November 18, 2012

Paying People To Buy Houses

Readers suggested a topic on the “fiscal cliff” and tax changes. “Which of the three doors will be chosen to resolve the fiscal cliff crisis? 1. Full sequestration? 2. Compromise solution? 3. Postpone the resolution deadline? Isn’t it natural for the Republicans to use the mortgage interest deduction (MID) as a cudgel in the fiscal cliff debate, since it is primarily Democrat-leaning states that have the highest average mortgage interest deductions?”

A reply, “Crazy idea. The MID is a political third rail. HOWEVER, what if there was a different idea related to housing tax breaks? 1. Lose the $500,000 capital gain tax exclusion; however, 2. Index the purchase price of the home (the initial basis) to inflation.”

“OR: 1. Lose the MID; however, 2. Index the purchase price of the home (the initial basis) to inflation. I think losing the MID is political hot lava, but getting rid of the capital gain exclusion might be doable, since it’s a controllable and event you can plan.”

“Like a 1031 exchange; you don’t pay gains on the portion that is traded into another property. The capital gain exclusion always bothered me and is ripe for abuse. A left leaning relative owns a bunch of rental homes…his plan (before they changed the rules to limit this abuse) was to live in each of his rentals for 2 years before selling to avoid the capital gain tax. I note that they’re left leaning just to note that avoidance of tax using the current code is not limited to the crazy Republicans in the room. It is pretty much everyone.”

“Again…we need massive tax reform to take these kinds of loopholes out of existence.”

And finally, “Can you imagine how insane it would be if a capital gains tax was only applied to the actual *real* (inflation adjusted) capital gain and *not* the inflated portion??? People that is almost hard money! Next thing you know you’ll have a gold backed currency! It’s absolute heresy!”

From National Public Radio. “The federal government has all these ways of paying people to buy houses without actually, you know, paying people to buy houses. We’ve talked a lot about two examples of this: 1. The mortgage-interest tax deduction is effectively a government payment to people who are paying a mortgage. 2. Fannie Mae and Freddie Mac allow home buyers to get below-market-rate mortgages. They blew up in the housing bust, requiring a massive federal bailout.”

“We haven’t talked so much about a third example of a federal housing subsidy that doesn’t seem like a subsidy: the Federal Housing Administration, aka FHA. Like Fannie and Freddie before the housing crisis, FHA has always funded itself. And, like Fannie and Freddie after the crisis, FHA may soon need a taxpayer bailout. An audit of FHA released today found that the agency is $16 billion in the hole.”

“The FHA doesn’t actually make loans. It guarantees them. The trouble is likely to come from loans made in 2008 and 2009. At that time, it became increasingly difficult to get a private loan. So more and more borrowers turned to FHA-backed loans, and the agency wound up backing hundreds of billions of dollars in mortgages. On top of that, FHA loans require only a tiny down payment — as little as 3.5 percent. As a result, when housing prices decline, borrowers very quickly end up owing more than their home is worth. This dramatically raises the risk of default.”

“FHA will probably need taxpayer money to make good on the promises it made as the housing market was collapsing.”

The New York Times Times. “More than one in six F.H.A. loans are delinquent 30 days or more, according to Edward Pinto, who specializes in housing. Delinquencies increased by 166,000 from June 30, 2011, to September 2012, he said, a 12 percent increase. Loans insured by the F.H.A. often allow very small down payments of 3.5 percent of the purchase price. ‘There’s a fundamental problem with the F.H.A.,’ Mr. Pinto said. ‘Its loans are too risky and that has to be addressed. It’s not the legacy book that’s creating all the problems. It’s beyond that.’”

“The F.H.A. is subject to a statutory capital requirement of 2 percent of loans, or about $22 billion on its $1.1 trillion portfolio. An economic value of negative $5 billion to $10 billion would leave the F.H.A. $27 billion to $32 billion short of this statutory requirement, Mr. Pinto said. This would be the fourth consecutive year that F.H.A. has failed to meet the requirement, he added.”

Mortgage News Daily. “At first glance, few in the real estate or lending industry want the government to do away with the mortgage interest tax deduction. But as noted in this commentary a few months ago, the deduction a) is rare in other countries, b) has a much larger perceived benefit than actual benefit. Besides, they’ll probably go from $1 million down to $500k, making it politically acceptable.”

“Lastly, ‘The Mortgage Interest Deduction is of limited value because of low rates and low house prices. A $300,000 house with a 30-year mortgage at 3.25% pays just $7,800 in mortgage interest, yet the 2012 standard deduction is $11,900 if married filing jointly. If the MID is nixed, placing your house into a corporation and having the corporation rent the home to you, allows you to continue deducting all mortgage interest.’ wrote economist Elliot F. Eisenberg.”

The Washington Post. “Tax experts say that under the Simpson-Bowles version of fiscal reform, virtually all real estate write-offs, including the capital-gains exclusion, would disappear in a vastly simplified federal tax code. Others on the list: deductions for local and state property taxes; federal tax exemption for interest on state government bond issues used to help provide mortgages for moderate-income home purchasers; and exemption from income taxation of mortgage amounts forgiven by lenders in loan modifications and short sales.”

