The Florida Legislator recently passed a ballot initiative that could turn our current property tax into one of the most biased, unfair tax schemes in the United States.
Under out current “Save out Homes” (SOH) plan, the assessed values of homesteaded properties can only go up by 3% per year. The plan had a noble purpose; it was design to prevent homeowners from getting priced out of their homes due to tax increases.
While the plan did have good intentions, there were many flaws in the plan. First, SOH only protected the assessed values of homestead homes, which is only portion of the tax equation. It never restricted the other half of the equation, millage rates. This means that the taxing authorities still have the ability to raise taxes far in excess of the 3% annual cap simply by raising millage rates. This hasn’t been a significant issue since SOH passed in 1992, mainly because home values have generally increased in Florida. However, as home values start to drop at a rate in excess of 3% per year, taxing authorities will have to find ways to overcome budget shortfalls. They can solve this by simply increasing millage rates, effectively eliminating the tax increase protection of SOH.
Another significant flaw in SOH is the fixed 3% rate, which has no protection from inflation. Again, this hasn’t been an issue since its passage in 1992 because overall inflation has generally hovered around that 3%. However, if we ever return to the double-digit inflation that we experience in the 1970s, the fixed-3% rate will become significant. In the face of rapidly rising prices due to high inflation, taxing authorities will be forced to increase millage rates. It is beyond me why SOH was ever passed with the 3% cap rather than a cap that adjusted with changed in the Consumer Price Index (CPI).
Still, the most significant flaw in SOH is its inherent unfairness. For the first nine years of its life, SOH worked well because home prices generally did not increase much more than 3%. However, between 2001 and 2005, most areas in Florida experienced dramatic increases in home values, often more than 200%. As a result, homeowners that purchased homes before 2001 are often pay very little in taxes when compared to homeowners who purchased in recent years.
Up until this time, I had little concern about SOH because I knew the deflation of the bubble would ultimately take care of some of the inequities. To show how the inequities would be solved through housing deflation consider two homeowners: one that bought his home in 2000 for $100,000 and one that bought an identical home in 2005 for $300,000. Assuming a 2% millage rate, in 2005 the homeowners would pay:
Homeowner 1:
2005 SOH assessed value (capped by 3% increase) = $115,927 - $25,000 homestead exemption = $90,927 taxable base x 2% millage rate = 2005 property tax of $1,819
Homeowner 2:
2005 assessed value = $300,000 - $25,000 homestead exemption = $275,000 taxable base x 2% millage rate = 2005 property tax of $5,500
Obviously this is clearly unfair because Homeowner 1 is paying only 33% of the tax paid by Homeowner 2. They pay vastly different amounts even though they are living in the same home and may be consuming identical levels of public services (fire, police, schools, roads, etc.).
However, I think things will eventually things will even out. Assume by 2009, the two homes are now worth $150,000. Also assume that the taxing authorities increase the millage rates to 2.5% to make up for the properties’ devaluations:
Homeowner 1:
2009 SOH assessed value (capped by 3% increase) = $130,477 - $50,000 homestead exemption = $105,477 taxable base x 2.5% millage rate = 2009 property tax of $2,637
Homeowner 2:
2009 assessed value = $150,000 - $25,000 homestead exemption = $125,000 taxable base x 2.5% millage rate = 2005 property tax of $3,125
Following the devaluation, the taxes paid by the two homeowners are much more equitable. Now, Homeowner 1 is paying 84% of the tax paid by Homeowner 2. Over time, the two taxpayers would probably end up paying similar amounts in tax.
However, if this new ballot initiative passes, much of the equality created by housing devaluation is eliminated. The new initiative consists of two main changes: an increase of the homestead exemption to $50,000 and the “portability” of SOH.
The increase in the homestead exemption will have little impact on equality other than increasing taxes on non-homesteaded properties. However, the portability provision may be one of the most unfair tax proposals I have ever seen.
Under the portability proposal, homeowners can “take” up to $500,000 in SOH differential (the difference between the actual assessed value versus the SOH value) when they move from one homestead to another. This means homeowners that purchased prior to 2000 and live in high-valued homes can pay significantly reduced property taxes.
