IN THIS ISSUE:
- A Message From Jason Kane
- Mortgage Tax Changes
- Cash-Outs Remain Strong
- 7 Habits for Highly Effective Loan Officers
Dear Friends,
I would like to thank you for your
wonderful response to our new website and newsletter. We welcome
your input and suggestions.
The goal of the "Connections" newsletter is to keep you
current with changes affecting the real estate industry. As always
we are here to answer your questions.
Effective December 1st we will have access to a closing facility
located on Jefferson Blvd in Warwick, RI. The office building is
seconds from Route 95.
Sincerely,
Jason S. Kane
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Last Months Trivia:
What was the name of the home that Sofia Patrillo lived in
before moving in with her daughter on the "Golden
Girls"?
Answer: Shady Pines
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So it's no surprise there's been
plenty of controversy surrounding the expected proposal from
President Bush's bipartisan tax reform panel to downsize the
mortgage tax break.
The nine-member panel is likely
to suggest a two-part change in its final report due next week:
- Lowering the mortgage interest
cap, which is the amount of a loan on which homeowners would
receive a tax break for interest paid. Currently, that cap is
$1 million. It's likely to be lowered to levels on par with
regional averages. The panel had discussed a range between
$172,000 for lower priced housing markets to $312,000 for
higher priced markets, but the numbers could be higher in the
final report, said the panel's executive director, Jeffrey
Kupfer.
- Converting the mortgage
interest deduction to a tax credit equal to 15 percent of the
interest paid on loans up to the mortgage interest cap.
Deductions reduce your taxable income but favor those who
itemize and those in higher tax brackets. Credits, which are
dollar-for-dollar reductions of the taxes you owe, benefit all
taxpayers equally, said Mark Luscombe, principal federal tax
analyst at CCH.
Who would benefit? Who
wouldn't?
Generally speaking, the higher
your mortgage loan and the higher your tax bracket, the more
likely it is that you'll see less of a tax break than you would
under the current system.
Take a new homeowner who pays
$18,000 a year in interest on a $300,000 loan and itemizes his
deductions on his federal return.
Under the current system, if he
were in the 25 percent tax bracket, he'd reduce his taxable income
by $18,000, for tax savings of $4,500 (18,000 x 0.25).
Under the panel's proposal, he'd
only save $2,700 (18,000 x 0.15). That assumes the $300,000 loan
doesn't exceed the mortgage-interest cap.
But if he were in the 15 percent
tax bracket, he'd see no difference under either scenario.
It also may be the case for some
homeowners that if they no longer can deduct their mortgage they
may opt to stop itemizing altogether, instead taking the standard
deduction plus the mortgage credit, if that would be allowed. In
that case, conceivably they might enjoy tax savings equal to or
greater than they would see under the current system.
As it is, the number of
homeowners who take the mortgage-interest deduction is far smaller
than the total number of homeowners who file tax returns.
Those who don't itemize take the
standard deduction, which they could take even if they didn't own
a home. In 2002, of the 130 million federal tax returns filed,
only 46 million were itemized. Of those, 37 million taxpayers
claimed the mortgage-interest deduction.
But among those who do itemize
mortgage interest deductions on primary mortgages in a given year,
only between 3 percent and 9 percent have mortgages over $300,000,
said David Brunori, vice president of Tax Analysts.
Those taking the larger loans, of
course, tend to be in the high-priced, high-income markets on the
East and West Coasts. So those are the taxpayers who may see the
biggest hit to their tax savings if the rules change.
On the other hand, if there will
be tax reform, it's possible that what you lose in tax savings on
your home you may make up for in new tax breaks elsewhere.
And by transitioning to a credit,
far more homeowners would get to take a tax break on their
mortgage.
What about current
homeowners?
Members of the tax panel have
said they would recommend provisions to protect existing
homeowners from any abrupt change.
"The devil's in the
details," Brunori said. If they put in a grandfather clause,
the problem would be solved in terms of not pulling the rug out
from under homeowners' feet. But it also means the move would
raise less revenue than if the base of homeowners subject to the
change was wider.
On the other hand, he added,
"any other transition (besides a grandfather clause) would
never fly from an administrative standpoint."
Will such a change push
down housing prices or interest rates?
In determining how much house
they can afford, home buyers do price in the deduction that
they've come to expect, said Keith Gumbinger, vice president of
HSH Associates. So a change that would make the tax break less
favorable to those in higher tax brackets and in higher priced
markets could put downward pressure on home prices.
The tax reform of 1986 ended
certain tax breaks for those buying multi-family dwellings. Prices
for rental buildings dropped for a period as a result.
But, noted Nicolas Retsinas,
director of the Joint Center for Housing Studies at Harvard, that
was an instance where a tax break was eliminated, not just
modified as would be the case with a new mortgage tax break.
What's the point of
change?
The move to a mortgage tax credit
could satisfy a number of objectives:
-- It would more evenly
distribute the tax break among taxpaying homeowners.
-- It potentially would foster
greater economic growth by making other types of capital
investments as attractive tax-wise as housing.
-- Most notably it would help
compensate for revenue lost if the alternative minimum tax (AMT)
is eliminated, another of the panel's suggestions. Eliminating the
AMT is estimated to cost $1.3 trillion over 10 years.
