As this article appears behind a paywall at wsj.com/articles/the-tax-breaks-for-homes-that-help-you-now-11596792602,
the full text is below.
August 7, 2020
By Laura Saunders
The coronavirus pandemic has had profound effects on real estate, and the sudden shifts make it a good time to delve into tax breaks available to home buyers and homeowners.
“There might finally be some good news this year about the nation's dismal housing market. Or, at least, the bad news could stop.”
“Either way, it will be welcome relief for current homeowners as well as for potential real-estate investors. Reasons to be optimistic have been sadly lacking since the housing bubble burst in 2006.”Constable points to the continuing decline in the S&P/Case-Shiller home-price index that fell again for the fifth month.
“Houses Are a Good Deal. Housing is the most affordable it has been in decades, according to analysts at Moody's Analytics. They don't just look at house prices. They also look at incomes.”
“Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years. Prices usually average close to two years' pay, although that varies nationally.”
“Investors Stepping Up. Here's another sign the market is nearing a bottom: Investors have started to buy up houses and condos, in some instances paying entirely in cash. That's a far cry from the heady bubble days when borrowed money seemed the key to riches. The bubble-era speculators who got burned tended to buy at the peak and borrowed heavily to do so. When the crash came, they quickly saw their wealth erased.”
“Plan to Stay Put. Buy and hold. While the good news is that the worst of the housing crash might be over, the bad news is that the fast gains of the glory days of 2005 and 2006 won't be back any time soon. So to cover the costs of buying and selling, and what could be a prolonged recovery, plan to own for more than 10 years, explains Jack Ablin, chief investment officer at Chicago-based Harris Bank.”
“Home Buying Without a House. There are other ways to benefit from a real-estate rebound than directly buying a house. Such investments include stocks, mutual funds or exchange-traded funds. Unlike homes, which typically cost tens of thousands of dollars, these financial investments can be made in smaller amounts and typically are easy to sell.”Is this the light at the end of the tunnel or a locomotive bearing down on us. Time will tell.
“The proposal is the first step in the government's effort to clarify how it will seize and dismantle large financial firms that run into trouble. The Federal Deposit Insurance Corp. was given authority to liquidate firms as part of the U.S. effort to prevent another collapse like that of Lehman Brothers, whose demise rippled through the financial sector.”The FDIC is taking the action at the same time that regulators in other countries are addressing the so-called “too big to fail” firms and banks.
"it planned to prohibit additional payments to shareholders and long-term debtholders in the event of a firm's demise. The FDIC said it could make additional payments to certain short-term creditors in situations where it maintains "essential operations" or to "minimize losses and maximize recoveries."The proposed rule has been put out for comment. We’ll keep you posted.
Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.
[T]he single most important factor is whether the homeowner has negative equity in a house -- that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.Liebowitz believes the statistics puts the lie to the belief that it was sub-prime lending that got us into the foreclosure pickle we are in now. It's not resetting of interest rates, either.
The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home.
Back when the housing mania was taking off, Massachusetts Congressman Barney Frank famously said he wanted Fannie Mae and Freddie Mac to "roll the dice" in the name of affordable housing. That didn't turn out so well, but Mr. Frank has since only accumulated more power. And now he is returning to the scene of the calamity -- with your money. He and New York Representative Anthony Weiner have sent a letter to the heads of Fannie and Freddie exhorting them to lower lending standards for condo buyers.
"new "mission" has become to do whatever it takes to prop up the housing market. The last thing they need is lawmakers like Mr. Frank, who did so much to lay the groundwork for their collapse, telling them to play faster and looser with their lending standards.
Read "Barney the Underwriter. Telling Fannie Mae to take more credit risk. Now there's an idea."
"Cheer up. Even in these hard economic times, Democrats across the nation are working on plans that will turn some of you into instant millionaires.There's only one catch. You're not actually going to be bringing in a million-dollar income. But the tax man is going to treat you just as though you did."
"In 2004, then Gov. Jim McGreevey became the first Democrat to get through a millionaires' tax whose reach extended to nonmillionaires. The McGreevey
"millionaires' tax" kicked in at $500,000. He justified it, moreover, by saying that any money collected would go toward funding property tax relief for the state's beleaguered homeowners.
"Five years later, we can see how that's turning out. Not only is Democratic Gov. Jon Corzine targeting property tax relief for many Garden State citizens, he wants to impose a "temporary" surcharge on the existing McGreevey millionaires' tax. "
"And why not? So long as Democrats are willing to rewrite the tax code, almost anyone can wake up one day to find himself a millionaire."
Read the full column, How Democrats Make Millionaires.
The best news about the new Treasury bad bank asset purchase plan is that Secretary Timothy Geithner has finally settled on a strategy. The uncertainty was getting almost as toxic as those securities. Now all Mr. Geithner has to do is find private investors willing to "partner" with the feds (Congress!) to bid for those rotten assets, coax the banks to sell them at a loss, and hope that the economy doesn't keep falling lest taxpayers lose big on their new loan guarantees.
In simplest terms, Treasury is using loan guarantees and $100 billion in remaining TARP money to create a more liquid market for dodgy financial assets. These include those infamous mortgage securities, as well as various loans that may be nonperforming. The idea is to create new buyers for those assets, perhaps leading to higher prices than now exist in a illiquid market, and thus help banks gradually clean up their balance sheets.
President Obama continues to insist that only "responsible families" will benefit from his foreclosure prevention program. Addressing Congress last week, Mr. Obama said his plan "won't help speculators or that neighbor down the street who bought a house he could never hope to afford." Sorry, Mr. President. It's becoming increasingly obvious that your plan is going to help tens of thousands of borrowers who put the "liar" into liar loans.
