Bush Plans Response to Subprime Crisis

[salo_t]

Bush is an idiot but that aside I don’t see how his plan will change anything that is already in motion in this market.
Sure a few more people might be able to hang on to the homes they reside in a little longer but all of the “investors” who have racked up 2, 3 or even more homes will be losing those just the same as they were going to anyway.
Also, lending guidelines are still being tightened so average Joe’s won’t be able to get into anything more than 300k if even that pretty soon. I honestly don’t see any reason to panic about prices. I think the average home owner/buyer is now very aware of the danger of buying a home out of their price range especially after this news.

[LA_Renter]

h82rent,

I guess the pop I’m referring to is the underlying credit bubble of which the housing bubble was made possible. The credit markets went from stable with large amounts of cheap credit to a panic stricken credit crunch within days. That’s a pop. You are correct housing kind of just hisses its way down much to everybody’s frustration and it will continue at a much faster pace now. The housing bubble was the body of the snake, the credit bubble was the head, the head has been severed and the body still has some last twitches to it but its dead with no chance of revitalization. I have pointed this out many times before this is a $5 to $10 Trillion dollar problem in the global CDO derivatives market. All of that stuff has to be re-priced. That is going to take a long time and with much pain that transcends even the political season. Bush and congress in actuality don’t have much in the way they offer at tax payers expense. This the FED’s problem and even they have limited ability to deal with this. If the FED takes big bold steps due to political pressures and the credit markets remain locked up, they run the the risk of creating an even bigger panic…..IF THAT DIDN”T WORK THEN…THEN…NOTHING WILL….OMG RUN AWAY, RUN AWAY! (remember Monty Python’s Killer Rabbit). If the politicians could re-inflate the bubble and could pressure the FED to their will….you are right they WOULD. The reality is that they CAN’T. Can they make things worse by trying…YEP!

[patientlywaiting]

bsrsharma, I think you need a little bit of tax education. (just kidding you :)).

The problem with this country is few people understand that the rich have many ways of legally avoiding taxes.

I work for the corporation. I need to pay payroll and income taxes on my salary (although I’m the largest shareholder).

I need to find a way to get the corporation’s money into my own pocket while minimizing taxes. Under the mortgage debt forgivess plan, the corporation gives me $1 million home equity loan. I default. I still have $1 million and pay zero in income or payroll taxes. The corporation gets to deduct $1 million as an expense. Uncle Sam is the loser.

This would work great for estate planning purposes as well to transfer wealth the next generation.

Say I have $10 million I want to transfer to my heir free of estate taxes. I give him a $10 million mortgage on his POS house. He defaults, still has the $10 million but neither he nor I paid any estate tax.

Sure they can limit the amount to $10,000. But smart people will find a way to profit.

I have a maid who makes $25k per year. Instead, I can just pay her $15k in salaray and give her $10k home equity loan. She defaults, keeps the $10k. The $10k in “effective compensation” is tax free. She pays no income taxes and I pay no payroll taxes. What a great deal!!!

I’m working on it right now, just in case they pass such a scheme for mortgages up to a certain date.

I’m Democrat because I believe in fairness. But the law is the law, and I see nothing wrong with following the letter of the law.

[noone]

A few years back, I was sitting in Callahan’s with some co-workers talking about housing. I was the only bear in the bunch. At that time I said that the one thing that would make me feel stupid for not jumping on the bandwagon and buying some POS that I knew I couldn’t afford… is a government bailout.

However, I think PadreBrian might be seeing this the right way. From the sounds of it, in this plan the only folks who will be able to hang on to their homes for another couple of years are in other parts of the country, not the SoCal area. San Diegan’s will be in the other category of being able to make a short sale without a tax penalty. And even then, the bank has to agree to the short sale.

[CostaMesa]

next thing you know, bush will decree farms use gatorade to water their crops…

It’s got electrolytes.

So true…cause who’d want to put that stuff in the toilet on their food?

[jimmyle]

I don’t like this move by Bush but to be fair Clinton and Obama call out for even more help to speculators.

[sdrealtor]

Is this the UNtipping Point?

Seriously, all you guys crack me up bigtime. You react to every little bit of news like it will shift the balance. Think invisible hand. RE is such a slow moving ship and day to day news has very little impact. You need a lot of patience and a long term view to assess this. We have just come off a couple weeks of the worst possible news regarding mortgages and the market is still breathing and prices havent plummeted instantly.

Give it time grasshoppah!

[JC]

Dude, Where’s My Bailout?

Seemed like a good time for a little levity. 🙂 I *think* most of you will enjoy this: http://www.businessweek.com/magazine/content/07_37/b4049050.htm

Enjoy the holiday!

[bsrsharma]

I need to find a way to get the corporation's money into my own pocket while minimizing taxes.

Commendable idea – done legally.

Under the mortgage debt forgivess plan, the corporation gives me $1 million home equity loan.

I am not sure the proposed tax exemption on mortgage debt forgiveness covers HELOC?

I default. I still have $1 million and pay zero in income or payroll taxes. The corporation gets to deduct $1 million as an expense. Uncle Sam is the loser.

Obviously this is fraud. I am certain the tax exemption will skip HELOC for this reason.

This would work great for estate planning purposes as well to transfer wealth the next generation. Say I have $10 million I want to transfer to my heir free of estate taxes. I give him a $10 million mortgage on his POS house.

I think this will be prevented by putting a limit, say $417K, for the program.

