The housing industry is crying Bah! Humbug!

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Congress may eliminate mortgage interest deduction

Mike Goodwin, the “Bow Tie Comedian” based here in Columbia, mike-goodwin-bowtie-comedianentertained us during lunch at our recent Chicago Title seminar. A joke that bubbled up through his very funny presentation was a line his mother used to keep him on the straight and narrow during his childhood, “what you NOT gonna do is…..”

For example, she would say, what you NOT gonna do is to stand there and hold that refrigerator door open while you try to decide what you want to eat. During one lull in the laughter, Mike said to us, “what you NOT gonna do is sit there and not laugh at my jokes.” (So we laughed.)

While some of us believe America is about to be made great again, some of us might like to borrow Mike’s line to deliver a Bah! Humbug! message to Congress:  What you NOT gonna do is to eliminate, or effectively reduce the effectiveness of, the mortgage interest deduction. Many homebuilders, lenders and real estate agents (and South Carolina dirt lawyers) believe that’s one thing we don’t need 2017.

The mortgage interest deduction is a major driver of the housing market. One reason American dreamers strive for home ownership is to take advantage of this tax break. That, along with the property tax deduction, the points deduction, the PMI deduction and the home office deduction, make owning a home a wise move from a tax standpoint. Eliminating or reducing the effectiveness of the home interest deduction, which many consider as American as apple pie, might put a damper on the improved economy we have been experiencing in 2016.

But that approach is definitely going to be under consideration by Congress, and players in the housing industry are preparing to defend the deduction. The plan under consideration involves not a direct elimination of the deduction, but an indirect attack via an increase of the standardized deductions, now at $6,300 for a single taxpayer and $12,600 for married taxpayers filing jointly. By doubling these standard deductions, many taxpayers would have no need to take the mortgage interest deduction.

The mortgage interest deduction is the largest deduction currently available to homeowners, allowing a write-off of interest from up to a $500,000 loan for a single taxpayer and up to a $1 million loan for joint filers. The deduction is especially important during the early years of a mortgage when the majority of payments are applied to interest rather than principal.

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“Congress … what you NOT gonna do is … “

If a single taxpayer pays mortgage interest of $8,000 in the first of home ownership, for example, that amount exceeds the current standard deduction of $6,300, and that taxpayer would itemize to claim a better tax break. If the standardized deduction is doubled, itemization is much less likely.

President-Elect Trump’s nominee for Secretary of the Treasury, Steven Mnuchin, has stated that the administration is planning to create the largest tax change since Reagan. Simplifying the tax code is one of the stated objectives, and a larger standard deduction is one method of simplification. In addition to the mortgage interest deduction, the charitable deduction would be affected in a similar manner.  Some say that as the standard deduction goes up, the incentive to give is reduced.

Any step that would reduce incentives for homeownership would likely encourage renting rather than buying. Home values might suffer, and the housing industry might suffer as well.

All Americans are interested in the changes that are about to happen, and those of us in the housing industry may be more interested than most! I have already seen prognosticators reducing their optimism about 2017, but I just got off the phone with a local wise man. He said that I should relax. 2017 is going to be a banner year, he said, because America is going to be great again. I hope he’s right!

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What’s in Store for Dodd-Frank and Seller Financing?

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The Washington Post and The New York Times are both reporting on potential restructuring of the financial system when the new administration takes over in January.

We all heard President-Elect Donald Trump call the Dodd-Frank Act a “disaster” during his campaign. The Washington Post article reports his transition team has a stated goal, “to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.” What, exactly, does this mean?  At this point, we don’t know.

But The New York Times article states Representative Jeb Hensarling, a Texas Republican who chairs the House Financial Services Committee, has long been an opponent of Dodd-Frank and has introduced his idea for reform, the Financial Choice Act. “Choice”, according to the article, stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs.

financial-systemIt seems clear that the Republican controlled Congress will work hard to make sweeping changes to this legislation that has basically rocked our collective worlds with the implementation of new forms and rules for closings. We promise to keep everyone up to date as this drama unfolds. We can only hope that, from a closing standpoint, the changes won’t be as sweeping as those we have just tackled!

In other CFPB news, the Bureau is investigating seller financing situations involving National Asset Advisors LLC, National Asset Mortgage LLC and Harbour Portfolio LLC. Orders involved in these investigations can be read on CFPB’s website.

We should pay attention to these enforcement proceedings because seller financing for residential owner-occupied residences has become a concern in South Carolina as a result of the interplay of the federal and state SAFE Acts, HUD’s final rule, released in 2011, and Dodd Frank’s Consumer Financial Protection laws.

The interplay between these laws appears to require licensing and registration of mortgage loan originators for mortgages of owner-occupied residences other than the sale of the seller’s residence. Clients who fail to become licensed as loan originators or fall into an exemption may find they are unable to close, and may, along with the attorneys who closed the transactions, be subject to claims and litigation.

The CFPB has broad enforcement powers, including the power to impose civil monetary penalties ranging from $5,000 to $1 million per day. South Carolina’s legislature could improve this situation greatly by addressing certain inconsistencies between our version of the SAFE Act and the federal version. Again, we will attempt to keep everyone up to speed on this issue as it develops.