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U.S. Warned by Fitch on Fiscal Cliff; Moody’s Stands Pat on View | Waccabuc Realtor

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Fitch Ratings warned that the U.S. may be downgraded next year unless lawmakers avoid the so-called fiscal cliff and raise the debt ceiling in a timely manner, while Moody’s Investors Service said it will wait to see the economic impact should the nation experience a fiscal shock.

Congress and President Barack Obama must confront more than $600 billion in tax increases and spending cuts set to take effect in 2013 or risk the economy tipping back into recession. Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, 2011, after months of political wrangling that pushed the nation to the deadline an agreement to lift the debt ceiling.

Nov. 7 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan, Alice Rivlin, a senior fellow at the Brookings Institution, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., and Peter Orszag, former director of the Office of Management and Budget, talk about outlook for action to avert a so-called U.S. fiscal cliff following the election of President Barack Obama to a second term. This report also includes comments from former White House spokesman William Burton, Potomac Research Group’s Greg Valliere and Jefferies & Co.’s David Zervos. (Source: Bloomberg)

The U.S. rating depends on “a stabilization and then a downward trend in the ratio of federal debt” to gross domestic product next year, according to a Moody’s statement. Fitch also said that the nation may lose its AAA ranking next year if the government fails to reduce the deficit.

Moody’s would likely “await evidence that the economy could rebound from the shock” of the U.S. falling off the fiscal cliff before considering restoring the nation’s stable outlook from negative, according to the company’s statement.

The U.S. Treasury reiterated Oct. 31 that it expects to reach the federal debt limit “near the end of 2012.” The agency said in a statement that it can use “extraordinary measures” that would “provide sufficient ‘headroom’ under the debt limit to allow the government to continue to meet its obligations until early in 2013.”

Failure to reach even a temporary arrangement to prevent “the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode” would probably result in a downgrade, Fitch said.

via bloomberg.com

Potential for tax hikes sparks interest in 1031 exchanges | Waccabuc NY Real Estate

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Given the uncertainties flowing from the elections and a lame-duck Congress getting set to play chicken with the “fiscal cliff,” is it any surprise that growing numbers of real estate investors are taking a new look at Section 1031 tax-deferred exchanges?

Talk to Scott Saunders, senior vice president of Asset Preservation Inc., a national 1031 subsidiary of Stewart Information Services, and he’ll tell you it comes as no surprise.

“We’ve had a significant increase in interest in exchanges” recently — 30 to 40 percent higher volume year over year, he told me in an interview. Part of the reason, he said, is rising real estate investor concerns about much higher tax bills ahead, no matter who wins the elections.

Or listen to Kevin M. Levine, executive vice president of Peak 1031 Exchange in Woodland Hills, Calif.: “We’ve seen a tremendous spike in 1031 transactions (in light of) election year uncertainty over the future of capital gains taxes. The political brinksmanship in Washington over extending or ending Bush-era tax cuts has left investors in the lurch. …”

What sort of brinksmanship and at what cost? Well, start with the fact that after Dec. 31, if the lame-duck Congress does not act with uncharacteristic bipartisanship and speed, capital gains taxes will jump to 20 percent on Jan. 1, up from the current 15 percent. The highest marginal tax rate for ordinary income will also increase, from the current 35 percent to 39.6 percent.

Then there’s the 3.8 percent Obamacare surtax on investment income scheduled to kick in for high earners ($200,000 adjusted gross income for single filers, $250,000 for married joint filers) on Jan. 1. Since many real estate investors and a sizable number of homeowners fall into this income category, a lot of people will be looking at capital gains taxes of 23.8 percent next year — a 58.6 percent jump over what they’re paying today.

For residential and commercial real estate investors, says Greg Rosica, an attorney and tax partner specializing in personal financial services and tax consulting with national accounting firm Ernst and Young, Section 1031 now “is worth doing the calculation: Do I rush to sell property in the closing days of 2012 and pay a 15 percent capital gains rate or do I begin planning to defer taxes with a 1031 exchange in 2013, assuming the worst?”

Section 1031 has been part of the federal tax code for decades. It allows the seller of an investment or business property to postpone recognition of gain provided the seller acquires another, “like-kind” property within the timing requirements spelled out in the law.

By eliminating capital gains taxes from the transaction proceeds, property sellers increase their purchasing power. With the money that would otherwise have gone to the IRS, they have more to reinvest in a bigger, perhaps higher-income-earning replacement property.

Consider this hypothetical case example prepared by First American Exchange Co., a subsidiary of First American Title Insurance Co.: Say you purchased a rental property for $100,000 many years ago, which now has a mortgage balance of $50,000. You’ve made no capital improvements to the property in the meantime, but have taken $50,000 in depreciation deductions.

