By all accounts, the program is far less successful than government officials had hoped. Out of 1 million homeowners who received a temporary loan modification from their lenders, just 116,000 — or 11 percent — have received a permanent loan modification.

But the number of people who have received permanent loan modifications is probably only a small fraction of the entire number of people who either applied for a loan modification under the Obama plan or wanted to. The number is far short of the 4 million homeowners President Obama said would be helped when he announced the program.

Homeowners looking for permanent modifications are running into significant roadblocks, including:

• Homeowners who are current on their mortgage but are at risk of imminent default are being told by lenders that they can’t be helped unless they are 60 days late on their mortgage.
• Uneven training for customer service personnel means homeowners hear different stories every time they call their lender.
• Important documents are frequently lost. Homeowners report sending in documents over and over again.
• Three-month trial loan modification periods have stretched into 5, 6 or even 8 months.

• Homeowners told they have been approved for permanent loan modifications cannot get their lenders to send the paperwork.

• Homeowners who might have qualified for a temporary loan modification have since lost their job, hence failing the verification process required for a permanent loan modification.
• Qualifying for a permanent loan modification continues to be an opaque process, very little of which is revealed to the homeowner. However, it is clear that there are requirements homeowners must meet other than the guidelines set forth by President Obama for the HAMP program.

Some lenders are better than others at handling loan modifications. Recent reports indicate that some big lenders have failed to deliver on permanent loan modifications and that the number of borrowers receiving permanent loan modifications is insignificant.

Lenders say that homeowners don’t understand that every piece of financial information must be reverified. It’s like qualifying for a home loan all over again. Lenders also add that homeowners don’t always send in their information, although they admit that documents have been lost.

However, some people working with homeowners wonder if lenders actually realize that the problems are getting worse for homeowners, and dragging out the loan modification process isn’t helping the situation.

Homeowners who are delinquent on their mortgage payments and own homes that are underwater (worth less than the mortgage balance) are starting to give up and simply walk away from their homes and loan obligations.

Another problem is that some homeowners in trial loan modifications no longer live in their homes. They’ve moved to find better job opportunities or for other reasons. But if you no longer live in your home, you will not qualify for a permanent loan modification under HAMP.

Homeowners who were granted a temporary loan modification and now, months later, find that they cannot get a permanent loan modification are facing foreclosure. According to RealtyTrac, a foreclosure data collection service based in Irvine, Calif., the number of foreclosures in 2010 could reach 4.5 million, a 50 percent increase over 2009.

Across the country, lenders and housing officials are frustrated by the pace of loan modifications and loan refinancing under HAMP.

Michael van Zalingen, director of homeownership services of Neighborhood Housing Services of Chicago, says of the borrowers who have applied for loan modifications, about 23 percent have received trial loan modifications but only a fraction (about 4 percent) of those have been made permanent.

According to Dick Lepre, a loan agent with RPM Mortgage in San Francisco, the ability to refinance loans under the Home Affordable Refinance Program has not been significant. He thinks that in some high-value areas such as San Francisco, and particularly in condo buildings where the original loans were not conforming, these borrowers are still having a hard time finding a lender to refinance their loans.

This week, Bloomberg News reported that the Obama Administration is looking into restricting the lending industry’s ability to put a homeowner into foreclosure who has not yet been through HAMP. Other program modifications are being discussed, a sign that the administration has noticed that HAMP has had less than stellar results.

Meanwhile, the pace of layoffs has picked up again, just as the number of new homes sold fell to an all-time low in January. Economists are wondering if the “nascent recovery,” as Federal Reserve Chairman Ben Bernanke called it, is stalling.

One thing is clear: Millions of homeowners are in financial trouble and are having trouble getting relief.

Found here.

And this week, Simon Properties tried to buy General Growth Properties, its shopping mall rival, for $10 billion, a price General Growth says is too low even though the company is in bankruptcy.

Yet in the midst of this, financial advisers are telling their wealthy clients that there is tremendous opportunity in real estate. What is equally intriguing is that these investors are looking again at something as illiquid as a building, which goes to show just how quickly people can reacquire their appetite for risk if it means higher returns.

“The trick with investing in commercial real estate is not knowing if something is bad, but knowing if that ‘bad’ is priced in,” said David Frame, global head of alternative investments at J.P. Morgan Private Bank.

