The National Association of Realtors® (NAR) stayed right on message as it proposed a four-point plan for Congress to enact to resuscitate the housing market and including yet another plea to keep banks out of the real estate business.
The plan, revealed in a statement made late last week and in the NAR President's Podcast released on October 21, calls for a special "lame-duck" session of Congress and asks that it consider the following, what it calls "consumer-driven" provisions to boost the economy and soothe the nerves of jittery homebuyers.
1. Eliminate the provision contained in last summer's housing rescue bill that requires first-time homebuyers to repay the $7,500 tax credit they receive under the plan and expand that credit to apply to all buyers of a primary residence.
2. Urge the government to use a portion of the allotted $700 billion that was provided to purchase mortgage-backed securities from banks to provide price stabilization for housing. The Treasury department should be required to:
3. Extend credit down to Main Street, making credit more available to consumers and small businesses;
* Extend credit down to Main Street, making credit more available to consumers and small businesses;
* Expedite the process for short sales;
* Expedite the resolution of banks' real estate owned (REOs) properties.
4. Make permanent the prohibition against banks entering real estate brokerage and management, further protecting consumers and the economy.
In the podcast NAR President Richard F. Gaylord called the proposal "a boldstep on the policy front," and urged NAR members to talk with members of Congress while they are home in their districts over the election hiatus about the proposal and how important its provisions are to consumers.
In the earlier statement Gaylor said, "Housing has always lifted the economy out of downturns, and it is imperative to get the housing market moving forward as quickly as possible." It is vital to the economy that Congress take specific actions to boost the confidence of potential homebuyers in the housing market and make it easier for qualified buyers to get safe and affordable mortgage loans. We are asking Congress to act right away."
Gaylord said NAR, as the leading advocate for homeownership and private property rights, believes it is important for Congress to address the concerns and fears of America's families, much in the way it has addressed Wall Street turbulence. "Housing is and has always been a good, long-term investment and a family's primary step towards accumulating wealth."
Gaylord said that NAR will strongly pursue those proposals and is calling on Congress to return to enact housing stimulus legislation in a lame-duck session after the national elections in November.
[Published 10/22/08 by Mortgage News Daily]
Wednesday, October 22, 2008
Tuesday, October 14, 2008
The Solution: Turn on the Printing Presses!
The financial markets are still volatile and people are still uncertain at best, or fearful at worst, for the future. Stratfor.com has a bit of commentary about the governments of America's and Europe's various attempts at solving the financial mess.
"Yet the Europeans and the Americans both had to intervene in some way, and now they face exactly the same problem: having decided to make the pig fly, there remains the small matter of how to build a flying pig. The problem is administrative. It is all very well to say that the government will buy paper or stock in companies, or that it will guarantee loans between banks. The problem is that no institutions exist to do this. There are no offices filled with officials empowered to do any of these things, no rules on how these things are to be done, no bank accounts on which to draw — not even a decision on who has to sign the checks. The faster they try to set up these institutions, the more inefficient, error-prone and even corrupt they will turn out to be. We can assure you that some bright lads are already thinking dreamily of ways to scam the system, and the faster it is set up, the fewer controls there will be."
Now that the governments have decided to force the banks to take money in exchange for preferred stock positions, the Dow industrial average yesterday flew up over 900 points (apparently pigs can fly!).
We will be monitoring developments closely, as always.
"Yet the Europeans and the Americans both had to intervene in some way, and now they face exactly the same problem: having decided to make the pig fly, there remains the small matter of how to build a flying pig. The problem is administrative. It is all very well to say that the government will buy paper or stock in companies, or that it will guarantee loans between banks. The problem is that no institutions exist to do this. There are no offices filled with officials empowered to do any of these things, no rules on how these things are to be done, no bank accounts on which to draw — not even a decision on who has to sign the checks. The faster they try to set up these institutions, the more inefficient, error-prone and even corrupt they will turn out to be. We can assure you that some bright lads are already thinking dreamily of ways to scam the system, and the faster it is set up, the fewer controls there will be."
Now that the governments have decided to force the banks to take money in exchange for preferred stock positions, the Dow industrial average yesterday flew up over 900 points (apparently pigs can fly!).
