Sequestration

Only in America would we desecrate the English language to find a word to describe what our government is up to. Yes, March 1 is the official sequestration date. But don't expect the government to declare the next Federal Holiday to be "Sequestration Day." Here are a couple of points about this word. First of all, the word sequestration means confiscation or seizure of assets. No one is proposing a seizure of assets here. What we are talking about is automatic and severe budget cuts. In this case we will defer to the Congressional Research Service which has rewritten the dictionary to expand the definition to mean... the permanent cancellation of budgetary resources by a uniform percentage. Moreover, this uniform percentage reduction is applied to all programs, projects, and activities within a budget account.
Okay, now that we know what it means, the questions that follow are... will it happen and if it does happen, what affect may it have upon our lives and especially the economy? There have been many articles written regarding what could happen if the budget is cut by approximately 10% overnight. These cuts include all discretionary spending from jobless benefits to food inspections to defense. Not all cuts would happen immediately. For example, if there are furloughs of Federal workers, we have read that the furloughs may take 30 days or more to implement. That gives Congress and the Administration more time to come up with a solution. And you know what they do when they have extra time? Usually nothing. There is no doubt that dropping hundreds of millions of dollars out of the budget will take some steam out of the economy this year. This could lead to lower rates and oil prices. We just don't think that the cuts will be allowed to take hold all year. With a compromise of some kind, there will be some cuts, but how much remains to be seen.

www.ChicagosMortgageChoice.com

The Numbers Don't Lie

This week the markets were focused upon the all important employment report. While the number can be volatile from month-to-month, the dip in first time unemployment claims during the previous two weeks made the markets more optimistic regarding January's numbers. They came in at a lackluster 157,000 jobs created for the month with an unemployment rate of 7.9%. These numbers were worse than expectations; however, a revision of previous data added over 300,000 new jobs to the data previously released in 2012. The numbers don't lie. There have been additional reports released recently that show the economy is growing more quickly. For example, the December orders for durable goods were much higher than expected. Preliminary numbers indicated that the growth of the economy stalled in the fourth quarter, but this pause was attributed to temporary factors such as the weather according to commentary by the Federal Reserve released after the Fed meeting ended on Wednesday.
As we have pointed out in the past, a growing economy is great news. But it also means that we can expect higher prices to join the party. It is not a coincidence that home prices rose last year. More recently, oil prices are up around ten percent and interest rates have begun creeping up as well. All along we have warned that the Federal Reserve Board has no power to keep rates low in a stronger economy. Nor would they want to. There was more drama regarding the Fed meeting this week for this very reason and rates eased a bit when the Fed indicated they are continuing their support for low rates. Meanwhile, it is expected that those who have been on the sidelines may very well recognize that this is their last chance to purchase a home which is on sale. Rates and home prices are up slightly, but they are currently still a bargain. If the numbers keep rolling in like they have, this fact may no longer be the case.

Keith Stewart
www.ChicagosMortgageChoice.com

Deduction for Mortgage Insurance Premiums for filers making below $110,000 is extended through 2013 and made retroactive to cover 2012

Real Estate Provisions in “Fiscal Cliff” Bill

On Jan. 1 both the Senate and House passed H.R. 8, legislation to avert the “fiscal cliff.” The bill will be signed shortly by President Barack Obama.

Below are a summary of real estate related provisions in the bill:

Real Estate Tax Extenders

• Mortgage Cancellation Relief is extended for one year to Jan. 1, 2014

• Deduction for Mortgage Insurance Premiums for filers making below $110,000 is extended through 2013 and made retroactive to cover 2012

• 15 year straight-line cost recovery for qualified leasehold improvements on commercial properties is extended through 2013 and made retroactive to cover 2012.

• The 10 percent tax credit (up to $500) for homeowners for energy improvements to existing homes is extended through 2013 and made retroactive to cover 2012.

Permanent Repeal of Pease Limitations for 99% of Taxpayers

Under the agreement so called “Pease Limitations” that reduce the value of itemized deductions are permanently repealed for most taxpayers but will be reinstituted for high income filers. These limitations will only apply to individuals earning more than $250,000 and joint filers earning above $300,000. These thresholds have been increased and are indexed for inflation and will rise over time. Under the formula, the amount of adjusted gross income above the threshold is multiplied by three percent. That amount is then used to reduce the total value of the filer’s itemized deductions. The total amount of reduction cannot exceed 80 percent of the filer’s itemized deductions.

These limits were first enacted in 1990 (named for the Ohio Congressman Don Pease who came up with the idea) and continued throughout the Clinton years. They were gradually phased out as a result of the 2001 tax cuts and were completely eliminated in 2010-2012. Had we gone over the fiscal cliff, Pease limitations would have been reinstituted on all filers starting at $174,450 of adjusted gross income.

Capital Gains

Capital Gains rate stays at 15 percent for those the top rate of $400,000 individual and $450,000 joint return. After that, any gains above those amounts will be taxed at 20 percent. The 250/500k exclusion for sale of principle residence remains in place.

Estate Tax

The first $5 million dollars in individual estates and $10 million for family estates are now exempted from the estate tax. After that the rate will be 40 percent, up from 35 percent. The exemption amounts are indexed for inflation.