The next few years are expected to be bad for commercial real estate largely because the rosy predictions made when the buildings were purchased in 2005 and 2006 have not come true. First, the values of those buildings have plummeted, as much as 45 percent in some instances. That is going to make it difficult for the owners to refinance their mortgages over the next few years. Second, the recession has reduced the rents and occupancy rates on which those inflated values were based.

But what’s bad for an owner may be good for an investor.

STATE OF PLAY The opportunities in commercial real estate run the gamut of risk, from buying undeveloped land to buying stock in real estate investment trusts, or REITs, which invest in property and mortgages.

Mike Ryan, head of wealth management research for the Americas at UBS Wealth Management, said while there were risks in commercial real estate, they would not be as bad as many bearish analysts had predicted and certainly not on the level of the residential real estate crash.

“The notion that the other shoe is about to drop and we’ll see a wholesale liquidation of property is overdone,” he said. But, he added, “We’re not saying people should plow in.”

Yet Mr. Frame said he saw the coming refinancing crisis in commercial real estate as a continuum of what has been happening with other securities in the last 18 months. “Our job has been to look through the capital markets and identify where there’s been a scarcity of capital,” he said, meaning where investors sold their positions quickly and fearfully. The first opportunities to take advantage of a turnaround were with convertible bonds and private equity. “Now,” Mr. Frame said, “we think the opportunity in real estate is much broader than it was 12 months ago.”

OPTIONS So how are people seeking to profit in commercial real estate? This depends on whether they are passive investors, who want to allocate some money to real estate, or entrepreneurs seeking to buy buildings.

Many investors who did not make their fortunes in real estate remain cautious. “You have to help them view real estate as private equity because you’re locking up your money for some period of time,” said Joanne Jensen, a private banker at Deutsche Bank Private Wealth Management.

But if they’re going to invest in real estate, they want the security of high-quality investments. “I’m speaking to a lot of real estate investors, and what they’ve been telling me is there’s been a bifurcation between the ‘A’ quality buildings and everything else,” Ms. Jensen said.

One intriguing strategy is to buy the underlying mortgage debt of buildings whose value was inflated. The debt is now trading at a deep discount. This may sound risky, particularly if the owner walks away from that debt, as happened with Stuyvesant Town. But Mr. Frame sees it as a way to make either a little or a lot of money.

He described one possibility: a building was purchased for $100 million in 2006. It is now worth less, but the underlying mortgage is still $50 million, and it is coming due next year. The owner is probably going to have a tough time refinancing the mortgage without putting in more money. That uncertainty is reflected in the price of the debt.

“Say it’s 70 cents on the dollar, or $40 million for the first-lien mortgage,” he said. “If, in the next year, I get paid off, I get a 12 percent return. If not, I own the building at 60 percent off the original purchase price.”

In many cases, he said, clients are hoping they do not get paid back because the return from owning the building could be far greater. But the risk is they may have to hold that property for at least several years.

Some of his other ideas carry the same caveat: they require time. In this category, he included buying land prepared for developments that have stalled or buying loans from the Federal Deposit Insurance Corporation. The agency acquired these from banks and has bundled them into packages to be sold off.

Hotels are one area in which the investment turnaround could come faster. Their occupancy rates plummeted in the recession, and many were further hurt by having too much debt. “The most upside can come from hotels, if we get an uptick in the economy,” Mr. Frame said. “But the risk is high.”

Still, he said he believed that all these seemingly risky investments were actually predicated on caution. “We’re not taking an optimistic view of the recovery,” he said. “As long as it doesn’t get dramatically worse, we’ll be O.K.”

REIT stocks are a more liquid alternative. They went through their own steep decline last year. In March 2009, REIT stocks were down 75 percent from their February 2007 high, according to the leading REIT index. The index had rebounded to half of its peak, but REIT stocks slid again after the Federal Reserve raised its lending rate to banks on Thursday. This is not necessarily a bad thing for long-term investors.

“We think REITs are trading roughly at the net-asset value” of the properties they own, said Thomas N. Bohjalian, a portfolio manager at Cohen & Steers, a real estate investment firm. “And that is not the ceiling; it’s the floor.”

What is more significant than stock price, he said, is Cohen & Steers’s prediction that dividends on REIT stocks will grow by an average of 12 percent over each of the next five years. REITs are legally required to pay out 90 percent of their taxable income annually. In flush times, they were paying out a good portion of their cash flow as well. As income from REIT-owned properties rebounds, so will the dividends.