“The exclusion of home sale profits, which is projected to save homeowners $86 billion between 2010 and 2014, according to congressional tax estimates, allows taxpayers who have owned and used their principal residences for two of the five years preceding a sale to escape capital-gains taxation on as much as the first $250,000 (for single filers) and $500,000 (married joint filers) of the profits they make from the transactions.”

“Bottom line here: Almost no one opposes the concept of reducing the federal deficit. But how this is achieved — who gets hurt, who benefits — will be key. If you own a home, keep your eye on the tax deduction ball. The largest single tax-free benefit most owners will ever receive from the federal government could be in play.”

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Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 09:00:34

“On top of that, FHA loans require only a tiny down payment — as little as 3.5 percent. As a result, when housing prices decline, borrowers very quickly end up owing more than their home is worth. This dramatically raises the risk of default.”

If these programs to turn Americans into underwater homeowners are disproportionately targeted at low-income and minority households, wouldn’t this be a prime example of the lending discrimination about which Ben Bernanke has warned us?

Comment by Ben Jones
2012-11-17 09:12:17

‘The trouble is likely to come from loans made in 2008 and 2009′

Yeah, nobody could have known house prices might fall in 2008-09.

Pull this back up:

‘More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame.’

‘It …raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk. Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America.’

‘Even for loans taken out in December - less than four months ago and the last month for which data is available - nearly 44,000 borrowers, or about 7.5 percent of the total, now find themselves under water.’

Maybe it’s just me, but losing many billions to back house loans and resulting in millions of people underwater is sorta illogical.

Comment by Pimp Watch
2012-11-17 11:58:06


It’s outrageous. And it’s incentivization for people who don’t know any better. And just who does it benefit? That’s right. The Housing Crime Syndicate and the statist power structures who own our government… And your moneychanger friends at the Federal Reserve are the enablers. This government no more represents it’s citizens than the USSR represented theirs.

Now everyone is getting snowed by the “fiscal cliff” mantra. Gee wiz…. If we don’t “do something”, lending rates and the rates you earn on your savings might go to 10%. The horror of it all.

Yep… your owned government at work. But you’re not the owners. So it’s the same bullshit you all were arguing about before the election. Here we are again.

And you paid housing hacks and housing PR jackasses….. go fukk yourselves.

Comment by Robin
2012-11-18 18:59:34

We’d love to make 10% or more interest again on our savings. Then we could actually retire in modest comfort

IF…….. (Insert scenarios here)

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Comment by Pimp Watch
2012-11-18 19:34:13

“We’d love to make 10% or more interest again on our savings. Then we could actually retire in modest comfort”

I’m with you. A further benefit of it would drive housing prices down to levels competitive with new construction.

Comment by ahansen
2012-11-17 14:41:11

The housing bailouts were supposed to mitigate the cascade of defaults so the economy could (theoretically) regain its equilibrium without causing panic in the greater market.

Tweaking the housing markets has a long history in this country, beginning with its founding. Then came the homestead act, the Relief and Construction act of the 1930’s, the Veterans Housing Act of the 40-50s. (Which, incidentally, restricted federally-guaranteed housing loans to veterans only.)

HUD addressed poverty and homelessness in the 60’s, CRA in the 70’s, Section 8 of the 80’s, the 2020 consolidation in the 90’s, and Bush’s “Ownership Society” in the early 2000’s. The law of Unintended consequences brought us the building/lending bubble and its global financial consequences.

I’m advocating that part of the sequestration negotiations entail cutting all FHA subsidies in half and doubling requirements for qualification. That way the fallout will be borne just as much by the financiers as the financed.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 17:12:14

“…long history…”

Never forget that George Washington himself was a real estate speculator.

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Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 09:13:37

Didn’t targeting subprime loans at minorities work in the exact opposite direction of redlining? Rather than limiting the number of mortgages to minority communities, the subprime era flooded low-income and minority communities with easy money loans.

Was this discrimination, or its antithesis?

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 09:17:56

Is pretending there is a lack of lending to minority communities supposed divert attention from the plethora of problems spawned by government-sponsored subprime lending programs that target low-income and minority communities on a discriminatory basis?

Bernanke Goes After Racial Discrimination In Bank Lending
BY Eleazar David Meléndez | November 15 2012 3:46 PM

A day after minutes were released that showed the Fed’s continuing concern about getting macro-level economic guidance right, the head of U.S. central bank went back to micro basics, warning against racial discrimination in lending in a speech about the state of the housing market.

“Lower-income and minority communities are often disproportionately affected by problems in the national economy, and the effects of the housing bust have followed that unfortunate pattern,” Bernanke said at the Operation HOPE Global Financial Dignity Summit in Atlanta.

Regarding the general state of the housing market, Bernanke said the housing market was still being affected by tight lending standards, though he said this problem was improving as the rest of the economy healed.

