Are Points Deductible?, Refis Down, BofA/Countrywide Merger

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.