CAUTION All these investment ideas are predicated upon patience and a healthy stomach for risk. With REITs, for example, Mr. Bohjalian said he did not expect double-digit dividend growth to start until 2011.

This patience works two ways. Ms. Jensen has several clients who have made their fortunes in real estate but have struggled to find properties at the discounts they expected. “They’re not willing to do a deal that doesn’t make sense,” she said.

That may be a good mantra for any investor.

Found here.

But the ambulance company had to end the offer and refund the subscription fees last year after discovering Connecticut insurance law does not allow the ambulance company to sell subscriptions, because it is not an insurance company.

On Tuesday, First Selectman Ed Haberek plans to travel to the State Capitol to testify in favor of a bill that would allow the corps to once again offer the subscriptions. The hearing on HB 5305 is scheduled to begin at 1 p.m. in room 2B in the Legislative Office Building before the Insurance and Real Estate Committee.

The $35 fee offers subscribers emergency and non-emergency transport within 100 miles when requested by police, a doctor or a 911 call. The corps then waives any balance not covered by the patients’ insurance company. Haberek said he has heard from many residents who want the subscription reinstated.

State Senator Andrew Maynard, D-18th District, and State Rep. Diana Urban, D-North Stonington, have been working together the past year to find a way to reinstate the subscriptions.

They along with Haberek and ambulance officials have been working with State Rep. Steve Fontana, D-North Haven, and state Sen. Joe Crisco, D-17th District, who co-chair the legislature’s insurance and real estate committee, to introduce the bill.

“This particular partnership has served the people of Pawcatuck well and should continue. Residents who subscribe to this membership should not have to fear that they will be hit with an unexpected and overwhelming bill if they pick up the phone to dial 9-1-1 for assistance,” Maynard said.

“I am confident that, by all of us working together, we can get this matter resolved and Pawcatuck residents will be able to be confident when they have to call an ambulance and not be worried about an unfair bill,” Urban added.

Under current law the subscription service makes the ambulance corps an “insurer”- a definition that carries requirements that would be prohibitively difficult for such small, voluntary emergency medical providers like Westerly ambulance.

The proposed bill would repeal the law and substitute language that would state “an ambulance service or company that provides emergency medical services on a subscription basis and is a nonprofit volunteer organization shall not be deemed to be engaged in the business of insurance.” The bill would not only apply to Westerly Ambulance but other volunteer EMS organizations that operate subscription services in the state.

Found here.

Often that reluctance to refinance stems from the fact that interest rates on their adjustable-rate mortgages have fallen below 3% – a better rate than they’d get by switching to a fixed-rate loan.

For now, anyway.

As the economy strengthens, super-low ARM rates will adjust upward. Meanwhile, rates on fixed-rate mortgages are expected by many in the industry to start rising this year, after the Federal Reserve halts its purchase of mortgage-backed securities.

Many ARM holders are faced with two options: Give up their low rate now and refinance into a fixed-rate mortgage with a higher rate – but one that’s still near all-time lows, or hold on to that cheaper ARM rate as long as possible.

If your rate is indexed to the Libor, it could be at about 3% right now, said Keith Gumbinger, vice president for HSH Associates, publisher of consumer loan information. The 30-year fixed-rate mortgage averaged 4.93% for the week ended Feb. 18, assuming payment of an average 0.7 point to obtain it, according to the latest Freddie Mac survey of conforming mortgage rates.

“Some borrowers may opt to roll the dice again,” Gumbinger said, and decide to stay in their current ARM to enjoy the lower rates as long as they can.

Trying to time the market, though, can be risky.

“The market can change very fast,” said Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania, and operator of “The Mortgage Professor” Web site, at mtgprofessor.com.

Depending on market conditions, it’s not impossible for an ARM’s rate to jump at least a couple of percentage points when it resets, he said.

“If you’re an ARM borrower, you can’t just look at your ARM rate and wait for that to change,” he added. If you do, you could be headed for some payment shock – and possibly miss out on securing a low fixed-rate mortgage that will remain low throughout the entire life of the loan.

Pick your moment

ARMs typically reset after an introductory fixed-rate period, then reset regularly, often on an annual basis. For example, a typical 5/1 ARM will adjust for the first time five years into the loan, then will reset every year afterwards. There are often caps on how high the rate can adjust.

