Peer-to-Peer Lending: Prosper’s new version

Peer-to-peer lending (sometimes called person-to-person lending) Web sites, such as LendingClub, Prosper and PertuityDirect, facilitate match individual borrowers with lenders online.

Now, after shutting down most of its operations since last October, Prosper is re-launching the service by introducing a secondary market that allows financial institutions to tap into its markets. By offering loans to investors willing to bid on them, banks, credit unions, auto-finance companies and others could get access to funds they could use to make loans to more people.

Prosper investors benefit with potentially higher interest rates on loans that have already been vetted by a financial institution, are current and have at least three months of payments that have already been made. Investors can see all the details related to each individual loan.

Though the industry is small, having brokered just $90 million in loans last year, peer-to-peer lending has offered choices to small lenders whose options for car loans and help with credit card debt have increasingly dried up.

These online lending models are gaining popularity as they provide alternatives for both lenders and borrowers, while banks have been nervous about lending to consumers for fear of rising delinquencies and losses. Banks have also been hampered by their limited capital and the bearish stock market, making it difficult and more expensive for them to raise money to fund new loans.

Claiming First-Time Home Buyers Tax Credit

First-time homebuyers who qualify for up to $8,000 in new tax credits under the 2009 economic stimulus plan can claim the credit on their 2008 or 2009 tax returns. They don’t have to wait until 2010 to get their money; they can claim the tax credit when filing their 2008 taxes this year, by April 15.

The federal stimulus package, called the American Recovery and Reinvestment Act of 2009, provides qualified first-time homebuyers with the tax credit up to 10 percent of a home’s purchase price with a maximum of $8,000. Purchases must be between Jan. 1 and Dec. 1.

The tax credit is capped at $4,000 for married people filing separately, and the amounts are less for people whose adjusted gross income is over $75,000, or $150,000 for joint filers.

The tax credit is refundable, which means that the homebuyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even the entire amount of the refundable tax credit.

Interestingly, one can choose the tax year, 2009 or 2008, that yields the largest credit amount. If the applicable income phaseout would result in less tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI (a modified adjusted gross income) amounts, then one can choose the more favorable tax year to apply the tax credit.

The following discussion will provide you more detail information whether you are qualified or not and how you claim for the credit.

How to claim the tax credit

You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return.

The IRS has posted a revised version of Form 5405, First-Time Homebuyer Credit, on www.IRS.gov. The instructions to the revised Form 5405 provide additional information on who can (or can’t) claim the credit, income limitations and repayment of the credit.

People who already filed federal income tax returns this year can still get the homebuyer tax credit early, by filing an amended return. They would need to file a 1040X to amend their tax returns, reflecting the new tax credit.

The other alternative for those who already filed the tax returns is to wait claiming the tax credit when filing 2009 tax returns, by April 15, 2010.

Some people may have bought a home after Jan. 1, but before the new tax credit was adopted on Feb. 17. If they’ve already filed their taxes, they may have claimed the old credit. They, too, could file an amended 1040X, to get the new credit this year.

Definition of a first-time homebuyer

The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the homebuyer and his/her spouse.

If you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time homebuyer tax credit.

Unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter.

Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time homebuyer.

Definition of principal residence

Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.

The buyer must live in the home for at least three years after the purchase date. Home purchasers cannot move, sell or otherwise leave the home they purchase for at least three years to retain eligibility to receive the tax credit.


Income limits

The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return.

The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

To find a modified adjusted gross income (MAGI), a taxpayer must first determine "adjusted gross income" or AGI. Adding to AGI certain amounts, such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs, results in the MAGI.

AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.


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Mortgage interest tax deduction

In the current economic malaise, people save every penny they can. Homeowner, specifically, should take advantage from mortgage interest tax deduction. But be careful, because some tax pros say taxpayers' mortgage interest deductions had just been targeted for IRS audit.

There is a good article "Homing in on audits" on MarketWatch discussing how the mortgage interest deduction works. Here is the excerpt from the article for average non-millionaires.

To deduct the interest on loans you received since October 13, 1987, the loan must have been used specifically to buy, build, improve or repair the property. Sounds simple, right?

O.K., suppose you bought the house in 1988 for $200,000 with zero down. By 1995, the house was worth $600,000. So you refinanced it to 70% of the new value. Your new loan is $420,000, or $220,000 higher than your original loan.

