Dazed and Confused — Led Zeppelin
The election is coming up in a few days. Has all the bull$hit being thrown around left you dazed and confused? I got a call from Robo-Bill Clinton today. I felt so special. I am planning to sit down with my California General Election voter information guide this weekend and make up my mind on how I plan to vote on the various initiatives. Since the topic of the weekend is politics, I thought it would be good to explore some of the politics of the housing bubble.
There are many ideas floating around the blogosphere regarding what can and should be done about the housing crisis. I have received a couple of emails recently from people with ideas on changes to our current system. One is from a local realtor named Shevy Akason who is championing legislation that would help the flagging housing market and get it on more solid ground (His blog is here). This isn’t a bailout, and although I think there are some issues, it is a proposal worth examining:
I also received an email from MalibuRenter:
buying vs renting, I realized the potential of a simple policy change: make the
standard deduction much larger. For example, instead of the current
$10,200, go to $20,000 for a married couple. About 75% of all home
mortgages are for $300k or less (see http://www.federalreserve.gov/pubs/bulletin/2008/pdf/hmda07draft.pdf , page 53). For someone with a new $300k loan at 6.5% and no other
itemized deductions, they would no longer have to itemize. For people with
a few other itemized deductions like income taxes and property taxes, they
still might take the higher standard deduction with a $200-$250k
loan. That would mean more than half of all mortgageholders would have no
reason to itemize.
anyone whose itemized deductions including mortgage interest fits under the new
limit, they are no worse off. Usually, they will be better off. Many
more people with modest incomes will not have to keep records or have to
understand the code in order to itemize. It is a way to both reduce and
simplify taxes for people with modest incomes. 2. Paying off your loan
earlier, or starting to pay faster, would not lower your income tax deductions
for people under the $20,000 standard deduction. 3. There would be more
incentive to refinance to lower interest loans, because the Federal Govt would
subsidize less of the interest cost, frequently they would subsidize none of
it. 4. There would be less marginal incentive toward larger
homes, higher loan to value ratios, home equity loans, and cashout refis.
5. In general, homes would be financed with less leverage.
would get less bang for the buck. It would certainly be more
politically feasible than trying to eliminate the HMID. I wonder, would this create a tipping point where you would have
incentive to jack up your mortgage. Once you crossed the threshold, the
larger your deduction the better. I suppose you could always lower the
cap as well. You could make the window of opportunity to benefit from
the HMID so small that only a small band of middle to upper income
homeowners get any benefit. Also, for our new Democratic president and Congress, raising the
personal exemption lowers the taxes on the most needy and trickles its
way up to the middle class. They would like that.
subsidy of ownership that encourages excessive debt loads. It would be
very difficult to get rid of politically, but since excessive debt was
the primary cause of the house price collapse and huge lender losses,
it is something that should be examined.
have my own proposals for preventing the next housing bubble. The
following is the last chapter of my book The Great Housing Bubble:
the new administration comes into office this January, the housing
crisis will be one of the most important issues facing the new
President. There will be many ideas floating around. Some of them good;
most of them bad.
Wanted a woman, never bargained for you.
Lots of people talk and few of them know,
soul of a woman was created below.
You hurt and abuse tellin’ all of your lies.
Run around sweet baby, Lord how they hypnotize.
Sweet little baby, I don’t know where you’ve been.
Gonna love you baby, here I come again.
Every day I work so hard, bringin’ home my hard earned pay
Try to love you baby, but you push me away.
Don’t know where you’re goin’, only know just where you’ve been,
Sweet little baby, I want you again.
Been dazed and confused for so long, it’s not true.
Wanted a woman, never bargained for you.
Take it easy baby, let them say what they will.
Will your tongue wag so much when I send you the bill?
Dazed and Confused — Led Zeppelin
How much impact could loan modification have on the pace of the decline and the ultimate destination in terms of pricing. It seems that banks, recognizing the huge downside to foreclosing in such massive numbers, as working in earnest to modify loans.
From my perspective these efforts are not beneficial to us renters.
All these events are designed to slow the rate of price decline, and in that regard, they may have some impact. I still think it is trying to put out a forest fire with a garden hose. The number of distressed homeowners is much too large, and these programs do nothing to address affordability. The greatest declines for Irvine are in front of us rather than behind us. Irvine is not quite half way to the bottom, IMO. Some other areas are much farther along, and some of the most beaten down markets may actually be at the bottom.
