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Refi Interest Trap?

By someone else following x   2008 Mar 28, 1:30am 44,776 views   354 comments   watch   nsfw   quote     share    


trap

A reader writes:

Word from the IRS is that they are auditing people based on refiances on their house. If you refied and pulled money out of the house and use for other purposes than home improvement you can not claim that as Mortgage Deduction, needs to be claimed as Interest expense. Guess what, they want proof of home improvements... Just wait -- how many toys people bought using their house as a ATM machine will be for sale on CraigsList?

Anyone know if this is true? And what's the difference between the mortgage interest deduction and interest expense?

Patrick

#housing

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315   BayAreaIdiot   ignore (0)   2008 Apr 1, 8:06am   ↑ like (0)   ↓ dislike (0)   quote   flag        

By the way I believe you are correct that China is too big to be abandoned by anybody. The potential upside is so gigantic, China will have to "abandon itself" first, as you correctly point out.

Of course if any black swans are lurking.....who knows?

316   Peter P   ignore (0)   2008 Apr 1, 8:08am   ↑ like (0)   ↓ dislike (0)   quote   flag        

But that second sentence above holds true for many Americans as well.

It is not the same...

Here, even illegal aliens cannot be denied treatment. So NINJA people effectively have free health care. This actually discourages saving.

317   Peter P   ignore (0)   2008 Apr 1, 8:11am   ↑ like (0)   ↓ dislike (0)   quote   flag        

What’s really tragic is for poor parents to do a HELOC to fund tuition so their son can attend Stanford to study a highly-paid specialty like …. sociology.

It is still better than drama. ;)

I think higher education may help mediocre people to get above the average. However, it is still up to the person to engage opportunities.

318   Peter P   ignore (0)   2008 Apr 1, 8:12am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Of course if any black swans are lurking…..who knows?

Black swans are always lurking. The worst case scenario is always yet to be discovered. ;)

319   BayAreaIdiot   ignore (0)   2008 Apr 1, 8:24am   ↑ like (0)   ↓ dislike (0)   quote   flag        

It is not the same…

Here, even illegal aliens cannot be denied treatment.

I was referring to Americans not illegals.

320   Peter P   ignore (0)   2008 Apr 1, 8:25am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I was referring to Americans not illegals.

American NINJAs have the same effective free health care.

321   BayAreaIdiot   ignore (0)   2008 Apr 1, 8:27am   ↑ like (0)   ↓ dislike (0)   quote   flag        

The worst case scenario is always yet to be discovered

True in the long run. But didn't somebody say that in the long run we're all dead?
;-)

By the way, I hear the earth's magnetic field is fixing to reverse. To me that seems a much much greater threat than global warming. HOw come Gore is spending 300 million to advertise for global warming (which is survivable even if true) and nobody cares about the mag field reversing? Were it to happen, it would probably cook us all.

322   BayAreaIdiot   ignore (0)   2008 Apr 1, 8:29am   ↑ like (0)   ↓ dislike (0)   quote   flag        

American NINJAs have the same effective free health care.

but if they're NINJAs how're they supposed to save? It's the ones with some money who are bankrupted by illness. Why don't we save more for that possibility?

323   Peter P   ignore (0)   2008 Apr 1, 8:30am   ↑ like (0)   ↓ dislike (0)   quote   flag        

but if they’re NINJAs how’re they supposed to save?

Answer: NINJA loans :lol:

324   BayAreaIdiot   ignore (0)   2008 Apr 1, 8:42am   ↑ like (0)   ↓ dislike (0)   quote   flag        

NINJA loans

touche!

325   StuckInBA   ignore (0)   2008 Apr 1, 8:44am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Strangely (?) it doesn’t induce the same savings oriented behavior. Why is that I wonder…

Because America suffers from Chronic Excessive Optimism. Consume today, tomorrow will take care of itself. If a rainy day actually arrives, just put it on the credit card / HELOC and everything will be fine.

On the other hand, people from developing countries have seen the worst in their lifetime, have no easy access to credit, cannot easily file bankruptcy and get on with life when the rainy day comes. So they prepare for it as much as they can.

