JANUARY 2013

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There was plenty of food for thought and takeaways from these conferences. Some might say that in 2012 the mortgage lenders were “comeback kids.” Comeback kids in terms of profits! With rates remaining at all-time lows, borrowers continue to refinance. Additionally agency applications are on the rise resulting in a flood of new servicers entering the market as more originators opted to retain their own loans. With the increasing HUD net worth requirements on the horizon, smaller lenders were considering whether to stay in the game and the industry continued to see mergers, acquisitions, and businesses which just “closed up shop.” Meanwhile, as foreclosures continue to plague the industry, some areas worse than others, it is important to consider whether you have proper loan loss reserves in place to address potential repurchase requests. On top of all this, there are additional regulatory developments which have taken effect this year, mostly resulting from the Dodd-Frank Act. The CFPB (Consumer Financial Protection Bureau) audits have started. Their audits appear to be focused on large originators or companies with customer complaints, so if you have stellar customer service, the risk of audit may be less. Overall, 2012 has been a busy roller coaster of a ride year for mortgage professionals.

WS+B’s conference season kicked off with the New England Mortgage Banking Conference (NEMBC) in Newport, Rhode Island during September. The conference’s beginning sessions covered topics such as fair lending practices, mortgage fraud trends, and building your origination business. Participants learned about fair lending violations, programs offered by the New England housing agencies, how to differentiate oneself

from the competition, and the use of social media to one’s advantage. The last session of Day 1 was a Government Sponsored Enterprise (GSE) update which was presented by personnel from the various entities. The session covered recent changes, changes on the horizon, and the potential future of the GSEs. Day 2 opened with opening remarks from Steven L. Antonakes, Associate Director, Supervision, Enforcement, and Fair Lending of CFPB who provided an update on the CFPB and answered participant questions. The afternoon continued with various more detailed sessions relating to the CFPB. The closing session on Day 3 was a housing update which discussed where we have been, where we are, and where are we going.

There was a break in the action until the first annual MBA’s Independent Mortgage Bankers Conference in Dallas in November. Some of the themes echoed those of the NEMBC such as a mortgage industry outlook, issues with fair lending, and CFPB mandates and exams. Some different areas of focus were discussed such as obtaining approval and doing business with the GSEs, increased regulatory environment, repurchases, loan officer compensation and licensing, and secondary marketing best practices. With an increased regulatory environment and larger net worth requirements, smaller lenders need to consider whether it is still profitable for them to remain in the business. Increased regulation and licensing, and compliance with such, has significantly increased costs for smaller lenders. One of the sessions addressed how large a company should be in order to remain profitable and how smaller lenders can adapt. One thing that could destroy a small lender is a significant amount of loan repurchases

Continued on the next page.

VARIOUS MORTGAGE CONFERENCES HAVE BEEN HELD THROUGHOUT THE COUNTRY DURING THE CLOSING QUARTERS OF 2012. FOR THOSE CONFERENCES WHERE WITHUMSMITH+BROWN WAS IN ATTENDANCE, HERE IS WHAT YOU MISSED!

BY JESSICA OFFER, CPA

or a specific loan repurchase of a significant size. One of the sessions addressed how to best mitigate the risks of repurchase, red flags for repurchase risk, and how to best implement processes and controls to address these risks.

Closing out the year was the MBA’s Accounting and Financial Management Conference. At the MBA’s Accounting and Financial Management Conference in San Diego (November 14th – 16th), session titles ranged from discussions on mortgage servicing rights to mergers & acquisitions to regulatory updates, in addition to the usual FASB (Financial Accounting Standards Board) and tax updates. And of course a conference would not be a conference, without some form of “Industry Outlook”. The MBA Finance Forecast anticipates a steady rise of housing prices and rates through 2013 into 2014. Another important item to note is that despite increasing volumes in 2012, per-loan expenses remained high which indicates that originators were not able to increase efficiencies and leverage their volumes to benefit from economies of scale. Looking forward at forecasted decreases in volume, these high costs could be troublesome and threaten profitability.

WELCOME TO 2013!

The Internal Revenue Code has specific tax laws surrounding vacation homes that a taxpayer rents and also enjoys for personal use. Ultimately, the number of days rented versus days of personal use will impact tax reporting and to what extent expenses relating to the vacation home are deductible. The following highlights some of the most important aspects of these tax laws but is not intended to be a complete discussion.

