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Archive for February, 2008

President reiterates his objection to a proposed change to help homeowners in bankruptcy and the creation of a $4 billion fund to let agencies buy foreclosed homes.

President Bush said Thursday that he opposed the foreclosure prevention legislation that Senate Democrats have introduced.

“The Senate is considering legislation that would do more to bail out lenders and speculators than to help homeowners keep their homes,” he said. “The Senate bill would actually prolong the time it takes for the housing market to adjust and recover, and it would lead to higher interest rates.”

Earlier this week, the Bush administration said the president would veto the Foreclosure Prevention Act of 2008 if it passes Congress because it objected to two key elements. The first is a provision that would change the bankruptcy law to let judges reduce the amount of principal and interest due on mortgages of those filing for bankruptcy.

The lending industry has been lobbying heavily against the provision, arguing that letting judges rewrite the terms of mortgages would cause lenders to impose a bankruptcy risk premium, raising rates on all mortgage borrowers.

Some studies, however, contend the increase in rates would be minimal.

The administration also objects to a provision in the bill that would provide $4 billion to let state and local government buy and rehabilitate foreclosed homes, and improve disclosure of subprime mortgage loans in hopes that borrowers won’t be surprised by big payment increases.

Senate Democrats still plan to put the bill to a vote.

In a letter to Bush on Wednesday, Senate Majority Leader Harry Reid, D-Nev., said the bankruptcy provision in the Senate bill had been modified and now would only apply to existing subprime and adjustable-rate mortgages and let lenders recoup some of the principal forfeited in bankruptcy should the borrower later sell his home.

“The Foreclosure Prevention Act contains necessary, targeted and appropriate solutions,” Reid wrote.

He said it would benefit 700,000 families, put 80,000 vacant and foreclosed homes to productive use and create 30,000 jobs and $10 billion in economic activity.

Bush: Give stimulus time to work

The president on Thursday said he believed the economy is not in recession.

“I don’t think we’re headed to a recession, but no question we’re in a slowdown. And that’s why we acted, and acted strongly, with over $150 billion worth of pro-growth economic incentives,” he said.

He also said that Congress, which is considering additional economic stimulus measures beyond the tax rebates and business breaks included in a package he signed into law, should give the original measures a chance to take effect.

“Why don’t we let stimulus package one have a chance to kick in?” he said. He noted that tax rebate checks to more than 130 million tax filers will be mailed out starting the second week of May.

The economic stimulus measure also included a measure that increased the caps on the size of mortgages Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) can buy. The aim of that provision was to stimulate more activity in so-called jumbo housing markets, where high prices means home buyers have to take out loans that exceed the “conforming loan limits” on mortgages that the two agencies may buy and sell in the secondary market.

On Thursday, Bush reiterated his call that Congress also pass legislation reforming how Fannie and Freddie are regulated.

In addition, Bush used the press conference to make the case for the permanent renewal of tax cuts he engineered in his first term.

“Keep the tax cuts permanent,” he said in response to a question about what hope he could offer to Americans hurting financially and facing the prospect of $4 a gallon for gasoline.

Deficit hawks warn, however, that the longer-term costs of keeping the tax cuts permanent would make the nation’s fiscal situation precarious.

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Low-income seniors, many of whom ordinarily don’t have to file with the IRS, will need to file tax returns to claim their checks.

The decision to add 20 million seniors to the ranks of Americans who’ll get rebates as part of the economic stimulus plan was in the end an easy one to make.

Getting the rebates in their hands may not be as simple to do.

According to the Treasury, everyone seeking a rebate under the program, which President Bush signed into law Wednesday, must file a 2007 federal tax return, preferably by April 15, if they want to receive their check as early as May or June. (Rebates: What you need to know.)

That filing requirement could cause complications – and expense – for some 12 million low-income seniors who typically don’t file tax returns because they don’t have to.

Not withstanding the rebate, a married couple 65 and older would only have to file if their 2007 income exceeded $18,550. Single seniors only have to file if their income exceeds $10,050.

The IRS has said it will make a special effort – working with the Social Security Administration – to reach out to seniors living on Social Security to make sure those who are eligible know what they will need to do.

The IRS outreach will be echoed by the AARP, which is planning a campaign to increase awareness about the rebates among seniors through its publications and Web site as well as on its TV and radio shows, said AARP spokesman Jim Dau.

What form low-income seniors should use

The IRS has clarified what low-income seniors living primarily on Social Security need to do to get their rebates.