To illustrate what will happen if this passes, lets add a third homeowner to our 2009 comparison. In this case, the third homeowner sells a home in 2009 that has a $110,000 in SOH differential. He then immediately downsizes and purchases a home that is identical to Homeowner 1 and Homeowner 2. Here’s what this third homeowner will pay on newly purchase home under the portability proposal:
Homeowner 3:
2009 assessed value = $150,000 - $110,000 portable SOH differential - $50,000 homestead exception = $0.00 taxable value (you can’t go negative) x 2.5% millage rate = 2009 property tax of $0.00
So, under the new proposal, in this scenario, you will have three neighbors all living side-by-side in identical homes. All three consume identical amount of public services. Homeowner 1 pays $2,137 in annual property tax (after accounting for the increase homestead exemption). Homeowner 2 pays $2,500. Homeowner 3 pays nothing.
Do you think this is fair?
Keep in mind that this not only has a disproportionate benefit for those who bought prior to 2000, it also has a disproportionate benefit for the extremely wealthy because they’re much more likely to have substantial SOH differentials than the middle class and working poor. In effect, this increases the already regressive nature of Florida’s property tax system.
If this doesn’t convince you, consider this: If this the voters pass this initiative, there will be some homeowners living in homes that are worth nearly $520,000 that will pay NOTHING in property taxes (at least in the short term) because they used the benefits of portability.
Showing posts with label Politics. Show all posts
Showing posts with label Politics. Show all posts
Wednesday, October 31, 2007
Sunday, October 7, 2007
Video: Presidential Candidate Mike Huckabee on the Proprosed Bailout
If you know of any local, state, or national political candidates that have videos where they address the housing bubble, please sent me a link. I do not want this site to seem one-sided politically.
In this video, Presidential Candidate Mike Huckabee gives his views of the proposed government bailout of troubled borrowers:
CLICK HERE TO VIEW THE VIDEO
In this video, Presidential Candidate Mike Huckabee gives his views of the proposed government bailout of troubled borrowers:
CLICK HERE TO VIEW THE VIDEO
Wednesday, October 3, 2007
The Mortgage Forgiveness Debt Relief Act of 2007
In previous post, “Do not trust a Realtor's® advice on short sales," I discussed the tax implications of short sales. Under current IRS regulations, troubled homeowners who complete a short sale could face a large tax bill. Typically, taxpayers will have to recognize any forgiven debt in the short sale as ordinary income.
In the comments to one of my posts yesterday, a reader asked if any progress had been made on, H.R. 3648, The Mortgage Forgiveness Debt Relief Act of 2007. The reader also provided a great link to Mish’s Global Economic Trend Analysis site that explains the the legislation:
“The legislation would provide relief to those families by permanently excluding debt forgiven under these circumstances from tax liability. Prior to this legislation, forgiven debts were added to a person's tax liabilities as ordinary income. For example, if a person walked away from a home owing $100,000 more on a house than the foreclosure sale proceeds and that debt was forgiven by the lender, the IRS considered that $100,000 as ordinary income and expected taxes to be paid on the amount of forgiveness. This proposal is estimated to cost $1.379 billion over 10 years.”
Last week, on September 26, 2007, the House acted:
“The House Committee on Ways and Means unanimously approved H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, today in response to some of the tax issues that have arisen as a result of problems in the subprime mortgage market. Under current law, debt forgiven following mortgage foreclosure or renegotiation is considered income for tax purposes, resulting in tax liability for individuals and families.”
“The legislation advanced by the Committee today would provide relief to those families by permanently excluding debt forgiven under these circumstances from tax liability. The bill would also help would-be homeowners secure their investments through a long-term extension of the tax deduction for private mortgage insurance, and would ease restrictions for qualifying as housing cooperative corporations. Finally, the bipartisan bill would tighten requirements taxpayers must meet to exclude gain from the sale of certain homes that have been used as a vacation home or rental property.”
Who will this benefit?