“The housing sector is far from being out of the woods,” Bernanke said. “Strengthening and broadening the housing recovery remain a critical challenge for policymakers, lenders and community leaders.”

But rather than focusing on the general state of the market, Bernanke’s speech dwelled on the disparities still seen in lending to minorities, highlighting the two main issues minorities face currently.

“One is redlining, in which mortgage lenders discriminate against minority neighborhoods, and the other is pricing discrimination, in which lenders charge minorities higher loan prices than they would to comparable nonminority borrowers,” Bernanke said.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 09:23:07

Perhaps the real lending discrimination crime committed by the FHA is discrimination in favor of the 1% who can afford to buy homes priced north of $500,000.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 09:30:18

I frankly don’t see how even the best propaganda campaign in history would be sufficient to allow this kind of insane lending program to continue.

November 07, 2012
By Yezer, Anthony
Proquest LLC

The Federal Housing Administration should take steps to return the program to serving its traditional constituency.

Sometime in the near future, policymakers will need to act on proposals concerning the U.S. housing finance system, particularly Fannie Mae, Freddie Mac and the Department of Housing and Urban Development (HUD). An important element is the Federal Housing Administration (FHA), housed within HUD. A number of academic economists have commented on the financial condition of FHA and the need for action. For example, in an April 201 2 essay entitled, “If HUD Must Close, Let’s Keep Its Best Programs,” Edward Glaeser, professor of economics at Harvard University, recommended that FHA be continued. Now that FHA’s financial situation, historic mission and role in the housing market are being discussed, it is important to look at all three in order to ensure the agency’s long-term viability. … as the nation emerges from the Great Recession, FHA needs to take steps to return to its historical role as an insurer of low- to moderate-income and first-time borrowers. There is no justification for having the government encourage individuals to purchase $700,000 houses with $25,000 down payments, particularly given the likelihood of significant losses to the insurance fund. FHA is currently operating in markets where it is not really necessary and which are outside of FHA’s business experience. Unfortunately for FHA, change does not come easy - and political pressures make action difficult.

The higher-income borrowers FHA increasingly has taken on in recent years - some say in an attempt to grow its way out of fiscal problems - may actually worsen the agency’s finances. Our research has shown that these borrowers have been defaulting at higher rates than FHA’s traditional lower-income constituency.

FHA has been losing money. If losses are as large as many analysts - including us - believe, FHA will require recapitalization by the U.S. Treasury.

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Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 09:43:01

Why does Uncle Sam provide discriminatory lending to the 1%?

Comment by AmazingRuss
2012-11-17 11:35:02

No problem. The fed will buy the required bonds with imaginary money from the fifth dimension.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 11:39:11

The great thing with computerized fiat is that you don’t even have to print the money…just tell people that you did some more Quantitative Easing and note it with an electronic book entry in your computer system, and it’s done.

Comment by SFBayGal
2012-11-17 18:07:59

AmazingRuss reference to the fifth dimension brought to mind this song by the Fifth Dimension. Kind of fits to this discussion:

Would you like to ride in my beautiful balloon
Would you like to ride in my beautiful balloon
We could float among the stars together, you and I
For we can fly we can fly
Up, up and away
My beautiful, my beautiful balloon
The world’s a nicer place in my beautiful balloon
It wears a nicer face in my beautiful balloon
We can sing a song and sail along the silver sky
For we can fly we can fly
Up, up and away
My beautiful, my beautiful balloon
Suspended under a twilight canopy
We’ll search the clouds for a star to guide us
If by some chance you find yourself loving me
We’ll find a cloud to hide us
We’ll keep the moon beside us
Love is waiting there in my beautiful balloon
Way up in the air in my beautiful balloon
If you’ll hold my hand we’ll chase your dream across the sky
For we can fly we can fly
Up, up and away
My beautiful, my beautiful balloon
Up, up, and away….

Comment by GrizzlyBear
2012-11-17 20:37:26

This stuff is just absolutely disgusting. I don’t know how Congress can look at themselves in the mirror. I’ve lost all faith in this country.

Comment by Muggy
2012-11-17 09:15:38

“statutory capital requirement”



Comment by Ben Jones
2012-11-17 09:31:07

Here’s another interesting item:

‘At a recent Colorado Association of Realtors conference, Fort Morgan Realtor Brian Urdiales heard that in the recent past home buyers have not had to pay certain taxes, but that might change. Further, people might have to pay taxes on a short sale. Legislation that waived those taxes will expire on Jan. 1, and NAR wants to fight against reinstating the taxes, he said.’

‘One scary thing is that USDA loans seem to be going away. Offices in Northeast Colorado have stopped taking applications, and offices are closing down, Urdiales said. USDA officials are concerned about what might happen with the federal budget in coming months.’

Comment by scdave
2012-11-17 11:13:43

Legislation that waived those taxes will expire on Jan. 1 ??

