[doubledogdare]

SDRealtor,

I share your sense of bewilderment and frustration. Per your question on Mortgage Backed Securities (MBS), my understanding is that they are fully callable bonds. When a investor buys them (e.g., a pension or hedge fund), the portfolio manager needs to factor-in the probability of the bond being called (i.e., mortgage payed off early).

In my opinion, the REIC is very much incented to throw good money at bad by refinancing FBs into new option ARMs since: (1) they avoid default thus keeping the original MBS holder happy, (2) the originator gets revenue from writing a new loan and selling it into the MBS market, and (3) a new fund manager gets to buy new MBS’ to replace ones that have been called. Furthermore, the investment bank maybe able to assemble these refinanced FB option ARMs into larger packages with higher quality MBS to where the fund manager is somewhat insulated from the higher risk…and potentially get a higher yield.

At some point, the music has to stop…probably when the FBs have exhausted their equity, cash and other investments, and they are so far underwater that they can’t refinance or even make the first payment. However, with all the industry players incented to keep the party going, the “creativity” of the financial wizards at the i-banks and sheer inertia of the markets, I’ve given-up on hoping for homes in California to return to rational pricing in the near future.

[doubledogdare]

I think that what you’ve described is already happening. The LA Times had an article back on Dec 11th with this interesting statistic on option arms:

“In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American Loan Performance”.

“Last year, 1 in 5 loan applicants got one.”

“In the first eight months of 2006…Nearly 1 in 3 California loan applicants are now choosing them.”

My hypothesis is that lenders are finding a way to refinance FBs with ARM resets into new option ARMs to delay defaults/foreclosures for another one to three years and hope that the boom years return to bail everyone out.

[doubledogdare]

From what I hear, the impact of AMT is growing to the point where people in the $100K income range will be the primary people hit by the tax (i.e., upper middle income segment). That would seem to over many of the people that stretched to get into over priced starter homes and trade-up homes. Here’s the URL and a paragraph from a study done by the Congressional Budget Office:

http://www.cbo.gov/showdoc.cfm?index=5386&sequence=0

“Until 2000, less than 1 percent of taxpayers paid the AMT in any year. Under current law, however, the number of taxpayers affected by the AMT will grow from just over 1 million in 2001 to nearly 30 million in 2010 before falling back to about 23 million in 2014 after the expiration of the 2001 and 2003 tax cuts.”

“Twenty percent of all taxpayers–and 40 percent of married couples–will owe AMT in 2010. AMT receipts in 2010 will total about $90 billion, roughly 7 percent of total individual income tax revenue.”

“Married couples filing jointly are more likely to have AMT liability than unmarried taxpayers with similar incomes. For example, CBO projects that about 95 percent of married taxpayers with AGI between $100,000 and $200,000 will owe AMT in 2010, compared with 84 percent of single filers in the same income category.”

“Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminate the tax are likely to grow. “

[doubledogdare]

I guess it all depends upon the situation and perspective. The answer is no from an asset management industry standpoint (e.g., private bankers, discretionary and advisory brokers, etc.). The key client measure is Investable Assets, which excludes money tied-up in a primary residence. To get into a decent private bank or high end broker, you have to be a High Net Worth Individual, which is someone with > $1MM in Investable Assets.

However, I think that the IRS does consider the primary residence to be part of net worth for the purposes of estate tax calculation as well as the courts (e.g., divorce settlememts)

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