0 Bailouts:The Money Doesn't Come From the Moon

This is a must read article. Every bailout requires mortgaging our future deeper with the proverbial government line of credit extended by investors and savers throughout the world.

“Be Nice to the Countries That Lend You Money” I am not a doom and gloom person but you should be watching the value of the US dollar and the cost of our debt over the next few years to see if the mighty American Empire is burning or dropping to an also ran status like France, Italy or Great Britain.

Detail: Bailouts:The Money Doesn't Come From the Moon

0 Housing and Recovery Act 2008

Various client's have discussed the housing bill signed into law two weeks ago. Below is a great summary. A few items will have a slight impact on housing. The biggest benefit is for borrowers that are in danger of foreclosing and first time home buyers. The FHA created a program which is a loan write down and shared equity participation with Uncle Sam for 50% of the future appreciation. My first economics teacher Dr.Lamb burned into our brains, that there is no such thing as a free lunch. Various elements of this bill bear that out. The bill is not sexy so I had to throw in a picture of Heidi Klum to liven things up. Enjoy your weekend.-Mr.Mortgage

Key provisions of the Act include:

New agency created to regulate Fannie Mae, Freddie Mac, and the Federal Home Loan Banks: The Act creates a new regulatory agency, called the Federal Housing Finance Agency, to oversee and regulate Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The agency is charged with the responsibility of monitoring the portfolio holdings of the entities it oversees and ensuring they maintain sufficient capital to operate healthy national housing finance markets.

FHA Program updated: Effective January 1, 2009, the FHA loan limit for conforming loans increases to as much as $625,500 in the most expensive U.S. markets. This affects both home equity conversion mortgages (reverse mortgages) and jumbo loans. Down payment requirements on FHA loans increase from 3 percent to 3.5 percent.

The Hope for Homeowners Program: The Act creates a new Federal Housing Authority (FHA) program designed to help borrowers in danger of losing their homes to foreclosure. Eligible homeowners may be able to pay off their original (foreclosing) lenders with a fixed-rate, 30-year-term mortgage for up to 90 percent of the appraised value of the property. Eligible homeowners are those who originated their loans before January 1, 2008, spend more than 31 percent of their monthly income on their mortgage, and are currently in danger of foreclosure. Borrowers would have to share future equity with the FHA. The program is completely voluntary; banks may elect not to participate. The program begins on October 1, 2008 and ends in September of 2011.

Temporary mortgage foreclosure protection for servicemembers: The Act provides mortgage foreclosure protection for members of the U.S. Armed Services by temporarily increasing (through December 31, 2008) the maximum loan guarantee for VA loans. The period a lender must wait before initiating foreclosure proceedings after a service member returns from service is extended from 90 days to 9 months. Increases in mortgage interest rates above 6 percent are suspended during the period of service and for one year after a service member ends service. This provision will sunset on January 1, 2011.

Temporary tax "credit" for first-time homebuyers: First-time homebuyers of a principal residence purchased after April 8, 2008 and before July 1, 2009 may take a refundable tax credit of 10 percent (up to a maximum of $7,500; $3,750 for married persons filing separate returns) of the purchase price of the property. The credit is phased out for individual taxpayers with adjusted gross incomes (AGIs) ranging from $75,000 to $95,000 ($150,000 to $170,000 if married filing jointly). However, taxpayers must repay the credit taken over 15 years in equal installments as a surcharge on their annual income tax return.

Temporary standard property tax deduction for non-itemizers: For 2008 only, taxpayers who do not itemize their deductions will be allowed to take a real property tax standard deduction (in addition to the standard deduction) of up to $1,000 if married filing jointly ($500 for all other filers).

Reduced homesale exclusion for nonqualified use: For sales and exchanges of a principal residence after December 31, 2008, the $250,000 ($500,000 if married filing jointly) homesale exclusion won't apply to the extent the gain is allocated to periods (not including any period before January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer's spouse.

Temporary increase in low-income housing credit: For 2008 and 2009 only, the Act provides a 20 cent increase in the low-income housing credit per-resident cap, and increases the small state minimum by 10 percent. The technical rules relating to the credit have also been simplified.

Expansion of the rehabilitation tax credit: The Act taxpayers to qualify for the full amount of the rehabilitation credit so long as less than 50 percent (up from 35 percent) of the rehabilitated building is leased to state and local governments or other tax-exempt entities.

Repeal of AMT limitations: on tax-exempt housing bonds, low-income housing credit, and rehabilitation tax credit. Generally effective after December 31, 2007, interest on tax-exempt housing bonds are not subject to the alternative minimum tax (AMT), and the low-income housing credit and rehabilitation tax credit can be used to offset AMT liability.