And why it passed in the first place is still confounding to me…

Comment by Muggy
2012-11-17 11:19:23

“One scary thing is that USDA loans seem to be going away.”


Solution = lower house prices.

My head is going to explode.

Comment by Pimp Watch
2012-11-17 12:01:17

Yeah…. “scary”. Be afraid of affordable commodities like housing.

Comment by Muggy
2012-11-17 14:11:53

At this rate, my children will probably have to buy toilet paper on margin.

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Comment by snowgirl
2012-11-18 13:09:49

I hear in colonial times they used corn husks. ;)

Comment by Muggy
2012-11-18 18:28:40

Corn husks to buy toilet paper on margin in colonial times? Good buy!

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-18 23:03:22

On Kauai grows a tree with soft, velvety leaves. And guess how they utilized those leaves before the advent of the modern paper products industry?

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 09:32:03

“We haven’t talked so much about a third example of a federal housing subsidy that doesn’t seem like a subsidy: the Federal Housing Administration, aka FHA. Like Fannie and Freddie before the housing crisis, FHA has always funded itself. And, like Fannie and Freddie after the crisis, FHA may soon need a taxpayer bailout. An audit of FHA released today found that the agency is $16 billion in the hole.’

FHA will probably need taxpayer money to make good on the promises it made as the housing market was collapsing.”

Bailout = handout = subsidy

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 10:02:15

“If you own a home, keep your eye on the tax deduction ball. The largest single tax-free benefit most owners will ever receive from the federal government could be in play.”

We need more free shit for wealthy home owners to save the economy!

Comment by 2banana
2012-11-17 10:54:58

Hope and Change did not fix this?

Comment by scdave
2012-11-17 11:15:24

did not fix this ??

The fix is in…You can bet on it…And there are going to be a lot of un-happy-campers….

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 11:23:30

Which candidate’s Wall Street connected economists and economics experts would have given away more free shit to homeowners?

Comment by Blue Skye
2012-11-17 17:14:11

Candidate? Are we having another election already, or are you in a do-loop?

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Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 21:53:28

“…would have given away…”

Pay close attention to those verb tenses if you want to follow the discussion.

Comment by Muggy
2012-11-17 15:30:40

“Hope and Change did not fix this?”

Are you saying you want government to fix your problems?

Comment by Muggy
2012-11-17 11:34:30

“We need more free shit for wealthy home owners”

Comment by Pimp Watch
2012-11-17 18:11:37

That’s a great image Mugz.

Comment by oxide
2012-11-17 16:06:37

I’d be stunned if the MID goes away entirely. And it’s doubtful that ditching the MID would be grandfathered in on existing mortgages. IMO the only people that should worry are those who are thinking of buying a second home in the next 2-3 years.

Comment by jane
2012-11-17 23:11:03

Oxy, it would flummox me as well - but there’s nobody here who can make any guarantees. Desperate times and solutions and all.

IMHO, it will arise as an opportunistic move to stave off what will be feared as an angry groundswell, threatening our paid-off hacks’ continuted suck off of the campaign contribution / fundraiser tit. We’ll have plenty of warning, because the memes floating around in popular discourse will shift, as if by magic. A consensus will emerge seemingly out of nowhere. “Here’s another way we’re being soaked by the rich f-kers”. “Everybody” will just “know” it’s the right solution. And then our paid-off hacks will deem it so. Won’t even go up for a vote.

That’ll carry them through the next two year cycle, and another couple ticks up in UE.

After that measure has proven insufficient, more posturing and televised hearings. Once the vets are all back home facing 12% unemployment, our massaging will get increasingly jerky. The meme machine will go into overtime. It will be interesting to witness how we are massaged for a policy about-face, after our debt no longer has any credibility, nobody lets us roll it over anymore, and austerity becomes the order of the day.

So Oxy I agree with you, I’d be flummoxed as well, but I’d not be surprised to hear the PR spinning up to float the idea over even more channels than it’s coming over now.

Comment by GrizzlyBear
2012-11-18 10:55:07

It’s hard to worry about how other nations view our debt when they are in the same shape or worse.

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Comment by Anon In DC
2012-11-18 11:22:15

If any gets “free” stuff it should be the people who pay the taxes not those who sponge off the taxpayers.

Comment by snowgirl
2012-11-18 15:03:33

Sounds good at first glance but don’t we need to make sure it gets spent back into the economy? Who’s most likely to do that?

Also this argument is tied to exec to worker income ratios. Remember this is the highest the ratios have been since the 1920s, the period before our last major market correction. I think most workers would be glad to pay higher taxes on incomes that reflected the more classic ratio back when our economy was healthy and not credit driven or FedRes propped.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 12:35:25

Edward J. Pinto, a former executive vice president and chief credit officer for Fannie Mae, is a resident fellow at the American Enterprise Institute.

The Next Housing Bailout? Big Trouble Brewing at the FHA
By Edward J. Pinto
Nov 16 2012, 3:20 PM ET 4

Housing is at the center of the economy. The Federal Housing Administration is at the center of housing. And there’s a danger that it could require a historic bailout next year.