Now you want to sell the building for $200,000. If you simply sell it and choose to pay capital gains at current rates, you’d owe $12,500 in depreciation recapture (which is taxed at 25 percent), $15,000 in capital gains taxes (at 15 percent), plus whatever tax your state levies on capital gains. For the purposes of this example,  the latter rate is 5 percent ($5,000), but it can go much higher in states such as California. So simply selling conventionally under today’s tax rates, you’d owe $32,500. After paying off the mortgage balance, you’d have net proceeds of $117,500 to invest somewhere.

If you instead structured the transaction as a tax-deferred 1031 exchange, you’d pay zero in federal or state taxes, and have $150,000 in cash available to acquire a bigger and better new income property, whether another residential building, commercial or retail real estate — the potential range of choices is vast under the law.

Say you were able to obtain mortgage financing of 75 percent on the replacement property — you could use your $150,000 cash in hand to make the down payment on a $600,000 building. Had you gone the conventional tax route, your $117,500 in proceeds would have limited you to acquiring real estate worth just $470,000.

Now fill in next year’s potential rates: 20 percent capital gains, 3.8 percent health care surtax. The costs of a standard sale go up dramatically, and the cash you have to acquire bigger and better real estate declines dramatically.

Sure there are a few downsides to 1031 — it is, after all, a deferral of taxation not a forgiveness, and at some point down the line you or your estate will probably have to reckon with the IRS and pay taxes at rates that are currently unknowable. Similarly, when you do a 1031 exchange, you move your tax basis to the replacement property and that cuts your depreciation deductions.

But bottom line, many real estate investors are beginning to “do the calculation,” as Greg Rosica puts it, and are finding that 1031 is looking better and better.

via inman.com

At American Express, Warnings About the ‘Fiscal Cliff’ | Waccabuc NY Realtor

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2:14 p.m. | Updated

After the widespread (and highly visible) damage caused by Hurricane Sandy this week, worries about the fiscal cliff may not be at the forefront of most people’s minds.

The economic calamity is a lot less visual (though The Wall Street Journal did come up with this clever video), and the destructive force seems somehow in the faraway future.

But companies are already warning investors about the harsh effects of the fiscal cliff. American Express’s 10-Q quarterly report, which was filed Wednesday, included a new dire warning about the rapidly approaching year-end deadline.

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“The company expects that it will take some time for the U.S. economy to get back onto a steady, upward growth track,” the filing said. “Moreover, in the absence of legislative action, there continues to be growing concerns about the potential impact of the ‘fiscal cliff’ arising from scheduled federal spending cuts and tax increases set for the end of 2012.”

The statement goes into more detail than what the firm’s chief financial officer, Daniel T. Henry, said during the quarterly earnings call two weeks ago. Then, an analyst for the Telsey Advisory Group asked if there might be a larger impact, specifically in terms of the company’s spending on marketing.

“If things were to be better, we know exactly what we’d do. And if things were to be worse, we know exactly what we’re going to do. So we will monitor this closely,” Mr. Henry said, according to a transcript of the call. Marina Hoffmann Norville, a spokeswoman for the company, declined to comment beyond what was in the Securities and Exchange Commission filing.

American Express isn’t the only large company to mention the fiscal cliff in filings with the S.E.C. But others have been more nuanced or noncommittal on the effects. In its quarterly earnings release on Thursday, the payroll processing company Automatic Data Processing noted that “there is concern in the U.S. surrounding the fiscal cliff.” In its quarterly earnings release on Wednesday, Visa, the giant credit card company, included the “so-called fiscal cliff” in a list of economic factors that might affect the company.

Also on Thursday, Tim Pawlenty, the former Minnesota governor who just took over as president and chief executive of the Financial Services Roundtable, issued its own warning in a letter sent to President Obama and Congress.

“We urge Congress and the administration to deal with the fiscal cliff in a two-pronged approach: First, bridge over the fiscal cliff as soon as possible to minimize negative economic consequences. Second, address the federal budget deficit in a comprehensive and bipartisan manner in early 2013 to put the U.S. on a path for sustained growth,” Mr. Pawlenty wrote.

But if the Dec. 31 deadline moves closer without any indication of resolution, companies are likely to step up their disclosures in S.E.C. filings.

Michelle Leder is the editor of footnoted.com, a Web site that takes a closer look at companies’ regulatory filings.