While this is still long way from becoming law, I think this piece of legislation is both fair and absolutely vital. Some of the reasons, I think this is great legislation includes:
1) Taxing individual taxpayers at a time when they can least afford it seems ridiculous. Furthermore, the way the current tax law is written, troubled homeowners are encouraged to choose bankruptcy and foreclosure over a short sale in order to avoid the tax. A short sale relative to bankruptcy is much less destructive to credit, costs the taxpayer little, and does not clog our legal system
2) While the individual taxpayer benefits from this bill, it also receives support from the National Association of Home Builders, the National Association of Realtors® and the Mortgage Broker Association. All three benefit from short sales over foreclosure.
3) The bill has some provisions to protect against those who “game” the system. For instance, the provisions of this bill would only apply to “home-acquisition debt.” It would not apply to “home-equity debt.” In other words, your neighbor who used a HELOC to purchase a Hummer, a 72” flat-screen television, and a new 25-foot center-console fishing boat, will not benefit.
It also will not help flipper or speculators because only principal residences would apply.
Furthermore, the bill, which will cost $1.4 billion, will be paid for by cutting out a another significant loophole. A Mercury News blog explains:
“But the more interesting thing about this bill is how it would offset those lost revenues by taking aim at a tax gambit promoted to wealthier taxpayers who own vacation homes or rentals. Those folks are likely to pay $2 billion more in taxes from 2008 through 2017 if this legislation becomes law.”
“Under current rules, single homeowners generally can shelter up to $250,000 of capital gains when they sell, while couples can shelter up to $500,000. The main condition: They must live in the house for two of the five years leading up to the sale.”
“This presents an opportunity for homeowners to shelter a lot of gains on several properties by living in each of them for two years. For example, a couple could sell their principal home in Sunnyvale, pocket $500,000 in capital gains, and move into a rental or vacation home. Two years later, they could sell that property and exclude gains of up to $500,000.”
“Uncle Sam wants to clamp down on a loophole that enables wealthier taxpayers to shelter gains from rental properties and vacation homes by briefly treating each of them as ‘principal’ residences.”
Basically, this bill, if passed in its current form will cost taxpayers nothing.
4) The bill benefits those taxpayers that must pay for private mortgage insurance (PMI):
“The bill extends the deduction for private mortgage insurance for seven years (through the end of 2014). Current law limits the deduction for private mortgage insurance to payments made prior to the end of 2007. The bill would provide that payments will qualify for this deduction whenever they are paid so long as the contract is entered into after 2006 and before 2015.”
How will this affect our local market?
I think one reader put it best, “If it passes in its current format, it could encourage more upside down property owners to give the keys to the bank and walk away.”
Still, a quote from the National Association of Homebuilders (NAHB) could lead one to believe that this will y result in more debt restructuring in lieu of short sales or foreclosure:
“The existing tax rules encourage many struggling homeowners (specifically those in states with non-recourse debt as the primary mortgage model) to seek foreclosure over restructuring their loan with lenders. This moves more homeowners out of their homes, destabilizes neighborhoods and increases the inventory of the housing stock on market. Second, the potential increase in tax liability discourages homeowners who are solvent from seeking restructuring agreements from lenders, a preferred situation for all involved. H.R. 3648 would encourage market-based restructuring between lenders and homeowners and discourage foreclosures.”
In context to this bill, the NAHB is not talking about interest rate reductions because changes in payment terms are not taxable -- only reductions in loan balances are taxable. Still, I cannot imagine that many lenders will simply reduce loan balances on borrowers and allow them to stay in their homes. If they did that for any homeowners, then lenders would be flooded by debt forgiveness requests from homeowners claiming insolvency.
In the end, I think passage of this bill will accelerate the flood of inventory that many of us are expecting as outstanding ARMs reset. With no tax liabilities, most troubled homeowners will jump at the chance of getting out of their mortgages.
In addition, even those who can afford their mortgage payments will take steps to qualify for short sales. After all, wouldn’t you try to short sell your home if it was worth a fraction of your outstanding mortgage, especially if there were no financial consequences other than some short-term blemished credit?
