Below the Line: Estimates of Negative Equity among Nonprime Mortgage Borrowers
The boom in nonprime mortgage lending that occurred in the United States between 2004 and 2006 was quickly followed by rapid increases in the rate of delinquencies and foreclosures on these loans. This pronounced deterioration alarmed investors, the public, and policymakers.
Significantly, uncertainty about the source of the decline in loan quality has played a key role in the credit crunch that began in mid-2007.
Nonprime loan originations rose sharply after 2003, and these loans became delinquent far more quickly than had earlier vintages. Indeed, loans originated in 2004 performed poorly compared with earlier vintages, and the 2005 and 2006 vintages became seriously delinquent within a year of origination at rates that the 2003 vintage took twenty and thirty months to reach, respectively.
Full Story here
More than $3 Trillion Worth of Property at Risk of Default
More than 15.2 million U.S. mortgages, or 32.2 percent of all mortgaged properties, were in negative equity position as of June 30, 2009 according to newly released data from First American CoreLogic. June’s negative equity share was slightly lower than the 32.5 percent as of the end of March 2009 and it reflects the recent flattening of monthly home price changes.
As of June 2009, there were an additional 2.5 million mortgaged properties that were approaching negative equity. Negative equity and near negative equity mortgages combined account for nearly 38 percent of all residential properties with a mortgage nationwide.
Full Story here
Showing posts with label homeownership. Show all posts
Showing posts with label homeownership. Show all posts
Pending home sales index rises again in June
...homebuilder D.R. Horton Inc. said its fiscal third-quarter losses shrank from the year-ago period, as it took smaller charges against the falling values of its land and unsold homes.
D.R. Horton's results followed similar numbers from Pulte Homes Inc. and Centex Corp., which reported quarterly earnings Monday that showed new-home orders picked up during the first half of the year.
Lawrence Yun, the Realtors group's chief economist said he expects existing home sales to gradually rise over the balance of the year, with conditions varying around the country.
"It appears home sales are on a sounder footing and inventory is gradually being absorbed," he said.
Regionally, the pending home sales index jumped 7.1 percent to 100.7 in the South and 2.9 percent to 100.4 in the West. The index inched up 0.4 percent to 81.2 in the Northeast, and up 0.8 percent to 89.9 in the Midwest.
...homebuilder D.R. Horton Inc. said its fiscal third-quarter losses shrank from the year-ago period, as it took smaller charges against the falling values of its land and unsold homes.
D.R. Horton's results followed similar numbers from Pulte Homes Inc. and Centex Corp., which reported quarterly earnings Monday that showed new-home orders picked up during the first half of the year.
Lawrence Yun, the Realtors group's chief economist said he expects existing home sales to gradually rise over the balance of the year, with conditions varying around the country.
"It appears home sales are on a sounder footing and inventory is gradually being absorbed," he said.
Regionally, the pending home sales index jumped 7.1 percent to 100.7 in the South and 2.9 percent to 100.4 in the West. The index inched up 0.4 percent to 81.2 in the Northeast, and up 0.8 percent to 89.9 in the Midwest.
Project going south? You need a Paladin.
Have Paladin will travel
Champion-for-Hire
A knight without armor in a savage land.
Housing Bill Won't 'Perform Miracles'
Senate Approves Measure, but Critics Say Law Unlikely to Prevent Most Foreclosures
By Lori Montgomery and Paul Kane Washington Post Staff Writers
Sunday, July 27, 2008; Page A01
Even as a huge bipartisan majority in the Senate voted yesterday to send a sprawling housing bill to the White House, economists, consumer advocates and other analysts said the package of programs for struggling homeowners and shaken mortgage lenders is unlikely to relieve the foreclosure crisis that is driving the nation toward recession.
"This is not the end of the housing crunch," said Jared Bernstein, a senior economist at the Economic Policy Institute. "Housing prices have already fallen 15 percent and they need to fall 10 percent more. This bill isn't going to change that equation."
By Lori Montgomery and Paul Kane Washington Post Staff Writers
Sunday, July 27, 2008; Page A01
Even as a huge bipartisan majority in the Senate voted yesterday to send a sprawling housing bill to the White House, economists, consumer advocates and other analysts said the package of programs for struggling homeowners and shaken mortgage lenders is unlikely to relieve the foreclosure crisis that is driving the nation toward recession.
"This is not the end of the housing crunch," said Jared Bernstein, a senior economist at the Economic Policy Institute. "Housing prices have already fallen 15 percent and they need to fall 10 percent more. This bill isn't going to change that equation."
On-Line House Hunting Sites Developers Should Know!
