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The skin-of-their-teeth Congressional action that avoided a national plunge over the fiscal cliff also rescued a measure that allows homeowners who participate in a short sale (selling their homes for less than they owe on the outstanding mortgage) or restructure their mortgages, to avoid tax liability on the debt forgiven under those transactions. 

In addition to resolving (albeit temporarily) the rancorous debate over spending and tax policies, the fiscal cliff agreement, embodied in the American Taxpayer Relief Act of 2012, also extends for a year the Mortgage Forgiveness Debt Relief Act of 2007, which was scheduled to expire on December 31.   That law exempted from taxation up to $2 million in mortgage debt forgiven on homeowners’ primary residence.  Realty Trac estimates that the average debt forgiven on a short sale is $95,000, which, the company estimates, could trigger a tax bill of as much as $33,250, depending on the individual’s tax rate. 

Housing industry executives and consumer advocates had argued frantically that eliminating this tax break would jeopardize the expanding, though still fragile, housing recovery. 

“Our tax policy should not result in bad housing policy that will prolong a foreclosure crisis that has already gone on for too long,” the Center for Responsible Lending and the Financial Services Roundtable argued in a joint letter to lawmakers in early December

The cliff legislation also renews a law that expired a year ago, allowing homeowners to deduct the premiums on private mortgage insurance as well as on government-backed FHA, VA and Rural Housing Service loans.   More than 3.5 million homeowners claimed that deduction in 2009, according to Compass Point Research & Trading.

In a (somewhat) related development, banking industry regulators appear ready to pull the plug on the foreclosure review program that was supposed to help lenders identify and compensate borrowers with legitimate complaints about foreclosure errors or abuses. 

Critics, including the Government Accountability Office, have complained for months that the reviews were slow, haphazard at best, expensive (the average review reportedly cost $10,000 or more) and largely unknown to or ignored by the borrowers who might benefit from them.  The Office of the Comptroller of the Currency sponsored a series of radio and television ads near the end of the year, promoting the program and urging eligible borrowers to take advantage of it before the application deadline.  

American Banker reported recently that the independent consultants performing the reviews had complained about the lack of guidelines and sought more oversight from regulators, warning that absent consistent standards, results would vary widely for different borrowers.  According to the American Banker report, regulators are close to reaching a settlement agreement with the largest lenders, requiring them to pay as much as $10 billion to resolve foreclosure abuse claims, and eliminating the need for case-by-case reviews to evaluate individual complaints. 

Making Progress

Although foreclosures continue to create a dead weight in many mortgage portfolios, lenders and servicers are making progress in clearing the backlog.  That is largely due to an increasing reliance on short sales, which is reducing the number of new foreclosures, industry analysts say.  The number of completed foreclosures declined by 18 percent in November compared with the same month in 2011, according to CoreLogic, which tallied a total of 55,000 newly completed foreclosures for the month. A strengthening housing market, meanwhile, is absorbing homes more rapidly, further contributing to the decline in the foreclosure inventory, the CoreLogic report notes. 

Massachusetts reflects that positive national trend.  Completed foreclosures in the Bay State declined for the sixth consecutive month in November, falling to the lowest level for the year, according to data compiled by the Warren Group.  The 295 foreclosure filings recorded for the month were 60 percent below the year-ago total, putting the year-to-date foreclosure total at 7,158, a decline of 8 percent compared with the same 11-month period in 2011.  

“It’s been quite a positive year for the local housing market,” Timothy Warren, Jr., CEO of the Warren Group, noted in a press release.  “We’re beginning to see a brighter picture, with fewer foreclosures and more home sales.” An improving employment market and government assistance programs are also reducing mortgage delinquencies, Warren added, suggesting that the positive foreclosure trend is likely to continue.  

Debt Collection Rules

 As the New Year begins, the nation’s debt collection agencies will find themselves operating for the first time under a regulatory spotlight operated by the Consumer Financial Protection Bureau (CFPB), which has the authority to oversee the industry.  Exercising the authority granted in the Dodd-Frank Financial Reform Law, the CFPB recently unveiled new rules establishing operating requirements and mandating consumer protections for agencies with more than $10 million in receipts.  Those companies will also be subject to periodic compliance examinations.   

The rules will cover approximately 175 of the nation’s 4,500 debt collection agencies, responsible for more than 60 percent of annual collections totaling more than $12 billion.  Industry executives have complained that the threshold for review is too low; consumer advocates say it is too high.  The Federal Trade Commission fielded more than 180,000 consumer complaints about debt collection agencies last year compared with only 14,000 a decade ago.