In my opinion, the continued flood of inventory is inevitable; this will just accelerate it.
What do you think?
In the comments to one of my posts yesterday, a reader asked if any progress had been made on, H.R. 3648, The Mortgage Forgiveness Debt Relief Act of 2007. The reader also provided a great link to Mish’s Global Economic Trend Analysis site that explains the the legislation:
“The legislation would provide relief to those families by permanently excluding debt forgiven under these circumstances from tax liability. Prior to this legislation, forgiven debts were added to a person's tax liabilities as ordinary income. For example, if a person walked away from a home owing $100,000 more on a house than the foreclosure sale proceeds and that debt was forgiven by the lender, the IRS considered that $100,000 as ordinary income and expected taxes to be paid on the amount of forgiveness. This proposal is estimated to cost $1.379 billion over 10 years.”
Last week, on September 26, 2007, the House acted:
“The House Committee on Ways and Means unanimously approved H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, today in response to some of the tax issues that have arisen as a result of problems in the subprime mortgage market. Under current law, debt forgiven following mortgage foreclosure or renegotiation is considered income for tax purposes, resulting in tax liability for individuals and families.”
“The legislation advanced by the Committee today would provide relief to those families by permanently excluding debt forgiven under these circumstances from tax liability. The bill would also help would-be homeowners secure their investments through a long-term extension of the tax deduction for private mortgage insurance, and would ease restrictions for qualifying as housing cooperative corporations. Finally, the bipartisan bill would tighten requirements taxpayers must meet to exclude gain from the sale of certain homes that have been used as a vacation home or rental property.”
Who will this benefit?
While this is still long way from becoming law, I think this piece of legislation is both fair and absolutely vital. Some of the reasons, I think this is great legislation includes:
1) Taxing individual taxpayers at a time when they can least afford it seems ridiculous. Furthermore, the way the current tax law is written, troubled homeowners are encouraged to choose bankruptcy and foreclosure over a short sale in order to avoid the tax. A short sale relative to bankruptcy is much less destructive to credit, costs the taxpayer little, and does not clog our legal system
2) While the individual taxpayer benefits from this bill, it also receives support from the National Association of Home Builders, the National Association of Realtors® and the Mortgage Broker Association. All three benefit from short sales over foreclosure.
3) The bill has some provisions to protect against those who “game” the system. For instance, the provisions of this bill would only apply to “home-acquisition debt.” It would not apply to “home-equity debt.” In other words, your neighbor who used a HELOC to purchase a Hummer, a 72” flat-screen television, and a new 25-foot center-console fishing boat, will not benefit.
It also will not help flipper or speculators because only principal residences would apply.
Furthermore, the bill, which will cost $1.4 billion, will be paid for by cutting out a another significant loophole. A Mercury News blog explains:
“But the more interesting thing about this bill is how it would offset those lost revenues by taking aim at a tax gambit promoted to wealthier taxpayers who own vacation homes or rentals. Those folks are likely to pay $2 billion more in taxes from 2008 through 2017 if this legislation becomes law.”
“Under current rules, single homeowners generally can shelter up to $250,000 of capital gains when they sell, while couples can shelter up to $500,000. The main condition: They must live in the house for two of the five years leading up to the sale.”
“This presents an opportunity for homeowners to shelter a lot of gains on several properties by living in each of them for two years. For example, a couple could sell their principal home in Sunnyvale, pocket $500,000 in capital gains, and move into a rental or vacation home. Two years later, they could sell that property and exclude gains of up to $500,000.”
“Uncle Sam wants to clamp down on a loophole that enables wealthier taxpayers to shelter gains from rental properties and vacation homes by briefly treating each of them as ‘principal’ residences.”
Basically, this bill, if passed in its current form will cost taxpayers nothing.
4) The bill benefits those taxpayers that must pay for private mortgage insurance (PMI):
“The bill extends the deduction for private mortgage insurance for seven years (through the end of 2014). Current law limits the deduction for private mortgage insurance to payments made prior to the end of 2007. The bill would provide that payments will qualify for this deduction whenever they are paid so long as the contract is entered into after 2006 and before 2015.”