Access on www.REALTOR.org

Behind Closed Doors

Many American's get upset when government officials and politicians do things behind closed doors rather than open to public scrutiny. After all, we are a democratic society and we want open government--not back room deals. On the other hand, we have a feeling that the majority of the negotiations aimed at avoiding the fiscal cliff are really taking place behind closed doors while the politicians ramp up the public rhetoric so that their political bases are satisfied with their leaders' positions. One should be looking not so much at what you see and hear in the media vs. what you can't see and hear as easily. For that news you have to dig a bit deeper. What we all should be looking for here is compromise. There is not a single side that will win the other side over. Each will have to contribute to the compromise with significant concessions. The true winner of the compromise will be America and especially the American economy. The latest employment report tells us that even though the numbers are improving, we still have a long way to go. The markets were relieved that Hurricane Sandy did not seem to have as great an impact on the report as expected. There is no denying the fact that we have come a long way from the depths of the recession and there is more work to be done. If our leaders start getting their work done behind closed doors, it certainly would help.

Fiscal Cliff Talks Get Serious

While the analysts report that the Holiday shopping season has gotten off to a strong start, the news from Congress continues to stay front and center. The lame duck session is addressing the automatic budget cuts and tax increases that go into effect in January if an agreement is not reached. The changes would be so draconian that the media has nick-named these "the fiscal cliff." The concern right now is whether the threat of the fiscal cliff is causing businesses not to hire and consumers not to spend. Thus far, the results from Black Friday and Cyber Monday seem to indicate that at least the public is not worried. We are not of a mind to believe that Congress will let us fall down a fiscal cliff. We do understand that if they wait for the last minute -- not unusual for Congress -- and start the finger-pointing rhetoric, it could hurt the economy as we approach the Holidays. Thus far, Congress has been pretty cordial. It is as if the elections delivered a message to our representatives that we want them to work together. Keep in mind that even though we think either a temporary "kick the can down the road" or permanent solution will come out of the talks, that does not mean the economy will not be affected. Higher tax revenues, budget cuts and even changes in Medicare and Social Security are all on the table. You can't cut a trillion dollar deficit without raising revenue and lowering spending. The lobbyists are busy protecting their clients' interests such as social security and the mortgage tax deduction. We hope a balanced approach will emerge and a major potential stumbling block for the economic recovery will be removed. Meanwhile, this Friday look for the most unimportant employment report in a while. The data is expected to be skewed because of the effects of Hurricane Sandy.

FHA Mortgage Insurance Premiums Will Increase Soon

If you are considering buying or refinancing a home, you should know that the Federal Housing Administration (FHA) will soon increase mortgage insurance premiums on FHA home loans.
The Department of Housing and Urban Development (HUD) announced it would increase the annual mortgage insurance premium (MIP) by 0.10% for FHA loans under $625,500. ...This would raise the fee from 1.15% to 1.25% of the total loan amount. This annual premium increase — which is broken down into monthly payments — takes effect April 1, 2012.
In addition, HUD announced it would raise the FHA's upfront annual mortgage insurance premium (UFMIP) from 1% to 1.75% effective April 1, 2012.
Starting June 1, 2012, the MIP for FHA loans over $625,500 will increase 0.35%, raising that fee to 1.50% of the total loan amount.
The primary reason for the changes is to bolster capital reserves for FHA's Mutual Mortgage Insurance Fund. Congress has mandated the fund keep 2% in reserves. Last year, that reserve had slipped to 0.2%. The changes are expected to generate about $1 billion annually for the fund.
The increase in mortgage insurance costs applies to the purchase or refinancing of all FHA loans regardless of the amortization term or loan-to-value (LTV) ratio. The increases will not apply to borrowers already in an FHA-insured mortgage, a Home Equity Conversion Mortgage (HECM), and other special loan programs to be outlined in a forthcoming FHA Mortgagee Letter.
If you are considering refinancing or making a purchase, you might want to act before the new mortgage insurance premiums take effect.
If you would like more information about what these higher fees will mean for you , please contact me today.

www.ChicagosMortgageChoice.com
keith@northpointlending.com
773-529-7000

Mandatory Increase In Mortgage Loan Fees Directed to Fannie Mae and Freddie Mac

On December 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011. Among its provisions, this new law directs the Federal Housing Finance Agency (FHFA) to increase guarantee fees charged by Freddie Mac & Fannie Mae by no less than 10 basis points from the average guarantee fee charged by these companies in 2011 on single-family mortgage backed securities....

This requirement is effective immediately, meaning that the average guarantee fees charged in 2012 need be at least 10 basis points greater than the average guarantee fees charged in 2011 and that this increase be remitted to the U.S. Treasury rather that retained as reserves by Freddie Mac and Fannie Mae.

Basically what this means is mortgage rates are going up and are being "taxed" in order to pay for the payroll tax cuts. So essentially, homeowners will pay for this program. Not to mention it will put a downward pressure on home values as new buyers will have reduced buying power. This definatley does NOT help to stimulate the struggling housing market. Additionally the money will be transfered from Fannie and Freddie to the Treasury.