The panel's final report will be
the starting point in the debate over tax reform among those in
the White House, the Treasury and Congress. But lawmakers are free
to discard or amend any proposal put forth.
Translation: A whole lot of
nothing – or a whole different something -- may result.
And it may be a while before any
tax reforms are implemented. The last major overhaul of the
federal tax code occurred in 1986, 10 years after tax-reform
discussions began.
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A full 72 percent of Freddie
Mac-owned loans that were refinanced in the third quarter resulted
in new mortgages with loan amounts that were at least 5 percent
higher than the original mortgage balances, the mortgage giant
reported today. This share is unchanged from the second quarter of
2005.
"Interest rates on 30-year
fixed-rate mortgages remained low, averaging 5.76 percent, in the
third quarter while the prime rate, key to home equity lending and
lines of credit, rose to 6.75 percent," said Frank Nothaft,
Freddie Mac vice president and chief economist, in a statement.
"The sharp rise in the cost of home equity lines of credit
and the expectation that mortgage interest rates will go higher
over the next year induced homeowners to look towards the
refinancing option to extract home equity for home improvements or
other investment purposes now."
"We are forecasting that
home equity extraction from the refinancing of prime first
mortgage liens will result in an extraction of $204 billion in
2005, up from the $142 billion converted to cash in 2004,"
noted Nothaft.
Freddie Mac expects home sales to
hit a new record again in 2005, as low fixed mortgage rates
combined with teaser discounts on adjustable-rate mortgages
maintain affordability, even as home prices rise.
"Home equity is also extracted through home sales when home
sellers roll only part of the equity from the sale into new down
payments. A recent study co-authored by Fed Chairman Alan
Greenspan put this form of equity extraction at roughly $350
billion in 2004 and $300 billion in the first quarter of 2005 at
an annualized rate."
Freddie Mac expects 30-year fixed
mortgage rates to rise through the end of the year, ending with a
fourth quarter average near 6 percent, approximately one-quarter
of a percentage point higher than the third quarter average.
"Refinancing activity was
strong in the third quarter, even with higher interest rates with
44 percent of new mortgage applications being submitted for refis,"
said Amy Crews Cutts, Freddie Mac deputy chief economist, in a
statement. "The large share of borrowers who took cash out
when refinancing their mortgages combined with the strong overall
refinance volume led to an extraction of home equity through prime
first-lien refinances of $60.4 billion, almost equal to the
revised estimate of $60.7 billion extracted in the second quarter.
"With the expectation that
mortgage rates will rise further in the fourth quarter, refinance
volumes overall should slow but cash-out refis will continue to be
in demand, and equity extraction through refinance should hit over
$200 billion this year, falling to about $114 billion in
2006," Cutts said.
In the third quarter of 2005, the
median ratio of old-to-new interest rate was 1.09. In other words,
one-half of those borrowers who paid off their original loan and
took out a new one had an interest rate on their old loan that was
at least 9 percent higher than the new interest rate.
"Also, in the third quarter
of 2005, homeowners who refinanced their fixed-rate mortgages
lowered their interest rate an average of 0.57 percentage points.
On an average loan size of $150,000, that lower rate translates
into a payment that is about $55 a month lower for a savings of
more than $660 annually," Cutts said.
"This same time last year,
borrowers who refinanced lowered their interest rate by an average
of 0.72 percentage points. As mortgage rates increase, the
borrowers who have an incentive to refinance will largely be those
seeking to exchange home equity for cash or those who are hitting
the adjustment period on their adjustable-rate mortgages."
The Cash-Out Refinance Report
also revealed that properties refinanced during the third quarter
of 2005 experienced a median house-price appreciation of 23
percent during the time since the original loan was made,
unchanged from the second quarter 2005. For loans refinanced in
the third quarter of 2005, the median age of the original loan was
2.6 years, one month older than the median age of loans refinanced
during the second quarter.
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- BE PROACTIVE! Don't
wait for borrowers and Realtors to call you. When you are the
caller you have the power. Even when you are delivering bad
news. Catch them by surprise!
- BEGIN WITH THE END IN MIND.
If you want the loan to close easily and happily, you have
written explanations and a list of what is required and WHY,
for the borrower to take home. You will leave nothing to
chance.
- PUT FIRST THINGS FIRST.
Spend the first two hours of every day prospecting for new
business. Once you start trouble shooting, you may never get
around to prospecting. What apps will you take next month? And
what loan will close the month after that?
- THINK WIN / WIN. Your
borrowers and your Realtors just want the loan to close and
they want to know what is going on. Provide written status
reports weekly. They'll be happy, your phone won't ring
constantly. That's win /win!
- SEEK FIRST TO UNDERSTAND,
THEN TO BE UNDER-STOOD. Do you remember how scared you
were when you were buying your first house and the lender
asked you 100,000 questions? It was awful! It still is. Be
gentle to them and they will be gentle to you.
- SYNERGIZE. Think of the
loan as a project for the team to win! The team includes your
processor, underwriter, closer, borrower, Realtor and lawyer.
Individually, you may have weak spots. As a team you are
invincible!
- SHARPEN THE SAW. There
is a direct correlation between the amount of time and money
you spend on you and your career and your level of success!
You probably won't learn a lot that is radically NEW, but that
is not the purpose of reading books and going to seminars. The
purpose is to help you access and USE the information you
already know is to keep you stimulated, make you more
productive and to make you some more money this year!
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