Obama has finally opened up and showed us the guts of his housing plan. USA Today does a fair job of outlining the details. This is a program that appears to have some potential, and addresses three core areas, refinances, loan modifications, and lender incentives.
What I like:
The loan refinancing is only available to those with good payment histories. We are rewarding those who have acted responsibly and paid their mortgage in a timely manner. This is the sort of thing that we should have been doing in the first place.
The loan modification requires proof of hardship. Those who simply overextended themselves will not qualify. The borrower must prove they can sustain payments on the new loan. The cost of the home has a maximum, so we won't see 5 million dollar mansion qualify. The plan is proactive and can be used BEFORE they fall into default.
Incentives to servicers have a set dollar value. I like this because it keeps them prioritizing high cost loans over lower value loans. The loan is reduced to 31% of income, IE affordable terms, through reducing the first mortgage and extending the loan term.
What I don't like/see:
No requirement for financial education. This is the magic wand approach. We fix the loan but do nothing to help the borrower keep themselves out of this situation in the first place.
The dollar cap on homes is still pretty high, and does not appeared to be adjusted by where they live. Lots of homes in LA cost more than $720,000...none of them will qualify. In contrast I am guessing 98% of the homes in Cache Valley would meet this requirement. We shouldn't be modifying a mortgage on a $700,000 home in Cache Valley!! It may be a regular home in LA, but here that is a mansion. FHA already has loan limits that are established and adjusted by area, why on earth aren't we using those, (or some percentage of them, like 120% of the limit or something?). Any time the government takes a blanket approach it is both unequal and unfair, and families lose.
Dealing with lenders/servicers is all carrot no stick. Asking them to play nice is fine and dandy, what about legislation that penalizes lenders who give loans that are blatantly unaffordable/inappropriate? Many of the subprime loans that were issued over the last 5 years were to families who would have qualified for prime loans.....but the lenders don't make as much money that way.....
Conclusion:
Anything is better than nothing. While it begins to address the problem we have today, it does nothing to lay the framework for avoiding this in the future. We are seeing more reaction to the problem, rather than action that leads us to a more permanent solution.
Showing posts with label Credit. Show all posts
Showing posts with label Credit. Show all posts
Wednesday, March 4, 2009
Saturday, February 21, 2009
Housing Tax Credit: Take Two
Second verse, same as the first, a little bit louder, a little bit....better?
The word is out on the new housing "tax credit" compliments of the Obama administration. The bill looked too good to be true coming in, and endured a good trimming before an end result was reached. The lighter bill will certainly be cheaper for the government (and us, our money after all).
First things first. The amount was cut from $15,000 to $8,000, bringing it closer in line to the false "tax credit" we currently have. The reduction in cost means they could in theory serve more people and will keep the whining down from those who purchased last year and only qualified for the $7,500 interest free loan version.
This brings me to my second point. This one is a genuine credit. It is fully refundable, meaning even if you have no tax liability you can get paid the full $8,000. Since it is a credit and not a tax deduction we are talking dollar for dollar benefits.
While the reduction from $15,000 to $8,000 may seem like a big deal, it isn't the most important change made in the bill. That honor goes elsewhere. The senate version allowed the credit to be claimed by any home buyer who purchased during the time frame. The house bill, the one ultimately adopted, limits this to first time home buyers who purchase from 1/1/2009 to 11/30/09. This cuts the majority of those who might have claimed the credit out of the picture. Think of it this way. Bob the first time home buyer purchases a home from Ted...who is buying a house somewhere else from Jerry, who is buying a home in the city where his new job is etc... Under the senate plan all of these individuals would claim the credit. Under the new bill only Bob gets the credit. The limitation may keep some homeowners, who would have viewed this as an ideal time to purchase somewhere else, sitting on the fence while waiting for the market to stabilize.
Now, what do I think of the above? Well, it certainly is cheaper! I am guessing the cost of the new bill will be 1/5 or less of what he old one would have cost us. This would be good news if I didn't believe that the money will simply be spent elsewhere rather than "saved". If if is for rum exports to Puerto Rico, as some of the stimulus package is, well, I can't help but think it would have been better spent in the housing tax credit.
What will it do? Some are estimating as many as 300,000 first time home buyers will take advantage of the incentive and take the plunge. Sadly, this is only a drop in the bucket compared to the number of foreclosures we are seeing. Heck, households lost more jobs in the last couple of months than that paltry number! It will benefit a few...it won't do much to stimulate the economy (a familiar refrain the more I look at the "stimulus" bill).