REIT modernization: The Act liberalizes the rules for real estate investment trusts (REITs) by clarifying that they can earn foreign currency income associated with real estate activities, increasing the permissible size of REIT investments in taxable REIT subsidiaries, modifying the REIT safe harbor for dealer sales, and extending the special rules for lodging facilities to health care facilities.

Election to accelerate recognition of historic AMT/R&D credits: The Act allows taxpayers to elect to accelerate the recognition of a portion of their historic AMT or research and development (R&D) credits in lieu of the bonus depreciation tax benefit allowed under the Economic Stimulus Act of 2008. The amount taxpayers can receive is calculated based on the amount invested in property that would otherwise qualify for said bonus depreciation. This amount is capped at the lesser of 6 percent of historic AMT and R&D credits or $30 million.

Detail: Housing and Recovery Act 2008

0 Mortgage Bailout Cost Will Hit Everyone

Yesterday, Mrs. Clinton wrote the Secretary of the Treasury about her bailout plan. This whole idea of freezing mortgage rates and foreclosure bailouts is bad medicine with unbelievable side effects. The equivalent to taking a drug to treat your fever but it gives you cancer a year later. We need to let free markets work. Flush out the people who can't afford their homes and took out loans that they could never pay. Otherwise, the housing crisis that is now a credit meltdown will last much longer.

Who would want to lend money to homeowners or other borrowers for that matter knowing that the government stepped in and altered the terms of millions of mortgages during the meltdown? Borrowers with less than perfect credit were given rates and terms much better than they otherwise would have received because the investors/banks were counting on the reset to make up for a teaser rate that didn't compensate for the credit risk of a non-prime borrower or high loan to value mortgage. Without the teaser rates borrowers would likely have had rates of 8-11%. That is what we see now at the remaining lenders that work in the non-prime market. If the bailout proponents win, we will see credit costs increase and credit availability dramatically decline. Someone pays, it will be the tax payer and anyone who borrowers will see increased requirements and higher rates. This has already happened with subprime rates, stated loans, and down payment requirements. I agree things were way out of hand but a bailout will only make the patient much worse off in the long run. Let the fever run its course. Terrible ideas found below:

December 3, 2007
The Honorable Henry M. Paulson, Jr.