Long time ago, America also saved, but till an entire generation feels the pain, America won't start saving again.

Being optimist is definitely better than being a pessimist. But the cheap access to credit (and related laws) has turned optimism into recklessness. That's what is frightening about bursting of this bubble. It was the credit bubble and access to cheap credit is no longer easy to come by. So it will get very ugly before people come to their senses.

326   skibum   ignore (0)   2008 Apr 1, 8:48am   ↑ like (0)   ↓ dislike (0)   quote   flag        

"American Ninja" was a terrible movie. On the other hand, "Beverly Hills Ninja" was AWESOME. Chris Farley was one of the funniest people I've ever seen.

327   Peter P   ignore (0)   2008 Apr 1, 8:49am   ↑ like (0)   ↓ dislike (0)   quote   flag        

So it will get very ugly before people come to their senses.

People are nothing but a block of swing votes. Remember that.

328   EBGuy   ignore (0)   2008 Apr 1, 9:28am   ↑ like (0)   ↓ dislike (0)   quote   flag        

What’s really tragic is for poor parents to do a HELOC to fund tuition so their son can attend Stanford to study a highly-paid specialty like …. sociology.
Come on Dennis, cut him some slack. :-)
Admissions officers say the problem is that low-income students don't understand how little the university charges them, so they don't apply. Scott, for instance, has had to pay roughly $2,500 a year, which he did by working and taking out a small loan. The university covered the remaining $44,700.

329   Peter P   ignore (0)   2008 Apr 1, 9:37am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Admissions officers say the problem is that low-income students don’t understand how little the university charges them, so they don’t apply.

But the HELOC parents are probably not low-income by any measure.

Higher education should be optional. I do not support any idea of subsidizing college education. (University researches should be subsidized for strategic purposes.)

High schools should give each student enough skills to be productive. They should teach more vocational skills and less fluff.

330   justme   ignore (0)   2008 Apr 1, 10:46am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Peter P,

How about subsidizing sushi, for "strategic purposes"?

331   justme   ignore (0)   2008 Apr 1, 10:47am   ↑ like (0)   ↓ dislike (0)   quote   flag        

>>People are nothing but a block of swing votes. Remember that.

True, as long as we have an undemocratic election system.

332   Peter P   ignore (0)   2008 Apr 1, 10:49am   ↑ like (0)   ↓ dislike (0)   quote   flag        

How about subsidizing sushi, for “strategic purposes”?

No. Sushi is a luxury.

True, as long as we have an undemocratic election system.

Huh?

333   justme   ignore (0)   2008 Apr 1, 10:56am   ↑ like (0)   ↓ dislike (0)   quote   flag        

StuckInBA,

Chronic Excessive Optimism has been a very profitable strategy for a very long time (since 1776 or so).

Now that the pyramid is cracking, this may change permanently.

334   OO   ignore (0)   2008 Apr 1, 11:49am   ↑ like (0)   ↓ dislike (0)   quote   flag        

BAI,

honestly I am constantly baffled by the unbridled financial optimism of Americans in general. Although first generation immigrant like myself still retain our undesirable habit of financial prudence, most of the second generations I know get rid of such a habit real fast.

But with the Fed and Treasury stepping up to assume risk for all financial gamblers, what can I say?

335   Paul189   ignore (0)   2008 Apr 1, 12:28pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

What do you say we start a new bank called 1st National Chance!

Every week we take all the deposits and buy Lotto tickets. Some weeks are good and some bad. If we hit it big the bank is dissolved and all depositors get there deposits back and we take the winnings. If we crap out, the FDIC or soon to be the Federal Reserve Bank takes all our losses and we walk with our nice large salaries.

Anyone in for the for the startup?

336   PermaRenter   ignore (20)   2008 Apr 1, 12:56pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

REDC auctions are all undisclosed reserve auctions. This is a huge ripoff. Save your money and wait for absolute auctions.

READ TERMS AND CONDITIONS, found here:
http://www.mylandhome.com/uploaded_files/29-pav-terms.pdf

Below are some snips from the Terms and Conditions:

"All Properties have a Reserve Price, meaning the Seller of each Property has established an unpublished, minimum selling price. The starting bid is not the Reserve Price."