There’s a growing consensus in America that the long-suffering housing market has reached bottom and is now mounting a recovery. Housing starts surged 15 percent in September to their highest level in four years. New home sales in the same month rose 5.7 percent to their highest level in two years. And the Zillow Home Price Index shows that home prices are up 3.4 percent from a year ago.

While these are welcome trends, figures released today from the Federal Housing Administration (FHA) throw a sobering splash of cold water. FHA’s FY 2012 Actuarial Study for its main single family program shows that its capital position has turned negative, by $13.5 billion. That’s a shift of $23 billion in economic value in a single year, and it puts the 78-year-old agency $34.5 billion short of its legal capital requirement.

If it were a private company, it would be shut down.

It’s bad enough that FHA may be forced to seek a taxpayer bailout, just months after acting FHA Commissioner Carol Galante told Congress that “FHA is not broke.” What’s worse is that the agency’s mounting fiscal problems portend deep trouble for the housing market and the American economy as a whole.

Here’s why.

Comment by Bigguy
2012-11-18 19:42:48

Statutory capital requirement? No problem, just change the law to raise the limit!

“We fixed the glitch.” Office Space

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 12:37:18

Audit shows US housing agency faces $16.3B losses
Posted: Nov 16, 2012 6:14 PM PST Updated: Nov 17, 2012 5:30 AM PST

WASHINGTON (AP) — A federal agency that insures mortgages for millions of low- and middle-income borrowers is facing losses of $16.3 billion and may require taxpayer support, according to an independent audit released Friday.

The Federal Housing Administration’s estimated losses were steeper than earlier projections. That shows high numbers of mortgage defaults triggered by the housing crisis have reduced the FHA’s reserve funds.

The Department of Housing and Urban Development, which oversees the FHA, stressed the agency has sufficient cash to pay insurance claims against mortgage defaults.

Still, HUD said the Obama administration will consider seeking taxpayer assistance for the agency. That will be decided early next year when the administration puts together its budget request for fiscal 2014.

The FHA has taken steps to shore up its reserves over the next few years, HUD said in a news release accompanying the audit. Among them: Expanding so-called short sales — when a home sells for less than what is owed on the mortgage — and raising annual insurance premiums paid by FHA borrowers by an average of $13 a month.

Lower mortgages rates contributed the FHA’s bleaker financial situation, HUD said. When people refinances at lower rates, it reduced revenue earned from loans.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 12:42:53

Am I reading correctly that the FHA planned to put itself into a situation where they would need a bailout? Or was it more like a controlled burn that morphed into a raging, uncontrolled conflagration?

Audit: Housing agency faces shortfall
By Annie Lowrey / New York Times News Service
Published: November 17. 2012 4:00AM PST

WASHINGTON — The Federal Housing Administration, a government agency that insures mortgages, said Friday that it was taking steps to shore up its books and avoid a taxpayer bailout.

An independent audit released on Friday projects that the agency’s expected losses will swamp its anticipated revenue, with a shortfall amounting to about $16.3 billion in its portfolio of insured home mortgages. That has raised the question of whether it will need an infusion of cash from taxpayers for the first time in its eight-decade history.

This is the first time that they’ve totally run out of money,” said Rep. Spencer Bachus, R-Ala., speaking with reporters Thursday. “They have about $600 million, as I understand, that they’re burning through. And within a month, because of the number of foreclosures, they indicated they will have to come to the American people and ask for money.

But federal housing officials stressed that the shortfall was projected,…

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 12:45:48

God forbid that Uncle Sam might stop the practice of giving away hundreds of thousands of dollars worth of unearned income to select homeowners.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 12:48:52

Notice how this housing pimp’s writing style is intended to suggest that homeowners are entitled to all the free welfare benefits that DC sends their way.

Originally published November 16, 2012 at 8:01 PM
November 17, 2012 at 8:08 AM

Ken Harney: ‘Fiscal cliff’ hits home for housing | Nation’s Housing

As Congress discusses how to reduce spending and raise revenue, will the biggest housing-related tax benefits — for mortgage interest, property taxes and home-sale capital gains exclusions — be on the chopping block in the coming six weeks?

Nation’s Housing

WASHINGTON — With the House and Senate back on Capitol Hill for the lame-duck session, preliminary negotiations aimed at keeping the country from careening off the “fiscal cliff” began in earnest this past week.

The macro issues — how to reduce federal spending and how to raise federal revenues — are getting the bulk of the attention.

But buried away in the discussions are bread-and-butter questions that could affect millions of homeowners and buyers:

•Will the biggest housing-related tax benefits — for mortgage interest, property taxes and home-sale capital gains exclusions — be on the chopping block in the coming six weeks?

Or will these popular, multibillion-dollar annual supports for homeownership be deferred for the big game, the “grand bargain” negotiations involving a wholesale transformation of the tax code in 2013?