IR-
What would you classify Irvine as? Alt-A or Prime (I highly doubt its subprime)? I’m looking primarily in south Huntington and its still WAY out of affordable according to median incomes on the redfin/onboardnavigator demographics.
Ordinarily, I would say Irvine was Prime, but the prices were so high, and there was so much refinancing going on that much of it is now Alt-A.
Irvine renter- generally I agree with you, however, there is still huge demand in Irvine and Orange County in general. The average bank owned property is selling in just over a month even though affordability is still really low. With the demand in Irvine a program like this will potentially slow and curb the price declines all together. Which seems good on the surface since our country seems obsessessed with immediate gratification this might be viewed as a victory,
However, as you stated the real problem is affordability. For homes to reach a sustainable affordability level prices need to come down or wages need to come up.
Therefore, although these programs slow or delay the price declines, they do not address affordability and ultimately delay the recovery process and are exactly what we don’t need.
I tend to agree. I don’t think the efforts aimed at stemming foreclosures will have much of an impact on the ultimate destination in terms of prices, however insofar as these efforts lower the foreclosure rates it seems that it will slow things down.
I have also been reading about how the loan mods work, and it appears that they are simply a combination of (1) a lowered rate that will reset in 5 years (2) if lowering the rate is insufficient the amount of the loan may be reduced in concert with the temporary rate reduction.
Regardless the banks are taking continued losses on their loan portfolios, and are considering loan modifications not out of altruism, but in an effort to increase the value of a loan above the value realizeable through foreclosure. The net result is tightening credit standards as banks are less willing and able to absorb future losses.
I think you guys are being a bit naive – the whole idea is to keep the taxpayer in a state of serfdom, with maximum debt and maximum income. that’s how you keep them on the treadmill paying for those congressional pensions. their worst nightmare is a citizen with a free and clear home, a nice pool of stable, balanced savings and a good long-term care insurance policy. a person like that doesn’t need to make much income, nor need much of anything from the federal govt, and that is their worst nightmare.
Don’t forget that housing is the only asset you can sell at a profit and reinvest without paying taxes…and every 2 years you can even pocket a few hundred thousand tax free. The differences in capital gains treatment made investing in homes ripe for a bubble.
I disagree with motivations. Capital gains is only 15% – right? Tax rates we’re NOT major driver for the bubble.
People bought homes as financial investments because they could get highly leveraged on an asset, a home, with little exposure and lending standards were lax.
If capital gains was 0.0%, there would have been the same housing bubble.
Why can’t we just keep things simple. When the prices fall, downpayments should be no problem for a disciplined saver. If someone is not disciplined, what are they going to do about the 30 years of payments. Downpayments are the test.
I am not a fan of savings accounts that lock the money into a specific purposes. What if you want or need to spend the money in a different way. What if your kid won’t go to college or you inherit the house of your dreams.
If they do this, there will be a guy that will go buy a house just so he can apply is tax free downpayment money, and then in the next breath pull it out in an equity withdrawal.
Brea- I agree with you, when prices fall downpayments should not be a problem for many and they are not, however many need an extra push in this type of market.
In addition, in a perfect world the government would not tinker. However, that’s not the case, they have committed to tinkering. Since that’s the reality we’re dealing with, at least they could encourage and reward positive behavior rather than negative. If mine/our/your tax dollars are going to be used for this bailout, would you rather it make the situation better or worse? Would you prefer your money be given to those that were part of the problem when they bid up a home in the first places and took exotic loans they couldn’t afford or someone that was responsible and chose to save, sacraficed and waited? (see entire PDF version to understand the dangers of the curren proposals)
The question is not whether the goverment is going to get involved and use our taxes to do it. It’s how wisely they are going to use this money and who’s going to benefit.
There are hundreds/ thousands of potential buyers out there waiting for prices to come down to reasonable levels. The foreclosures need to flush through the system the quicker the better. Do you think that it’s possible that this or similar legislation may get these buyers into the market and help prevent legislation that rewards irresponsible behavior?
Great point regarding the equity withdraw, provisions would need to be added to prevent that.
landmark,
Regarding your comment: “Would you prefer your money be given to those that were part of the problem when they bid up a home in the first places and took exotic loans they couldn’t afford or someone that was responsible and chose to save, sacraficed and waited?”
I would prefer that tax money not be used for anyone’s personal interest. So far, the modifications I have read about, don’t look like a windfall to the reckless borrower. I just don’t see were a banker/investor will give up anything unless it is in his own best interest to do so. The talk of the politicians just disgust me, but it may just be pandering to voters.