This post has been revised to reflect the following correction:

Correction: November 1, 2012

An earlier version of this post misstated the fiscal quarters that were reported on this week by Automatic Data Processing and Visa. A.D.P.’s report was for its first quarter of 2013 and Visa’s report was for its fourth quarter of 2012, in both cases not the third quarter of 2012.

via dealbook.nytimes.com

Great Recession creates 4.8 million renters | Waccabuc NY Real Estate

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The United States added 4.8 million renters in the past six years while losing 1.7 million owner households as the dynamics of the real estate space changed in the wake of the 2008 financial meltdown, according to the Mortgage Bankers Association.

The market experienced additional changes in the first nine months of 2012, creating unexpected outcomes in the housing finance sector, prompting the MBA to alter its forecast for 2012.

In brief, the MBA revised its estimate for 2012 mortgage originations to $1.7 trillion, up from $1.4 trillion a year earlier. Still, the trade group predicts total originations will taper off to $1.3 trillion in 2013, eventually hitting $1.1 trillion in 2014. However, mortgage rates are expected to hover below 4% through the mid-part of next year.

The MBA expects gross domestic product will inch up from 1.6% in 2012 to 2% in 2013. Meanwhile, the forecast suggests existing home sales will increase from 4.6 million in 2012 to approximately 4.78 million next year.

Still, economic growth is contingent on government tax policies and at least a temporary avoidance of the fiscal cliff in early 2013.

“The tax increase in particular would be devastating to economic growth,” said MBA chief economist Jay Brinkmann.  “We believe that the entire package of tax increases and spending cuts, if left unaltered, would cut 3.5 to 4 percentage points from our growth forecast.”

Another outlier is the final definition of the qualified mortgage rule from the Consumer Financial Protection Bureau, which will define what type of mortgage qualifies as safe from repurchase risk in cases of default. It’s unknown whether the final rule from CFPB, which is due out in  January, will contain a safe harbor provision to protect lenders from buy back risk if they follow the guidelines.

These forecasts are based on the idea that QM comes in with a safe harbor and legislatures get past the fiscal cliff without dramatic spending and tax changes, said Mike Fratantoni, the MBA vice president of research and economics.

If the nation moves past the QM rule and the fiscal cliff without the introduction of new risks, the MBA expects moderate economic growth and an uptick in home prices annually from roughly 1.2% in 2012 to 3.5% in 2013.

via housingwire.com

Waccabuc NY Real Estate | Mortgage delinquencies spike in September, report says

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While the nation’s foreclosure inventory continues to shrink, new delinquencies spiked sharply during September 2012, new data released Monday afternoon showed.

According to Lender Processing Services ($28.51 0%), the total U.S. mortgage delinquency rate — loans 30-plus days past due, but not in foreclosure — surged upward by 7.72%, reaching 7.4% in September versus the 6.87% reported one month earlier.

Despite the spike, September 2012 delinquency totals still remain below levels seen last year, LPS said.

While new delinquencies spiked in September, the volume of properties in foreclosure continues to shrink as banks and other financial instutions continue to work through a backlog of distressed real estate that remains well above historical levels of half of a percent or so, according to most industry experts.

LPS said that the nation’s foreclosure pre-sale inventory rate fell to 3.87% during September, down 4.05% from one month earlier and down 7.37% less than one year ago.

Florida, Mississippi, New Jersey, Nevada, and Louisiana represented the states with the highest percentage of noncurrent loans, according to the data report; Lousiana replaced New York, which had been in the top five for most of this year.

Despite the drop in foreclosure inventory, the surge in new delinquencies has led to something not seen this year until now: an increase in the amount of distressed properties, defined as properties 30 or more days delinquent or in foreclosure.

According to LPS, there were 5.45 million properties in distress during August 2012; for September, thanks to increasing delinquencies, that number now equals 5.64 million.

via housingwire.com

10 Strategies To Increase Your Credit Score In 24 Hours | Waccabuc Realtor

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When you are in a hurry to increase your credit score there is 10 things that you can do with in 24 hours that help immensly. Here are the 10 things to increase your score:

1. Order your credit reports online for each of the top three credit reporting agencies individually. Even though it may be cheaper to order a three in one report offered by one of the Agencies, ordering individual credit reports will grant you the access to initiate a dispute online with each agency. You can’t improve your score in 24 hours unless you know what it is! Knowing where to start is important.

2. Call your credit card companies and request to increase your credit lines. Increasing credit lines will improve your outstanding debt to-available-credit ratio amounts on your revolving accounts, and can improve your credit by as much as 60 points.

3. Rearrange your debt so that every one of your credit cards have the lowest possible outstanding debt-to-available-credit ratio. A ratio of 25%-35% is ideal.