Secretary

United States Department of the Treasury

1500 Pennsylvania Avenue,

N.W.Washington, D.C. 20220

Dear Mr. Secretary:
I am encouraged by news accounts that Treasury officials are negotiating an agreement with the mortgage industry to curb the foreclosure crisis. Reports of this agreement indicate that it will allow homeowners to apply to quickly refinance their mortgages or temporarily stop their adjustable rate mortgages from resetting at higher levels.
An effort to end the foreclosure crisis is long overdue. 1.8 million foreclosure notices have been sent out this year, an increase of 74% from last year. And with the monthly payments set to rise on more than 1 million subprime loans next year, the situation is likely to worsen. Experts now say that the foreclosure crisis is weakening the economic outlook, hurting industries from construction to autos, and making banks reluctant to lend companies the capital they need to expand and create jobs. Cities face the prospect of vacant properties marring neighborhoods, cutting tax receipts, and dragging down property values.
It is critical that we address this crisis. The Administration and the mortgage industry must reach an agreement that matches the scale of the problem. If you produce an inadequate agreement, or fail outright, the cost to our economy will be incalculable. A satisfactory agreement must do at least the following: impose a moratorium on foreclosures, freeze mortgage rates before they escalate, and require that the mortgage industry report its progress on loan modifications:
Impose a foreclosure moratorium of at least 90 days on subprime, owner-occupied homes. The moratorium will stop foreclosures until lenders and servicers have an opportunity to implement the freeze in mortgage rates. Servicers have complained that they do not have the systems in place to quickly contact the large numbers of at-risk borrowers. Servicers can certainly expect that during the moratorium at-risk borrowers will contact them. The moratorium will also give state and city organizations as well as community groups the necessary time to provide financial counseling to at-risk homeowners. The moratorium only applies to owner-occupied houses, and therefore excludes real estate speculators.
Freeze the monthly rate on subprime adjustable rate mortgages, with the freeze lasting at least 5 years or until the mortgages have been converted into affordable, fixed-rate loans. After the moratorium, there should be a long freeze in rates on adjustable rate mortgages. The overwhelming majority of subprime mortgages have adjustable rates. The long rate-freeze will give the housing market time to stabilize. It will give families an opportunity to rebuild equity in their homes. It also gives the mortgage industry time, and incentive, to convert mortgages that were designed to fail into loans that are actually affordable. The rate freeze and loan modification must be extended not only to borrowers who are current but to some who have fallen behind. After all, it is indisputable that brokers and mortgage companies lured families into mortgages which were designed to end in foreclosure. This was only possible because regulators were asleep at the switch. A rate freeze is critical. An average of $30 billion in loans will reset monthly next year. One study indicates that the average reset increases monthly payments by 40%. It is no surprise that rate resets are the major driver of the foreclosure crisis. The rate freeze and loan modification would only apply to owner-occupied houses.
Require the mortgage industry to provide status reports on the number of mortgages it has modified. Resolution of the foreclosure crisis will require that large numbers of unworkable mortgages be converted to more stable loans. To date, however, despite pressure from Congress and the press, lenders and servicers have modified only about 1% of subprime mortgages. This obviously has to change. We cannot take the industry at its words that it will follow through on an agreement to convert loans expeditiously. Accordingly, the agreement must impose on lenders and servicers an obligation to regularly report their modifications.
Mr. Secretary, if you produce an agreement that lacks these provisions, I will pursue another course to end the crisis:
I will consider legislation that enables lenders to convert unworkable mortgages into stable, affordable loans without the permission of investors. Protection from lawsuits will remove the obstacle that keeps lenders, servicers and others from turning mortgages that were designed to fail into mortgages families can afford. Right now, servicers who process monthly loan payments and interface with homeowners have flexibility to modify loans. However, they are reluctant to fully exercise this discretion in part because they fear investor lawsuits. Investors who own the securities into which the mortgages have been packaged may assert that they are harmed when servicers help at-risk borrowers. Protection from lawsuits could enable the servicers to help homeowners avoid foreclosures, help investors avoid the losses they would otherwise suffer, and help the economy.
I also propose to provide financial assistance to communities on the frontlines of the crisis:
A fund of up to $5 billion to help hard-hit communities and distressed homeowners weather the foreclosure crisis. The fund will support initiatives by states, cities, and community groups to reduce foreclosures, and to help cities cope with the financial and social costs associated with an increase in vacant properties. The fund will provide a much-needed boost to communities already feeling the effects of the economic downturn. States are already piloting programs to stem foreclosures. Many of the programs provide financial counseling to at-risk homeowners, help borrowers work out solutions with lenders and educate homeowners about predatory lending. Studies demonstrate that the overwhelming majority of families that receive financial counseling ultimately avoid foreclosures. Financial counseling can cost as little as $3,000 per household, while each foreclosure costs a local community $227,000 when the harm to surrounding property values is included. Foreclosure prevention is more critical than ever. The concentration of foreclosures in particular neighborhoods has a negative ripple effect on communities. It leads to higher rates of crime, lower tax revenues, and lower property values. Low-income communities are especially at risk. Risky subprime loans are three times more likely in low-income neighborhoods than in high-income ones. Minority communities are also disproportionately at risk because subprime loans are five times more likely in predominantly black neighborhoods than in predominantly white neighborhoods. The Center for Responsible Lending estimates that 55% of African-Americans and 46% of Latinos who purchased homes in 2005 received subprime mortgages. Those loans were mostly adjustable rate mortgages, and most of them will experience escalations in the monthly payments either this year or next. The foreclosure crisis threatens to undo the gains in minority homeownership rates. Lawsuits have been filed against mortgage lenders alleging discriminatory practices. Regulators should be especially attentive to these concerns.
In March I called on the mortgage industry to observe a “foreclosure timeout” so that lenders and borrowers could work out solutions. I also wrote to Federal Reserve Chairman Ben Bernanke urging him to act swiftly to curb abusive and irresponsible lending practices. Just two weeks later, however, you told Congress that the subprime problem was “contained.” Unfortunately it was not. While you and others in the Administration misdiagnosed the problem, over 1 million additional foreclosure notices were sent out. Later, I called on the Administration to convene a “crisis conference” that gathered the housing stakeholders–lenders, investors, mortgage servicers, regulators, representatives of homeowners, and others–to devise a way of modifying the large number of unworkable mortgages. I am glad that the Administration has at least heeded this call.
Now that you have gathered the housing stakeholders, it is imperative that you negotiate an agreement appropriate to the scale of the problem. The proposals I have outlined provide the framework for a comprehensive workout, not a bailout. This is a moment of shared responsibility. Investors, lenders, and homeowners all have a part to play and sacrifices to make. While we work to solve the immediate problem, I call on the Administration, the regulators, and the mortgage industry to ensure that the abuses of recent years never recur. There must be a commitment to tightening underwriting standards and disclosure obligations. Federal prohibitions against abusive lending must be vigorously enforced. Prepayment penalties must be eliminated. Brokers must be subject to federal registration. Mortgage servicing fraud and foreclosure rescue fraud must be prosecuted. Homeowners and homebuyers must have greater access to financial counseling. I have already announced proposals to accomplish many of these things. It is unfortunate that the Administration has been so slow to act. But now that you and others are engaged, I urge you to make the bold decisions that the situation warrants. Thank you for your attention to this critical issue.
Sincerely,

Hillary Rodham Clinton

Detail: Mortgage Bailout Cost Will Hit Everyone