How will this affect our local market?
I think one reader put it best, “If it passes in its current format, it could encourage more upside down property owners to give the keys to the bank and walk away.”
Still, a quote from the National Association of Homebuilders (NAHB) could lead one to believe that this will y result in more debt restructuring in lieu of short sales or foreclosure:
“The existing tax rules encourage many struggling homeowners (specifically those in states with non-recourse debt as the primary mortgage model) to seek foreclosure over restructuring their loan with lenders. This moves more homeowners out of their homes, destabilizes neighborhoods and increases the inventory of the housing stock on market. Second, the potential increase in tax liability discourages homeowners who are solvent from seeking restructuring agreements from lenders, a preferred situation for all involved. H.R. 3648 would encourage market-based restructuring between lenders and homeowners and discourage foreclosures.”
In context to this bill, the NAHB is not talking about interest rate reductions because changes in payment terms are not taxable -- only reductions in loan balances are taxable. Still, I cannot imagine that many lenders will simply reduce loan balances on borrowers and allow them to stay in their homes. If they did that for any homeowners, then lenders would be flooded by debt forgiveness requests from homeowners claiming insolvency.
In the end, I think passage of this bill will accelerate the flood of inventory that many of us are expecting as outstanding ARMs reset. With no tax liabilities, most troubled homeowners will jump at the chance of getting out of their mortgages.
In addition, even those who can afford their mortgage payments will take steps to qualify for short sales. After all, wouldn’t you try to short sell your home if it was worth a fraction of your outstanding mortgage, especially if there were no financial consequences other than some short-term blemished credit?
In my opinion, the continued flood of inventory is inevitable; this will just accelerate it.
What do you think?
Friday, August 31, 2007
Bush and the Fed Promotes a Taxpayer-Funded Bailout of Irresponsibility
President Bush, who once said he was against a Federal bailout of troubled mortgage holders, is now jumping on the bandwagon to aid irresponsible borrowers (and lenders). The Sun-Sentinel reports:
“Offering federal help for strapped mortgage holders, President Bush is proposing to aid hundreds of thousands of borrowers hard hit by the housing slump.”
“The president on Friday was to talk about several initiatives and reforms to help homeowners with risky mortgages keep their homes, a senior administration official said Thursday. Bush also was to discuss efforts to prevent these kinds of problems from arising in the future.”
“The official said Bush will direct Treasury Secretary Henry Paulson and Housing Secretary Alphonso Jackson to work on an initiative to help troubled mortgage holders get services and products they need to keep them from defaulting on their loans. The official spoke on condition of anonymity to discuss details of the initiatives ahead of the presidential event.”
The Chairman of the Federal Reserve is also promoting the idea that hard-working taxpayers should be forced to subsidize reckless flippers and those that are living far beyond their means. The Sun-Sentinel reports:
“Federal Reserve Chairman Ben Bernanke is suggesting that policymakers look for ways to encourage a wider range of mortgages geared for low income and other borrowers who have been hard hit by the housing slump and credit crunch.”
“Bernanke, in a letter to Sen. Charles Schumer, D-N.Y., that was released Wednesday, said the Fed is keeping close tabs on financial markets and is "prepared to act as needed" to ensure spreading credit problems that have rocked Wall Street in recent weeks don't hurt the economy. It's a message the central bank has been sending as the markets have grown more turbulent.”
“Foreclosure and late payments have spiked especially for "subprime" borrowers with blemished credit histories or low incomes. Higher interest rates and weak home values have made it impossible for some to pay or to keep up with their monthly mortgage payments. Some overstretched homeowners can't afford to refinance or even sell their home.”
Do you want to increase the Federal debt in order to promote irresponsibility? Or would you rather they raise your taxes?
I previously wrote about the bailout proposal (click here to see the post) and encouraged readers to write their Congressional representatives to demand that there be no bailout. At the end of the post, I provided links to the email addresses of your Representative and Senators.
Have you sent them a letter yet? What are you waiting for?
If you’ve received any response from your letters, please forward them to me and I will post them on this site.