•Could Congress fail to extend the Mortgage Forgiveness Debt Relief Act before its expiration Dec. 31, potentially exposing large numbers of owners who receive cancellation of unpaid principal balances on their loans to punitive income taxes on the amounts forgiven?

•Will smaller-scale deductions for mortgage-insurance premiums, energy-conserving home improvements and tax credits for builders who construct energy-efficient new houses be renewed? Or could they become poker chips that “pay” for other concessions to real-estate interests?

Though strategies and timing could change in the House or Senate, the betting is it’s unlikely a still-fractious Congress will be able to pull off a major rewrite of the tax code during the lame-duck session.

As a result, the big-ticket housing preferences such as the mortgage-interest deduction — a nearly $100-billion-a-year revenue drain for the Treasury — would not be an action item in the coming several weeks, although agreements in principle could be forged to limit them in some way, with details to be worked out in 2013.

But cutting back on housing preferences will be a bruising fight on Capitol Hill, where powerful groups such as the National Association of Realtors and the National Association of Home Builders view them in almost existential terms.

Plus any changes to the write-offs — even in a grand reform where every special interest gets dinged — would need to be phased in over an extended period of years, given the important role that housing plays in the economy.

Renewal of the mortgage-debt-forgiveness legislation may well be the most time-sensitive issue affecting homeowners during the lame-duck session.

If it expires at the end of the year, owners who receive principal reductions through loan modifications, short sales or foreclosures by lenders next year could face painful tax bills: The IRS would treat their debt cancellations as ordinary taxable income.

Michelle Adams, an attorney in Rockville, Md., with a large practice assisting distressed borrowers, said that “for some homeowners, the amount forgiven is a couple of hundred thousand dollars.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 13:08:56

Why is it OK with Republicans for Uncle Sam to hand out hundreds of thousands of dollars to wealthy homeowners, yet they begrudge the poor union slobs their pittance of income and benefits.

I guess I just never will understand Republican “values.”

Comment by Blue Skye
2012-11-17 17:16:51

Didn’t you ask one of our other posters to stop using the word “Democrats”? The election is over. Now there is the Administration and the Opposition.

Comment by Patrick
2012-11-17 13:05:52

It seems the government continues to admire the TREES;
by species; by age; by locale; moisture; rate of growth; -

That is what is wrong.

Overstudy of TREES and no action on the FOREST.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 13:53:16

A great, all-absorbing focus on TREES helps divert attention away from government-induced FOREST FIRES.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 13:18:15

Is there any chance the FHA need for a bailout will be timed in such a way that the federal government’s role in undermining a rational and functional housing market is scrutinized as part of the fiscal cliff negotiations?

A guy can hope…

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 13:51:53


P.S. Try antifragile robust.

P.P.S. I prefer to think of the present economy as a cat going around in a washing machine on spin cycle.

November 16, 2012, 8:34 p.m. ET

Learning to Love Volatility

In a world that constantly throws big, unexpected events our way, we must learn to benefit from disorder, writes Nassim Nicholas Taleb.

Several years before the financial crisis descended on us, I put forward the concept of “black swans”: large events that are both unexpected and highly consequential. We never see black swans coming, but when they do arrive, they profoundly shape our world: Think of World War I, 9/11, the Internet, the rise of Google.

In economic life and history more generally, just about everything of consequence comes from black swans; ordinary events have paltry effects in the long term. Still, through some mental bias, people think in hindsight that they “sort of” considered the possibility of such events; this gives them confidence in continuing to formulate predictions. But our tools for forecasting and risk measurement cannot begin to capture black swans. Indeed, our faith in these tools make it more likely that we will continue to take dangerous, uninformed risks.

Some made the mistake of thinking that I hoped to see us develop better methods for predicting black swans. Others asked if we should just give up and throw our hands in the air: If we could not measure the risks of potential blowups, what were we to do? The answer is simple: We should try to create institutions that won’t fall apart when we encounter black swans—or that might even gain from these unexpected events.

Fragility is the quality of things that are vulnerable to volatility. Take the coffee cup on your desk: It wants peace and quiet because it incurs more harm than benefit from random events. The opposite of fragile, therefore, isn’t robust or sturdy or resilient—things with these qualities are simply difficult to break.

To deal with black swans, we instead need things that gain from volatility, variability, stress and disorder. My (admittedly inelegant) term for this crucial quality is “antifragile.” The only existing expression remotely close to the concept of antifragility is what we derivatives traders call “long gamma,” to describe financial packages that benefit from market volatility. Crucially, both fragility and antifragility are measurable.

As a practical matter, emphasizing antifragility means that our private and public sectors should be able to thrive and improve in the face of disorder. By grasping the mechanisms of antifragility, we can make better decisions without the illusion of being able to predict the next big thing. We can navigate situations in which the unknown predominates and our understanding is limited.

Herewith are five policy rules that can help us to establish antifragility as a principle of our socioeconomic life.

Rule 1: Think of the economy as being more like a cat than a washing machine.