Here's are a few:
DotHomes.com : Billing itself as a "real estate search engine," DotHomes scans the websites of agents and brokerages and returns listings in a way reminiscent of Google. The comparison is not accidental -- there's an "I'm Feeling Wealthy" search button that pays tongue-in-cheek homage to Google's "I'm Feeling Lucky" button; it returns listings by price. Much like a general search engine, it allows you to enter your parameters very efficiently in one box as if they were keywords, such as "Santa Monica, CA 3 bedrooms.
"FrontDoor.com: One thing that listings sites tend to lack is content that's broader than the listings themselves. That's not the case with FrontDoor, where the popular HGTV cable channel has leveraged its archive of home-improvement and real estate programming. Be warned, however, that if you're a fan of the channel, it might be tempting to kill a lot of time watching videos of "Designed to Sell" host Lisa LaPorta ripping out bad bathroom tile. Non-video content includes numerous brief articles on the ins and outs of buying and selling. On the listings side, the site helpfully breaks them down by neighborhood.
CyberHomes.com: This site also has easy-to-access content: a big library of articles on the nuts and bolts of real estate. CyberHome’s Explore Maps feature goes way beyond the usual mapping -- with this tool, you can zero in on neighborhoods where there isn't much crime or areas where there are likely to be a lot of toddlers.
Movoto.com: You may be able to make up the time you lost looking at the videos at FrontDoor.com when you get to the noticeably efficient home search at Movoto. Enter your search parameters, and it returns 20 listings at a time, shown in pairs. Click on one of them, and it delivers lots of information about that property, including detailed lists of local schools and community amenities, plus demographic information, all in one continuous scroll, without having to click on a lot of links.
OpenHouse.com: The name says it all. If you're setting out on a Sunday to stalk homes for sale, OpenHouse can be a useful tool for planning your itinerary. The details that are available for each listing vary quite a lot, depending on what the agent has included. There are also "virtual open houses," which translate into tons of photographs and videos of many properties.
Wal-Mart.com: Although it's too soon to say, "Look out, Craigslist," the retail behemoth’s recent entry into free classified advertising should not be dismissed. Wal-Mart, after all, is Wal-Mart. In addition to the free consumer-submitted listings, it aggregates broker ads through a partnership with Oodle.com. The number of listings that turned up in our searches in July was not huge, but the service is only a few months old. A search here can be broken down by the usual bedrooms, bathrooms, square footage etc., as well as by homes for sale by agents, via foreclosure or FSBO (for sale by owner).
Excerpts from LA Times Article By Mary Umberger, July 27, 2008
DotHomes.com : Billing itself as a "real estate search engine," DotHomes scans the websites of agents and brokerages and returns listings in a way reminiscent of Google. The comparison is not accidental -- there's an "I'm Feeling Wealthy" search button that pays tongue-in-cheek homage to Google's "I'm Feeling Lucky" button; it returns listings by price. Much like a general search engine, it allows you to enter your parameters very efficiently in one box as if they were keywords, such as "Santa Monica, CA 3 bedrooms.
"FrontDoor.com: One thing that listings sites tend to lack is content that's broader than the listings themselves. That's not the case with FrontDoor, where the popular HGTV cable channel has leveraged its archive of home-improvement and real estate programming. Be warned, however, that if you're a fan of the channel, it might be tempting to kill a lot of time watching videos of "Designed to Sell" host Lisa LaPorta ripping out bad bathroom tile. Non-video content includes numerous brief articles on the ins and outs of buying and selling. On the listings side, the site helpfully breaks them down by neighborhood.
CyberHomes.com: This site also has easy-to-access content: a big library of articles on the nuts and bolts of real estate. CyberHome’s Explore Maps feature goes way beyond the usual mapping -- with this tool, you can zero in on neighborhoods where there isn't much crime or areas where there are likely to be a lot of toddlers.
Movoto.com: You may be able to make up the time you lost looking at the videos at FrontDoor.com when you get to the noticeably efficient home search at Movoto. Enter your search parameters, and it returns 20 listings at a time, shown in pairs. Click on one of them, and it delivers lots of information about that property, including detailed lists of local schools and community amenities, plus demographic information, all in one continuous scroll, without having to click on a lot of links.
OpenHouse.com: The name says it all. If you're setting out on a Sunday to stalk homes for sale, OpenHouse can be a useful tool for planning your itinerary. The details that are available for each listing vary quite a lot, depending on what the agent has included. There are also "virtual open houses," which translate into tons of photographs and videos of many properties.
