Mortgage Debt

Proponents call it the crucial missing tool needed to get us out of the national foreclosure morass. Critics say it could be disastrous - pushing up interest rates on all future mortgages, even for people with excellent credit, and creating huge new losses for already-ailing banks. Wherever you come down on the griddle-hot issue of home mortgage "cramdowns," the reality is this: Congress is poised to pass legislation empowering bankruptcy court judges to reduce the loan balances of potentially large numbers of financially distressed owners to affordable levels, and to lower their interest rates and monthly payments.

For homeowners around the country who are seriously delinquent on their mortgages and hoping for relief, the IRS has bad news: If your lender agrees to modify your loan and forgive any part of your debt, you could owe federal income taxes on the amount forgiven. Think of it as the tax code's "kick-'em-while-they're-down" rule. When personal debts are canceled by a creditor, the amount forgiven is treated as ordinary income under the Internal Revenue Code unless the taxpayer is insolvent or bankrupt.

IF ONE OF the largest banks in the country has its way, you as a homeowner won't have credit-card balances at high interest rates to worry about in the coming decade.That's because your house will function as your ultimate piece of plastic. In the words of Wells Fargo & Co. Senior Vice President Colin Walsh, "home equity will become the credit card" of the future, thanks to a new wave of high-tech "credit balance transfer" programs heading your way.With virtually no fanfare, Wells Fargo has begun contacting its $14 billion home equity loan customer base and offering homeowners the opportunity to convert electronically all of their outstanding credit-card balances to their equity account -- up to 100 percent of the market value of their homes.

Among economists, the belief that the Federal Reserve will announce a quarter-point increase in interest rates after its Tuesday meeting is close enough to unanimous that Mitchell Held, a managing director at New York City-based Salomon Smith Barney, quips that "the only people who don't think so are Mrs. Smith's third-grade class -- and they're recalcitrant."With that settled, the question becomes: How will America's vaunted Goldilocks Economy be affected by a quarter-point bump, coupled with the one in June and the one that will or won't occur in October.

IN THE FIRST study of its kind, researchers have documented the dimensions of the vast financial shift under way among American consumers to convert their consumer debt -- especially credit card balances -- into home mortgage debt.During the past 24 months alone, according to researchers, 4.2 million American households have converted a stunning $26 billion of credit card debt into home equity mortgage debt.Aggressively pitched on TV by sports celebrities such as Dan Marino and Jim Palmer, and promoted by endless blitzes of direct mail, home equity loans and lines of credit have become the "debt-consolidation" tool of choice for millions of families.

WHO SAYS American families are hocking their homes to the hilt, racking up new debt to pay off credit cards and auto loans?A major new study of the housing debt loads carried by Americans suggests that many homeowners don't fit that mold:Nearly 40 percent of all homeowning households now have no mortgage debt -- no first deed of trust, no equity line of credit, no second mortgage.Nearly one of five homeowners between ages 18 and 34 has no mortgage debt. Half of all homeowners between ages 55 and 64 have zero debt against their houses.

CONGRESSIONAL auditors have taken a look at the home mortgage market's most controversial products -- loans that exceed the value of the home by 25 percent or more -- and pronounced them safe for the banking system, and for consumers.In a new study, the General Accounting Office (GAO), the watchdog agency for Congress, says so-called "high loan-to-value" (high-LTV) mortgages do not pose major risks to financial institutions because their level of default by borrowers -- so far -- appear to be lower than defaults on credit cards.

The Affordable Housing Alliance Inc., a Columbia-based nonprofit housing agency, is offering "loss mitigation" and reverse-mortgage counseling for homeowners in Central Maryland.Loss mitigation programs attempt to help families avoid foreclosure and retain their homes by working with mortgage lenders to develop a repayment plan that is agreeable to both parties.Options include a special forbearance plan, a mortgage modification plan, partial claim to cure a loan default, a deed in lieu of foreclosure or a preforeclosure sale.

Reverse mortgages for senior homeownersMaryland residents can apply for the "Ever Yours" reverse mortgage credit line from Household Senior Services through 17 Household Finance Corp. branches in the state.Reverse mortgages allow property owners older than 62 with low or no mortgage debt to convert their equity into cash through open lines of credit or loans secured by their home.Unlike other types of debt, reverse mortgages generally don't have to be paid off until the owner moves or dies.

The Affordable Housing Alliance Inc., a Columbia-based nonprofit housing agency, is offering "loss mitigation" and reverse-mortgage counseling for homeowners in Central Maryland.Loss mitigation programs attempt to help families avoid foreclosure and retain their homes by working with mortgage lenders to develop a repayment plan that is agreeable to both parties.Options include a special forbearance plan, a mortgage modification plan, partial claim to cure a loan default, a deed in lieu of foreclosure or a preforeclosure sale.