Your proposal is a separate matter. Why should income taxes not be paid on downpayments? It is income. We have deficits. In the case of retirement IRA’s, the withdrawals are taxed when the money is withdrawn. I assume the Home Equity Accounts would not be taxed when the money is pulled out at the house purchase, otherwise, you would just be postponing taxes for just a few years. Why bother. The while the housing market’s has been extreme, it will eventually return to a buyer’s market with prices tied to wages. That is when buyer’s should come back and they will.
Brea— Frist, again, I agree- tax money should not be used for personal interest. However, we have a problem that was started with housing. The general belief is that it will end with housing. If people believe that and goverment is set on doing anything they can to shore up the housing market there has to be better plan that modifying loans through principle reduction.
“So far, the modifications I have read about, don’t look like a windfall to the reckless borrower.” -I do not do loan modifications, so I cannot speak to the average modification, however I have heard numerous stories of modification that I would consider reckless. For example, a good friend of mind lives in Victorville, he’s a vice principle, makes over 100k/year, bought a new home for circa 400k. His neighbor bought his home at a similar time for a similar price. His neighbor went to the bank for a modification, they said no because he was making his payments. So he quit making his payments and asked them again a few months later. They took $100,000 off of his principle. What makes this even worse is that his neihbor quit making his mortgage payment but kept paying his payment on his quads and “toys”. I would consider that a “windfall to a reckless borrower” do you agree? I have heard at least 1/2 dozen stories like that. Guess what my friend wants— a modification.
Great point regarding the money when it is pulled out of the home. My thought is that it would be treated similar to a 1031 exchange. If the money is then put into another home it can be tranferred tax free. However, once the home is sold taxes will be paid.
In addition, I do not think that legislation should go on forevor, I believe the government is trying to create a softer landing and avoid a major catostrophe. If we are in as bad of a spot as they are saying and something needs to be done I think we need to explore every avenue.
Do you have any ideas besides do nothing. Which again, I tend to agree with you that the market will work itself out and the goverment should only step in if the situation is incredibly extreme.
“They took $100,000 off of his principle. What makes this even worse is that his neihbor quit making his mortgage payment but kept paying his payment on his quads and “toys”.”
This suggest to me that the bank was willing to forgive 100k in principle hoping that the borrower would pay the mortgage that was still underwater. When the borrower sees that houses are still dropping, he going to walk anyway. Nothing was going keep this guy in his house. When he says he got 100k off his principle, did he mention that he also gave up future appreciation. He may not have even realized it at the time. These stories are misleading many times.
Also, my guess is that your friend may not want the modification once he reads the documents.
Back to the Tax Free Home Equity Account discussion, 529 College Savings Plans are funded with after tax money, but the appreciation on the investments is tax free. 401k’s are a substitute for a pension. But, your HEA’s are just short term savings. So I am still wondering, why give the tax windfall at all for the contribution to the HEA account?
Maybe if I was a realtor or someone else who profits from the RE transactions, I would feel differently, but home buyers will come when it is a good deal.
Brea- The problem using the notion that “homebuyers will come when it’s a good deal” is that the goverment is afraid of how low the prices need to go to make it a “good deal” and the consequences of allowing that.
If they were ok with allowing the market to work itself out we would not be having this conversation and I think they would be doing the right thing.
Ultimately, there is demand for homes once they’re priced at levels that are deemed “good deals” Since the government is set and interfering the question is will prices be supported when there is 1) less supply or 2)Demand
I agrue that creating less supply without addressing affordability or demand is a mistake.
From everyhing that I’ve read the government is set on creating legislation that will create a softer landing or even a support that drives stabilization or even appreciation. If the choice is between loan modifications that give a break to those that purchased irresponsibly (to what level or how big of a break is given is not improtant) or creating more demand through tax breaks to responsible buyers I cannot see how the first option is preferred.
Again if there are three options.
1) Do little to nothing- only helping those that can stay in their homes at market rates if they can refinance into 30 year fixed fully ammortized loans with a goverment gaurnatee since there’s no equity.
2) Decrease supply and leave demand alone – By enacting legislation that favors loan modifications with a combination of exceptional interest rates, principle reduction, etc, thus lowering supply
3) Increase supply and increase demand an allow a free market economy to work itself out with incentives to purchase and put more money down as down payments and towards principle.