Wal-Mart.com: Although it's too soon to say, "Look out, Craigslist," the retail behemoth’s recent entry into free classified advertising should not be dismissed. Wal-Mart, after all, is Wal-Mart. In addition to the free consumer-submitted listings, it aggregates broker ads through a partnership with Oodle.com. The number of listings that turned up in our searches in July was not huge, but the service is only a few months old. A search here can be broken down by the usual bedrooms, bathrooms, square footage etc., as well as by homes for sale by agents, via foreclosure or FSBO (for sale by owner).
Excerpts from LA Times Article By Mary Umberger, July 27, 2008
Conversion Conundrum
By W. Michael Howlett
During the recent residential housing boom, many apartment building owners converted their rental units to condominiums. Though the market has cooled a bit over the last year and a half, interest in condo conversions remains strong. But with the current downward pressure on prices and the increased expectation of seller assistance with closing costs, property owners need to reexamine the potential income tax cost associated with these conversions.
Structuring a condo conversion properly can yield capital gains instead of ordinary income, subjecting earnings to the 15 percent federal capital gains tax rate as opposed to the 35 percent top ordinary tax rate. When successful, these savings can restore much of the financial luster that has been lost due to softening market conditions.
However, capital gains treatment is available as an option only in those instances where individuals own a property either directly or indirectly via a pass-through entity (i.e., partnership, limited liability company [LLC], or S corporation). It also is important to note from the outset, especially with apartments, that the portion of the capital gain attributable to the depreciation taken is subject to a 25 percent tax rate.
Avoiding dealer status is generally the key to achieving capital gains treatment for the sale of property. Section 1221 of the Internal Revenue Code disallows capital gains treatment for the sale of property held by a taxpayer primarily for sale to customers in the ordinary course of business. Whether property is being held for sale in the ordinary course of business is very dependent on facts and circumstances. Over the years, published Internal Revenue Service (IRS) rulings and decisions rendered by the courts have developed several factors used to make this determination.
As with any planning technique driven by facts and circumstances, there are favorable as well as unfavorable rulings to consider, but the orderly liquidation approach receives support from some very favorable case law. The approach relies on the owner’s ability to show that the conversion to condominiums and the sale of the units can be classified as the orderly liquidation of trade or business assets (i.e., rental property) and not a change of status to being in the trade or business of selling condominiums.
The Goldberg v. the United States case from the 1950s was one of the first to explore this theory. During World War II, rental units were built to provide housing for defense workers.
After the war, the rental market dropped off and housing sales boomed with the return of the troops. Due to this significant change in market conditions, the property owner decided that it would be better to sell off its rental portfolio and, in 1946, 90 houses were sold.
In fact, demand was so strong that no sales or marketing activities were undertaken, the houses were sold by word of mouth, and there were no real estate commissions paid. The court agreed with the taxpayer that the sales were not a result of changing the nature of their business from rental to sales, but a strategy to exit from the business of rental real estate in light of changing market conditions.
A case that dealt directly with apartments being converted to condominiums is the 1987 Gangi case. In Gangi, two individuals formed a partnership and constructed a 36-unit apartment building as part of their retirement planning. After eight years of renting, the business relationship between the partners had soured and the two decided to part ways. An analysis of the property showed that the value could be maximized by selling condo units versus selling the building intact. The partnership went through the conversion process, listed the units, and sold 26 of them within one year.
The IRS argued that the conversion had changed the intent from investment and rental to holding property for sale in the ordinary course of business. The court, however, held that the taxpayers had merely liquidated their investment, a business decision based on market conditions and a desire to part ways. The conversion was just a step taken to effect the liquidation.
What these cases and others show is that it is possible to have a high number of sales and not necessarily be viewed as having sales in the ordinary course of business. As with any fact-based argument, extreme care must be taken to apply these cases to a different situation.
Another avenue to explore that may yield the desired result of capital gains treatment is to sell the apartment building to another entity prior to converting it to condos. A sale at market value will trigger the gain in the entity that held the property for rental purposes, and that gain will be subject to capital gains rates. This technique has been used successfully in connection with raw land in both the Richard H. and Patsy J. Bramblett v. Commissioner and Timothy J. and Deborah A. Phelan v. Commissioner cases. The key to this strategy is that there must be a business reason, aside from tax planning, behind the sale. Two of the most common reasons would be the de-sire to limit liability exposure and the involvement of different partners in the sales activity.
In addition to the normal issues faced whenever contemplating a sale to another entity, such as arm’s-length dealing, avoiding agency relationships, and establishing a business purpose, the sale of an apartment building to an entity that will convert it to condos and market them for sale has one additional hurdle—Section 1239 of the Internal Revenue Code. Section 1239 recharacterizes what would normally be capital gains into ordinary income when a related party acquires depreciable property. However, there are two possible ways to deal with this rule.