When a vacation home is rented for less than 15 days, it is considered a personal home, and you are not required to report the rental income; it is “tax-free.” The qualified mortgage interest and real estate taxes are included with a taxpayer’s itemized deductions on the taxpayer’s personal income tax return (Schedule A), subject to limitation. All other expenses related to the vacation home are considered nondeductible personal expenses.

FOR EXAMPLE: Jim owns a vacation home located on a golf course which hosts an annual PGA tournament. Jim rents his vacation home every year for two weeks (14 days) during the tournament for an annual sum of $60,000. As favored by the tax laws, Jim does not have to report any of the money received as income. Assuming Jim rented the home for the past five years, that’s $300,000 in his pocket tax-free! Jim is also able to include the qualified mortgage interest and real estate taxes with his itemized deductions on his personal income tax return.

When a vacation home is rented for more than 15 days, a taxpayer has to determine if it’s considered a residence by applying the personal use test from the IRS. The vacation home is considered a residence if the amount of days spent for personal use is more than the greater of:

1. 14 days, or2. 10% of the total days rented to others

FOR EXAMPLE: Sally has a vacation home she rented for six months (180 days) and vacationed at for 20 days during the

year. Sally’s vacation home is considered a “residence” because her 20 personal use days were more than the greater of 14 days or 10% of the days rented (18 days). In other words, her vacation home passed the personal use test.

When a vacation home is considered a residence, all rental income is reported on Schedule E. However, expenses are to be divided between rental use and personal use based on the number of days used for each purpose. In addition, rental related expenses are limited to the extent of rental income (cannot generate a tax loss). Expenses that are limited under this rule may be carried forward to future years but remain subject to the income limitation.

When a vacation home fails the personal use test (not considered a residence), the vacation home is considered a rental property, and deductions are not limited to income but are subject to passive activity rules.

FOR EXAMPLE: Using the same fact pattern above, assume Sally collected $12,000 of rental income which is reported on Schedule E. She also incurred $10,000 of property expenses during the tax year which must be split between personal use and rental expenses. This bifurcation is accomplished by taking the rental days of 180 divided by 200 total days (180/200 = 90%). Thus, $9,000 ($10,000 x 90%) of the property expenses offset the rental income and are deducted on Schedule E. The balance of the expenses are considered nondeductible personal expenses.

The classification of a vacation home as a personal home, residence or rental is determined on a year-to-year basis. Therefore, it is important to maintain accurate records on a vacation home to document the number of personal days and days rented.

Please contact your local WS+B advisor if you have any questions regarding the rental of a vacation home.

VACATION HOMES: THE TAX PERSPECTIVE

We will all revisit the forecasts and outlooks discussed at these conferences to assess if they were right. We all hope actual results will exceed expectations. However, while you continue to weather the storm, keep in mind the hot issues, and focus your efforts to those areas which are of biggest concern to your business.

For a profitability analysis or loan loss reserve review, please contact Kirk Holderbaum, CPA, Practice Leader at kholderbaum@withum.com or call 908.526.6363.

By Eric Wilson, CPA

The regulators in their infinite wisdom have made it increasingly harder on borrowers after the damage has already been done. It’s the equivalent of buying a fire extinguisher after you already had a fire. Rigid income and debt ratio guidelines with no exception tolerances, credit score requirements that have no room for exceptions (even by a single percentage point —regardless of how good your payment history has been), and appraisals that must be ordered through newly created regulated appraisal management companies that are mostly owned by the very mortgage companies themselves. They have become an additional income source to the lenders garnered under the auspices of adding an extra layer of protection to the lenders while increasing the cost of the appraisal to the borrower by thirty percent. Add to that the fact the appraisals are no longer portable, meaning that if you end up not liking your lender you cannot transfer the appraisal to another one- another $400 out of your pocket. And if you’re in a rush you cannot order an appraisal until your Good Faith Estimate has been signed and received back. The average turn time just to order an appraisal is a week and the appraisers are the be all and the end all of the transaction: often killing transactions because of lower valuations —sometimes because of a difference of a mere thousand dollars or two. We forget that houses are not widgets or shares of stock: each house has its own unique (and sometimes intangible) qualities, and trying to value it with comparables, again with no possible wiggle room, in a downward market, all the while the appraisers are scared to death… well you get the picture. This is indeed a very challenging environment in which to do business.

