Here’s the circumstance: if you fall far enough behind on paying your federal income taxes, either personally, or as a small businessperson, the IRS can file a Tax Lien against all of your personal property. That includes your house. And that tax lien takes precedence over your mortgage. That means the IRS can seize your home and sell it to cover your tax debt. If there isn’t enough money to pay back the lender, they are just out of luck. Unfortunately, that means no lender will want to carry a mortgage on your home. Which means you can’t possibly refinance your way out of an exploding mortgage and into a nice new safe mortgage.

Today the IRS announced that they are willing to “subordinate” their lien to your mortgage. If the house gets sold, the lender is protected and gets to go first. The IRS has over 1 million current tax liens against US residents, so a lot of families got a load of relief today.

Read more about the story here at the Journal or here in the IRS Newsroom

All in all a situation that needs to unwind through the decisions of millions not just a handful in Washington, Wall street or London.

Here’s what CNNMoney has to say about it.

NEW YORK (CNNMoney.com) — Lending rates fell again Friday, but as the cost of borrowing eases, some government data suggest private lending is not expanding.

The 3-month Libor rate dropped to 2.29% from 2.39% on Thursday, according to Dow Jones, marking the rate’s lowest point since Nov. 12, 2004.

The overnight Libor rate held steady at 0.33%, according to Bloomberg.com. The overnight rate is just a hundredth of a percentage point above the all-time low.

About a month ago, 3-month Libor was at 4.82%, and the overnight rate was at an all-time high of 6.88%. Lower rates are a major boost for the strangled credit markets because more than $350 trillion in assets are tied to Libor.

A number of U.S. government programs aimed at easing funding concerns for banks and encouraging lending between financial institutions have also helped lower Libor rates. Such initiatives include lowering interest rates, injecting capital into banks and providing insurance on all non-interest bearing accounts.

Falling Libor rates are “a very important ingredient” in the recipe for economic recovery, said Michael Strauss, chief economist at financial research firm Commonfund.

“Improvement in the Libor market is an important first step towards getting banks to act like banks again,” Strauss said.

As financial institutions become more confident in lending to each other, they will become more willing to lend to businesses and consumers, according to Strauss.

But with the economy likely in a recession, some indications show the Federal Reserve’s programs and lower rates have not yet encouraged banks and free market investors to lend to businesses.

The Fed announced Thursday that it lent another $100 billion to companies over the past week through a new short-term funding program. In its so-called Commercial Paper Funding Facility, the Fed has provided critical short-term financing to businesses and financial institutions in desperate need of cash.

But in a separate report, Fed data showed the market for commercial paper expanded by just $50.5 billion. Even as the Fed’s program has dragged down borrowing rates, the difference of $49.5 billion between the Fed’s injection and the market’s growth suggests that the commercial paper market would have contracted without the Fed’s involvement.

Read the rest of the story here

The term “points” is used to describe certain charges paid to obtain a home mortgage.

Here are some things to remember when deducting points: Straight from the IRS:

Taxpayers who itemize deductions generally may be able to deduct the points paid to obtain a home mortgage as mortgage interest

Points paid solely to refinance a home mortgage usually must be deducted over the life of the loan

Points can be fully deducted in the year paid if certain tests are met

For a refinanced mortgage, the interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan. This information is usually available from lenders.

Taxpayers may deduct points only for those payments made in the tax year.

However, if part of the refinanced mortgage money was used to finance improvements to the home and if the taxpayer meets certain other requirements, the points associated with the home improvements may be fully deductible in the year the points were paid. Also, if a homeowner is refinancing a mortgage for a second time, the balance of points paid for the first refinanced mortgage may be fully deductible in the year it is paid off.

Unfortunately, not all of the costs of your refinance are deductible.

Other closing costs – such as appraisal fees and other non-interest fees – generally are not deductible. Additionally, the amount of your Adjusted Gross Income can affect the amount of deductions that can be taken.

For more information on deductions related to refinancing, visit IRS.gov for Tax Topics 504, Home Mortgage Points, and 505, Interest Expenses. You may also review IRS Publication 936, Home Mortgage Interest Deduction, available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Source:
IRS Tax Tip 2008-55