Other problems remain as well. The credit does nothing to address the issue of down payments. Our savings rate has been ridiculously low over the last few years...how many of those first time buyers have actually saved anything at all? Are they purchasing homes with no money down....at with 100% LTV ratios....haven't we been down this road before? There is a reason private mortgage insurance exists (the insurance the borrower pays if they have less than 20% down payment, this insurance protects the lender). It exists because studies show that those who make smaller down payments are more likely to walk away from their home and/or let payments lapse.
Proverbs say that "Where there is no vision, the people perish". Until we catch the vision of personal responsibility and SACRIFICE, understanding that a home is something to be worked for and not a right, I think we will continue to see home owners perish.
I am going to pretend it is my bill now. The credit is only available in the form of a match, 2:1, for what the family is bringing to the table. They want $8,000, they better bring $4,000 for down payment. What about those who don't have it? They could set up a plan with a bank to save X number of dollars a month to reach their goal, and those who enrolled during the time frame of 1/1/09 to 11/30/19 and stick to their plan would still qualify for credit. For example: Bob wants to buy that house, but hasn't saved a dime. He decides to he can save $150 a month. He sets up a savings account with Wiser Bank and commits to saving $150 a month for the next 27 months. At the end of 27 months he has his downpayment, and his $8,000 match. This won't do much to stimulate the economy now (if anything saving money will hurt it a bit) but in the long run I think it is a smarter move than throwing good money after bad and allow potential homeowners who can't buy now a chance to work towards it in the future. I suspect those who worked and sacrificed to get the credit are more likely to make their payments than those who got $8,000 back from Uncle Sam with no effort and used it to pay for their new living room furniture.
The second thing I would require is education. Home buyer education can help them actually understand the documents they are signing, avoid being taken advantage of by sellers, ensure they have a budget (in theory, they still have to choose to follow it), and help them understand what to do if they fall behind on payments (or even think they will). If they don't want to get education....they can find their own $8,000.
In the meantime we won't see this make much of an impact. Some might buy homes who wouldn't have. Some of them might spend the $8,000 they get from Uncle Sam, and thereby stimulate the economy that much more. Maybe a third verse is in order....Third verse, where is the harm, give it one more shot, third times a charm.
Friday, February 13, 2009
Foreclosure: What families really pay
We all know what the F word means...it means someone is losing their home. A family that has a foreclosure loses what is usually their largest financial asset, but what happens after that? I want to take a minute to explore the real impact of foreclosures on families.
1: First things first. Any equity in the home is lost. Depending on how long they have been in the home this may or may not be that big of a deal. For some, like the family from the Washington Post article a couple of blogs back, it was to the tune of $300,000 . It is hard enough for me to imaging having that kind of money, let alone losing it ;).
2: Deficiency. Whether the home is sold in a short sale, returned via a deed in lieu, or foreclosed upon a lender can seek a deficiency judgment against the borrower for losses. If you owed $200,000 on the mortgage and the lender can only sell it for $150,000 they can come after the original borrower for the difference by taking them to court. The lender will add those pesky court fees to this amount (as they should)as well. Once a deficiency judgment is in place the borrower may find their future wages garnished, liens placed against other property, and may even have financial assets seized. Sometimes the lender won't come after you to pay the money, that sounds good, right? Well, except for the fact they will tell the IRS the money was forgiven.....which means the family has to claim it on their taxes as income! With deficiencies in the hundreds of thousands of dollars in some areas you can imagine what that could do to a tax return......Maybe you could cover it with you $7,500 tax "credit" :) A family who cant pay may turn to....
3. Bankruptcy. Bankruptcy and foreclosure often go hand in hand. The loss of the home may have been precipitated by the loss of a job or major medical problem that will take time to resolve. Just because the home goes away doesn't mean these other problem do as well. Often families in trouble are missing payments on credit cars, cars, student loans, and other obligations as well. Throw a deficiency judgment or increased taxes on top and the elaborate mess is complete. While this may be good news to some, it certainly isn't for the families.
4. Finding a new "home". If you don't have the money to pay your mortgage, how much are you going to have to pay the deposit on your new apartment? Will a change in where you live affect basic expenses, such as travel to work, school, and to purchase goods? Will your children need to change schools? Will the time taken to secure housing impact work schedules while they try to move? How will family and friends be impacted if they crash with them until they get back on their feet or procure new housing? What kind of choices for housing will they have when they now have bad.....
5. Credit. Potential landlords can, and do, check your credit history. When they see a family just lost their home what kind of message does that send to the landlord about their capacity to make payments? For many families that mean they may not be able to obtain reputable housing, accepting landlords who are less scrupulous because they cannot find a place anywhere else. They are unlikely to report bad landlords if they feel that is their only housing option.