Proponents call it the crucial missing tool needed to get us out of the national foreclosure morass. Critics say it could be disastrous - pushing up interest rates on all future mortgages, even for people with excellent credit, and creating huge new losses for already-ailing banks. Wherever you come down on the griddle-hot issue of home mortgage "cramdowns," the reality is this: Congress is poised to pass legislation empowering bankruptcy court judges to reduce the loan balances of potentially large numbers of financially distressed owners to affordable levels, and to lower their interest rates and monthly payments.

Fed Chairman Ben Bernanke once famously promised - half-seriously - to drop cash from helicopters if the economy got too bad. With yesterday's decision to cut the short-term cost of borrowed money to nearly zero, one would think he has almost accomplished this. One would be wrong. You can lead a banker to cheap money, but you can't make him ink a loan. Banks aren't lending in enough volume to pull the economy out of its slump. Until they do, the price of short-term credit is largely irrelevant.

WASHINGTON - The American consumer's long-running love affair with debt appears to be on the rocks. But like a lot of soured romances, the reasons are a bit murky. What's known is that the debt held by U.S. households shrank in the three months ended Sept. 30. That's the first time that has happened since the government began keeping records more than 50 years ago, the Federal Reserve said yesterday. Economists say consumers appear to be curbing their spending and displaying a healthier prudence about taking on new debt.

Improbable as it sounds at a time when American homeowners have lost billions in equity holdings, a new industry is taking shape to help them tap portions of their equity wealth without incurring traditional mortgage debt or making interest payments. Three companies with sophisticated capital market backers - REX & Co., Equity Key and Grander Financial - are offering cash to owners who agree to cut them into some of the future appreciation growth of their properties. The cash typically represents a fraction of the current market value of the home, and rises with the percentage of future appreciation the owner is willing to share.

Bills are piling up to the point where you dread opening your mailbox. If only your creditors would forgive your debt. Sometimes, they will -- but even then your money troubles might not disappear. Canceled debt in many cases is considered income -- taxable income. And if a creditor forgives thousands of dollars of debt, you can find yourself whacked by a big tax bill. And that is not the only consequence. Forgiven debt can raise your income to the point where you're ineligible for certain credits and tax deductions, or part of your Social Security benefits is taxed, says Bob Scharin, a senior tax analyst with Thomson Tax & Accounting.

LONDON -- The Carlyle Group's troubled mortgage-debt investment fund, Carlyle Capital, said yesterday that it had asked lenders to halt further liquidation of collateral worth as much as $16 billion while the two sides discuss ways to repay the debt. The fund, which invests mainly in triple-A rated mortgage securities issued by Fannie Mae and Freddie Mac, has received $400 million in margin calls, and some lenders started to liquidate collateral for $5 billion in debt. Banks are asking for their money back amid concerns the economic climate may deteriorate further.

With the daily din of bad news about the state of the housing market, it's easy to lose sight of some larger economic realities: Despite declining prices in many markets, homeowners still control near-record equity holdings, just under $11 trillion. In its latest quarterly "flow of funds" statistical report, the Federal Reserve calculated that American homeowners' equity accounts totaled $10.9 trillion by mid-2007. That was the net difference between total home mortgage debt ($10.1 trillion)

Frances of Ellicott City poses one of the most frequent questions financial planners get. Should she pay off her mortgage early? Frances reads financial magazines that say it's a mistake to prepay when you could be earning more with it in the stock market than what you pay in interest. "I get that," she says in an e-mail. "But in these days of crazy market swings, it feels much better to see a declining balance on my mortgage than to see the shares that I bought last week decrease in value this week!

For homeowners around the country who are seriously delinquent on their mortgages and hoping for relief, the IRS has bad news: If your lender agrees to modify your loan and forgive any part of your debt, you could owe federal income taxes on the amount forgiven. Think of it as the tax code's "kick-'em-while-they're-down" rule. When personal debts are canceled by a creditor, the amount forgiven is treated as ordinary income under the Internal Revenue Code unless the taxpayer is insolvent or bankrupt.

The economy may be chugging along, but the gains are not trickling down to many American families' incomes and net worth. New government figures released yesterday show the median value of families' holdings barely budged from 2001 to 2004, rising just 1.5 percent, after registering double-digit gains for the previous six years. The median income edged up 1.6 percent, after adjusting for inflation, during those years, according to the Federal Reserve's 2004 Survey of Consumer Finances.