If the difference between someone’s current ARM rate and the fixed-rate they’d be able to obtain isn’t too large – say, 1% or less – there likely isn’t a significant difference in monthly payment and it might be wise to refinance now, even if it means forfeiting your current low rate, Guttentag said. That way, you can secure a low fixed rate now and not gamble on when rates will move higher.

But for those with an ARM rate of 3% or less, it’s a tougher decision.

Those who don’t err on the side of caution and choose not to refinance now should vow to be astutely aware of the market so they can refinance before rates go up substantially, Guttentag said. They need to pay special attention to the index to which their ARM is tied – the 1-year Treasury or the Libor, for example.

“If someone decided to do watchful waiting, they should establish a rule for themselves. Something like ‘if that index increases by more than 1 or 1.5%, I’m going to move, I’m going to refinance,’” he said. “If you’re not prepared to exercise this surveillance, you should refinance right now and trade short-term loss for long-term stability.”

He also recommends developing a refinance strategy, getting your information ready for when it’s time to make a move.

When will that be? It’s difficult to tell. The consensus is that mortgage rates will go up, but no one knows exactly when or by how much.

“Rates are not going to go down this year. The question is: How much are they going to go up,” said Mark Goldstein, chief executive of Refinance.com, a site that helps people decide whether to refinance and puts them in touch with lenders.

The Mortgage Bankers Association is predicting that average rates on 30-year fixed-rate mortgages will rise to about 6.1% by the end of the year, said Michael Fratantoni, vice president of research for the MBA. HSH Associates predicts the increase won’t be quite as severe.

A shrinking pool

Not all homeowners who haven’t refinanced are ARM holders. Some simply can’t refinance into a lower rate.

“For a lot of borrowers, they had the incentives before and didn’t act – largely because they don’t have equity or don’t qualify for income or credit reasons,” Fratantoni said. For this reason, the MBA predicts a 65% drop in refinance origination this year, compared with 2009.

Probably the biggest reason people aren’t able to refinance right now is because their mortgage is underwater – that is, the homeowner owes more on the home than the home is currently worth, Goldstein said. Personal situations, such as divorce, also can alter people’s creditworthiness and keep them from refinancing into a lower-cost loan, he said.

Some struggling borrowers might find relief in the government’s Home Affordable Refinance Program, set to expire in June. And if conditions do improve – meaning home prices stabilize and lending requirements ease somewhat – the pool of people who can refinance could expand, Gumbinger said.

Found here.

“The mortgage-interest deduction — like other deductions — is based on the square footage of my office divided by the total square footage of the house. Keeping track of all your household expenses is very important,” says Ms. Bernath who has about 15 corporate and 100 personal clients.

Ms. Bernath is one of the more than 700,000 home-based business owners who might be eligible to deduct a portion of their mortgage interest on their principal residence as an expense.

Generally speaking, in Canada, interest on residential mortgages is not tax deductible.

However, Ms. Bernath can do so because there is a direct link between the borrowed money and earning income.

“The long and short of it is if you want to be able to deduct interest on your mortgage, the loan has to be incurred for business purposes,” says Yens Pederson, a partner with the Regina law firm of Balfour Moss LLP.

Canadians like to talk about mortgage-interest deductibility because the mortgage on a principal residence is the biggest debt Canadians have. They also like to talk about it because tax laws in the United States have provisions for residential mortgage-interest deductibility. A fewer number realize that Americans must pay a capital gains tax when they sell their home.

But beyond the fairly straightforward deductions of mortgage interest, the political machinations and bookkeeping shenanigans have made the mortgage-interest debate a colourful one in Canada.

Many say that the promise of mortgage-interest deductibility put the Conservatives in power and made Joe Clark prime minister in 1979. The Clark government was gone within nine months and the legislation was never enacted.

In 2003, the Conservative Party of Ontario announced that if re-elected it would pass legislation allowing homeowners to deduct $5,000 of their mortgage-interest payments from their taxable income, resulting in up to $500 in savings for homeowners. The party was defeated in the next provincial election.

In between these political attempts to liberalize mortgage interest, deductibility was slowed as the federal government moved to restrict tax avoidance strategies. In 1988 parliament enacted the general anti-avoidance rule (GARR) in to curb so-called “abusive” tax avoidance.