Seniors with at least $3,000 in qualifying income (which includes not only wages, but Social Security benefits, certain veterans’ benefit payments and railroad retirement benefits), should report these benefits on Line 20a on Form 1040 or Line 14a of Form 1040A.

Beyond that, they only need to fill out their name, address and Social Security number, according to a sample return provided by the IRS. They should also write the words “Stimulus Payment” at the top of the form they file.

If a senior has already filed a return and reported at least $3,000 in qualifying income, they don’t need to do anything else to receive their rebate. The IRS will simply process that return and issue a rebate check.

Seniors who have already filed a tax return reporting less than $3,000 in qualifying income may want to file an amended return if, in fact, they received enough total income to qualify for a rebate.

Case in point: A low-income senior with $1,000 in 2007 wages, from which $100 was withheld, has already filed for a refund on that $100. And on his return, he only reported the $1,000 and not, say, another $8,000 in Social Security benefits because they weren’t taxable. For the purposes of the rebate, he had $9,000 in qualifying income.

To file an amended return, use Form 1040X. The IRS emphasized that reporting the benefits would not increase a filer’s tax liability. It would just establish eligibility for the rebate.

Weighing the cost of filing

Some seniors, of course, have already learned that they don’t need to file a return for 2007 based on their income alone.

The rule: If your gross income falls below your standard deduction plus the exemption for you and – if you’re married, your spouse – you don’t have to file a return.

David Mellem, a tax preparer in Green Bay, Wis., authorized to represent taxpayers before the IRS, says he has a dozen clients who come in every year to see if they need to file. Most don’t and he doesn’t charge them. So far, he’s seen about six of them and will now have to call them back to tell them they will indeed need to file to get the rebate.

But he questions whether it makes financial sense for low-income seniors to use a paid tax preparer just to fill out a return for the rebate. Low-income seniors living on Social Security are most likely to get rebates of $300 for singles and $600 for couples. So even a $50 to $100 fee can eat away a sizeable chunk of that.

If low-income seniors need help filling out their forms, Mellem said, they might be better off going to one of the IRS’s free tax preparation services. The IRS’s Volunteer Income Tax Assistance Program has locations in community and neighborhood centers, as well as shopping malls, schools and libraries. More information about its locations can be found by calling 1-800-906-9887.

There also is an IRS program called Tax Counseling for the Elderly (1-800-829-1040) and an affiliated AARP counseling program called Tax Aide (1-888-227-7669). To top of page

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Beat the tax man with these valuable deductions, credits and exemptions. What you need to know before you file.

Are you cross-eyed trying to figure out which tax breaks you can take this year?

You’re not alone. And we have Congress to thank for it.

The income tax code – 1.3 million words long, or well more than twice the length of Tolstoy’s “War and Peace – includes thousands of tax breaks for individuals and businesses, according to the Tax Foundation.

And it’s not as if these breaks – or their eligibility requirements – are set in stone. To the contrary. Since 1986, lawmakers have made roughly 15,000 changes to the tax code. So there are always new tax breaks, expiring ones and little known or confusing ones to consider each tax season.

Help now: New tax breaks

For a look at some of the important deductions and credits you don’t want to miss, we spoke with experts at tax information publisher CCH and the National Association of Tax Professionals.

Mortgage insurance premiums. If you itemize your deductions and pay for mortgage insurance, for the first time you will be allowed to deduct your premiums on your 2007 return in addition to any mortgage interest you pay.

The one catch: your mortgage insurance policy must have gone into effect after Dec. 31, 2006. The deduction is also subject to income limitations.

The premiums, plus the interest you pay on your mortgage, is entered on line 13 of Schedule A.

Mortgage debt forgiveness. If your lender forgave some of your mortgage debt on your principal home last year, you no longer have to pay income tax on that cancelled debt as you would have had to in prior years.

You will have to fill out and attach IRS Form 982 to your return to get this new tax break, which is subject to some limitations on loan size and income.

One-time stimulus rebate. With the exception of high-income taxpayers, most tax filers will receive a one-time tax rebate this year. All you need to do to get yours is file a 2007 federal income tax return and report a minimum of $3,000 in qualifying income.

Beyond that, the IRS will figure out how much of a rebate you should get.

The rebates are worth up to $600 for single filers or up to $1,200 for joint filers. Those with kids under 17 may get an additional rebate of $300 per child.

Here’s a breakdown of what you need to know about how the rebates will work and who is eligible.

Last-call: Expiring tax breaks

State and local sales tax. If you itemize your deductions, you may deduct either the state and local income tax you paid in 2007 or the amount you paid in state and local sales tax.