“Offering federal help for strapped mortgage holders, President Bush is proposing to aid hundreds of thousands of borrowers hard hit by the housing slump.”
“The president on Friday was to talk about several initiatives and reforms to help homeowners with risky mortgages keep their homes, a senior administration official said Thursday. Bush also was to discuss efforts to prevent these kinds of problems from arising in the future.”
“The official said Bush will direct Treasury Secretary Henry Paulson and Housing Secretary Alphonso Jackson to work on an initiative to help troubled mortgage holders get services and products they need to keep them from defaulting on their loans. The official spoke on condition of anonymity to discuss details of the initiatives ahead of the presidential event.”
The Chairman of the Federal Reserve is also promoting the idea that hard-working taxpayers should be forced to subsidize reckless flippers and those that are living far beyond their means. The Sun-Sentinel reports:
“Federal Reserve Chairman Ben Bernanke is suggesting that policymakers look for ways to encourage a wider range of mortgages geared for low income and other borrowers who have been hard hit by the housing slump and credit crunch.”
“Bernanke, in a letter to Sen. Charles Schumer, D-N.Y., that was released Wednesday, said the Fed is keeping close tabs on financial markets and is "prepared to act as needed" to ensure spreading credit problems that have rocked Wall Street in recent weeks don't hurt the economy. It's a message the central bank has been sending as the markets have grown more turbulent.”
“Foreclosure and late payments have spiked especially for "subprime" borrowers with blemished credit histories or low incomes. Higher interest rates and weak home values have made it impossible for some to pay or to keep up with their monthly mortgage payments. Some overstretched homeowners can't afford to refinance or even sell their home.”
Do you want to increase the Federal debt in order to promote irresponsibility? Or would you rather they raise your taxes?
I previously wrote about the bailout proposal (click here to see the post) and encouraged readers to write their Congressional representatives to demand that there be no bailout. At the end of the post, I provided links to the email addresses of your Representative and Senators.
Have you sent them a letter yet? What are you waiting for?
If you’ve received any response from your letters, please forward them to me and I will post them on this site.
Saturday, August 25, 2007
Do you want your tax dollars spent to bail out irresponsible lending?
The proposed Federal bailout of irresponsible borrowers and lenders is picking up steam. The Sun-Sentinel recently reported:
“Sen. Charles Schumer urged federal regulators Wednesday to do more to help certain homeowners struggling to make mortgage payments.”
“The Democratic senator from New York made his plea in a letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke -- two men at the forefront of efforts to make sure the credit crunch that has rocked Wall Street doesn't undermine the economy.”
“Schumer asked Paulson and Bernanke to support a plan in Congress to provide $100 million to nonprofit housing groups to help troubled subprime borrowers -- those with blemished credit histories -- refinance their homes.”
“‘I urge you to use your leverage over financial institutions -- whether banks, lenders, servicers or brokerages -- to encourage them to match the federal government's efforts to provide funding to nonprofit group working to prevent foreclosures, and to work with the nonprofits to help borrowers who need loan modifications,’ Schumer wrote.”
“He said he intends to offer legislation when Congress returns next month to boost investment caps on Fannie Mae and Freddie Mac "to increase their flexibility to participate in loan modifications with borrowers and lending institutions." The administration has so far been opposed to raising the caps. The two mortgage giants a few years ago suffered multibillion-dollar accounting scandals.”
The problem with these proposals is the bailout will not help the borrowers – it is purely a bailout for the irresponsible lenders or hedge funds that invested in poorly-structured mortgage-backed securities.
Troubled borrowers got into their position because they bought homes they could not afford. Most were enticed by low-interest, negative-amortization ARMs that have since reset to their normal rates. While restructuring their loans to a fixed-rate mortgage will temporarily lower their monthly payments, in the long run, most of these troubled borrowers can not afford the payments unless they can continue paying the low, negative-amortization payments.
Furthermore, this encourages these troubled borrowers to continue paying monthly for an asset that may be worth hundreds of thousands less than their outstanding loan balance. In many cases, over the long-term, it would be better for these borrowers to simply walk away.