The first is to plan to avoid the related party designation. In this case, if more than 50 percent of the ownership of the two entities is under common control, then they are considered related.
Ownership by various family members will be attributed to each family member. For example, if a father owns 40 percent and his son owns 20 percent, they are each deemed to own 60 percent.
This keeps owners from spreading ownership across various family members to avoid the related party rules. Therefore, 50 percent of the entity buying the apartment building must be unrelated to the existing ownership.
At first glance, it would appear that this hurdle would be insurmountable. Why give away 50 percent of the profit to a new partner in order to get a better tax rate? Though a new 50 percent partner would have to be found to participate in the condo sales entity, that new partner would not be getting 50 percent of the overall profits. Most of the profit would be triggered in the existing entity that owns the property. In selling the building to the condominium sales entity, the price would normally capture most of the profit back in the rental entity.
In addition to how the pricing is set, another way to deal with the related party rules is to look more closely at who is considered related. Some family relations (e.g., stepparents and in-laws) fall outside the rule’s definition, so it may be possible to keep the ownership within the expanded family and not trigger the related party rules.
Another way to deal with Section 1239 is to look at whether the property fits the definition of depreciable property. A literal interpretation of Section 1239 implies that the property is depreciable in the hands of the acquirer. Since the entity acquiring the property intends to convert it to condo units and sell them, it can be argued that the acquiring entity is a dealer with respect to the condominiums. Therefore, the condos are dealer property and are not depreciable.
With this last approach, it is very important to be very clear that the acquiring entity is a property dealer. By choosing this approach, the related party rules under 1239 are rendered moot, making it possible to use identical or nearly identical ownership to the selling entity. While this strategy is consistent with the wording of Section 1239, there is no case law at present to either support or deny this position.
A conversion from apartments to condominiums does not automatically taint what would have been a capital gain and convert it to ordinary income, but preserving capital gains status cannot be assumed. Several avenues do exist that can be employed to structure your conversion either to preserve capital gains treatment or to claim most of the profits as capital gains. Each approach has its own strengths and pitfalls, so proper planning with a certified public accountant is essential in order to maximize the potential tax savings.
W. Michael Howlett is a tax partner with Cherry, Bekaert & Holland, LLP, and a member of the firm’s Real Estate and Construction Industry Group. He is licensed as a certified public accountant in Virginia.
During the recent residential housing boom, many apartment building owners converted their rental units to condominiums. Though the market has cooled a bit over the last year and a half, interest in condo conversions remains strong. But with the current downward pressure on prices and the increased expectation of seller assistance with closing costs, property owners need to reexamine the potential income tax cost associated with these conversions.
Structuring a condo conversion properly can yield capital gains instead of ordinary income, subjecting earnings to the 15 percent federal capital gains tax rate as opposed to the 35 percent top ordinary tax rate. When successful, these savings can restore much of the financial luster that has been lost due to softening market conditions.
However, capital gains treatment is available as an option only in those instances where individuals own a property either directly or indirectly via a pass-through entity (i.e., partnership, limited liability company [LLC], or S corporation). It also is important to note from the outset, especially with apartments, that the portion of the capital gain attributable to the depreciation taken is subject to a 25 percent tax rate.
Avoiding dealer status is generally the key to achieving capital gains treatment for the sale of property. Section 1221 of the Internal Revenue Code disallows capital gains treatment for the sale of property held by a taxpayer primarily for sale to customers in the ordinary course of business. Whether property is being held for sale in the ordinary course of business is very dependent on facts and circumstances. Over the years, published Internal Revenue Service (IRS) rulings and decisions rendered by the courts have developed several factors used to make this determination.
They are as follows:
- the frequency, number, and substantiality of sales;
- the taxpayer’s intent or purpose for the purchase of the property;
- sales and marketing activities undertaken by the taxpayer either directly or through the use of brokers or agents; and
- the extent of subdividing and de-veloping the property to increase its value.
As with any planning technique driven by facts and circumstances, there are favorable as well as unfavorable rulings to consider, but the orderly liquidation approach receives support from some very favorable case law. The approach relies on the owner’s ability to show that the conversion to condominiums and the sale of the units can be classified as the orderly liquidation of trade or business assets (i.e., rental property) and not a change of status to being in the trade or business of selling condominiums.
The Goldberg v. the United States case from the 1950s was one of the first to explore this theory. During World War II, rental units were built to provide housing for defense workers.
