Under normal circumstances, the amount of debt forgiven by a lender on the behalf of a homeowner is taxed under standard income tax rates by the IRS. For example, if the owner of a $250,000 home still owes $125,000, is facing foreclosure, and wants to work with the lender to forgive the remainder of the $125,000 loan amount, he or she would have that disparity taxed. For most homeowners, that amount would be significant and could result in anywhere from 15% to 35%.

Of course, thanks to the Mortgage Forgiveness Debt Relief Act of 2007, homeowners in this situation can exempt up to $2 million on a principal residence (or $1 million for someone who is married but filing separately). For most Americans who are in this situation or have been since the housing market took a steep nose-dive in 2007, that is a welcome relief.

Unfortunately, the very same law that was such a boon for so many homeowners is set to expire at the end of this year. Much like other propositions and laws at the federal level, there is no guarantee that the law will be extended, even though there would be much pressure from constituents and consumer advocacy groups to continue the legislation. After all, the wildly-popular First-Time Homebuyer Credit was not renewed even though it arguably led to a spike in home sales that was desperately needed at the time of its inception in 2009.

Homeowners who are considering entering into a short sale transaction as a way to stop foreclosure need to be mindful of the tax considerations involved in the property transfer – especially those considering principal reductions with their mortgage loans. Since loan modifications take months on average to complete – and many fall by the wayside and fail during that timespan – homeowners caught unawares could be penalized heavily at tax time with an unexpected bill.

Also consider the fact that a deed in lieu of foreclosure – another common alternative to foreclosure in addition to a short sale- may also result in a taxable income situation if the law should expire. Homeowners should consult a certified tax attorney for qualified legal advice.

Today, Freddie Mac, one of the two largest owners of mortgages in the United States (along with sister company Fannie Mae), reported that homeowners who opted to take cash out when refinancing their homes during the fourth quarter of 2011 was at the lowest point in the 26 years the company has been keeping up with those numbers.

According to the report, less than 15% bumped up the amount of their loan by 5% or more. This constitutes a “cash-out” option in which the loan amount increases while the homeowners take cash from the home’s equity through liquidation.

To compare with historical trends for home refinancing, cash-out refinancing constituted 46% of all refinancing on average from 1986 to 2010.

Instead of using their home’s equity as a way to obtain cash, more homeowners are actually putting cash in, or decreasing the total amount of the new loan. These “cash-in borrowers” constitute roughly 49% of all homeowners refinancing their home, which is also a record. The new loans are roughly three-quarters the size of the old loan.

The remaining 37% of homeowners refinancing their homes left with the same loan amount. All told, homeowners going through a home refinance locked in an interest rate that was 1.4% on average – saving an estimated $2,700 the first year of the new loan.

The trend doesn’t sound surprising, as more and more homeowners – burned by sharp downturns in the housing market – are afraid to touch their equity, particularly with underwater homeowners littering the landscape. Such behavior ran rampant in the decade prior to the bursting of the housing bubble in 2007 and is one of the contributing factors to the record numbers of foreclosures that have hit every year.

Just how much money was taken out of homes that underwent homeowner refinancing? According to Freddie Mac, cash-out homeowners removed approximately $5.5 billion in equity form their homes, just 3% of the total financed amount. In the third quarter of 2011, those numbers were $5.6 billion and 3.7% – down from the peak historical levels of $83.7 billion and 31.1%.

Clearly, American homeowners are hunkering down on their equity and trying to conserve as much as possible – especially given how many foreclosure properties are caused by an inability to refinance out of high monthly mortgage payments due to having negative equity.

Figures for the first quarter of 2012 are still two months away but are expected to continue this trend.

The program – originally announced in 2011 – seeks to connect private equity investors with government foreclosures to convert them into rental properties. Instead of the federal government serving as a virtual landlord to thousands of government homes – such as VA homes, HUD homes, and USDA homes – private investors would purchase them in bulk, rehabilitate the home foreclosures, and then turn them into rentals.

The plan would take advantage of an increased demand for rental properties over the last few years while also serving to relieve the government – and the American taxpayer – of the financial burden of maintaining thousands of non-performing assets. Over 200,000 foreclosure listings would be marketed by the government for the new pilot program, set to begin sometime this year.

Already, private equity investors are lining up around the block. The proposition has turned a decently-sized market worth millions into a huge potential market worth billions – a move that could inject much-needed capital into the housing market and potentially provide a boost to the economy as well.