We are victims of the post-Enlightenment view that the world functions like a sophisticated machine, to be understood like a textbook engineering problem and run by wonks. In other words, like a home appliance, not like the human body. If this were so, our institutions would have no self-healing properties and would need someone to run and micromanage them, to protect their safety, because they cannot survive on their own.

By contrast, natural or organic systems are antifragile: They need some dose of disorder in order to develop. Deprive your bones of stress and they become brittle. This denial of the antifragility of living or complex systems is the costliest mistake that we have made in modern times. Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place. As with the flammable material accumulating on the forest floor in the absence of forest fires, problems hide in the absence of stressors, and the resulting cumulative harm can take on tragic proportions.

And yet our economic policy makers have often aimed for maximum stability, even for eradicating the business cycle. “No more boom and bust,” as voiced by the U.K. Labor leader Gordon Brown, was the policy pursued by Alan Greenspan in order to “smooth” things out, thus micromanaging us into the current chaos. Mr. Greenspan kept trying to iron out economic fluctuations by injecting cheap money into the system, which eventually led to monstrous hidden leverage and real-estate bubbles. On this front there is now at least a glimmer of hope, in the U.K. rather than the U.S., alas: Mervyn King, governor of the Bank of England, has advocated the idea that central banks should intervene only when an economy is truly sick and should otherwise defer action.

Promoting antifragility doesn’t mean that government institutions should avoid intervention altogether. In fact, a key problem with overzealous intervention is that, by depleting resources, it often results in a failure to intervene in more urgent situations, like natural disasters. So in complex systems, we should limit government (and other) interventions to important matters: The state should be there for emergency-room surgery, not nanny-style maintenance and overmedication of the patient—and it should get better at the former.

Comment by GrizzlyBear
2012-11-17 20:41:40

And the banner above is offering loans which are guaranteed by the government. Megabank, Inc., with their political toadies, have ruined this world.

Comment by nickpapageorgio
2012-11-17 20:50:19

I save a lot of cruft on my hard drives, here is something that was posted on the Blog a while back, I just happened to stumble on it looking for another file.

Fill in the blanks:

Our town of __________ has high growth prospects. It is said that residential real estate in __________ will be in high demand for years to come due to the rapid influx of new high-paying jobs. What’s more, a lot of monied baby boomers are expected to be drawn to __________ as they begin retiring in two years. The strong industry and opportunities in tourism, health care, infrastructure, liesure activities, as well as a talented and diverse workforce will continue to make __________ a desirable destination for both companies and families alike for years to come. The city managers and industry leaders have even unveiled a plan to make __________ the next Silicon Valley, revolutionizing the way technology is developed and marketed to the world.

Unlike other cities in the US, __________ maintains a healthy real estate market with a world-class nation-leading real estate workforce ready to work for you whether you decide to buy or sell your home. Even the real estate investor in __________ has a lot to be excited about. Home prices in __________ are expected to moderate to a plateau and then increase substantially for the next 10 years or more. When you get right down to it, no other town has as much to offer as __________ for professionals in real estate or any other industry.

Comment by Pimp Watch
2012-11-17 22:32:59

Nick…. laughable stuff right there.

We could develop a game with that tripe. Say…. “Guess That Liar”.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-17 22:14:19

ft dot com
On Wall Street
November 16, 2012 7:57 pm
Investors smart to spurn politics for Fed
By Dan McCrum in New York

Should investors place their faith in politicians or the central bank?

The stock market took a look at a US election result that maintained the political status quo and did not like what it saw: the S&P 500 index has dropped 5 per cent since voters returned Barack Obama to the White House, while insisting that he again work with a Republican House of Representatives.

In the high-yield market there were signs of investors turning tail as well, beginning with a retreat from valuation highs as cash was pulled out, with a BlackRock high-yield exchange traded fund showing the biggest-ever one-day outflow this week.

There is an element of a correction here. The hunt for yield had made it cheap to issue junk-rated debt and there have been signs that companies were starting to take advantage of indiscriminate demand, for instance by issuing debt simply to fund payouts to shareholders.

For stocks, nagging doubts have persisted even as the S&P 500 rallied this year.

Flows into equity funds have remained minimal, hedge fund activity has been subdued and enthusiasm for initial public offerings thin.

Corporate profitability is already high, meaning that to move earnings, companies need growth.

But with most Wall Street forecasters expecting the US economy to grow by 2-3 per cent next year, there is little room for a sudden dose of austerity in the new year if Congress cannot agree to put off spending cuts and higher taxes. It is hard to rely on agreement when both sides appear to think it is a simple matter of the other compromising.

So investors might instead look to the Federal Reserve, where the latest policy innovation announced in September, of buying up $40bn of mortgage-backed securities each month to push down the cost of borrowing, appears to be working.

Freddie Mac, the agency that backs home loans with a government guarantee, says the average fixed interest rate on a 30-year mortgage is 3.34 per cent, down from 3.4 per cent the week before and at the lowest level since it started to keep records in 1971.