You used that $220,000 to pay off your $15,000 car loan (a personal expense), spent $40,000 to add a room (improvement), paid off $35,000 in credit cards (personal expense), $20,000 went into the business (business expenses), $60,000 were gifts to children and grandchildren (personal) and you used the other $50,000 to build up your savings and investments (investment costs).

How much of the new mortgage can you deduct on your Schedule A?

The original $200,000, plus the $40,000 for the new room adds up to $240,000 of acquisition debt and improvement debt. Plus, up to $100,000 of debts used for personal purposes. That means you may deduct interest on up to $340,000 of the total $420,000 mortgage balance.

Stimulus Plan for First-Time Home Buyers

In its efforts to stimulate the economy and revive the housing market, Congress has enacted legislation called the American Recovery and Reinvestment Act of 2009. One of provisions that will benefit homebuyers is a tax credit of up to $8,000 for qualified first-time homebuyers purchasing a home as a principal residence for at least three years or face recapture of the tax credit amount.

Time is of the essence for buyers who want to take advantage of this opportunity. Only homes purchased within the period starting from January 1, 2009 to December 1, 2009 are eligible.

This special feature can put money in homebuyers’ pockets right now rather than waiting another year to claim the tax credit. This important change gives qualifying homebuyers cash they do not have to pay back.

This tax credit is different from the previous tax credit already available to some homeowners under Housing and Economic Recovery Act that Congress enacted in July of 2008. The most significant difference is that this tax credit does not have to be repaid. The previous $7,500 tax credit was essentially a 15-year interest-free loan that was available to homebuyers who purchased their homes after April 9, 2008, and before July 1, 2009.

First-Time Home Buyer Tax Credit Summary

• The tax credit is for first-time homebuyers only
• The house being purchased must be a principal residence
• The credit is available for homes purchased within the period starting from January 1, 2009 to December 1, 2009.
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.
• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
• The tax credit does not have to be repaid.

The tax credit is refundable, which means that the homebuyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even the entire amount of the refundable tax credit.

Interestingly, one can choose the tax year, 2009 or 2008, that yields the largest credit amount. If the applicable income phaseout would result in less tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI (a modified adjusted gross income) amounts, then one can choose the more favorable tax year to apply the tax credit.

Amex entices cardholders to close their card

American Express is paying to get rid of customers whom the card issuer used to lure them with cash rewards. The company is enticing selected cardholders a $300 Amex prepaid gift card if they pay off their balances and close their accounts. The strategy reflects deteriorating credit-card market.

There is growing concern that credit-card defaults will soar into the stratosphere as have been happening with mortgage, which provoked the current economic crisis. Consumer credit card delinquencies jumped to a record 5.6 percent in the fourth quarter 2008 from 4.8 percent in the third quarter.

The concern about growing default ascends as the economic crisis widens and unemployment climbs. Unemployment rate rose to 7.2 percent in December 2008, the highest level in 16 years.

Selected members began receiving letters with the voluntary offer earlier this month, according to Molly Faust, an American Express spokeswoman. Ms. Faust did say that it was offered only to retail credit-card holders, not corporate accounts. Customers who received the offer have until Feb. 28 to respond.

The member’s card will be immediately canceled when the customer submit the RSVP code, came with by letter, online. Members have from March 1 to April 30 to pay off their balances and receive the prepaid card. During that time, the balance is subject to the same interest rates and fees that it would be if they chose to keep their card. If customers don't pay off their balance by April 30, they will not get the gift card and their accounts will still be closed, says Ms. Faust.

As soon as eligible Amex customers sign up for the offer, they lose all Membership Reward points accumulated while they were customers. That means customers should use up their points before agreeing to the offer.

After converting into a bank-holding company late last year, Amex received $3.4 billion from the U.S. Treasury's Troubled Asset Relief Program in exchange for a stake in the company.

Closing a line of credit generally hurts customer credit scores, even if the customers do it themselves.

Slow economy pushed mortgage rate down

Following bond yields, Freddie Mac benchmark mortgage rate average dropped from last week, Freddie Mac said Thursday, Feb. 19. The 30-year fixed-rate mortgage declined to 5.04 percent for the week ending Feb. 19, down from last week's 5.16 percent. That was close to the 4.96 percent reached in mid-January, which was the lowest rate since Freddie Mac began its survey in 1971.