Throw in the consideration that today’s sky-high rental prices could be reduced by increased demand and savings incurred through cheaper foreclosures and millions of American renters could receive a stimulus boost as well.

Lenders are cautiously optimistic about the proposal, at least as it concerns originating loans that are guaranteed by the federal government. This could lead to more home loan origination as well as a general check on declining home prices throughout the country – particularly in hard-hit areas like Florida, Michigan, California, New York, New Jersey, Georgia,Illinois. Already home prices have plummeted by 3.7% from November 2010 to November 2011, with the trend set to continue throughout the next year.

The federal government is currently working on initial partnerships and transactions with private-equity investors and firms that will be completed in the first quarter. Additional partnerships will be announced throughout the year, possibly with rent-to-own clauses included for many tenants. Time will tell if the program will be a success, but it is fair to say that the Obama administration needs a big-time victory with this initiative to both help repair the housing market and bolster its chances with elections in November.

HAMP, originally created in 2009, was designed to help American homeowners avoid foreclosure by working with lenders to modify their mortgages. The theory behind the program was that homeowners could keep their properties – and stop foreclosure from creating more destructive home foreclosures in already-depressed markets – with lower, more-affordable monthly mortgage payments and principal reductions.

But, the $29 billion program has not been without its critics, who allege the program has been too limited, too underfunded, and too ineffective in preventing foreclosure properties from flooding the market.

Largely because of these criticisms, the Obama administration is seeking to fix these and other problems by offering additional financial incentives to lenders for principal reductions. This means thousands of American homeowners could see their monthly payments drop by having lower principal balances. Such a move could have a stimulating effect on the economy, especially since the administration will also offer financial incentives to Fannie Mae and Freddie Mac for modifications. Since the two programs account for the vast majority of mortgages currently owned, the impact could be significant.

Whatever the future impact, the past performance of HAMP has been less than desired. Out of roughly 1.7 million program applicants, only about 900,000 have had their mortgages permanently modified – and a significant percentage of those have fallen through since.

Some of this failure has been blamed on the nation’s largest lenders, including JPMorgan Chase, Wells Fargo, and Bank of America. Others point the finger at the mass of red tape and bureaucracy that has plagued the program’s administration.

Whatever the cause of the problem may be, the nation’s foreclosure rate – hovering around 3.51% as of October 2011 – is still far too high for a healthy housing market. Serious gains have yet to be made in removing foreclosure listings and having homeowners fill vacancies, primarily due to reluctance by big banks to lend to most prospective homebuyers. Loosening a still-tight credit market is one priority, as is an Obama initiative to sell blocks of distressed properties to private investors for rehabilitation and transformation into rental units.

At any rate, the besieged program has another year to perform before Washington becomes serious about pulling the plug.

Florida has long since been near the top of the list when it comes to home foreclosures. The state’s current foreclosure rate remains sky high, with one out of every 360 housing units in the state in some part of the foreclosure process. South Florida has been particularly hit hard by the foreclosure crisis; it’s foreclosure rate of over 18% is six times higher than the national rate of 3.51%. Since the area contains a significant portion of the state’s population – and registered voters – the housing market is at the top of the list of issues in the state.

Unfortunately for Florida homeowners, none of the four main candidates – Mitt Romney, Newt Gingrich, Rick Santorum, and Ron Paul – has offered any significant plans on fixing the broken housing market and restoring a sense of normalcy to a domestic market that is marked by high numbers of foreclosure properties and falling home values.

Part of the silence from the Republican nominees is due to their ideological backgrounds, which call for less government interference in the market. Romney, extolling this approach, has stated repeatedly that the best solution is to indirectly impact the housing market by creating jobs through tax cuts and other alleged solutions for unemployment and other economic woes.

Gingrich has largely echoed these sentiments, stating that government interference in the housing market helped to lead to the current mess that has resulted in millions of foreclosures over the past few years and left millions more owing more on their homes than what they are worth. Gingrich has come under fire lately for his ties as a lobbyist with Freddie Mac, one of the key agencies accused by Republican critics of playing a major role in the crisis.

Paul is even more anti-government when it comes to housing solutions. Santorum, for his part, did recommend a refinancing plan, and he and Romney have advocated looser restrictions for loan modifications.

Still, the most prominent Republican solution for the foreclosure crisis seems to be to let the market “run its course and hit the bottom” (according to Romney). For Florida residents, that may not be an acceptable course of action.

The question now becomes this: If/when this settlement passes, will homeowners receive any significant benefit?