Under its most common allowances and interpretations, mortgage-interest deductions can still work as an effective strategy for reducing taxes. In addition to the home business, one can deduct mortgage interest when investing in a residential rental property.

“If you are purchasing a property and you take a mortgage to purchase that property and then you rent out that property. Then you are getting rental income from it. That interest would be deductible. There always has to be an earning income use of the funds,” said Todd Trowbridge, partner of Toronto-based accounting firm Trowbridge Professional Corp.

Take the case of Toronto resident Howard Frank who invested just over $400,000 in a 2,400-square-foot residential rental building with three units in May 2007. Mr. Frank took out a $300,000 mortgage, paying 5% interest. So in addition to a wide range of other deductible expenses such as property tax, maintenance, any utilities, insurance, administrative and legal fees, Mr. Frank deducts $15,000 in interest payments against the $33,600 in rental income.

A similar mortgage-interest deduction opportunity exists when one is renting out a room in one’s principal residence or is earning income from a vacation property for all or part of the year. In either case, the arrangement must be a legitimate commercial agreement.

“If you rented [the vacation property] out below value to family it would probably be offside. If you rented it out to third parties at a reasonable rate [the Canadian Revenue Agency might] look to see whether there was any commercial reality. At the very least you could deduct it off the rental income for the portion of time it was actually rented,” says Mr. Trowbridge.

Some deduct mortgage interest, although “the Smith manoeuvre” as promoted by Victoria, B.C.-based former financial strategist Fraser Smith. In its simplest terms, the homeowner pays down the mortgage as quickly as possible creating small amounts of equity each month.

The equity is simultaneously filled with a line or credit to be used for investment purposes. The interest on the growing investment loan isdeductible.

“Instead of giving it to the bank for making mortgage payments we can then invest it in ourselves and build our investment portfolio,” says Mr. Smith, 71, who has sold 53,000 copies of his book Is Your Mortgage Tax Deductible?

“You deduct the interest on the investment loan. In the end, if you started with a $300,000 mortgage, you will end up with a $300,000 investment loan. So you’ll be deducting the interest on the $300,000 for the rest of your life.”

One way to deduct mortgage interest without actually paying the interest is through a reverse mortgage. The reverse mortgage allows a homeowner to tap into the equity of his or her home without having to pay interest or principal on the loan. The loan is satisfied on the death of the home owner or the selling of the home. Therefore, when the proceeds are invested, the homeowner can deduct interest charges against investment income, without actually paying the interest.

“CHIP Home Income Plan interest expenses may be used as a deduction to offset, in part or entirely, income tax liability generated by investments — as long as those investments were purchased with CHIP proceeds,” says Arthur Krzycki, director or marketing and public relations at reverse mortgage specialist HomEquity Bank.

Mr. Krzycki says that if one invests a $100,000 reverse mortgage at current rates, the interest expense will be about $3,750. If one has an investment that earns a 3.75% return in the same time period, the two amounts will offset. So, the 3.75% investment income appears to be ‘tax free’ for cashflow purposes, while the interest expense is added to the outstanding balance of the reverse mortgage.

An even more creative application of mortgage-interest deductibility came in the late 1980s. John Singleton, a partner in a law firm, tested current mortgage-interest deductibility rules by withdrawing $300,000 from his partnership capital account to purchase a house. Mr. Singleton then mortgaged the house by borrowing $298,750 from the bank and depositing the money into his partnership account, along with $1,250 of his own money.

When the time came to do his tax return, Mr. Singleton deducted $3,688 of interest on his 1988 tax return and $27,415 on his 1989 return. Mr. Singleton argued the borrowed funds, not the withdrawn funds, were used for investment purposes.

The deduction was originally challenged by then called Revenue Canada and after winding its way through the courts Mr. Singleton won the day.

“The court effectively looks at the direct use — the form of the transaction — and does not consider economic substance. So, by the same token, if a taxpayer cannot demonstrate that the direct use of the borrowed money was an income-earning purpose, the interest will not likely be deductible,” says Daniel Sandler of Toronto-based law firm Couzin Taylor LLP.