He defaults, still has the $10 million but neither he nor I paid any estate tax.

Since it was a mortgage, the heir should not have the money. It should have gone to the sellers, unless fraud is involved.

Sure they can limit the amount to $10,000. But smart people will find a way to profit. I have a maid who makes $25k per year. Instead, I can just pay her $15k in salaray and give her $10k home equity loan. She defaults, keeps the $10k. The $10k in "effective compensation" is tax free. She pays no income taxes and I pay no payroll taxes. What a great deal!!!

Powerful reason why HELOC should not benefit from the program. I think the existing law also distinguishes between recourse loans and non-recourse loans for this reason. HELOCd people will have to rot in debtors hell all their life.

[patientlywaiting]

bsrsharma, you make it more complicated than it needs to be.

For simplicity, think of it this way… You own a house free and clear and want to borrow $10 million pledging your house as collateral. I agree and give you the money. I’m the lender (but not a regulated financial institution) and I’m free to lend you any amount I want.

You default. What can I do? The most I can do is take your house and sue you for the money. But as the lender I don’t even have to do that. I can just write-off the bad debt and call it water under the bridge (if I’m a corporation with enough income, I could write off the full amount as bad debt. Even individuals can carry mortgages and write off bad-debt on their tax returns).

If debt forgiveness were not taxable, you’d see a lot more of these kinds of non-taxable transactions. The law firms and estate planners are already sharpening their pencils.

[bsrsharma]

I can well understand your example. I am just confident that IRS is at least as competent as you and me to prevent this open fraud. They are going to institute a sequence of “Tests” you have to jump through to qualify. Hey, you can’t even write off a room in your home as home office that easily.

[patientlywaiting]

bsrsharma, regardless of the amount, why would you call that fraud if the law were to permit it?

We’re talking about bailing out the irresponsible here. And there will be grave unintended consequences.

What do you think would be a legitimate reason for defaulting on a mortgage and getting relief? Would having crushing medical expenses apply? What about blowing all your salary in Vegas, drugs, or a boob job for your wife? What if you simply don’t feel like paying anymore? What if you quit your job and no longer don’t want to work?

More importantly, how would Congress write all of that into law?

[bsrsharma]

patient – There is this feeling among many that this plan is some great giveaway. It is really not if you read the details.

1. It extends FHA guaranteed loan conversions (to fixed mortgages) to people who are CURRENT on their mortgages. Almost zero taxpayer money involved. If any, some losses will be borne by lenders since they won’t get their juicy yields. The CMO holders will feel stiffed. Why should taxpayers worry?

2. It allows homeowners with upside down loans to petition the lender for partial loan forgiveness (probably for a short sale). The lender has to agree to that. It seems to be a vary laborious and difficult process, and usually denied. With the proposed rule, with possibility of fraud you described, lenders will be even more stingy in allowing any forgiveness. I am sure they will never allow it for recourse loans (HELOC). They will be incredibly stupid to allow that and I am sure the IRS rules will be written to exclude them from tax leniency. No fear of subsidizing Vegas, drugs etc.,

IRS will write the law to carefully verify that the loans are non-recourse, limited to small amount and may even demand personal bankruptcy from the borrower to prove hardship. Nobody has ever accused IRS of being kind and forgiving.

[cantab]

Stockstradr, I also thank you for your actions. You stood up for what is right when almost all of us didn’t.

[LA_Renter]

Here is some more commentary from Barons via BigPicture

“THE IRONY IS THAT MR. BUSH’S proposals may have served a function in goosing a very nervous stock market but aren’t likely to yield much else than disillusionment.

A hedge-fund manager quoted by Barry sums it up rather persuasively: “I don’t see anything in Bush’s plan that will change the insolvency of the home buyer. The ‘system’ is illiquid (and that ‘problem’ was addressed by the central banks two weeks ago), but the ‘borrowers’ are insolvent. Nothing I’ve seen yet changes that fact. Nothing. Besides, has this administration, which doesn’t believe in government programs, ever done anything well bureaucratically?”

Softening the tax bite on mortgage write downs and allowing homeowners who are delinquent by more than three months and who have a decent credit history to switch into a Federal Housing Administration loan carrying a lower interest rate will effect modest fixes, but are no big deal. Certainly, given the wretched condition of housing, the inexorable decline in home prices and the prospect of a huge resetting upwards of adjustable-rate mortgages over the next 12 months, with a big spike in March ’08, we’re talking Band-Aids rather than serious relief.

Now that the president, however tentatively, is officially on board, the bailout bandwagon is sure to pick up speed, volume and passengers, particularly with an election year looming. That could mean, as the sharp rise in the price of gold, up over $7 an ounce on Friday, gives fair warning, a rash of fiscal fecklessness, fresh debasement of the dollar and that most unenviable of economic combinations — no growth and inflation.

What it doesn’t mean is a return to the good old days of easy and just about free credit and all the nice bubbly things that went with it. Nor, we fear, does it portend even a modest rebound in housing in the next 12 months. The party’s definitely over and no one’s sorrier than we are. It sure was fun to watch.”

http://bigpicture.typepad.com/comments/2007/09/bailout-bandwag.html

One of the things most people on the bearish housing blogs fear the most is a bailout of the credit/housing bubble and it’s restoration. At this point that is beyond the laws of physics per se. What most astute observers are correctly pointing out is that the most likely outcome of any bailout will be that 70’s retro classic STAGFLATION. The double knit polyester leisure suit of economic conditions.

[Author]

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