My comment: Why attend an auction where you don't know the minimum price? Reserve auctions are OK, assuming the reserve is disclosed. Absolute (i.e. no reserve) auctions are best. With an unpublished reserve, you are shooting in the dark.

"the Auctioneer may open bidding on any Property by placing a bid on behalf of the Seller and may further bid on behalf of the Seller, up to the amount of the Reserve Price, by placing successive or consecutive bids for a Property, or by placing bids in response to other bidders."

My comment: The auction house bids against you? So not only are you up against other bidders, but you are bidding against an auction house, up to a price you don't know.

"Winning Bidder’s purchase is subject to, and contingent upon, the REO management of Seller approving the purchase, which shall be given or denied at their sole and absolute discretion within fifteen (15) business days"

My comment:
So even if you manage to outbid everyone else, and the auction house, the bank has 2 weeks to reject your offer.

"Auctioneer is not acting as an agent for any Bidder in any capacity, and is acting exclusively as the Seller’s agent."
"The total purchase price will include a buyer’s premium equal to five percent (5%) of the winning bid amount"
"The buyer's premium is the fee the Auctioneer charges the bidders to bring the Property"

My comment:
5% is a steep fee to pay as a buyer. Normally a the seller takes the hit for the 6% agent commission.

Folks, there is no way you'll get a bargain here. Hold out for absolute auctions. There is a tidal wave of foreclosures about to hit the market, and you'll get a much better deal.

337   PermaRenter   ignore (20)   2008 Apr 1, 12:57pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I went to one of these auctions in San Mateo, CA a few weeks ago for
about one and half hours. I don't have my notes with me, but here's my
memories. There were several thousand people at the auction, vast
majority without bidding cards. The seating was spread across half a
dozen rooms in a convention center.

Each auction had only a few people bidding. There were auction staff
dressed in tuxedo's bouncing around to drum up excitement. Many
properties (around 20%) were reauctioned a within 15 minutes after
the first auction closed, then between 5-10% were reauctioned twice!
Most reauctioned houses sold for slightly less than the original
auction.

The auctioneer's voice is positively blasted into the halls (very loud),
and even when there is no interest in the property he rapidly drones
out two numbers (last bid and amount of next allowed bid). It is
surprisingly hard to understand what he's saying... given that the whole
point is to hear him.

Some houses were for sale in "cash-only" status, which means the inside
lender had inspected the property and was unwilling to issue a loan
to any buyer for any amount. These houses seemed to sell for much
closer to the normal houses than I expected.

Given the format, high sales fee (5%), high "re-auction" rate, etc...
I would not recommend buying anything from this auction
company... something seemed very wrong.

I do intend to go back to a followup auction, to see how many of the
"sold" houses from the first auction are back on the block and to
inspect some of the local properties before the auction to understand
what condition the "cash only" homes are in.

338   desibaba   ignore (0)   2008 Apr 1, 1:31pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Given the current foreclosure situation in south bay, I have started seeing Banks literally dumping properties, at below market price(-100K), below what original buyer payed to builder, four years ago. He bought it for $950K in 2004 from builder. It's in great condition and in good school district. Now, thats too enticing - is it spur market activity or fair deal? I am sure in these turbulent times, there would be opportunities to be had, but it needs some way to detect it. How?

339   justme   ignore (0)   2008 Apr 1, 1:58pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

desibaba,

some more details (final price, location) would be useful.

340   Lost Cause   ignore (0)   2008 Apr 1, 2:54pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I see some of these bank owned listings with stipulations such as "buyer pays closing costs", "sold as-is", and "no offers less than asking price acceipted." Also, the auctions seem odd as well. This, to me, is just more evidence that there is a still a large downside to the real estate market, before capitulation. All of the manipulation by the Fed is also postponing the enevitable, and prolonging the agony.

341   justme   ignore (0)   2008 Apr 1, 3:51pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Perma,

I also attended one of the auctions in February. Much the same as what you described. Many re-auctions, over and over again. Not sure if it was because the buyer balked afterwards or because the reserve price was not met. In many cases, the price was indeed lower upon re-auction.