I would choose 1 over 2 all day. However I would choose 3 over 2.
Unfortunately 1 does not seem to be an option. Maybe 3 isn’t either, however, I think it should be.
I really trust that the key players here, the banks and the borrowers, will come to their best deals for themselves. These borrowers are not going to be made whole by the banks.
Prices will drop because they were too high. It is hard to watch, but I am not interested in encouraging someone to purchase while home prices are still over-valued. If someone is going to enter the market, he can make that decision without being baited.
Incentives will prop up prices, which will hurt affordablity. I would like to see all the priced-out renters buying without using my taxdollars to do it. We lived through the 90’s, We will live through this. I am more concerned about jobs, than house prices.
I just can’t get behind this proposed bill. With our budget deficits, why add any more tax shelters.
I hear you. Please contact your representative and let them know that that you are against your tax dollars being used to pay for loan modifications or any other legislation that is meant to prop up home prices. There are too few people like you and I speaking out. Even if the goverment is just gauranteeing these loans, eventually many of them will go bad and we will pay for it. In addition, once one person get’s a modification everyone and their brother will want one, that’s the reality.
I have sent many emails aready.
Mortgage equity withdrawal is one of the big problems with this proposal. As I read it, someone could pay down their mortgage, get a tremendous retroactive tax break, then HELOC the money right back out again after they got their check from the government.
The best solution to that problem would be to tax HELOC money. In fact, I think HELOC money should be taxed as income since defaulting on it is not taxed now. The way our current tax system is set up, people are strongly encouraged to take on this debt. The money is essentially tax free, and the service on the debt is tax deductible.
IR,
I am torn between reading your book and reading this site. What I have read is very interesting and useful. I am so glad you wrote it.
I hate when politicians make sweeping rules just to look like they care. IMO, this tax relief on debt forgiveness could have been handled on a case by case basis. When they can’t pay, harass them and then write it off.
Based on the IRS website:
http://www.irs.gov/irs/article/0,,id=179073,00.html
HELOC money used to improve the home, would qualify for the tax relief. When they bought cars and still claim they used it to improve the home, they are cheating. Maybe they will audit some of the returns. I still believe that we need to tax income and not loans. The real issue it that they get relief from the forgiveness of debt and isn’t that why we are in deep trouble now.
Case-by-case relief is ideal but apparently impractical. The financial system has repackaged these loans as investments and apparently it is hard to find paperwork and expensive to do case-by-case assessment.
The problem with NOT doing anything is debtors can’t cope and walk away from **all** their debt. We all lose in that scenario.
We all lose worse if a standard is set that encourages more people to ask for handouts.
The forclosures and loan modifications on on a case by case basis. Loans have servicer and they will process everything. I was talking above about the IRS 1040 filings to get relief from forgiveness of debt. That will be filed on each individual basis.
Getting borrowers talking to lenders is the key. If borrowers like the lenders terms they will stay in the house. Every borrower may make a different decision.
Handouts? The whole country wants a handout. GM wants a hand out to buy Chysler. My BOA took a hand out and bought Merrill Lynch. We’re 1 trillion dollars in handouts past that point.
That doesn’t mean I agree and definately does not make it right, however, I do not know the direct affects or all of the reasoning behind that. What I do know is that loan modification leaves a lot of people saying what about me and a whole group of people that are fine joining the party.
Not to mention that most of those completing modifications are the mortgage brokers that became experts at creating paper work to make their client look like they could afford a home— now the same ex-brokers are becoming “loan modification expers” and getting really good and showing the bank that they can’t. funny how that works.
I addressed this with some one on another occasion, and I should add some of these details to the legislation as I go ,however, there should be a provision that if the money is pulled out through a HELOC or through a sale that is not an exchange it is taxed as ordinary income.
Yeah, right, what we need is a more complicated tax code. How about we simplify the tax code to “zoiks pays no taxes, every one else can eff off”.
Feeling so special after the robocall? Just wait for national TV on November 7th, this would be a “special” experience:
http://www.cnnbcvideo.com/index.html?nid=fY3TWTZfHXOfejIU2sfzwjkzMjc4OQ–&referred_by=13429144-ae0dQ5x
Sry, IR, I couldn’t resist!
😀
That is really funny. LOL!
Thanks for that laugh. That was great.