Deducting sales tax is the clear choice for those who live in the seven states without any income tax – Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

That’s also true for those in New Hampshire and Tennessee whose income is based primarily on a paycheck, because those states don’t tax wage income. But they do impose tax on interest and dividend income, so if that’s your primary source of income, the choice may not be as clear.

Tuition and related expenses. Whether or not you itemize your deductions, you may deduct qualified higher education expenses. You may take the deduction on up to $4,000 in tuition and fees if your adjusted gross income is $65,000 or less ($130,000 for joint filers). If your AGI is higher ($80,000 or less for single filers; $160,000 or less for married couples), you may deduct up to $2,000.

The tuition deduction may not be taken for expenses for which you are claiming an education credit such as the HOPE or Lifetime Learning credits.

You’ll need to fill out and attach to your return IRS Form 8917, and enter the tuition deduction on line 34 of the 1040.

Energy-efficient appliances. Making your home more energy efficient can really pay off. You can take a 30% credit on up to $2,000 for the cost of a solar water heater and up to $2,000 for the cost of photovoltaic equipment.

You also can get a 10% credit on up to $500 for insulation and heat-reducing metal roofs, including up to $200 for energy-efficient windows.

Old reliables: Confusing tax breaks

To get the credit you’ll need to fill out IRS Form 5695 and enter

Claim your rightful dependents. Just because your child is 18 or older and earning a paycheck doesn’t necessarily mean you can’t claim her as a dependent.

If you support your child, step-child, sibling or step sibling – and support means you pay for more than 50% of their expenses – you’re on the way to being able to claim them as a dependent and get a $3,400 per child exemption against your taxable income.

To seal the deal, they must live in your home for more than half the year and must be under 19, or under 24 if they’re full-time students.

For more information, see IRS Publication 501.

Child care. If you work full-time and pay for the care of a dependent – a young child, elderly parent or disabled adult child or spouse – you may be able to get a credit for what you spend above the expenses covered by your tax-deductible flexible-spending plan at work.

Depending on your income, you’re entitled to a 20% to 35% credit on up to $3,000 in expenses for one dependent or $6,000 for two or more.

Translation: If you have two small kids, pay $6,000 for their care and defer $5,000 from your paycheck into your flexible-spending plan at work, you may only take the dependent care credit on $1,000 of your expenses, since you’re already getting a tax break on the first $5,000.

If you don’t put money into a plan at work, you may take a credit on all of your expenses up to a $3,000 limit for one dependent or $6,000 for two or more, assuming your income qualifies.

For more information, see IRS Form 2441 or IRS Publication 503. The credit is entered on line 47 on the 1040.

Last-minute IRA deduction. You have until April 15 to make your 2007 contribution to an individual retirement account.

To qualify for a deductible IRA, you may not be covered by a retirement plan at work or, if you are, your modified adjusted gross income (AGI) must be under $62,000 ($103,000 if you’re filing jointly).

The 2007 contribution limit is $4,000, plus an additional $1,000 if you’re 50 and older.

Saver’s credit. Saving for retirement can result in a lower tax bill in more ways than one. If your AGI is $26,000 or less ($52,000 or less for married couples), you may take up to a 50% credit on up to $2,000 in contributions made to qualified retirement savings plans, such as 401(k)s, 403(b)s and traditional and Roth IRAs. The closer you are to the income ceilings, the lower your credit will be.

That credit is on top of the deduction that you get for making contributions to a 401(k), 403(b) or deductible IRA. A deduction reduces your taxable income. A credit, which is more valuable, reduces your tax bill dollar for dollar.

For more information on the saver’s credit, see IRS Form 8880. The credit is entered on line 53 on the 1040To top of page

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More and more borrowers are watching their house values sink while the cost of their loans skyrockets. What to do? Skip out on the mortgage all together.

Mortgage payments are set to jump. Home prices have plunged. “I’m outta here.”

Homeowners are abandoning their homes and, more importantly, their mortgages, rather than trying to keep up with rising payments on deteriorating assets. So many people are handing their keys back to lenders that a new term has been coined for it: jingle mail.

“I stopped paying my mortgage in October, after shelling out about $70,000 in interest [over 15 months],” said one borrower, David, who doesn’t want his last name used. “Now, I’m just waiting for the default notice.”

The Los Angeles-based writer bought two properties in Hancock Park, west of downtown, using no-down, interest-only mortgages in 2006. He paid just over $1 million for both.

David had planned to sell them quickly but got caught in the slump. Soon his interest rate will jump by a few points, and his payments will go up by several hundred dollars a month for each place. He figures his properties have fallen in value by at least $60,000 each.