Our credit problems don't stop with housing though. Families with poor credit pay more for everything, from credit cards to vehicle loans and even insurance rates. With the family already down on their luck the last thing they want to see is higher insurance rates for their car and credit card rates jump to 29%, yet that is exactly what happens. If they have problems with an overdraft account or auto loan they may find difficulty using that bank again in the future. A family may not even be able to secure a checking account, requiring them to use check cashing services that come with a price.
6. Hard to measure impacts. Money is the easy problem to track. What about lost time? How can depression and stress from financial situations impact parents at work or children at school? Foreclosures are linked to higher levels of deviant behavior including domestic abuse, drinking, suicide, and risk taking behaviors like gambling. While we are busy bailing out banks who will foot the bill, or even more importantly provide the counseling/supports for families after they lose their homes? (Not every one lost it because they overextended their credit or obtained a stupid loan). High density foreclosure areas often have higher levels of crime and unoccupied buildings can serve as safe havens for illegal activities and contribute to neighborhood/price decline. Yet with our economy struggling social service agencies and police departments who need extra help to cope are finding their budgets cut instead.
The real irony here is this does not even look at the impact it has on banks, investors, and neighborhoods as a whole. The cost is truly staggering.
The foreclosure is a hard pill to swallow, but its the after taste that has me worried.
So where do we go from here? Like it or not, keeping families in their home is usually the best option. That means we need loan servicers, and more importantly the investors they represent, to be willing to work with borrowers who can reasonably afford to pay for their homes. This may require some kind of loan modification to ensure the solution is a long term one.
Perhaps its time we supported building smaller homes? If the homes were smaller, and more affordable in the first place, would we still have this problem?
We need to look for supports to families who need assistance procuring safe affordable housing and dealing with stresses on the family stemming from the foreclosures. We need more money headed towards social services, not tax breaks for race track owners and rum exports from Puerto Rico. Perhaps the main thing that needs to be cut from government spending is the paychecks and benefits of lawmakers who waste our time and money.
1: First things first. Any equity in the home is lost. Depending on how long they have been in the home this may or may not be that big of a deal. For some, like the family from the Washington Post article a couple of blogs back, it was to the tune of $300,000 . It is hard enough for me to imaging having that kind of money, let alone losing it ;).
2: Deficiency. Whether the home is sold in a short sale, returned via a deed in lieu, or foreclosed upon a lender can seek a deficiency judgment against the borrower for losses. If you owed $200,000 on the mortgage and the lender can only sell it for $150,000 they can come after the original borrower for the difference by taking them to court. The lender will add those pesky court fees to this amount (as they should)as well. Once a deficiency judgment is in place the borrower may find their future wages garnished, liens placed against other property, and may even have financial assets seized. Sometimes the lender won't come after you to pay the money, that sounds good, right? Well, except for the fact they will tell the IRS the money was forgiven.....which means the family has to claim it on their taxes as income! With deficiencies in the hundreds of thousands of dollars in some areas you can imagine what that could do to a tax return......Maybe you could cover it with you $7,500 tax "credit" :) A family who cant pay may turn to....
3. Bankruptcy. Bankruptcy and foreclosure often go hand in hand. The loss of the home may have been precipitated by the loss of a job or major medical problem that will take time to resolve. Just because the home goes away doesn't mean these other problem do as well. Often families in trouble are missing payments on credit cars, cars, student loans, and other obligations as well. Throw a deficiency judgment or increased taxes on top and the elaborate mess is complete. While this may be good news to some, it certainly isn't for the families.
4. Finding a new "home". If you don't have the money to pay your mortgage, how much are you going to have to pay the deposit on your new apartment? Will a change in where you live affect basic expenses, such as travel to work, school, and to purchase goods? Will your children need to change schools? Will the time taken to secure housing impact work schedules while they try to move? How will family and friends be impacted if they crash with them until they get back on their feet or procure new housing? What kind of choices for housing will they have when they now have bad.....
5. Credit. Potential landlords can, and do, check your credit history. When they see a family just lost their home what kind of message does that send to the landlord about their capacity to make payments? For many families that mean they may not be able to obtain reputable housing, accepting landlords who are less scrupulous because they cannot find a place anywhere else. They are unlikely to report bad landlords if they feel that is their only housing option. Our credit problems don't stop with housing though. Families with poor credit pay more for everything, from credit cards to vehicle loans and even insurance rates. With the family already down on their luck the last thing they want to see is higher insurance rates for their car and credit card rates jump to 29%, yet that is exactly what happens. If they have problems with an overdraft account or auto loan they may find difficulty using that bank again in the future. A family may not even be able to secure a checking account, requiring them to use check cashing services that come with a price.