Classic
Probably the best thing to do is figure out a way to keep as many fully-employed, tax-paying families in their homes as possible, while limiting the assistance to pure price speculators. I seriously doubt that there is much to be gained “helping” renters by letting prices fall all the way to their natural price support levels.
That said, now really is the time to take some steps to prevent another bubble from inflating. Here are my thoughts:
1) I like the idea of a “luxury tax” or cap on the interest deduction. I’d set it at the interest on $415,000 for sole property, $533,850 for a home owned jointly by a married couple and bump the cap $26,000 for every dependent under 17.
2) This would encourage equity. Let’s take an average sizes house of 2,300 square feet, assume a per square foot rental price in the area of $2.00 and the 30 year average Irvine rent multiple of around 200. That house has a market price of $920,000. A married couple with one child would only able to write off the interest on the first $559,000 in debt, or 60% of the market price. If they are going with a traditional 20% down, then it raises the effective interest rate on the last $184,000 borrowed from, say, 6% to 8%. That would slow the use of leverage.
3) As long as mortgages are being converted into securities and re-sold, there needs to be a method for folks to do work-outs with a third-party. Bankruptcy courts are not ideal, but it is better than having mass foreclosures.
Dean—
I agree— if a fully employed family can afford their payment by refinancing into a 30 year fixed, fully ammortized loan, at 5 or 6% but as a result of too little equity the banks won’t help them a govermnent gaurantee could be in order.
For most others, they may need to short sell, or may be faced with foreclosure and have to rent. This will not be the end of the world for them. As I repsonded to Brea above, if the goverment weren’t committed to being involved that would be plenty, however, since the goverment seems to be committed, there has to be better options than what they are proposing.
I’d be a bit more generous. Anyone who put their own cash money into a purchase and has lost 100% of that equity plus some of the bank’s money should have a chance to get the principal brought down. Also, the interest rate could get tweaked to a fixed rate that matches an appropriate percentage of their W2 income.
Clearly, there need to minimums. Like, say 10% of the purchase price. Also, there needs to be some kind of real penalty. Like, no further access to credit for, like, seven years. No new Lexus, or fancy colored AmEx Cards, would be a real penalty for OC debtors. That would keep folks in their homes, the broader economy out of free-fall and punish the irresponsible.
Dean– you are more generous than me. First, I do not see any room for principle write down without creating more issues than it solves. Although, I agree with your comment regarding a penalty or consequence. Second, I do not think it’s fair to give a certain percentage of the poppulation and special interest rate because they bought when they shouldn’t have and took a loan when they shouldn’t have. Many people are renting and gave up on buying as a result. Are those people going to be given special rates when they choose to buy based upon their W2 income?
Look, prudent renters are getting screwed one way, or another, at this point. Trying to let houses free-fall until they hit their fundamental valuations has thrown the entire global financial system into chaos. Loosening the money is going to kick off a round of inflation that will have an adverse effect on their savings and the current spending orgy isn’t going to help their taxes.
I’m sorry, but they’re innocent victims one way or another. Nor are the credit addicted very sympathetic in many cases. It just seems like some kind of bail-out for individuals is coming. I am trying to think of ways to funnel that money to the most sympathetic individuals.
Dean— again, I agree. That’s why I suggest a tax credit to prudent renters so that those that want to purchase will have more reason to.
Again, if there was a way to help only those that are truely deserving without creating more defaults from those saying what about me it would be worth looking at. Nevertheless, instead of incentivizing irresponsible behavior, I think incentivizing people to stay in their homes and those that want to and can afford to to buy is a good start.
I like MalibuRenters’s idea of increaseing the standard deduction. A 20k deduction would be apropriate of the high cost of living areas, but that would be to high for the midwest and such.
I’m ok with the idea that in some cities and states almost everyone would be below the standard deduction. People who live in expensive places would have an added complexity in their lives: itemizing for their taxes.
I’ve had some related discussions with IrvineRenter. Under the current tax code, in places where most people have lower tax rates, or where most of them have mortgage interest below the standard deduction, the price to rent ratios should be lower.
I have been hearing that 40% of the population don’t pay income tax. Giving someone who makes 30k/yr, who also lives in a state with a lower cost of living, a standard deduction of 20k, seems like quite a gift. But it does seem more appropiate here.
Couldn’t all the modifications backfire and encourage otherwise solvent borrowers to stop paying? If I’m living next door to a guy who has his loan written down by $100,000 I’d want to get in on that action, even if I were otherwise able to continue making payments on a higher loan.