Even so, poorer households have struggled to refinance. Jefferies calculates that for all the Fed’s efforts, the average interest rate on the $9tn of outstanding US mortgage debt is still 5 per cent.

Indeed, Ben Bernanke, the Fed chairman, said in Atlanta on Thursday that credit standards remain tight and the housing sector is far from out of the woods.

So perhaps the most important discussion for investors to pay attention to this week was not the one between the parties over the fiscal cliff, but rather that contained in the minutes of the latest Fed meeting published on Wednesday.

Comment by Bill in Los Angeles
2012-11-18 10:55:12

Pulled out $9,000 from my best performing g mutual fund and another $70,000 from individual stocks, including a utility company and especially my company stock. Significantly cut my 401k contributing rate back in June. Have to pay for the second half of my tradional IRA conversion to Roth.

I am seeing some stocks that are on my wish list looking good. ROST, WLP, HE’S, DELL.

Also seeing a lot more insider sales…GOOG, QCOM, PCLN, MA, VLO. I think we will see more dead cat bounces and then the big correction or even bear the next five weeks.

Have alerts set on over 20 companies when their prices are 60% of their 2012 peak highs.

Comment by Bill in Los Angeles
2012-11-18 10:58:27

Some are already 75% of their peak prices this year.

Comment by WT Economist
2012-11-18 06:00:30

The FHA was changed from an agency whose purpose was to allow moderate income households to buy houses to an agency that socialized the losses to save the banks and the bonds of the rich.

Lots of programs “for the poor” have ended up that way.

Comment by Cantankerous Intellectual Bomb Thrower™
2012-11-18 08:34:08

You can easily tell an economist who doesn’t take money from the real estate industry.

What tax loopholes to cut? EconoMeter panel knows

This Tuesday, Nov. 13, 2012, photo shows the Capital building in Washington. The federal government started the 2013 budget year with a $120 billion deficit, an indication that the U.S. is on a path to its fifth straight $1 trillion-plus deficit. Another soaring deficit puts added pressure on President Barack Obama and Congress to seek a budget deal in the coming weeks. (AP Photo/J. Scott Applewhite)

Written by Roger Showley
noon, Nov. 16, 2012

Q: Is there one deduction or tax break Congress and the president should reduce or eliminate to generate substantially more federal revenue?

James Hamilton, University of California San Diego

The mortgage interest deduction costs the federal government about $70 billion annually in foregone taxes, and has encouraged overinvestment in housing relative to productive capital. However, trying to eliminate this all at once would be a significant blow to an economy that is still trying to recover from the devastation of the last half decade. The way to change the mortgage deduction is to start now with a fairly high cap on the total amount that can be deducted so that it initially affects relatively few households. We could then very gradually lower the cap over time.

Comment by Rental Watch
2012-11-18 18:24:45

They had a few economists of all political persuasions on NPR the other day to talk about deductions that should be taken out…it was universal in their assessment that the MID needed to go.

We can all hope…

Comment by Montana
2012-11-18 14:14:28

Well I’m pretty sure they’re going to kick the can down the road again. I hear people railing about he “failure of leadership” in Congress and how “no one wants to make the hard choices” but as soon as certain programs are discussed, all hell breaks loose…I’m looking at SS and Medicare in a couple years but I say go for it, I’ll adjust somehow. Seniors already on it are in denial, and in escapist mode.

But most people think, are you crazy? don’t let them cut that, they should cut somewhere else! the military !1!eleventy!!1! well cut that too, cut everything.

Maybe the fiscal cliff would be a good thing, since no one wants to go on the record anyway.

Comment by snowgirl
2012-11-18 14:53:45

There was an older woman a few years back waiting it out for the Obama administration to somehow click in and pay for some sort of custom created knee instead of the standard knee replacement. She was experiencing greater and greater pain but she was holding out for that free upgrade. Her uncle was reportedly a former senator in another state so I was thinking all along that she could probably pay for that upgrade herself.

I’ve also watched one spouse need wheelchairs and walkers that the family will get rid of when he passes instead of holding onto them for reuse in other family members because they’ll just get new ones when they’re in need. Isn’t this a complete waste of money that the next generation will sorely need just for basics?

Comment by tresho
2012-11-18 15:12:54

New owner finds dead dogs in home
MIDDLEVILLE (AP) — A man who purchased a foreclosed home formerly owned by an animal-welfare advocate found mounds of feces and dead dogs when he got control of the property in western Michigan.

Kurt Wierenga said he plans to demolish the house, which is only 10 years old, after discovering the conditions. He told WOOD-TV that dead dogs were inside and outside the rural home near Middleville, about 30 miles southeast of Grand Rapids.

The home formerly belonged to Marcie Tepper, who rescues animals and is the sheriff’s appointee on the Barry County animal control/shelter advisory board. The sheriff said she is now under investigation.

Comment by GrizzlyBear
2012-11-18 16:43:42

This f***ing lady needs to go to prison. This kind of crap makes my blood boil.

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