6. Hard to measure impacts. Money is the easy problem to track. What about lost time? How can depression and stress from financial situations impact parents at work or children at school? Foreclosures are linked to higher levels of deviant behavior including domestic abuse, drinking, suicide, and risk taking behaviors like gambling. While we are busy bailing out banks who will foot the bill, or even more importantly provide the counseling/supports for families after they lose their homes? (Not every one lost it because they overextended their credit or obtained a stupid loan). High density foreclosure areas often have higher levels of crime and unoccupied buildings can serve as safe havens for illegal activities and contribute to neighborhood/price decline. Yet with our economy struggling social service agencies and police departments who need extra help to cope are finding their budgets cut instead.The real irony here is this does not even look at the impact it has on banks, investors, and neighborhoods as a whole. The cost is truly staggering.
The foreclosure is a hard pill to swallow, but its the after taste that has me worried.
So where do we go from here? Like it or not, keeping families in their home is usually the best option. That means we need loan servicers, and more importantly the investors they represent, to be willing to work with borrowers who can reasonably afford to pay for their homes. This may require some kind of loan modification to ensure the solution is a long term one.
Perhaps its time we supported building smaller homes? If the homes were smaller, and more affordable in the first place, would we still have this problem?
We need to look for supports to families who need assistance procuring safe affordable housing and dealing with stresses on the family stemming from the foreclosures. We need more money headed towards social services, not tax breaks for race track owners and rum exports from Puerto Rico. Perhaps the main thing that needs to be cut from government spending is the paychecks and benefits of lawmakers who waste our time and money.
Saturday, January 31, 2009
Too good to be true? The truth behind the housing tax "credit"
The Housing and Economic Recovery Act of 2008 announced a new tax "credit" allowing qualified first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009 to claim up to $7,500 on their taxes. The credit is a dollar for dollar reduction for taxes paid (rather than a deduction from your taxable income) but the term credit may be a bit deceptive.
You see, unlike any other tax "credit" that I can think of, this one has to be repaid. The credit truly acts like a zero interest loan that is repaid over the next 15 years, or when the house is sold if there is sufficient gains. So if a family claimed (ie borrowed) $7,500 they would repay that by owing an additional $500 on their taxes each year for the next 15 years.
An interest free loan is a good thing though, right? It can be, if used constructively. My beef lies in calling it a tax "credit". You don't have to repay your earned income tax credit, or child and dependent care tax credit. In fact, I can't seem to find a single "credit" that you have to repay.....except this one, which makes the name all the more galling. It seems that it sets the stage for an expectation, free money because it is a tax credit, when in fact it is nothing of the sort.
Won't borrowers take the time to learn the rules and read the fine print so they won't be surprised when they owe $500 more on their 2010 taxes? If we have learned anything from the market meltdown we shouldn't even have to ask this question. So lets look at the possibilities of how this "credit" could impact families now.
Lets start with the good. We will assume a family actually owes $7,500 in taxes and will therefore be able to claim the whole credit. In our current economy this could be a fantastic boon for a household in distress. If they are struggling to make ends meet they could use this to make up the difference rather than turning to a high interest credit card or insane interest payday loan. They could use it to pay down existing debts and bills, leveraging the no interest loan in a smart way to wipe out high interest payments and freeing up cash reserves. It could even act as emergency savings for the family, they could sock it away for a rainy day to help cover medical expenses or vehicular distress. This is a great tool for families.
If they spend it that way. Remember, part of the reason the government is providing the money in the first place is to stimulate the economy. They want them to spend it. If they spend it to make ends meet, the family is helped, and the government gets what they want. If it is used to pay down debt, it has little impact on the economy (unless it frees up money for the family to spend in the future by reducing payments). It could however be used for our favorite past time, increased consumption. Increased consumption implies we are spending more than what is required to meet our needs, and all too often in a world of instant gratification this is the way of most financial windfalls. Many households have developed the habit of spending the tax return frivolously, why should we expect them to approach this larger windfall any differently? If the money is spent on increased consumption then the family has not "gained" anything, they are simply spending today what they could have spent tomorrow...for the next 15 years.
Regardless what the initial $7,500 is spent on, lets look at the other end. For the next 15 years the family will owe $500 more on their taxes. Will families even remember to take this into account in 2010? What impact will this have on our spending for the next 15 years in and around tax time?