Sure, they will have ruined credit. However, appropriately-managed credit will typically recover partially in three years and fully in seven years – far less than the 30-year sentence that will be imposed by the restructured debt on an asset that may end up being worth 50% of what they borrowed.
On the other hand, the bailout will help those that recklessly loaned money to people who never had a chance of sustaining the payments. It will also help the hedge funds and their investors that fueled this recklessness. Your tax dollars will be used to prop up their irresponsibility.
A second part of Senator Schumer’s proposal is to increase the $417,000 cap on Fannie Mae and Freddie Mac. Under current Fannie Mae and Freddie Mac regulations (for more information on them, see this link), these quasi-government entities are prohibited from buying mortgages beyond the cap. Because of these caps, mortgages that exceed $417,000 are sold on the open market – a market that has recently soured to these Jumbo loans in the wake of a flood of foreclosures. As a result, Jumbo loans have become expensive relative to mortgages under $417,000. Thus, Senator Schumer’s proposal is simply an attempt to reduce the cost of mortgages in excess of $417,000.
Keep in mind the Fannie Mae and Freddie Mac were created by Congress to assist low- and middle-income Americans. They were never designed to help higher-income Americans.
Most financial advisors recommend that homebuyers should not purchase a home in excess of three times their annual income. This means that only those with a household income in excess of $139,000 should consider a Jumbo loan. Hence Senator Schumer proposal to increase the cap ignores the original charter of Fannie Mae and Freddie Mac. Ultimately, Schumer is simply attempting to pass a government welfare program for the rich.
Is this how you want you want Congress to spend your tax dollars? Do you want to fund a bailout of irresponsible lenders and hedge funds – a bailout that could potentially hurt the homeowners Schumer claims to be protecting? Do you want your government to guarantee loans that will only benefit those with incomes in excess of $139,000?
Have you written you Congressional representatives and told them how you feel?
I did. When Senator Schumer first started pushing for a Federal bailout of subprime borrowers, I wrote my representatives, Senator Bill Nelson, Senator Bob Martinez, and Representative Robert Wexler and pleaded with them not to consider any bailout.
Unfortunately, only Senator Martinez replied to my emails and his reply was nothing but a canned reply that didn’t even remotely respond to the email I sent him. This was his response:
Please take a few minutes to write them and tell them what you think of Senator Schumer's proposal.
“Sen. Charles Schumer urged federal regulators Wednesday to do more to help certain homeowners struggling to make mortgage payments.”
“The Democratic senator from New York made his plea in a letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke -- two men at the forefront of efforts to make sure the credit crunch that has rocked Wall Street doesn't undermine the economy.”
“Schumer asked Paulson and Bernanke to support a plan in Congress to provide $100 million to nonprofit housing groups to help troubled subprime borrowers -- those with blemished credit histories -- refinance their homes.”
“‘I urge you to use your leverage over financial institutions -- whether banks, lenders, servicers or brokerages -- to encourage them to match the federal government's efforts to provide funding to nonprofit group working to prevent foreclosures, and to work with the nonprofits to help borrowers who need loan modifications,’ Schumer wrote.”
“He said he intends to offer legislation when Congress returns next month to boost investment caps on Fannie Mae and Freddie Mac "to increase their flexibility to participate in loan modifications with borrowers and lending institutions." The administration has so far been opposed to raising the caps. The two mortgage giants a few years ago suffered multibillion-dollar accounting scandals.”
The problem with these proposals is the bailout will not help the borrowers – it is purely a bailout for the irresponsible lenders or hedge funds that invested in poorly-structured mortgage-backed securities.
Troubled borrowers got into their position because they bought homes they could not afford. Most were enticed by low-interest, negative-amortization ARMs that have since reset to their normal rates. While restructuring their loans to a fixed-rate mortgage will temporarily lower their monthly payments, in the long run, most of these troubled borrowers can not afford the payments unless they can continue paying the low, negative-amortization payments.
Furthermore, this encourages these troubled borrowers to continue paying monthly for an asset that may be worth hundreds of thousands less than their outstanding loan balance. In many cases, over the long-term, it would be better for these borrowers to simply walk away.
