Are points still deductible? Wachovia constricts, CW/BofA update

April 2nd, 2008 · No Comments


From the U.S. Master Tax Guide: “Points on a home mortgage loan for the purchase or improvement of, and secured by, a principal residence are deductible in the year paid to the extent that the payment of points is an established practice in the area… are designated as points on the RESPA settlement statement (HUD-1) as ‘loan origination fees’, ‘loan discount’, ‘discount points’, or ‘points’.” The IRS will not automatically consider points paid on home improvement loans, second or vacation homes, refinancing or home equity loans, or lines of credit to be deductible. “Points paid to refinance a home mortgage are not deductible in full in the year paid but must be deducted ratably over the period of the loan…” I am not going to reproduce the tax code here, as there are plenty of exceptions, but it is safe and easy to remember that purchase points are all generally deductible, but refinance points are spread out.

As most everyone knows by now, earlier this week Fannie Mae announced that it will require a minimum credit score of 580 for most loans it buys through whole loan purchases, although it will still buy loans with lower credit scores in certain circumstances. Effective this Monday, Wachovia’s senior management has announced temporary cutbacks to the number of counties in CA, AZ, FL, and NV in which they will offer pay option ARM products, and restrict underwriting guidelines. (14 counties in CA were impacted.) They are in the process of evaluating the delinquencies in their servicing portfolio, and are taking this action pending further review and clarification, hopefully to be completed within a week. These cutbacks include: a minimum 700 FICO score for any stated loan, regardless of LTV, 660 minimum FICO for any loan, whatsoever, regardless of LTV, and a maximum refinance LTV of 70%, regardless of FICO.

Will your mortgage insurance company be there when you need them? In February defaults on privately insured U.S. mortgages rose 38%, increasing for the 14th straight month as record U.S. foreclosures forced the industry to reimburse lenders for more bad loans. Mortgage insurers pay lenders when borrowers default and foreclosure fails to cover costs.

Mortgage applications fell 28.7% last week, with refinancing applications dropping 32% while purchase applications fell 12%. (Talk about volatility, last week’s near-30% drop followed the week before’s 48% increase!)

The 10-yr is back up to 3.59% and mortgage prices are worse by roughly .125 so far this morning, basically on some feeling that the economy is stabilizing (that’s debatable!) and some nervousness about Fed Chairman Bernanke’s two-day testimony before the Joint Economic Committee of Congress. Yesterday we worsened after some solid manufacturing data, along with reports that some of the financial companies have expansion plans on the table. With that in mind, however, analysts give a 75% chance of a 25 bp rate cut in overnight funds at the Fed’s next meeting later this month.

Countrywide and BofA expect to complete the merger by July 1, three months from now, although the merger has to be reviewed under antitrust laws, various regulations, and be reviewed by the Federal Reserve Board. Countrywide shareholders would receive 0.1822 shares of BofA stock for each share of Countrywide they own. On Jan. 9, Bank of America’s common stock was valued at $38.74 and Countrywide’s was $5.12. Under the terms of the stock deal, the implied value of one share of Countrywide (when traded in for the 0.1822 share of Bank of America) was $7.06. Lately Countrywide has been in the mid $5 range and BofA around $38 per share. David Sambol, CEO & president of Countrywide, would lead Bank of America’s consumer mortgage group after the merger and would give up the CW severance package in exchange for a retention package. (Sambol would be paid half of the $20 million set aside for him in a retention account on the first anniversary of the merger and the remainder on the second anniversary. He also would receive an $8 million restricted stock bonus. His base salary would drop from $1.4 million with Countrywide to $500,000 with Bank of America.) Chairman Mozilo has agreed to waive his right to cash severance and pro rata bonus payments (about $36.4 million in cash and $400,000 in consulting fees and perks) when his employment ends after the merger, but hopefully saved some of the $120 million from salary and stock sales from 2007.

Bubba, a furniture dealer from Alabama , decided to expand the line of furniture in his store, so he decided to go to Paris to see what he could find. After arriving in Paris he met with some manufacturers and selected a line that he thought would sell well back home.

To celebrate the new acquisition, he decided to visit a small bistro and have a glass of wine. As he sat enjoying his wine, he noticed the small place was quite crowded, and that the other chair at his table was the only vacant seat in the house. Before long, a very beautiful young Parisian girl came to his table, asked him something in French (which he did not understand), and motioned toward the chair. He invited her to sit down.  He tried to speak to her in English, but she did not speak his language & so, after a couple of minutes of trying to communicate with her, he took a napkin and drew a picture of a wine glass and showed it to her. She nodded, and he ordered a glass of wine for her.
After sitting together at the table for a while, he took another napkin, and drew a picture of a plate with food on it, and she nodded. They left the bistro and found a quiet cafe that featured a small group playing romantic music. They ordered dinner, after which he took another napkin and drew a picture of a couple dancing. She nodded, and they got up to dance. They danced until the cafe closed and the band was packing up.
Back at their table, the young lady took a napkin and drew a picture of a four-poster bed. To this day, Bubba has no idea how she figured out he was in the furniture business.

Rob Chrisman

Tags: Commentary · Mortgage Market

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