342   empty houses   ignore (0)   2008 Apr 1, 9:00pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I think it's a couple of years too early to consider the auctions. I noticed that they are starting to have housing auction shows on TV. I expect this to gain in popularity. I'm expecting homes in East San jose in the 95127 area to dip under $200k in the next 3 years. I'm talking about the built in 1955, 3 bd 1 bath 996 sq ft house. This house would be under $100k almost anywhere else in the country. I figure double that for being in the Silly con valley. I read somewhere that there are currently 22 homes like that selling for under $400k right now. $400k is still a lot of money and a person with 20% to put down would probably not want to find themselves in that hood during this upcoming recession/depression.

343   Duke   ignore (0)   2008 Apr 1, 11:28pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

One of the artciles today did a very good job of discussing the greed and fear components of the financial markets. So, in a weird week of Wall Street ups on bad news, what does an unemotional examination tell me?

1. Seeking Alpha had a very good statistical study of probable housing prices. At its mostoptimistic, the 10% we have already lost is as far as we will go. This can be argued only form the perspective that the Fed is trying its best to place a floor under housing prices.
At its worst, and equally improbably, we lose 85%.
The most likely scenario is a 40% loss. That's a lot.
A 40% loss in housing alone would trigger a recession lasting 30 months with unemployment heading to 10% And a total GDP contraction of around 3%.

But housing isn't alone. We are getting a credit crunch beyond just housing. Faith in complex instruments has been shattered. Valuations are impossible to determine and UBS statement of spinning of its mortgage debt unit and focusing on core banking will be echoed everywhere.

We also have high oil prices. Arguably they are solely the reult of the Feds inflationary policey, but they are not.

Fear aside, the market should be pricing a recession, and the fact it is not seems to me we are seeing some powerful moves by large players who lead everyone into commodities then run over to equities then run back. It just looks like momentum plays while they deleverage.

Becasue anything other than world market contraction simply does not make any sense.

344   Duke   ignore (0)   2008 Apr 1, 11:55pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

The article the other about Taleb was very interesting. What is funny about Black Swans is how similar it is to betting the long-shot in horse racing. While MR. Taleb made a pile of money during the Russian default, he only did so because the orchestrated bailout of LTCM put money on the table.
If everyone has now adopted the practice of far-out-of-the-money-puts for the improbable-but-large-payday, who will be able to afford to pay the long shots? I think we are already seeing that items like CDS are not worth the premiums anyone is paying for them. And not even the FED can bailout a marget segment with a notioanl value of 45+ trillion.
Simple counter-party surveilance is telling finance people that the pockets of their partners are no deeper than their own. Which is thin in an over-levereaged market conracting. The Darwinian game now is to live just longer than the other guy who goes belly up so you the (now smaller) group of remaining funds/hedgies/banks can grab the real asstes of their now dead partner.
Again, this is a game of dep pockets. Even if you bet the winner, you may not be paid.
Caveat Emptor.

345   SP   ignore (0)   2008 Apr 1, 11:57pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Overnight (March 31 to April 1), there is a 30% jump in inventory search results in the Fortress (Cup/LosAltos/Saratoga) area in my saved searches on Zip realty. Prices seem all over the place, but there are some noticeably lower asking prices in the new bunch of listings.

Is it just the "spring bounce" or did something happen?

346   sa   ignore (0)   2008 Apr 1, 11:57pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I have a friend who lives in livermore and had bought a home for about 270K around 2003. It was appraised to 470K around 2005. Now it's appraised to 250K. One of his neighbour has maxed out equity to 450K. He is ready to walk away although, his equity has gone to other investments. I am sure he is waiting for the bailout or he will walk away and buy a home on his wife name. Either way he gains.

347   DinOR   ignore (0)   2008 Apr 2, 1:10am   ↑ like (0)   ↓ dislike (0)   quote   flag        

sa,

Therein lies the problem. Just being under water on your mortgage can't be the sole determination. Hell, Bill Gates probably over paid for his home! Should he be eligible? LOL.