"Millions of consumers are affected by debt collection, and we want to make sure they are treated fairly," CFPB Director Richard Cordray said in a press statement. "We want all companies to realize that the better business choice is to follow the law — not break it," he added.

 Examiners will review collection practices to make sure agents are correctly identifying themselves, are properly disclosing the amount of debt owed and are not “harassing or deceiving” consumers in pursuing debts, the CFPB statement said.  

Underscoring its regulatory focus, the CFPB recently won a law suit against Payday Loan Debt Solution, Inc., a Florida-based debt settlement agency.  A Federal district court ordered the company to refund up to $100,000 in fees it had charged consumers illegally.

"This action is part of the CFPB's comprehensive effort to prevent consumer harm in the debt-relief industry," an agency press release said, adding, "The bureau is working to ensure federal consumer laws are being followed at every stage of the process and is focusing not only on debt-relief service providers, but also on their partners, including those who facilitate their unlawful conduct and who may also violate federal consumer financial laws."  

More Collateral Damage

The damage foreclosures cause for borrowers and for communities has been well documented. Less noted has been the collateral damage on tenants when banks foreclose on the homes they are renting.

“Renters are innocent bystanders caught in the crossfire of the foreclosure crisis, becoming vulnerable to homelessness through no fault of their own,” the National Law Center on Homelessness and Poverty (NLCHP) notes in a recently published  report on the issue, “Eviction (Without) Notice: Renters and the Foreclosure Crisis.”  The report estimates that 20 percent of the foreclosed properties in 2010 were rentals and 40 percent of the families facing eviction resulting from foreclosures were tenants, not owners.  

A federal law, Protecting Tenants at Foreclosure  (PTFA) provides some protections to tenants living in foreclosed properties – requiring new owners to honor existing leases  and to give tenants with short-term leases or without leases 90 days’ notice before evicting them – but that law is set to expire in 2014 and it has many shortcomings, the study found, among them:  “Violations …are widespread,” tenants are often unaware of their rights, and new owners often fail to communicate with tenants or “provide illegal, misleading, or inaccurate written notices” to them.

The NLCHP recommends several Congressional actions to address the problems the report identifies, among them:

  • Make the PTFA permanent;
  • Amend the law to include an express right of private action for tenants whose rights are violated; and
  • Designate a federal agency to be responsible for enforcing the law.

Additionally, the report suggests that federal regulators monitor banks for compliance with PTFA and urges states to enact expanded protections for tenants living in foreclosed properties.  

Credit Union Gains

Credit unions, which haven’t been known as aggressive mortgage lenders, to say the least, are becoming more energetic in that arena – poised this year to originate more than $100 billion in mortgages for the first time in the industry’s history.  A combination of record low mortgage rates and historically high levels of dissatisfaction with banks (fueling strong growth in credit union membership) are driving the trend, credit union executives say. 

“We’d be remiss if we didn’t give a shout-out to the major banks for being annoying to consumers and forcing people to seek out other alternatives,” Bob Dorsa, president of the American Credit Union Mortgage Association in Las Vegas., told the New York Times.   Credit unions had originated nearly $90 billion in mortgages through the third quarter, exceeding by $7 billion the origination total for 2011, according to theTimes article, which also notes the emphasis on member service as an advantage for credit unions competing with other mortgage lenders. 

“The people working at credit unions know that they’ll keep their jobs if they keep their members happy,” Bill Hampel, chief economist for the Credit Union National Association and one of the industry executives quote din the Times article, observed.  “There are no divided loyalties,” he added.

While credit unions are rightly celebrating their inroads in the mortgage market, they might want to keep an eye on Wal-Mart, which could become a formidable competitor for credit unions and banks.  More than one-third of the consumers responding to a recent survey said they would consider obtaining a mortgage from the discount giant, while nearly half said they would shop for mortgages at PayPal if those entities began offering mortgage loans.  Costco, the huge warehouse club, already offers mortgages online, but is doing so in partnerships with banks. 

More than half of the  consumers responding to the survey, conducted by Carlisle & Gallagher (a North Carolina consulting firm) complained about the slowness of the loan approval process, and nearly a third coted poor communication as a major cause of their dissatisfaction with banks. 

“Consumer attitude is driven by three things, price, service and trust," Doug Hautop, Carlisle & Gallagher's lending practice leader, said in a news release. "Institutions looking to gain market share must target customer values instead of traditional asset segmentation," he added.