A question about refinancing

This is one of those posts where we seek your wisdom and guidance, so pay attention, please.

We were reading the transcript of the President's news conference today, and noticed this quote: "...we need to change the tax laws. You're disadvantaged if you refinance your home. It creates a tax liability. And if we want people staying in their homes, then it seems like to me we got to change the tax code. That's why I talked to Senator Stabenow the other day and thanked her for her sponsorship of an important piece of tax legislation that will enable people to more likely stay in their homes."

Our first, knee-jerk response was this: The president is more clueless than ever -- There's no tax disadvantage in refinancing! What's he talking about? And doesn't he know that the Stabenow tax relief bill is not about keeping your house? It's about selling it at a loss and not owing income tax on the amount of your loan that is forgiven? This is about avoiding taxes on short sales; it's about selling your house, not keeping it.

But then we looked at the Stabenow proposal, and found that the President might be right. In some cases, it would help homeowners avoid owing taxes when they refinance -- in a scenario we haven't heard much about: "... if a family owns a home with a $100,000 mortgage and can’t afford to make their payments, the bank can step in and refinance the house at a lower value to better reflect the decreased market value. Under current law, if the bank values the home at $80,000, the family would have to pay taxes on the $20,000 difference between the new and the original mortgages."

So here is our question: are lenders really willing to refinance homes at lower values? Is this really happening? And if this is happening, are these new, bank-endorsed, lower property values showing up as comps? As always, comments and insights are greatly appreciated.

Comments

[Inland Empire]

I think banks will throw in some sort of enticement like no closing costs but in the long run they will find new routines like 40 year mortgages (which have been used in the past) or other things that will benefit them.

[MyLessThanPrimeBeef]

BofA might refinace you at $80K, but your current lender, Citicorp, would still like to get their $100K back.

[Rich]

Zillow.com is estimating the value of my house as the last amount that I refinanced at, though in theory that amount is only 80% of the value the mortgage company believed it to be worth at sale. It will be interesting to see what my Town tax assessor does when they revalue next year...

[HB]

This a no-brainer: (a) the president is clueless or (b) the president is brilliant and banks are willingly going to eat millions in losses.

If you vote "b" you also believe in the Tooth Fairy, the Easter Bunny, and that them thar hills in Iraq are still hiding WMDs.

[Hula Girl]

I guess 10 airplane tickets per home purchase will allow buyers to flee when they can't pay their over-priced mortgages. Unreal.

http://www.latimes.com/business/
la-fi-jumbo18oct18,0,6136197.story?
coll=la-home-businessCalifornia

broker ties jumbo miles to jumbo mortgages

CHICAGO -- In Southern California, a jumbo mortgage can now land you on a jumbo jet.

In a bid to draw high-end buyers to the region's floundering housing market, Beverly Hills-based real estate brokerage, Incentive Real Estate Inc, said today homes buyers can earn 250,000 airline miles on the purchase of a newly constructed house valued at more than $500,000.

That is enough miles for 10 free round-trip coach tickets within the United States to see how other depressed real estate markets are faring. Or two round-trips to Asia to get away from Southern California's bleak real estate news....

"Our program is a win-win for the homebuyer and the builder," Incentive Real Estate's Managing Broker Patrick Gorman said in a press release.

Home buyers falling below the $500,000 threshold will be eligible for 100,000 airline miles -- still enough for two free coach-class, round-trips to Europe.

[MyLessThanPrimeBeef]

Where can I sign up to earn 100,000,000 airline miles?

That's the one way distance to Mars...more or less, if you know what I mean.

I want to be the first Homo Sapiens Sapiens to homestead there.

[Toby]

This a no-brainer: (a) the president is clueless or (b) the president is brilliant and banks are willingly going to eat millions in losses.

Posted by: HB

I think that would be billions in loses.

And I don't know about anyone else, but I haven't had a "do over" since I was 12.

[Hula Girl]

MyLessThanPrimeBeef - I hate to tell you, but Mars is an overbuilt desert - much like Phoenix - but not as hot. Buyers consider it a Black Hole and financing is hard to come by. Pretty soon they'll be giving it away.
Don't forget your cat ;-)

[Jeremy (jemarqu)]

I just have a couple questions.

How does the bank determine who qualifies for this?

Does this mean I can buy a home now and if the price lowers in the next 2 years I can just re-finance at the market price?

[MyLessThanPrimeBeef]

Hula Girl, we have to ask Ace.

According to him, I will make out alright eventually.

[MyLessThanPrimeBeef]

Jeremy, I am afraid it work for you.

You have already demonstrated that you can read, therefore Caveat Emptor applies to your case.

[sfvrealestate]

Peter, your column was the first I'd heard of this, and I'm a Realtor. I don't think lenders are going to exactly, uh, JUMP on this solution, and I haven't heard of any banks doing this -- yet. However, if the amount of defaults rises much higher, they will have to do SOMETHING. And this would probably be less costly for the banks than for them to have lots and lots of foreclosure properties to manage/sell. However, if an average homeowner is in trouble with his mortgage, is a debt forgiveness of, say, $20k to $80k really going to help that much? That's only going to be a savings to the mortgage holder of (using 20k-80k) $140/month to $560/month.

[tew]

One of the aweful things about this retroactive tax "put" for home BORROWERS (not "owners"), is that there is no "recapture" from what I can tell. The borrower gets a tax break, but if ultimately they sell the house for a profit then they still get the tax break for the entire gain.