Current lending practices have created an environment where a measure as extreme as abandoning a home actually makes sense to some people.

Many buyers put little or no money down, so they don’t have much invested in them. That leaves them with little incentive to keep making payments when a home’s market value dips below the balance of the mortgage.

The most serious consequence is a tremendous hit to credit scores. For some, that’s better than throwing away money they’ll never recover by selling their home.

And while a mortgage default can savage a person’s credit record, trying to pay off a loan they can’t afford could be worse for borrowers if it leads to bankruptcy, said Craig Watts, a spokesman for the credit reporting firm Fair Isaac.

Credit scores are hurt much more by missing multiple payments – on credit cards, cars and so on – than by a single foreclosure.

“The time it takes to regain your credit score [after foreclosure] can be shorter than after bankruptcy,” said Watts.

It typically takes three years of a spotless payment record after a bankruptcy before credit scores recover enough for someone to think about buying a home again, he said. After abandoning a mortgage, a person may be able to buy a new house in two years or less.

And now skipping out on a home is easier, thanks to the Mortgage Debt Relief Act of 2007. Previously, if a bank sold a foreclosed home for less than the mortgage balance and it forgave the difference, the borrower had to pay tax on that difference as if it were income. Now the IRS will ignore it.

“That’s going to help a lot of people,” said Mike Gray, a San Jose accountant who runs the web site Realestatetaxletter.com.

The trend of walking away is most pronounced among real estate investors, according to Jay Brinkman, an economist with the Mortgage Bankers Association (MBA).

But families are doing it too. “If they have to stretch to make mortgage payments for a home that will not recover its value, then yes, they may walk away,” he said.

Often they chose hybrid adjustable rate mortgages (ARMs) that came with low initial payments. After a few years, interest rates on these loans reset higher. But buyers thought they could count on the increased value of their homes to refinance into affordable, fixed-rate loans.

Now, that may not be possible. Take Susan (not her real name), a client of HouseBuyerNetwork.com, which specializes in arranging short sales. A short sale is when a bank agrees to accept the sale price paid for a home – even if it is less than the outstanding mortgage on it – as payment in full. An owner might sell a house with a $200,000 mortgage for $180,000, and then the bank forgives the difference.

HouseBuyerNetwork.com CEO Duane LeGate says that Susan’s two-bedroom condo in Sonoma County is worth $340,000, but the mortgage balance is $380,000. She can’t refinance and it’s difficult to sell.

She’s still trying for a short sale but, said LeGate, “She’ll almost certainly end up walking away.”

Beyond anecdotes, some statistics indicate that hard-pressed owners are deliberately courting foreclosure. An analysis by the consumer credit rating agency Experian last spring found that many borrowers were choosing to pay off credit card and other consumer debt before making mortgage payments. They were electing to put their mortgage at risk rather than their credit cards or auto loans.

Similarly, Richard DeKaser, chief economist for National City Corp., (NCC, Fortune 500) notes that while all credit metrics are deteriorating, mortgage delinquencies are rising disproportionately. “That makes sense if people are choosing to walk away,” he said.

And now reports are emerging of homeowners skipping out on mortgages even though they can still afford to pay them.

Wachovia (WB, Fortune 500) CEO Ken Thompson described these people on an earnings call last month.”[These are] people that have otherwise had the capacity to pay, but have basically just decided not to, because they feel like they’ve lost equity, value in their properties.”

Lenders are afraid that borrowers may find it’s worth the hit to their credit scores, if they can drastically reduce their housing expenses. Someone with good credit and a $600,000 home in a town with cratering real estate prices could buy a similar house nearby for $450,000, and then let the other $600,000 mortgage go into foreclosure.

The stage is set for this kind of thing particularly in California, where huge numbers of buyers used low or no-down deals to buy homes. The trend has even spawned at least one new business, San Diego-based YouWalkAway.com, which for a fee of $1,000 purports to guide clients through the process of ditching their mortgages. It launched in early January, and says it has already signed up 180 clients.

California is a bit of a safe haven for these borrowers, since banks that repossess and then sell a foreclosed property for less than the mortgage that was owed on it cannot come after borrowers for the difference – as long as it’s the initial mortgage, one that has not been refinanced. So if a borrower owes $200,000 and the bank sells the house for $170,000, the borrower comes out of it debt-free.

And for many homeowners, the prospect of becoming debt-free is growing increasingly alluring.

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Lenders trying to derail legislation that would allow bankruptcy judges to reduce mortgage balances for home owners.