After the war, the rental market dropped off and housing sales boomed with the return of the troops. Due to this significant change in market conditions, the property owner decided that it would be better to sell off its rental portfolio and, in 1946, 90 houses were sold.
In fact, demand was so strong that no sales or marketing activities were undertaken, the houses were sold by word of mouth, and there were no real estate commissions paid. The court agreed with the taxpayer that the sales were not a result of changing the nature of their business from rental to sales, but a strategy to exit from the business of rental real estate in light of changing market conditions.
A case that dealt directly with apartments being converted to condominiums is the 1987 Gangi case. In Gangi, two individuals formed a partnership and constructed a 36-unit apartment building as part of their retirement planning. After eight years of renting, the business relationship between the partners had soured and the two decided to part ways. An analysis of the property showed that the value could be maximized by selling condo units versus selling the building intact. The partnership went through the conversion process, listed the units, and sold 26 of them within one year.
The IRS argued that the conversion had changed the intent from investment and rental to holding property for sale in the ordinary course of business. The court, however, held that the taxpayers had merely liquidated their investment, a business decision based on market conditions and a desire to part ways. The conversion was just a step taken to effect the liquidation.
What these cases and others show is that it is possible to have a high number of sales and not necessarily be viewed as having sales in the ordinary course of business. As with any fact-based argument, extreme care must be taken to apply these cases to a different situation.
Another avenue to explore that may yield the desired result of capital gains treatment is to sell the apartment building to another entity prior to converting it to condos. A sale at market value will trigger the gain in the entity that held the property for rental purposes, and that gain will be subject to capital gains rates. This technique has been used successfully in connection with raw land in both the Richard H. and Patsy J. Bramblett v. Commissioner and Timothy J. and Deborah A. Phelan v. Commissioner cases. The key to this strategy is that there must be a business reason, aside from tax planning, behind the sale. Two of the most common reasons would be the de-sire to limit liability exposure and the involvement of different partners in the sales activity.
In addition to the normal issues faced whenever contemplating a sale to another entity, such as arm’s-length dealing, avoiding agency relationships, and establishing a business purpose, the sale of an apartment building to an entity that will convert it to condos and market them for sale has one additional hurdle—Section 1239 of the Internal Revenue Code. Section 1239 recharacterizes what would normally be capital gains into ordinary income when a related party acquires depreciable property. However, there are two possible ways to deal with this rule.
The first is to plan to avoid the related party designation. In this case, if more than 50 percent of the ownership of the two entities is under common control, then they are considered related.
Ownership by various family members will be attributed to each family member. For example, if a father owns 40 percent and his son owns 20 percent, they are each deemed to own 60 percent.
This keeps owners from spreading ownership across various family members to avoid the related party rules. Therefore, 50 percent of the entity buying the apartment building must be unrelated to the existing ownership.
At first glance, it would appear that this hurdle would be insurmountable. Why give away 50 percent of the profit to a new partner in order to get a better tax rate? Though a new 50 percent partner would have to be found to participate in the condo sales entity, that new partner would not be getting 50 percent of the overall profits. Most of the profit would be triggered in the existing entity that owns the property. In selling the building to the condominium sales entity, the price would normally capture most of the profit back in the rental entity.
In addition to how the pricing is set, another way to deal with the related party rules is to look more closely at who is considered related. Some family relations (e.g., stepparents and in-laws) fall outside the rule’s definition, so it may be possible to keep the ownership within the expanded family and not trigger the related party rules.
Another way to deal with Section 1239 is to look at whether the property fits the definition of depreciable property. A literal interpretation of Section 1239 implies that the property is depreciable in the hands of the acquirer. Since the entity acquiring the property intends to convert it to condo units and sell them, it can be argued that the acquiring entity is a dealer with respect to the condominiums. Therefore, the condos are dealer property and are not depreciable.
With this last approach, it is very important to be very clear that the acquiring entity is a property dealer. By choosing this approach, the related party rules under 1239 are rendered moot, making it possible to use identical or nearly identical ownership to the selling entity. While this strategy is consistent with the wording of Section 1239, there is no case law at present to either support or deny this position.
A conversion from apartments to condominiums does not automatically taint what would have been a capital gain and convert it to ordinary income, but preserving capital gains status cannot be assumed. Several avenues do exist that can be employed to structure your conversion either to preserve capital gains treatment or to claim most of the profits as capital gains. Each approach has its own strengths and pitfalls, so proper planning with a certified public accountant is essential in order to maximize the potential tax savings.
W. Michael Howlett is a tax partner with Cherry, Bekaert & Holland, LLP, and a member of the firm’s Real Estate and Construction Industry Group. He is licensed as a certified public accountant in Virginia.
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