There is a moral hazard in rewarding bad decisions. But it's worse than that: The White House plan contains penalties for everyone else. The mortgage "cramdown," allowing bankruptcy judges to reduce the amount owed, can only make investors less willing to lend to future homebuyers.
President Obama will propose further tax increases on the affluent to help pay for his promise to make health care more accessible and affordable, calling for stricter limits on the benefits of itemized deductions taken by the wealthiest households.Today, February 26, 2009, the Wall Street Journal weighs in on the matter discussing The 2% Illusion,
President Obama has laid out the most ambitious and expensive domestic agenda since LBJ, and now all he has to do is figure out how to pay for it. On Tuesday, he left the impression that we need merely end "tax breaks for the wealthiest 2% of Americans," and he promised that households earning less than $250,000 won't see their taxes increased by "one single dime."
This is going to be some trick. Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can't possibly raise enough revenue to fund Mr. Obama's new spending ambitions.
But let's not stop at a 42% top rate; as a thought experiment, let's go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That's less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable "dime" of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.
The bottom line is that Mr. Obama is selling the country on a 2% illusion. Unwinding the U.S. commitment in Iraq and allowing the Bush tax cuts to expire can't possibly pay for his agenda. Taxes on the not-so-rich will need to rise as well.
"There are other problems. A bankruptcy judge's power to reset interest rates and strip down principal to the value of the property sets up a dynamic that will fail to help many needy homeowners, and also reward bankruptcy abuse.
"Consider that the pending legislation requires the judge to set the interest rate at the prime rate plus "a reasonable premium for risk." Question: What is a reasonable risk premium for an already risky sub-prime borrower who has filed for bankruptcy and is getting the equivalent of a new loan with nothing down?"
The compensation caps are no doubt politically satisfying as revenge for Wall Street's role in creating the current financial mess. Heaven knows it's hard to sympathize with Goldman Sachs, which yesterday expressed its desire to leave the Troubled Asset Relief Program on the very day the new bonus limits were announced. We assume this means that from here to eternity Goldman will not be too big to fail.
Taxpayers need to realize, however, that Members of Congress want to impose salary and bonus limits to give themselves political cover when they are next asked to provide more bailout cash. Congress wants to seem to be tough on bankers in return for the cash, even if in reality the feds aren't tough at all.
Chuck Schumer, the Senator from Wall Street, told Bloomberg this week that insuring bad bank paper "is one possibility that seems to be gaining some currency." And no wonder: For bankers and politicians, the benefits are clear. The bankers know their losses have been limited, which means their bad lending choices become largely the taxpayer's problem. Unlike a public capital injection, a guarantee also doesn't by definition dilute current shareholders. When the Federal Reserve guaranteed $29 billion in Bear Stearns paper for J.P. Morgan Chase last year, it came with no strings attached.
Stocks are continuing their decline in the New Year since Congress has returned and as the federal government once again revs up its bailout machinery. Maybe this isn't a coincidence.
With Barack Obama about to take the oath of office, this ought to be a moment for fresh, more consistent economic leadership. Instead, we're getting a new version of the same ad hoc policy and scare-tactics that marked 2008. No clear spokesman or leader has emerged with a strategy to rebuild the financial system.
"Consider Fed Chairman Ben Bernanke, who used a London speech on Tuesday to pat the Fed on the back as the Horatio at the Bridge of this panic. This would have been appropriate for a Princeton seminar a couple of years from now. Amid the current uncertainty, however, he succeeded mainly in suggesting that the financial system is in even worse shape than we thought, the President-elect's "stimulus" isn't sufficient, and thus more of Mr. Bernanke's policy magic will be needed to save the day."Strong leadership is required or the effort to revitalize the economy will stall.
"Mythmaking is in full swing as the Bush administration prepares to leave town. Among the more prominent is the assertion that the housing meltdown resulted from unbridled capitalism under a president opposed to all regulation."
"Like most myths, this is entertaining but fictional. In reality, FannieMae and FreddieMac were among the principal culprits of the housing crisis, and Mr. Bush wanted to rein them in before things got out of hand.
The real estate industry will be dealing with the collapse of FannieMae and FreddieMac for a long time. As in all cases, the history will be written by the eventual victor.
Read the full article here.
The FDIC wants to pay loan servicers to restructure delinquent loans and then have taxpayers share the losses if the loans fail again after six months. The FDIC did not appreciate that we reported private data showing that more than 50% of modified loans go delinquent again. The agency suggested that 15% might be a better estimate.The Journal's approach was somewhat ratified by a report issued by the Comptroller of the Currency, John Dugan, that showed high default rates following modification. "The results, I confess, were somewhat surprising, and not in a good way."That estimate just got a lot harder to defend. Comptroller John Dugan released the default numbers on loans modified in the first two quarters of 2008, based on data from institutions servicing more than 60% of all first mortgages. "What makes these quarterly reports unique is that they are not merely surveys, but instead consist of validated, loan level data," said Mr. Dugan. "We believe the reports include the most accurate and reliable data on mortgage performance that is available today."
"Of mortgages modified in the early part of this year, more than 35% had gone at least 60 days delinquent again after just six months, and a full 53% were 30 days delinquent or more. By eight months, this default rate had climbed to 58%. Second quarter modifications are on track to be nearly as ugly, with more than 50% of borrowers at least 30 days delinquent at the six-month mark. Come to think of it, these stinkers are going south so quickly that perhaps the FDIC's plan actually will protect taxpayers -- there won't be much left to insure after these toxic loans blow up in the first six months after modification."Perhaps New Jersey Governor Jon Corzine should take a closer look at these numbers and accept the strong possibility that his efforts to stop foreclosures will create more havoc in the real estate market by not allowing "toxic loans" to blow up and clear the mortgage out of the market place and allow the property to get into the real estate market sooner than later.
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