4. If you have the ability, pay down the cards until that ratio is recognized on your credit report.

5. Borrow money to pay down your debts referenced on your credit reports from a lender that doesn’t report, such as friends and family. Unreported debts will assist you to decrease those debt to available credit ratios and boost your score. Your private lenders may even want lesser interest than you are paying on the cards! While this business deal doesn’t appear on your credit report, it’s still debt, so use it wisely. You don’t want horrible Thanksgiving dinners after failure to pay on a loan made by a family relative.

6. If you have freshly paid down or paid off debts and they don’t show corrected on the report, fax that information to the credit agencies. Providing them with the verification of payoff is much faster then initiating a dispute of the account information. In many cases, the agency won’t verify the payoff with the lender, and accept your proof as correct.

7. Begin your dispute approach online with each service. The online dispute will suspend the negative derogatory items from your credit report for the short term, increasing your score. When the dispute is resolved your score will change accordingly, but for the period in-between you get a momentary reprieve from the effects of the negative derogatory information.

8. If you must choose one credit score to work on, spotlight your focus on the middle score. For most major purchases such as real estate or a vehicle, the lender will pull all three credit scores and use the middle score, (all three scores in one is called the tri-merge score) so this is the one that matters the most. If you improve your middle score over your highest score, the formerly top score is the one that now matters most.

9. Have a close friend or family member with a solid credit history add you to their card. You don’t even need to have the possession of an actual card, but by adding you to the account, you get the benefit of their long credit history. This doesn’t hurt their credit history at all. A Credit report is a compilation of accounts with your social security number attached to them. When your social security number was added to their account, you agreed to be responsible for it, and their years of good credit history now show up on your credit report. The individual person who lent you their excellent credit didn’t add their social security number to any of your accounts with the negative or derogatory history, so there is no way for the bad information to appear on their credit report.

10. If you have recent collection account reporting to your credit file that haven’t been paid? If so call the collection agency and ask, “do you delete?” About half of all collection agencies will take away the item from your credit report if you pay it in full, or a generous portion of the debt. Sometimes the collection agency can remove the debt from the credit bureaus instantaneously.

There are other things that can help you improve your credit score that will take much longer to implement. I think this list will suffice for now because these things can be done in 24 hours.

via articles.submityourarticle.com

‘Obamacare’ individual mandate has no teeth | Waccabuc NY Real Estate

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If, like most real estate professionals, you’re self-employed, you have to obtain your own health insurance unless you can obtain coverage through a spouse. Lots of self-employed people have no health coverage because they can’t afford it.

Starting in 2014, these people will run up against the most controversial portion of the Patient Protection and Affordable Care Act (“Obamacare”) — the individual health insurance mandate. This is the requirement that most legal residents of the United States obtain at least minimal health insurance coverage by 2014.

The word “mandate” sounds pretty serious. But what will actually happen if you don’t obtain health insurance by 2014? Surprisingly little.

The health care law says that individuals who can afford health insurance coverage and are not otherwise exempt must purchase minimum essential health coverage or pay a penalty to the IRS with their tax returns. The assessment of this penalty is the only consequence of not obeying the health insurance “mandate.”

How much is the penalty?

The exact amount of the tax penalty is based on household income above the level at which an uninsured individual is required to file a tax return — currently $9,500 per person and $19,000 per couple. This penalty is scheduled to be phased in over the next several years as follows:

  • for 2014, the penalty is the greater of $95 or 1 percent of income
  • for 2015, the greater of $325 or 2 percent of income
  • for 2016, the greater of $695 or 2.5 percent of income, and
  • the $695 amount is indexed for inflation after 2016.

The penalty for children is half the amount for adults, and an overall cap will apply to family payments. This cap will be three times the amount of the per-person penalty, regardless of how many people are in the family. Thus, the cap is $285 in 2014 but rises to $2,085 in 2016, after which point it is indexed to inflation. Moreover, the total penalty can never be more than the cost of a minimal “bronze” heath insurance plan that can be purchased through a state health insurance exchange. The CBO estimates that these policies will cost $4,500-$5,000 per person and $12,000-$12,500 per family in 2016, with the costs rising thereafter.

All in all, for most people the penalty will be less than the cost of obtaining health insurance. Many people may choose to wait until they get sick to purchase health insurance. This is something they will be able to do because “Obamacare” does not allow health insurers to refuse to insure people with pre-existing conditions.

In addition, the penalty applies only to taxpayers who can afford insurance but do not purchase it. The Congressional Budget Offices says that of the 30 million non-elderly Americans it estimates will not have health insurance in 2016, only about 6 million will be subject to the tax. The remainder will be exempt because their income is too low or they qualify for another exemption.