Exactly– if you download the PDF- you are example 1 and you’re are not alone. Modifications only make the problem worse.
I’m far less concerned with “unfair/uneven” relief than I am with massive defaults and the blight that would come with my neighbor getting a “free ride” on some part of his or her loan.
If my neighbor defaults and the house goes to S&^t then I *really* lose. I might have to move. That scenario reminds be of “block busting” that I saw in racially charged 60-70s of Chicago. Whole neighborhoods go down in value.
The debt relief I heard of has to do with lowering rates for some temporary period of time – say 5 years – so people can maintain their ownership and make payments.
First, why would you have to move if your neighbor’s house is worth less. I heard McCain use this as an argument for principle write down and it seems rediculous to me, however, I am open to beding educated.
From what I have heard the goverment is supporting a temporary period that they lower interest rates to 3% for 5 years to try to keep people in their homes. So what happens in 5 years? This seems to delay the process and give special treatemnt to a select group.
Of course, if you have an adjustable rate loan or an exotic mortgage and no equity and you need to refince you currently have a problem. That is why I am in full support of giving people in that situation the ability to refinance into a 30 year fixed fully ammortized loan at 5% or 6% and since no banks will do that I think that a goverment gaurantee on those loans would make sense.
My fear: Massive foreclosures can ruin a neighborhood. Abandoned homes are magnets for crime. That punishes a community, not just the irresponsible parties.
NPR had a story of a family that had help as you suggested. Their ARM was changed to a fixed mortgage and they were able to keep the home. I agree those are wise things to do given the alternative of doing nothing meant they’d lose the home.
The temporary lowering of an ARM’s interest rate assumes the debtor’s situation improves. I’m not familiar with the full details but the point is it’s temporary and I assume a easy fix to deploy.
One argument is that these fixes have to be done in a timely way and even if temporary, spreading the defaults out over a longer period of time could mitigate damage.
There are no good solutions.
Joe— good points. The near destruction or abandonment of neighborhoods is not acceptable. It is not fair for those working hard to make a living and raise a family to suffer as a result. Of course, for those that have a medical issue or temporary cirumstances that put them in a tough spot it’s a different issue not related to ARM loans/exotic mortgage or people spending beyond their means.
There is value to the argument that not letting it happen all at once could lessen the pain. However, I would argue that if we help those we can and help those we can’t by educating them on credit, even helping them find a suibtable lease (if necessary), and encourage strong responsible homeownership (possibly through tax credits) to those that can purchase and stay in in their homes with 30 year fixed fully ammortized loans I think that we can start to recover quicker. If we put some of this legislation into affect it will take longer before we can start to heal.
Another idea would be to identify the really hard hit neighborhoods and create a special area similar to the Go Zone in Houston that encourages investment in those neighborhoods.
Joe,
We had a large turn over at the peak and then a lot of vacant homes during this last year. They are now all occupied. It helps if everyone keeps their eyes open and call the police and city as needed.
I like my new neighbors better than the old ones too.
In Orange County there is still solid demand. Bank owned properties are selling in just over 1 month on average and most have multiple offers if they’re priced correctly. 3 weeks ago I saw a home in Lake Forest get 17 offers in 3 days. If we assist homeowners that can afford their homes with decent loans and incentivize those sitting on the fence there will be a softer landing and a stronger more sustainanble and natural price support.
A drop in prices in most areas is still necessary because affordability is still low
IR writes, regarding increasing the standard deduction “I wonder, would this create a tipping point where you would have incentive to jack up your mortgage. Once you crossed the threshold, the larger your deduction the better.”
While I am not sure how many people would be astute enough to run the calculations, an interesting thing occurs. If you have a mortgage which is just moderately over the standard deduction limit, you won’t get an interest deduction in a few years. Why?
1. Assuming a fixed rate amortizing loan, the amount of your fixed payment which is interest drops over time.
2. The higher standard deduction would also rise over time.
The combination of these two can act pretty fast. For example, take a couple with at $400k mortgage at 6% and no other itemized deductions. The first year the interest is about $24k. By the 5th year it’s $22,672. If inflation is 3.5% per year, the standard deduction the 5th year is $22,950. They are no longer getting any tax break for their mortgage interest.
Take another example, $500k loan and similar terms. By the 9th year, they get no break for their mortgage interest either.
For any loan size, the mortgage interest deduction gets smaller each year, until it reaches zero.
What about the itemized deduction for CA income tax?