By January 2009, the Supreme Court of Canada sent a signal that it was open to creative applications of mortgage-interest deductibility, but not financial shenanigans. The case in question dates back to 1994, when a husband-and-wife team entered into an agreement to buy a home. Ms. Lipson borrowed $562,500 from a bank to buy shares in a family investment company from Mr. Lipson. The couple then obtained a mortgage from a bank for $562,500, using the funds to repay the share loan in full. In his 1994, 1995 and 1996 tax returns, Mr. Lipson deducted the interest on the mortgage loan and reported the taxable dividends on the shares as income where it was applicable.

“In essence, the majority of the court allowed the interest expense, but in the hands of Mrs. Lipson not Mr. Lipson. According to the majority, the interest-expense rule was not the rule that was abused in the case; it was the attribution rule,” says Mr. Sandler.

Recently, a more liberal interpretation of mortgage-interest deductibility has emerged. In November, 2009, the Tax Court of Canada ruled in the case Henkels vs. The Queen, that expenses deducted from rental income in a private residence do not have to be directly tied to the square footage used by the tenant. The Henkels rented 700 square feet of space to a tenant, which is only 35% of the square footage of their home, but deducted 50% of the acceptable household expenses because the tenant had access to the entire house.

“This case reinforces the position that you could measure expense deductibility on a reasonable basis other than square footage,” says Marc Weisman, a tax lawyer at the Toronto-based firm of Torkin Manes.

As for Mrs. Bernath, she takes the more cautious approach, sticking with existing standards.

“[The ruling] does allow you the opportunity to deduct more. It is good to be aggressive but being too aggressive gets you a nasty invitation from CRA.”

“Yes,” says Mrs. Bernath, “walk on the grey line [but] ensure that your expenses can be justified.”

Found here.

Forty-two percent of the reported activity took place in California and Florida, while the greater Miami, Los Angeles and New York areas topped the list of metropolitan locations.

The Bank Secrecy Act requires financial institutions to file suspicious activity reports, or SARs, with FinCEN when they identify or suspect fraudulent activity.

FinCEN, a unit of the U.S. Treasury Department that provides and analyzes financial intelligence, administers the Bank Secrecy Act.

The report covered the period from July 1 to Sept. 30, 2009. FinCEN said that 15,697 mortgage loan fraud SARs had been submitted during the quarter, up 7.5 percent over the third quarter of 2008.

But the agency cautioned that the increase did not necessarily reflect an uptick in fraud. It said three-quarters of the suspicious activity reports, which were filed by depository institutions, included activities that were more than a year old, and half included activities that were more than two years old.

But FinCEN said it had received hundreds of reports describing possible loan modification fraud or foreclosure rescue scams since it asked financial institutions in April to look for “red flags” indicating such activities.

The agency said two schemes were most commonly reported in the SARs:

One involved homeowners who were duped into signing quit-claim deeds to their properties. The homes were then sold to straw borrowers and the homeowners received eviction notices.

The other involved scammers who falsely claimed affiliations with lenders to convince distressed homeowners to pay large advance fees for modification services. The scammers then took no action on the homeowners’ behalf.

U.S. Attorney General Eric Holder said last month the FBI was investigating more than 2,800 mortgage fraud cases — up nearly 400 percent from five years ago.

In November, President Barack Obama set up an interagency task force to focus on fraud in mortgages, securities, economic stimulus programs and government bailouts.

Found here.

Hewlett-Packard Co. has become an unlikely member of a group of companies targeted by the U.S. Internal Revenue Service in a coordinated legal assault on suspect international tax credits.

H-P is one of roughly a half-dozen firms, nearly all in the banking and insurance industries, now ensnared in the IRS’s “three-and-out” litigation strategy targeting so-called foreign tax credit generators, experts say. The IRS has pegged a handful of such cases as promising enough to pursue, in hopes of winning at least three decisions in a row — and thereby gaining a more solid legal footing on the issue.

“Usually the government does a good job of starting with cases that are very weak for the taxpayer, and developing law,” said University of Southern California Law Professor Edward Kleinbard.

Foreign tax credit generators are investments by U.S. companies that earn income and result in taxes overseas. Companies can then claim foreign tax credits, to offset their tax payments in the U.S. However, the IRS alleges that many are designed to unnecessarily load up on foreign tax credits, and create an artificial financial benefit.

The IRS’s effort to curb foreign tax credit generators is part of a broader push to keep pace with overseas transactions. Uncollected taxes thanks to corporate offshore deals can short government coffers hundreds of billions of dollars annually, by some estimates. Clamping down has become a priority amid the troubled economy, as tax revenue thins out.