What about the other option? What if I sell my home and the government wants their money back? Profit from the sale is subject to recapture up to the amount claimed. My concern here is the fact that many homeowners put little to nothing down in the first place, and as such when they go to sell one or two years later, especially with the current home appreciation rates ;) there may not be much, if any, profit from the sale. When you pay off the $7,500 on top of that (or whatever is left over based on how long you have been shelling out $500 a year for)....I suspect many homeowners will have little to nothing to show for their time in the home unless they stay for five years or more. This means no down payment for the next home, meaning if they want to keep being a home owner they will have to look at another low to no down payment loan....haven't we been down this road once before? Or they could go back to the renting. Either way the family has made no progress.
It all comes back to how it is sold. The US government gets grumpy with businesses for false or deceptive advertising. How is this any different? It could have been called many things, a tax refund advance (implying a loss of future refunds) or most appropriately, a no interest first time home buyer loan. What it never should have been called, is a credit. They are not freebie bailout bucks. Do you think the Better Business Bureau accepts complaints against the US government? No matter what we say on the side of the package, its the contents that matter most.
The most confusing part of all? The proposed new housing tax credit doesn't look like it will have to be repaid at all. But we will call both of them credits, just to make things clear ;) .
You see, unlike any other tax "credit" that I can think of, this one has to be repaid. The credit truly acts like a zero interest loan that is repaid over the next 15 years, or when the house is sold if there is sufficient gains. So if a family claimed (ie borrowed) $7,500 they would repay that by owing an additional $500 on their taxes each year for the next 15 years.
An interest free loan is a good thing though, right? It can be, if used constructively. My beef lies in calling it a tax "credit". You don't have to repay your earned income tax credit, or child and dependent care tax credit. In fact, I can't seem to find a single "credit" that you have to repay.....except this one, which makes the name all the more galling. It seems that it sets the stage for an expectation, free money because it is a tax credit, when in fact it is nothing of the sort.
Won't borrowers take the time to learn the rules and read the fine print so they won't be surprised when they owe $500 more on their 2010 taxes? If we have learned anything from the market meltdown we shouldn't even have to ask this question. So lets look at the possibilities of how this "credit" could impact families now.
Lets start with the good. We will assume a family actually owes $7,500 in taxes and will therefore be able to claim the whole credit. In our current economy this could be a fantastic boon for a household in distress. If they are struggling to make ends meet they could use this to make up the difference rather than turning to a high interest credit card or insane interest payday loan. They could use it to pay down existing debts and bills, leveraging the no interest loan in a smart way to wipe out high interest payments and freeing up cash reserves. It could even act as emergency savings for the family, they could sock it away for a rainy day to help cover medical expenses or vehicular distress. This is a great tool for families.
If they spend it that way. Remember, part of the reason the government is providing the money in the first place is to stimulate the economy. They want them to spend it. If they spend it to make ends meet, the family is helped, and the government gets what they want. If it is used to pay down debt, it has little impact on the economy (unless it frees up money for the family to spend in the future by reducing payments). It could however be used for our favorite past time, increased consumption. Increased consumption implies we are spending more than what is required to meet our needs, and all too often in a world of instant gratification this is the way of most financial windfalls. Many households have developed the habit of spending the tax return frivolously, why should we expect them to approach this larger windfall any differently? If the money is spent on increased consumption then the family has not "gained" anything, they are simply spending today what they could have spent tomorrow...for the next 15 years.
Regardless what the initial $7,500 is spent on, lets look at the other end. For the next 15 years the family will owe $500 more on their taxes. Will families even remember to take this into account in 2010? What impact will this have on our spending for the next 15 years in and around tax time?
What about the other option? What if I sell my home and the government wants their money back? Profit from the sale is subject to recapture up to the amount claimed. My concern here is the fact that many homeowners put little to nothing down in the first place, and as such when they go to sell one or two years later, especially with the current home appreciation rates ;) there may not be much, if any, profit from the sale. When you pay off the $7,500 on top of that (or whatever is left over based on how long you have been shelling out $500 a year for)....I suspect many homeowners will have little to nothing to show for their time in the home unless they stay for five years or more. This means no down payment for the next home, meaning if they want to keep being a home owner they will have to look at another low to no down payment loan....haven't we been down this road once before? Or they could go back to the renting. Either way the family has made no progress.
It all comes back to how it is sold. The US government gets grumpy with businesses for false or deceptive advertising. How is this any different? It could have been called many things, a tax refund advance (implying a loss of future refunds) or most appropriately, a no interest first time home buyer loan. What it never should have been called, is a credit. They are not freebie bailout bucks. Do you think the Better Business Bureau accepts complaints against the US government? No matter what we say on the side of the package, its the contents that matter most.
The most confusing part of all? The proposed new housing tax credit doesn't look like it will have to be repaid at all. But we will call both of them credits, just to make things clear ;) .
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