IR – I hadn’t realized the full effect of my proposal on bank liquidity and foreclosures. It’s starting to sound even better.
For someone who isn’t getting any marginal benefit from itemizing their mortgage interest, the aftertax return on paying down their mortgage is the same as the pretax return. That means a return of 5.5-8.0%. In the current investment environment, that’s pretty good.
If more people start paying down their loans, they also increase bank liquidity, are less likely to have their loans go underwater, and are less likely to default on their mortgages.
I think that once an owner decides to stay in their home, if possible, they should start prepaying on their mortgage. That will mean less time underwater.
For every government action there is an equal and opposite market reaction.
Mortgage foreclosure has hit real close to home for me recently.
My mom was in danger of losing her home as her ARM mortgage was just raised. What we did was rent out the house while we waited for a better time to sell. There are a couple other options for homeowners, My Florida Home Is About To Be Foreclosed, How Can I Save My Mortgage?.
Landmark,
Does your HEA contributions have limits like IRA’s. A high limit would benefit the high earner allowing him to shelter a lot of his income. Too low and savers would have to be saving in a HEA and also additional amounts outside of the HEA.
I still feel strongly that it is in a persons best interest to save without comitting mpney to specific purposes. Think of all the people who raid their IRAs and 401ks, paying large penalties, just to meet their obligations.
Hi Brea- I think that setting an income limit for those that can benefit is a good idea that should be explored. What limit do you think would be appropriate?
In addition, I do not think a penalty should be applied if the money is not used, however, they will pay ordinary income tax and not have the benefit if they do not use it towards to downpayment or closing costs on a primary residence.
I threw out this question of limits on contribution just to show the problems involved. You need some limit, but I don’t no where. Maybe take a target downpayment amount and divide by 5.
Without a large penalty, people will use this to postpone their taxes. With the 529 College funds, they don’t get it back if they don’t use it for their children. Please correct me if I am wrong. You need large penalties or there would be abuses.
My thoughts for limit would be based more upon income. I would say that the benefit should be phased out for income earners around $250,000/year. $250,000 will probably seem high to many, however, there are a lot of people, particularely young people that have gotten caught in this mess that make good money and have wanted to purchase but have been stuck leasing because of timing, I hate to see good hard working individuals suffer as a result of the indescretion of others. It’s tough because we live in California, particularely Orange county and the number are so skewed as compared to most places.
My thought is that it’s a temporary program, (my original hope was that the mortgage interest decuction limit could be incorporated in as well on more of a permanent basis with the phasing in starting in a set time frame) starting with one year, the downpayment money is only put into or tranferred into the HEA account as a formality, maybe there doesn’t even need to be an actual account it just needs to be claimed as in income deductoin on taxes. I’m definately not good with tax code, I don’t even do my own taxes. My idea with current proposal is to give a platform for tax professionals and legislators to have something to work with as an alternative to bail outs.
If the government does not monkey too much and they are concerned with the potential for an immediate glut of foreclosures, and program like this that creates a bit more urgency in those getting close to purchasing may help to speed up the recovery process by initially making it a program that is only good for 1 year, with an option to renew in 12 month increments.
I really don’t like this proposal at all and that guy making 250k is not a victim here. Poor guy had to rent. I wonder how much money we would have to throw at him to get him to enter the market?
IMO, there are enough tax benifits for homeowners. What we need are regulations for bankers and wall street, and then time to work through these problems. As of now, your proposal has lots of holes in it for abuse. You may want to sit down with a CPA. Visit irs.gov and read up on IRAs and the 529 savings plans to become familiar with them.
By the way, the auto industry could use some proping up. Should you include purchasing of cars in your proposal. Maybe double money off for the purchases of SUVs. I am sick of the handouts.
$250,000 may be high—- however, at the same time, an average home is still close to $500,000 in Orange County. Therefore maybe 1/3 of the average home price making it $165,000 for a 2 or less, with a 10% increase per dependant. I think that it was you that brought up the stat that 40% of American’s don’t pay taxes. Take a guy making $165,000 that has 3 kids and is renting in California, I don’t care what you say, it’s still hard for that guy to get ahead, now if we sit buy and do nothing and let the government give that money to his neighbor through loan modifications to stabalize and get the housing market to “start appreciating again, as John McCain and other politicians want we make it virtually impossible.
Hey now that’s Kirk’s gone are there gonna be auditions for the new blog jackass?
I keed, i keed-