Mortgage rates followed bond yields lower this week as recent economic reports suggest the economy is still slowing, which reduces the future threat of inflation. Yields on benchmark 10-year U.S. Treasury notes, which influence rates lenders offer to consumers, dropped as low as 2.65 percent this week from 2.99 percent in early February after bearish economic reports.

Mortgage in 2009

Current financial and housing crisis has provided another golden opportunity: a fantastic time to get a mortgage. Not if you have poor credit, to be sure. But you can get a great deal on a 30-year, fixed-rate, conforming loan these days if you have a solid FICO score, a manageable debt burden, and proof positive of a reliable income.

You have to go back to around 1961 to find a time when 30-year mortgages had rates this low, according to Keith Gumbinger, a vice-president at financial publisher HSH Associates in Pompton Plains, N.J. For that, thank the U.S. government, which is trying to jump-start the stalled housing market by buying up mortgage-backed securities.

Rates are probably headed even lower in 2009, raising the question of whether you should borrow now or wait for a better deal. The experts are sharply divided over this one. Put it this way: If you're a gambler, wait. If you can't sleep at night worrying that rates will go up from here, borrow now.

Now More Than Ever

In ordinary times, one loan is about as good as another because most lenders' offers on 30-year loans are clustered within around a quarter of a percentage point. Now, with the economy so shaky, lenders are all over the map in how much risk they're willing to take in making loans. So it really pays to shop around. And keep checking, because rates are constantly changing.

Get a Fixed Rate for New Loans

Forget what you were told in quieter times about the pros and cons of fixed- vs. adjustable-rate mortgage loans. These days, all the best deals are on fixed-rate loans because that's the segment of the market that the government has been targeting with support. The securitization of adjustable-rate loans has mostly dried up, so banks don't want to originate ARMs, therefore they don't offer attractive rates on them.

Prepare Your Finances

The hurdles to get one of those low fixed-rate loans are high because Fannie Mae and Freddie Mac have tightened standards for the loans they'll buy or guarantee, even though the two mortgage finance giants are now under government conservatorship. You'll need a FICO score of at least 720 for the best interest rate, although for a big enough fee Fannie and Freddie will guarantee loans with FICO scores down to the mid-600s. You may also need a down payment of 20%. In the boom times you could get a "piggyback" loan to shrink your down payment, but those are history. Even private mortgage insurance, which used to cover some of the financing gap up to 20%, is much harder to get now because the issuers have suffered big losses.

Lately, says LendingTree's Findlay, the highest hurdle for many buyers has been lenders' debt-to-income standards. Here are the numbers, as of late December: For a Fannie or Freddie conforming loan, monthly mortgage payments cannot exceed 28% of gross income, while all debt payments (including student loans, etc.) cannot exceed 36% of gross income.

For a Federal Housing Administration-guaranteed loan, the corresponding figures are 29% for mortgage debt and 41% for all debt.

Get Credit Counseling if You Are First-Time Borrowers

A lot of the mess we're in now could have been avoided if first-time home buyers had paid attention to warnings about getting overextended. If you don't want to listen to your parents or nosy brother-in-law, then visit a credit counseling agency. Most people getting into the market for the first time seriously underestimate the cost of maintaining a home, from taxes to upkeep. What happens if that water heater blows? Do you have enough money to pay for it without missing a mortgage payment?"

Get Pre-Qualified Before Making an Offer

Home sellers are likely to give you a better deal on a house if you're pre-qualified for a mortgage. Why? Because it shows you can get the deal done quickly. In this market, nothing burns a seller more than being strung along by a buyer who wants the house but can't qualify for a loan to buy it.

Keep Your ARM if You Have it

On the other hand, if you got an ARM in the past and it's coming up on an interest rate reset, don't rush to unload it. Short-term interest rates have gotten so low that you're very likely to see your monthly payment fall. Thank your lucky stars if your ARM happens to be indexed to the one-year Treasury bill, whose yield has fallen below half a percent. Even with the typical spread added on, you're still paying only around 3.25% a year, says Gumbinger. ARMs indexed to LIBOR (the London Interbank Offered Rate) are resetting these days to the low 4s, which is still excellent.

Consider Refinancing Now

The decision about when to refinance comes down to personal risk preferences. Of course, you should also run your numbers through one of the many online calculators (a rough rule of thumb is that it makes sense to refinance if the new rate is a full percentage point below your current rate and you don't plan to move soon).