H-P, a technology giant best known for its personal computers and legendary origins in a Silicon Valley garage, doesn’t generally fit the mold of a company making extensive use of foreign tax credit generators.

Other firms now involved in related litigation with the IRS include insurance giant American International Group Inc., Wells Fargo & Co., Bank of New York Mellon Corp., Sovereign Bancorp Inc. and Principal Financial Group Inc.

“It’s typically always banks doing these transactions,” said USC’s Kleinbard. “For them, earning financial income is part of their core business.”

H-P is contesting $132 million in disallowed tax credits resulting from an investment in a Dutch legal entity called Foppingadreef, according to court filings. The IRS has characterized the Foppingadreef deal as “a sham that lacked economic substance and business purpose,” and the case is proceeding to trial in U.S. Tax Court, according to filings.

An IRS spokesman declined to comment.

An H-P spokeswoman said in a statement that, “We disagree with the IRS’s position and are optimistic that we will prevail in court.” A. Duane Webber, an attorney with Baker & McKenzie representing H-P, declined to comment.

In addition to its petition filed in U.S. Tax Court, H-P has filed a related suit against the IRS in federal court in California. The California proceeding has been put on hold pending the U.S. Tax Court trial scheduled for September, according to public filings.

‘The bad actor end of the spectrum’

The IRS’s three-and-out strategy aims to pursue cases in a variety of federal circuits. Losses could then be sent on to different appeals courts, while a split at that level could later theoretically be resolved by the Supreme Court, legal experts say.

The IRS has followed a similar three-and-out litigation strategy, with some success, in pursuing tax shelters.

Other foreign tax credit generator cases currently underway include Principal Financial Group’s case in Iowa, where Principal Life Insurance is a plaintiff, Wells Fargo’s case in Minnesota, and Sovereign Bancorp.’s case in Massachusetts. Bank of New York Mellon’s case is proceeding in U.S. Tax Court. Representatives of Principal Financial Group, Wells Fargo, Sovereign Bancorp and Bank of New York Mellon declined to comment.

AIG’s New York-based foreign tax credit generator case has drawn the most public attention, for pitting what is now a government-backed firm against the government in an effort to recoup some $306 million in taxes. The government bailed AIG out in 2008, during the darkest days of the financial collapse, and wound up with a roughly 80% stake in the company.

An AIG spokesman said in a statement that, “AIG is taking this action to insure that it is not required to pay more than its fair share.”

H-P may seem an oddity among the insurance and financial firms litigating over foreign tax credit generators, though in one sense it blends in. The company’s financial services unit, which specializes in leasing and financing hardware and software purchases, pulled in nearly $2.7 billion in revenue in the company’s fiscal year ended last October.

The IRS has been working for years to restrict foreign tax credit generators. Its efforts are becoming more visible now, as related court cases hit the public docket.

In prepared remarks for a late 2008 speech, IRS Commissioner Douglas Shulman criticized corporate structures aimed at sparing earnings from U.S. taxation. “One of the most problematic of these structures are foreign tax credit generators,” Shulman said, adding, “FTC generator transactions are examples of situations where certain taxpayers may be trending toward the bad actor end of the spectrum.”

“It’s very popular, it’s done all over the world and the focus on them is growing,” New York University Law Professor H. David Rosenbloom said of foreign tax credit generators. In many cases, “it’s quite obvious what’s going on, [companies] are going out of their way to incur taxes” and stack up credits, Rosenbloom said. One key benefit: The credits aren’t hit with a 35% U.S. tax rate that would apply to earnings.

Foreign tax credit generators are only one of a number of international tax structures under close scrutiny by the IRS.

According to a report published by the Treasury Inspector General for Tax Administration last year, the government can lose out on over $100 billion in revenue annually that goes uncollected from international transactions. The number of individual taxpayers in the U.S. filing for foreign tax credits rose from 270,000 in 1981 to nearly 4.3 million by 2001, the report noted.

Found here.

ARMs are the reason that many found themselves in trouble during the real estate meltdown. Sub-prime loans with attractive interest rates that adjusted to a higher rate, or even had a balloon payment, put those who had gotten themselves into homes they could not justifiably afford, into situations that could only end in foreclosure.