On the surface, the question is a bit silly. One would expect homeowners to receive some kind of restitution for being wrongfully foreclosed on by banks like Bank of America, Citibank, Wells Fargo, JPMorgan Chase, and Ally Financial. Previous versions of the settlement, though, did little to assuage the doubts of consumer advocates – including several high-powered attorneys general involved in the negotiations.

The latest incarnation of the settlement does provide for some monetary compensation for homeowners who suffered as a result of the banks’ alleged practices, but former owners of home foreclosures will not get their homes back.

Of the $25 billion, approximately 68% of the amount – $17 billion – will be allocated toward principal reduction to help owners of distressed properties and underwater homes. Roughly 20% of the amount – $5 billion – will be targeted toward state and federal programs that include a provision to give roughly 750,000 Americans checks worth $1,800 apiece. The remaining amount – $3 billion, or 12% – will go toward assisting homeowners with refinancing their mortgage loans at a lower interest rate around 5.25% – higher than today’s incredibly low rates but lower than most of the interest rates for today’s outstanding loans.

There could also be measures of reform contained in the bill, but one of the most contentious measures – civil immunity for banks – is still very much on the table and a real possibility. Limited criminal immunity may also be included, but banks will be vulnerable to some legal action by the states. Already several states have promised to initiate investigations into faulty foreclosure processes, including Delaware, New York, and Massachusetts.

In the end, if the settlement passes, nearly a million Americans could see a $20,000 reduction in their principal balances on their loans. That will help some homeowners, but large swathes of underwater and distressed homeowners will not receive any benefit from the settlement.

Since this is an election year, the Obama administration will likely pressure all sides to make this latest itineration of the settlement the final one. Even if states decide to not sign the agreement, it will likely pass – still leaving the door open for major legal battles down the road.

The data – compiled by Lender Processing Services – suggest that overall mortgage delinquencies fell by a substantial 7.7% from December 2010 to December 2011. This would indicate a current mortgage delinquency rate of roughly 8.15%, trending downwards.

Foreclosure rates fell by a lesser margin – 1% – but in this environment, any drop is good news. The current rate is hovering around 4.11% across the country.

The downside to the data released resides in some ominous numbers that suggest we are not out of the woods yet. Approximately 1,792,000 homes are at least 90 days delinquent, which is usually when they turn into home foreclosures. The only reason why many of these seriously-delinquent homes have not already become foreclosure properties is due to the backlogged foreclosure process that still remains mostly clogged in many areas of the country. (The top states with the most foreclosures and delinquencies as of December 2011? Florida, Mississippi, Nevada, New Jersey, and Illinois.)

Still, analysts are open to the prospect that 2012 – once thought to be the beginning of a new flood of foreclosure listings that were delayed by foreclosure fraud and robo-signing scandals – could actually be better than expected for the real estate industry. More homes are being sold, builders are optimistic about new customer prospects, and low mortgage rates are enticing more investors and homebuyers to enter the real estate market.

Going forward, the market will need to continue the current trend of falling foreclosure rates and increasing existing home sales. A major reworking of the Home Affordable Refinance Program, called HARP 2.0 by some, will more than likely debut at the end of the first quarter and could eventually lead to hundreds of thousands of Americans avoiding delinquency and saving money through lower monthly payments.

Until then, analysts are continuing to wait to see if consumer demand is able to step up and pick up home sales activity that is still well below desired levels. If these data are any indication, though, that demand may be here sooner than later.

Now, well over a year later, and after several false alarms of a settlement between a coalition of state attorneys-general and the five major lenders at the heart of the case (JPMorgan Chase, Wells Fargo, Bank of America, Citibank, and Ally Financial), a deal may be within striking distance according to Washington insiders.

Naturally, those in the real estate industry who have been following the foreclosure fraud case for the past year are skeptical; after all, the deal was supposedly close to completion on many prior occasions before the coalition of AGs virtually splintered in 2011 over several unpopular components of the deal – including the notion that the deal did not go far enough in punishing the banks for their illicit processes and ensuring that they would not conduct themselves the same way with future home foreclosures.

Since 2012 is an election year, the Obama administration – the impetus behind the meeting of the minds going on in D.C. – is under more pressure than ever to arrange some kind of workable solution. This version of the deal apparently incorporates principal reduction for close to one million borrowers across the country, a move that is much desired by housing advocates and one that could serve as a mini-stimulus – paid for by the banks rather than the taxpayers.

