Making the Most of Your Money NOW

If you walk away from a mortgage you don’t want any more, what are the consequences? I wrote about the moral and credit implications in a previous post. A reader emailed to ask about the federal tax implications. “In my state, the banks send a notice saying that you owe taxes on the unpaid debt,” he wrote.

He’s right. In many states, any part of a mortgage that the bank forgives is reported as taxable income.

In some states, you’re off the tax hook if the bank forecloses on your original mortgage. But you could still be taxed on a home equity loan or on a loan you refinanced.

You’ve probably heard that the government has temporarily stopped taxing people who lose or give up their homes. That’s the Mortgage Forgiveness Debt Relief Act (otherwise known as “The Don’t Kick ‘Em When They’re Down Act”). But it doesn’t apply to every mortgage. You can be foreclosed and get a tax bill, too.

The majority of people going through foreclosure have no choice. They can’t afford the payments any more.

But a growing number of homeowners are choosing “strategic default.” They’re not broke. They owe more than the house is worth and decide to stop throwing good money after bad.

Many considerations come into the default decision – moral, reputational, financial, credit-score and what the kids will think. Taxes matter, too. Here are the questions to ask:… more

The financial reform law includes tough new mortgage regulations, to stop the deceptions (and self-deceptions) that have driven millions of homeowners into foreclosure. Here’s how the market will change in 12 to 18 months, when the new rules start to take effect:

1. The fees you can be charged at closing will be capped at 3 percent. That’s not as money-saving as it sounds. Many fees aren’t counted toward the cap, including such things as FHA insurance premiums, up to two of the points you pay in order to get a lower interest rate, and third-party charges such as appraisal and legal fees. But it does cover fees paid to mortgage brokers. Some lenders already limit fees to 3 percent. High-fee brokers will be squeezed.

2. You’re less likely to be steered unfairly into a loan with high fees and interest rates. Today, lenders offer incentive payments, to encourage brokers and loan officers to recommend mortgages that cost you more. You might not realize that you qualify for a better deal. The law makes these payments illegal…. more

Harvard law professor Elizabeth Warren dreamed up the idea of a Consumer Financial Protection Bureau, which Congress authorized as part of Wall Street reform. She campaigned for it tirelessly and understands the issues better than anyone else. She’s the most qualified person, by far, to become its first director – the one that will set its course.

Naturally, the banks oppose her. Having failed to strangle consumer protection in its cradle, they’re now out to stunt its growth. They want a director they can co-opt right from the start. So it’s time for another cavalry call. Consumers have to stand up and scream for their champion all over again.

No one can co-opt Elizabeth Warren. She’s fearless in defending families and merciless on financial abuse. She understands fine print and how it’s used to con customers. She believes, passionately, that banks and other lenders ought to come clean.

That’s why she’s so unpopular, especially on the Republican side of the aisle. She could win a majority in the Senate, but the Senate is no democracy. A minority – 40 percent – can stop her nomination from reaching the floor. On television last week, Sen. Chris Dodd, chair of the Senate Banking Committee, floated the possibility that the minority might win. The banks and their anti-consumer defenders could keep her from being confirmed…. more

Wall Street costs too much. “It’s an extractive industry”, says Vanguard founder John Bogle. “The investor feeds at the bottom of what is now the tremendously costly food chain of investing.”

In his new book, “Enough: True Measures of Money, Business, and Life,” he cites what might be an investment banker’s view of the national economic crisis: “The bad news is that we lost a ton of money. The good news is that none of it was ours.”

For all of his professional life, Bogle has crusaded against the enormous fees the financial industry charges for investments. “It’s not only the largest sector of our economy, it is also the only industry in which customers don’t come anywhere near getting what they pay for,” he said in an interview. “On balance, the financial system subtracts value from society.”… more

The summer wedding season isn’t just for the young. Plenty of older couples are marrying, too, which raises the rigors of the pre-nuptial agreement.

I was a widow when I remarried two Junes ago and can testify that pre-nups aren’t for sissies. They’re essential when each of you has children from a previous marriage to protect. But when you start talking terms, you might find that you have different ideas about what the contract should say.

Love will triumph. Still, start the negotiation early so you can get over any emotional stress. It almost always takes longer to resolve issues and deal with new ones than you originally thought.

There are also complications involving retirement accounts and long-term care that a pre-nup can’t resolve…. more