More than 95 percent of refinanced mortgages were fixed rate, according to Freddie Mac. 30-year fixed-rate mortgages remained the most popular, but 15-year fixed-rate mortgages gained favor among refinancers.

Freddie Mac said:

“Average interest rates fell on 30-year and 15-year fixed-rate mortgage loans in the fourth quarter to a record low in the 39-year history of Freddie Mac’s Primary Mortgage Market Survey. The lowest fixed-rate interest rates in more than a generation, coupled with the comfort that a constant monthly principal and interest payment provides the homeowner, are important drivers in fixed-rate product choice.

“While homeowners are choosing the safety of fixed-rate mortgages in large numbers, at the same time many borrowers are now looking at paying down their mortgage balances faster by choosing a shorter mortgage term of 15 or 20 years instead of 30. This is consistent with the results from our fourth quarter Refinance Report, published at the end of January, which showed a record share of borrowers paying down a portion of their principal balance, that is, “cashing in” rather than “cashing out” when they refinanced their loan. When you can only earn a very low interest rate on your CD or money market accounts, and returns on other investments remain extremely uncertain, it can make sense to pay yourself 4.5 or 5 percent by eliminating some mortgage debt whether by making extra payments or going for a shorter loan term.”

The data comes from a sample of properties on which Freddie Mac has funded at least two successive loans, with the latest being a refinance rather than home purchase.

Found here.

California law bans insurance companies doing business in the state from investing in Iran, which the State Department considers to be a state sponsor of terrorism. This week, Iran announced that it would begin producing more highly enriched uranium – which would bring it closer to producing weapons-grade nuclear fuel.

While no California insurer is directly investing in Iran, Poizner said some of them have found “a big loophole,” by funneling money to Iran through third-party companies based in other parts of the world.

On Wednesday, Poizner published on his department’s Web site a list of 50 companies that the agency found to be holding such investments.

Poizner, who is seeking the Republican nomination to be governor, sent a letter to California’s insurers Wednesday giving them until March 31 to divest their indirect Iranian investments and agree not to make future investments.

If they do not comply, Poizner said, the department would not give them credit for their investments in these companies. State law requires insurers to keep a certain level of capital in order to be licensed to sell insurance in California.

“These investments, from my point of view, are risky and they’re wrong and they should think twice about holding onto them,” Poizner said.

Plus, he said, “there is no question that these investments are helping to prop up the Iranian regime.”

While indirect investments in Iran represent only a minute portion of the $4 trillion in investments that California insurers hold, Poizner said “there is an opportunity here for a win-win.

“We can send a very powerful message to Iran,” he said. “The alternative to maximum pressure on Iran is a military strike, so hopefully we will pursue every other alternative first.”

On Monday, Democratic Attorney General Jerry Brown, who is expected to soon declare his candidacy for governor, accused leaders of California’s two largest public pension funds of violating state law by investing in companies that do business with Iran.

The same day, U.S. Senate candidate Carly Fiorina called for “tough, crippling sanctions” against Iran after hearing that the nation would begin producing higher-grade enriched uranium.

Found here.

“The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery,” Mr. Kanjorski said in a statement.

“In order to safeguard the businesses operating on Main Street and protect the millions of jobs depending on commercial real estate, the Treasury and the Federal Reserve now must take needed and urgent action to stave off a potentially devastating wave of commercial real estate foreclosures and bank losses,” Mr. Kanjorski said.

The congressmen are calling for the agencies to make clear public statements encouraging lenders to continue to make credit available for performing assets, even if the value of the property has taken a hit in its value. More than $1.4 trillion in commercial mortgages will come due by 2013, and as much as 65 percent of those deals will have trouble getting refinanced because of the drop in property values, according to Deutsche Bank.

By encouraging lenders to refinance the deals, the lawmakers are hoping that commercial real estate values will stabilize. But that assumes commercial real estate owners will even want to refinance their properties. In many cases, the debt payments exceed the rent roll, making it uneconomical to hold on to the property.

Take the $6.3 billion purchase in 2006 of residential apartment blocks Stuyvesant Town and Peter Cooper Village, above left, on the East River in Manhattan. The buyers, Tishman Speyer Properties and BlackRock Realty defaulted willingly on the property last week after the complex could not cover its costs. The property is now valued at less than $2 billion.

– Cyrus Sanati

Found here.