Sure, they will have ruined credit. However, appropriately-managed credit will typically recover partially in three years and fully in seven years – far less than the 30-year sentence that will be imposed by the restructured debt on an asset that may end up being worth 50% of what they borrowed.
On the other hand, the bailout will help those that recklessly loaned money to people who never had a chance of sustaining the payments. It will also help the hedge funds and their investors that fueled this recklessness. Your tax dollars will be used to prop up their irresponsibility.
A second part of Senator Schumer’s proposal is to increase the $417,000 cap on Fannie Mae and Freddie Mac. Under current Fannie Mae and Freddie Mac regulations (for more information on them, see this link), these quasi-government entities are prohibited from buying mortgages beyond the cap. Because of these caps, mortgages that exceed $417,000 are sold on the open market – a market that has recently soured to these Jumbo loans in the wake of a flood of foreclosures. As a result, Jumbo loans have become expensive relative to mortgages under $417,000. Thus, Senator Schumer’s proposal is simply an attempt to reduce the cost of mortgages in excess of $417,000.
Keep in mind the Fannie Mae and Freddie Mac were created by Congress to assist low- and middle-income Americans. They were never designed to help higher-income Americans.
Most financial advisors recommend that homebuyers should not purchase a home in excess of three times their annual income. This means that only those with a household income in excess of $139,000 should consider a Jumbo loan. Hence Senator Schumer proposal to increase the cap ignores the original charter of Fannie Mae and Freddie Mac. Ultimately, Schumer is simply attempting to pass a government welfare program for the rich.
Is this how you want you want Congress to spend your tax dollars? Do you want to fund a bailout of irresponsible lenders and hedge funds – a bailout that could potentially hurt the homeowners Schumer claims to be protecting? Do you want your government to guarantee loans that will only benefit those with incomes in excess of $139,000?
Have you written you Congressional representatives and told them how you feel?
I did. When Senator Schumer first started pushing for a Federal bailout of subprime borrowers, I wrote my representatives, Senator Bill Nelson, Senator Bob Martinez, and Representative Robert Wexler and pleaded with them not to consider any bailout.
Unfortunately, only Senator Martinez replied to my emails and his reply was nothing but a canned reply that didn’t even remotely respond to the email I sent him. This was his response:
Thank you for sharing your views about responsible lending practices. I
appreciate hearing from you and would like to respond to your concerns.
As you know, on March 15, 2005 Representative Bob Ney (R-OH) introduced the Responsible Lending Act (H.R. 1295). This legislation responds to the growing complaints of predatory lending practices, conflicting state laws, and the need to further enhance consumer education and protections. H.R. 1295 was referred to the House Subcommittee on Housing and Community Opportunity in the House Committee on Financial Services.
You may also be interested to know that on March 9, 2005, Representative Brad Miller (D-GA) introduced the Prohibit Predatory Lending Act (H.R. 1182), legislation to amend the Truth in Lending Act to eliminate specific abusive lending practices
and ensure that credit for home ownership is available for consumers with
impaired credit. H.R. 1182 was referred to the House Committee on Financial
Services.
Although no related legislation has been introduced in the Senate, as a member of the Senate Committee on Banking, Housing, and Urban Affairs, I am working closely with Chairman Richard Shelby to develop comprehensive legislation that addresses the need for uniform, responsible lending practices and consumer education. State laws are cumbersome and Congress must update existing federal laws to create a strong national standard with significantly greater protections.
Again, thank you for sharing your concerns with me. If you have any other further questions or comments, please do not hesitate to contact me. In addition, for more information about issues and activities important to Florida, please sign up for my weekly newsletter at http://martinez.senate.gov/.
Sincerely,
Mel Martinez
United States Senator
Obviously, our elected representatives need more input for their constituents. Please take a few minutes to write or email you representatives in Congress, even if it’s just a short paragraph.
You can find your Senators' address and email here and your Representative’s address and email here.
Please take a few minutes to write them and tell them what you think of Senator Schumer's proposal.
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