As a mortgage broker, I witnessed firsthand what was going on. My own business fell off a cliff. During the darkest days I had no borrowers, after all, who would want to purchase a house when they didn’t know if they would be employed next week? I had no lenders, guidelines became excruciatingly tight, as for banks didn’t want to take any risk —after all, the rules were changing week by week. Because of some bad actors in

our industry preying on unassuming buyers looking for a share of the American Dream, throwing underwriting guidelines out the window, selling them mortgages they didn’t qualify for. Products were developed and securitized through large Wall Street firms and chopped up and packaged to unassuming investors such as mutual funds and foreign countries who thought they were buying triple A rated securities. What they were buying couldn’t be further from the truth. What most don’t understand is how close we actually came to a total global credit meltdown. Total annihilation. And most people don’t realize the true ramifications of such a world. The credit markets are the basis of our entire financial universe. They are crucial to large and small businesses alike. No company, regardless of its size or strength would survive without the massive, established credit markets. We were dangerously close to seeing a world none of us would recognize.

For more information, please contact:

Jeff Shapiro, Branch Manager, Menlo Park Funding908.231.9100jshapiro@mpfunding.com

You’ve heard the news. Over the last few years mortgages got 37% more expensive to close and three times harder to obtain. The reason for both is directly related to the Dodd-Frank Act and other regulations that resulted from the global credit collapse of 2008. What resulted was the typical knee jerk reaction of our regulators of restricting free and open market lending when the damage had already been done when the markets could least afford it. The fact is that real estate led our economy into this expanded recession and unfortunately we will not recover until real estate recovers (specifically the first time homebuyer segment).

The credit markets are the basis of our entire financial universe. They are crucial to large and small businesses alike. No company, regardless of its size or strength would survive without the massive, established credit markets. We were dangerously close to seeing a world none of us would recognize.

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An Accountant’s Perspective on the Mortgage Industry is published by WithumSmith+Brown, PC, Certified Public Accountants and Consultants. The information contained in this publication is for informational purposes and should not be acted upon without professional advice. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Please contact a member of the Mortgage Banking Services Group with your inquiries.

Prominent Congressional documents often hold hidden secrets. What follows is a list of some of the tax aspects of the fiscal cliff deal that may not have made headlines, but are just as important as those that did:

YOUR TAXES ARE GOING UP. According to the Tax Policy Center, even though the Bush tax cuts have been extended for 98% of taxpayers, 77% of Americans will pay higher taxes in 2013. Why? Because on December 31, 2012, the temporary 2% reduction in an employees’ share of the Social Security tax expired, and this provision was not extended as part of the fiscal cliff negotiations. As a result, if you earn wages, you can expect your paychecks to be 2% lighter in 2013 than they were in 2012, at least on the first $113,700 of income.

IF YOU EARN BETWEEN $250,000 AND $450,000, YOU MAY NOT HAVE RECEIVED THE REPRIEVE YOU THINK YOU DID. At your income level, you will find that the alternative minimum tax (AMT) exemption – which was permanently patched as part of the deal, a move that will save an additional 28 million taxpayers from falling victim to the AMT – does you no good, as you are completely phased-out from using the exemption by virtue of your high income. Making matters worse, your four personal exemptions and sizeable state tax deduction are not permitted in computing your income subject to the AMT. Lastly, because the AMT is subject to a flat 26% rate on income up to

$175,000 and 28% thereafter, you do not get any benefit from the continuation of the lower marginal tax rates in computing your AMT liability. As a result, you may well find that the raising of the barrier of where the 39.6% tax rate kicks in from $250,000 to $450,000 is inconsequential, as you would have been subject to the same AMT liability under either scenario.

SECTION 179 IS BACK. Finally, some good news. Section 179, which provides for the immediate expensing of qualifying assets, was scheduled for a precipitous drop in usefulness in 2012 and beyond. The provision allowed for the immediate write-off of up to $500,000 in assets in 2011, but only $125,000 in 2012 and $25,000 in 2013. The fiscal cliff deal changed all of that, however, increasing the limit back to $500,000 for 2012 and 2013. Similarly, the amount of qualifying assets that can be placed in service before a reduction in the limitation is required has been increased from $500,000 in 2012 and $200,000 in 2013 to $2,000,000 in both years. Furthermore, the definition of “qualifying assets” will continue to include computer software in 2013, as the new legislation extended this piece of Section 179 for one year.

For more hidden secrets, please visit:

http://www.forbes.com/sites/anthonynitti/2013/01/02/secrets-of-the-fiscal-cliff-deal/#more-1213

SECRETS OF THE FISCAL CLIFF DEALCheck out Tony Nitti’s blog on Forbes.com for a summary of the fiscal cliff deal high-profile changes.