 Two bills before Congress would give bankruptcy court judges the authority to reduce mortgage debt, which could save thousands of borrowers from foreclosure.

Lenders are furious at the prospect of having judges seize control of their mortgage portfolios. Community and consumer advocates argue that such a move makes sense amid the current mortgage crisis.

Both the Emergency Home Ownership and Mortgage Equity Protection Act of 2007 and the Foreclosure Prevention Act of 2008 aim to provide relief for some home owners in bankruptcy. Only borrowers who live in their homes and hold subprime or non-traditional mortgages, like interest-only loans, would be eligible.

“This will help 600,000 households avoid foreclosure this year and next,” said Ellen Hornick an attorney for the Center for Responsible Lending.

The policy, which in industry parlance is called a cram-down, would reduce mortgage balances and monthly payments based on how much a home’s value had decreased.

It is one of many efforts by government and consumer groups to encourage lenders and mortgage servicers to restructure loans to more affordable terms for home owners in danger of default.

“While there are some loans being [voluntarily] modified,” Hornick said, “foreclosures are still outstripping modifications by seven to one; subprime ARM foreclosures by 13 to one.”

But opponents say the cram-downs would increase mortgage borrowing costs for everyone.

“It would affect a lot of prospective home owners,” said Wayne Brough, chief economist for FreedomWorks, a conservative policy advocate, “anyone who applies for a mortgage.”

Cram-down opponents argue that borrowers who take risky loans should take the fall when they fail. Without penalties, borrowers would keep making bad bets.

And forgiving debt transfers risk from borrowers to the debt holders – investors in mortgage backed securities. That means interest rates will have to be higher to attract investors.

Steve O’Connor, the senior vice president for government affairs at the Mortgage Bankers Association (MBA), claims this could add upwards of one-and-a-half percentage points to everyone’s interest rates. That would translate into an increase of about $200 a month on a $200,000, 30-year, fixed-rate loan.

“Looking forward, investors will say, ‘How do I know this won’t happen again, on a larger scale?'” O’Connor said. “Investors have choices in the marketplace and if they see an additional risk, they’ll migrate to other securities.”

The CRL’s Ellen Harnick argues that the cram-down provisions narrowly target relatively few borrowers.

There were only 800,000 bankruptcy filings in the United States in 2007, according to the National Bankruptcy Research Center.

And while there is little hard data as to how many of these involve homeowners, some evidence suggests that about half the cases do. In one metro area, Riverside, Calif., 62% of 2007 bankruptcies involved home owners with outstanding balances. And not all of these would qualify for cram downs.

“These bills have means tests,” Harnick said. “If you can afford to pay your mortgage, you don’t qualify. If you can’t afford to pay even after the mortgage balance is reduced, you’re not eligible.”

And Adam Levitin, a law professor at Georgetown University contends that cram-downs would add little to the costs of new mortgages.

He examined historical mortgage rates during periods when judges were allowed to reduce mortgage balances, and concluded that the impact on interest rates would probably come to less than 15 basis points – 0.15 of a percentage point.

“The MBA numbers are just baloney,” said Levitin.

However, even though the direct impact on borrowers would be limited, permitting cram-downs could indirectly give borrowers more leverage in dealing with lenders, according to Bruce Marks, founder and CEO of the Neighborhood Assistance Corporation of America (NACA).

Mortgage borrowers could force lenders to negotiate loan restructurings by threatening to file for bankruptcy and have the judges do it for them.

Some people with credit-card debt already win concessions from credit card lenders by threatening bankruptcy, where the debt may be discharged.

“I consider this one of the most important pieces of legislation before Congress right now,” said Marks.

Will it become law?

“We believe it will be very difficult to stop this legislation and we put the initial odds of enactment at 60%,” said Jaret Seiberg of the Stanford Group, a policy research company, in a press release assessing the new bills.

A vote on the Senate bill could come as early as next week.

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 What are your thoughts on the dollar? The dollar’s recent resilience to weak U.S. data suggests markets may have fully priced in expectations of a struggling U.S. economy. Against the euro, do you think the dollar has bottomed out?

The dollar has depreciated a long way. But I’m not convinced that the decline is yet over. The fundamental forces that are driving the dollar weakness I don’t believe have yet ended. I think you’ll see the dollar erratically fall some more. There will be rallies, it may become more volatile, but I don’t think we’ve quite yet reached the bottom.

Until we get the credit crisis behind us I think we will have continued volatility in all markets. I think you’ll see continued weakness in the dollar.

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What are the top growth countries you should invest in? « Bridges to Hope Foundation

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