The rest of the details – a $25 billion settlement split amongst the banks – still leaves some housing advocates critical. To them, including California AG Kamala Harris and NY AG Eric Schneiderman, the deal doesn’t do much to create a viable framework to protect against future abuses in the system. Even a principal reduction for some borrowers would not be a punitive measure to the banks, and those who could not stop foreclosure wouldn’t get anything for their troubles.

With that being said, some kind of arrangement will be made between the states and the banks, even if the Obama administration has to engage in heavy arms-twisting behind the scenes with California and New York. Too many foreclosure properties are in the market, driving down prices, for the administration to take anything less than an aggressive stance with their solutions to the housing crisis.

As the first quarter of the new year gets into full gear, the real estate market finds itself trying to still solve the foreclosure crisis and recover from nearly five years of falling prices, rising inventory, and lackluster demand.

Will the new year be any different? What changes and trends will we notice in 2012 – and which, in particular, can be observed over the next few months?

The Bottom May Be Near

It would be premature to say that we have reached the bottom of the housing market as far as housing prices are concerned. We expect prices to continue to fall or at least remain stagnant in most of the country, with pockets of positive growth here and there.

Still, the much-awaited bottom of the market may be near. It won’t happen in the first quarter, but aggressive investors should think about this: we could look back later and see that the first quarter of 2012 was the perfect time to buy.

Refinancing Goes High; Rates Stay Low

Historically-low interest rates will remain another hot trend throughout the first quarter, as the Federal Reserve has shown no signs of allowing rates to rise. Rates will continue to remain low, which will in turn encourage more people to refinance – especially once the new provisions of the old Home Affordable Refinance Program take full effect in a month or two.

The upsurge in demand for the revised program could help thousands of underwater homeowners, which in turn could lower the foreclosure rate for the second and third quarters and cause housing prices to gain traction later on in the year – this time in the right direction.

More Competition for Investors

Yet another trend that is heating up quite nicely for investors is competition – and the effects aren’t entirely bad. More competition from an increased number of investors – particularly foreign entrepreneurs flush with cash – means that lenders are more apt to sell foreclosures and short sales on a faster timeline. This in turn means you could capitalize on these distressed properties much more quickly than you could last year.

Those who have been learning their way around the short-sale market could be the dark-horse winners of the market for 2012 if they pay close attention, but virtually anything in the foreclosure market is gold waiting to be discovered.

It is that time of the year when reports are coming out that discuss everything from the number of homes sold in 2011 to foreclosure filings. All eyes are on these reports to see if real estate market progress is occurring or if the market remains stagnant.

What, exactly, did foreclosures look like in 2011 in comparison to previous years?

A recent report revealed that there were almost 1.9 million foreclosure filings in 2011, including everything from notices of default to repossessions and auctions. At first sight, the 1.9 figure can seem incredibly high; however, it is actually significantly lower than the numbers over the last 3 years. Specifically, 1.9 million is 34% lower than 2010 and 33% in 2009; therefore, these numbers reveal that real estate market progress is being made.

When looking at the nearly 1.9 million, how many of these homes were REO properties? According the report, there were just over 800,000 REO homes put back on the lender’s books.

What is an REO Property?

A REO property is also known as a real estate owned property. These homes are reacquired by the lenders when they are not purchased at foreclosure auctions. More often than not, the lender (normally a bank or government agency) obtains the property because the home is far less than the amount owed on the loan. As a result, nobody purchases the property at auction which returns it to the lender. These REO properties are considered non-performing assets (or a loan that remains past due).

It is not shocking to see 800,000 REO homes in the report considering that a sky-high foreclosure inventory has led to a drastic reduction in home prices. When home prices fall below market value and outstanding loans are significantly higher than the value of the home, many people abandon their properties. When sending these homes to foreclosure auctions, many people are still unwilling to purchase the property for the loan settlement amount. Therefore, the home goes back to the lender and is categorized as a REO property.

REOs and Flipping Houses

Another piece of news could make 800,000 REO homes on the market even more attractive.

Today it was announced that the Federal Housing Administration (FHA) was renewing its permission to flip homes, in essence allowing investors to take out home loans guaranteed by FHA for the purpose of buying homes, renovating them, and selling them less than 90 days after the initial purchase amount. Previously this was not allowed until the FHA decided otherwise last year.

With 800,000 REO homes on the market in 2011, plus renewed permission from the FHA for house-flipping, investors could see a very opportunistic 2012.