The only way I could get on board is to have a "Uniform Application For Mortgage Relief Benefits Form" that takes into account the borrowers complete financial profile. Only fer chrissakes let's make it like FICO scoring where certain determining factors are PFM (Pure F@cking Magic!)

Obviously it would be tied closely to your last two tax returns. (This eliminates the Liar Loans) If you lied there, don't look for relief here. Make this "form" a mandatory requirement for anyone seeking to re-finance, period. Make it a lengthy and painful process (kind of like a VA Loan) with TONS of supporting documentation.

Your FHA REFCO (Refinance Score) will determine what (if any) payment relief you may get and what portion of the deficient payment will be added to the back end of your loan and whether or not (in certain cases) where you will be asked to vacate the property immediately and the PROPER procedure for completing your Deed-In-Lieu. Since the process will be somewhat secretive relief filers won't know if they're getting a free ride on some payments or a visit from the sheriff.

This will keep the "throw your hat in the ring filings to an absolute minimum. We will tabulate your scores and have your answer with 90-120 days. In order to qualify you must remain current on your mortgage payments. Your filing this request does not in any way excuse from your contractual obligations.

348   skibum   ignore (0)   2008 Apr 2, 1:13am   ↑ like (0)   ↓ dislike (0)   quote   flag        

SP,

I would hold off on an assessment of the market. It's more or less typical for inventory to creep up through the "spring selling season." It's really a matter of how much of that crap moves. I have noticed in the areas I'm tracking that, even though there are occasional under agreements, it is a LOT slower than I would have expected - as in 1-2 homes UA per week, despite being in the "prime" spring market.

And this is in the ultra-Fortress...

349   justme   ignore (0)   2008 Apr 2, 1:14am   ↑ like (0)   ↓ dislike (0)   quote   flag        

SP,

I didn't see a bounce with the abruptness you describe, but I did not check cupertino and saratoga. I did however see a 40-50% gradual increase in listings in some other fortress cities over the last 2 months.

350   Peter P   ignore (0)   2008 Apr 2, 1:14am   ↑ like (0)   ↓ dislike (0)   quote   flag        

“spring selling season.”

April is the cruelest month. :)

351   Peter P   ignore (0)   2008 Apr 2, 1:15am   ↑ like (0)   ↓ dislike (0)   quote   flag        

There is so much inventory that I have stopped looking.

There is always the fear of missing out on buying a better house for the same money. :)

352   sa   ignore (0)   2008 Apr 2, 1:21am   ↑ like (0)   ↓ dislike (0)   quote   flag        

dinor,

As complicated as it can get with all details to be worked out for bailout, this person is waiting to see the details of the plan. My belief is, a bailout wouldn't help this person much. Prices have gone down over 40% and a bailout will mostly have provisions of govt getting back any appreciation on the house. He still stands to benefit by walking away and all the equity he has taken out, he can buy the house in same neighborhood cash down!!

353   DinOR   ignore (0)   2008 Apr 2, 1:36am   ↑ like (0)   ↓ dislike (0)   quote   flag        

sa,

Oh I'm sure of it! With as jaded as the avg. American housing-consumer has gotten over the last decade no one among us can account for their every contingency plan.

Hell, half of these people had a back-up plan going in. "If it continues to go through the roof I'll..."

A. Cut the lawn
B. Rent it out
C. Flip it
D. Rent it out (but claim as "primary residence")
E. Do a lease/option
F. Torch it and blame it on the Earth Liberation Front

Additionally, perhaps in 2004/5 one could have gotten away with buying a new home BEFORE selling the old home but I don't see that in today's credit environment? I don't know the particular situation but the only way a guy could put the "new" home in his wife's name alone is if she QUALIFIED on her own! Any joint app. would show a credit report and a VERY recent foreclosure. Not happening.

354   DinOR   ignore (0)   2008 Apr 2, 1:41am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Oh and I forgot, they WON'T KNOW what the "details" of the plan are! I would make it so you can file to "see if you qualify for benefits" *not "this is what we're offering" (see if you can "shoe horn" yourself into that description)

That's absolutely paramount! We need to make it clear up front that only a certain percentage of filers will get relief (of the portions they're visioning) Again, "PFM".

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