How will the IRS collect?

Taxpayers subject to the penalty are supposed to report the amount due on their tax returns and pay it along with their income taxes. What happens if they don’t? Not nearly as much as when they don’t pay their regular taxes.

The law greatly limits how the IRS can collect the penalty. It cannot use liens or levies to collect it, and taxpayers are not subject to criminal prosecution or any additional penalty if they don’t pay. Moreover, the IRS says that its revenue agents will not be involved in enforcing the penalty — that is, they won’t ask you about it during an audit. All enforcement will be done through automatic assessments and computer-generated correspondence.

The only power the IRS will have to collect the penalty is to withhold it from an uninsured taxpayer’s tax refund. Currently, most taxpayers get refunds because they have too much tax withheld during the year. This year 77 percent of taxpayers received an average refund of $2,707.

However, self-employed taxpayers have no tax withheld from their pay. Instead, they pay estimated taxes to the IRS four times a year. Self-employed people can easily avoid qualifying for a tax refund by making sure they don’t pay too much in estimated tax. If you have no refund, the IRS will have no way of collecting the penalty.

As a result of all this, some experts predict that the IRS will be unable to effectively enforce the penalty tax. Only time will tell.

via inman.com

Wealthy Home Buyers Return to Risky ARMs | Waccabuc NY Real Estate

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Luxury-home buyers are returning to adjustable-rate mortgages, despite pitfalls that pushed many homeowners into foreclosure during the housing bust.

The pitch? A lower interest rate — at least for a period — than a fixed-rate mortgage means savings could be huge.

Ryan Sullivan for The Wall Street Journal

ARMs have a fixed rate for a certain number of years before they become variable, rising or dropping depending on prevailing interest rates. A five-year fixed rate is typical, though the time period can vary and be as long as seven or 10 years. As the loan’s rate changes, so does the monthly payment, possibly increasing or shrinking by thousands of dollars.

ARMs account for 30% to 40% of private jumbo loans at Bank of America (BAC: 9.44, -0.03, -0.32%) and roughly half of the private jumbos distributed by NASB Financial (NASB: 22.09, -0.81, -3.54%), the holding company of North American Savings Bank. Private mortgages aren’t backed by the government.

Lenders say high-net-worth buyers face relatively little risk because they can tap liquid assets to pay off a loan should a sudden spike in rates occur.

“They’re typically looking to the future and saying, ‘Here’s how I’m going to strategize based on my assets,’ ” says Tony Caruso, mortgage loan officer for PNC Wealth Management, where more clients have been choosing ARMs over the past two years.

ARMs accounted for just 4.2% of all mortgage applications in July, according to the Mortgage Bankers Association. But they had a 34.9% market share of the number of private home loans originated that month, according to data compiled for The Wall Street Journal by LPS Applied Analytics, a division of mortgage-data firm Lender Processing Services.

Rates on a jumbo 5/1 ARM — where the rate remains the same for the first five years and then adjusts annually — average 2.82%, compared with 4.06% on a 30-year fixed-rate jumbo, according to mortgage-info website HSH.com. Over the first five years, borrowers with the 5/1 ARM would save nearly $90,900 in interest on a $1.5 million mortgage compared with a fixed-rate jumbo.

Lenders also prefer ARMs, though for different reasons. When the Federal Reserve raises rates, banks have to increase the rates they pay out on deposit accounts, but they receive bigger interest payments from ARM borrowers whose rates rise. “From a bank’s perspective, it’s a much safer asset to hold if it’s an ARM,” says Mike Fratantoni, vice president of research at the Mortgage Bankers Association.

For that reason, not every lender will offer a home buyer both mortgage options. Here are possible risks associated with ARMs.

Rate spikes: After the fixed-rate period ends, rates could adjust higher. On a 5/1 ARM today, rates could increase by up to five percentage points during the sixth year — surging as high as 7.82%. The rate can move by two percentage points each year after that as long as it doesn’t surpass this cap.

Nowhere to turn: ARM borrowers could refinance into a fixed-rate mortgage when rates rise, but rates on the fixed-rate loans could be just as pricey as ARMs at that point.

Home equity could derail a refinance: Borrowers who decide to refinance out of an ARM will need enough home equity to do that, and so should consider making a down payment of at least 30% when they buy the home, says Kevin Miller, chief executive of Aspire Financial Inc., a mortgage lender that mostly provides fixed-rate mortgages. Otherwise, if home values drop, they may have to pay down some of the loan amount to refinance, or be forced to stay with their current mortgage.

via smartmoney.com