. I conferred with our loan expert, JVM Lending, for an easy to understand synopsis. It is important to be educated on the distinctions of these because effectively over 90% of all mortgages are Fannie Mae, Freddie Mac or FHA loans. This was his explanation.
FANNIE MAE and FREDDIE MAC
Fannie and Freddie are Government Sponsored Enterprises or “GSEs”. Prior to the 2008 “meltdown,” this meant the Federal Government gave them certain advantages. Today, they are (for the most part) owned and operated by the Federal Government.
Fannie and Freddie were set up to “provide more liquidity” for mortgages; they buy mortgages from banks and investors and “bundle them into securities” and sell them on Wall Street. This access to the capital markets brings more mortgage funds and lower rates to borrowers/consumers. Without Fannie and Freddie, rates would be much higher. This is because there is not enough private sector demand for mortgages to keep rates as low as they are.
Fannie and Freddie do not originate loans. They only buy them from other lenders and investors. There is little difference between Fannie and Freddie, other than some minor guideline nuances. They are separate entities doing largely the same thing, although Fannie is much larger than Freddie.
Lenders underwrite loans subject to standards that “Conform” to Fannie and Freddie guidelines. Fannie/Freddie will not buy loans that do not “Conform”. This is why we refer to “Conforming” loans. The “Conforming Loan” is currently $625,000 in our area.
Loans that do NOT “Conform” to Fannie/Freddie guidelines are referred to as “Non-Conforming” loans. They include FHA, Jumbo and Portfolio loans.
NON-CONFORMING LOANS, JUMBO AND PORTFOLIO LOANS
“Non-Conforming Loans” include “Jumbo” and “Portfolio” loans. Jumbo loans have loan amounts that exceed Conforming and FHA limits ($625,000 and $729,000 in the Bay Area). The rates for these loans are higher than Conforming/FHA rates. Portfolio loans are loans that are held by their originating lender; they are not sold to investors.
FHA (Federal Housing Authority) Loans are loans that are underwritten to FHA or HUD (Housing and Urban Development) standards. These guidelines are looser and more flexible than Fannie/Freddie’s (“Conforming”) guidelines. FHA was initially set up to help less well-off borrowers buy homes. But today, FHA has no income limits and borrowers do not have to be “first time buyers”
FHA does NOT buy loans the way Fannie or Freddie does. They only insure them. This is a key distinction. FHA loans are originated, underwritten and funded just like Fannie/Freddie loans. “Ginnie Mae” is the name of a security backed by FHA Loans.
You can call your lender to confirm what type of loan you have and if it is backed by any of these organizations.