We will be monitoring developments closely, as always.
Friday, October 10, 2008
How Busy Are We???
Sorry that I haven't posted my perspective on current events and the housing market lately.
Here's a quick note that I just sent to a friend and client:
I have been busier than a one-armed paper hanger lately. Have three offers out there and waiting to hear back on them... and they are all great offers too! Currently prepping two other offers for submission today. Right now am working with buyers buyers buyers. Not so much listings. The ebb and flow of this biz...
Betwix you and me, I think prices are going to be all over the board for a while, but locally there is a negotiation parity between sellers and buyers. There is a six month inventory based on number of listings to sales rate ratio. Very balanced... and my last three offers have been with multiple offer situations.
[Regarding the news...]
The world is not ending.
It will take a while for all of the extraordinary government intervention to work through the system and for confidence to re-build, but both will happen. That's not to say that there will not be some wild shocks to the system down the road, but I think that we are either past or nearly past the critical period of danger of systematic collapse.
[Some] people will lose jobs and houses. Christmas will be leaner than any in our children's memory. But we will get past this.
Tip o' the Day: Keep your wits about you as others are losing theirs.
[By the way... we are never too busy for you and your referrals of friends, neighbors, and associates! Please call Ray and the SCV Home Team at 661-290-3750.]
Here's a quick note that I just sent to a friend and client:
I have been busier than a one-armed paper hanger lately. Have three offers out there and waiting to hear back on them... and they are all great offers too! Currently prepping two other offers for submission today. Right now am working with buyers buyers buyers. Not so much listings. The ebb and flow of this biz...
Betwix you and me, I think prices are going to be all over the board for a while, but locally there is a negotiation parity between sellers and buyers. There is a six month inventory based on number of listings to sales rate ratio. Very balanced... and my last three offers have been with multiple offer situations.
[Regarding the news...]
The world is not ending.
It will take a while for all of the extraordinary government intervention to work through the system and for confidence to re-build, but both will happen. That's not to say that there will not be some wild shocks to the system down the road, but I think that we are either past or nearly past the critical period of danger of systematic collapse.
[Some] people will lose jobs and houses. Christmas will be leaner than any in our children's memory. But we will get past this.
Tip o' the Day: Keep your wits about you as others are losing theirs.
[By the way... we are never too busy for you and your referrals of friends, neighbors, and associates! Please call Ray and the SCV Home Team at 661-290-3750.]
Wednesday, October 08, 2008
SCV Home Sales Rise in August Y2Y
Single-family home sales increased 7.0 percent during August throughout the Santa Clarita Valley, the Southland Regional Association of Realtors reported.
The 199 closed escrows were 13 sales higher than a year ago, but down 16.0 percent from this July when 237 homes sold.
While buyers generally are focusing more on single-family home opportunities, condominium sales increased 31.7 percent to 83 closed escrows during August.
"Lower prices were the most important factor driving increased sales activity, simply because buyers realize that they now have a chance of buying a home that was out of reach just a short time ago," said Doreen Chastain-Shine, president of the Association's Santa Clarita Valley Division. "The increase also could be related to the positive effects of being able to obtain a larger loan at a lower cost."
Chastain-Shine was referring to the fact that the July and August were the first months that saw the conforming loan limit at its new level of $729,000, which means loans up to that amount can be obtained at a lower interest rate than ever before.
The median price of homes sold during August decreased 19.6 percent to $450,000. That was $1 10,000 below the $560,000 median price of August 2007 and $9,000 higher than the $441,000 median posted this July.
The condo median during August came in at $269,500, down 25.6 percent from a year ago and off 5.4 percent from this July.
‘The real estate market will not find some level of normalcy until Washington resolves the current financial crisis, thus making more money available for home loans, and the limited supply of bank-owned properties on the local market work their way through the system," said Jim Link, the Association's chief executive officer. [The other way, of course, is to let the market find its own level through agreement of buyers and sellers on price. However, credit availability is a critical variable in the marketplace. The financial markets are so clogged by distrust and bad paper, that some measure of governmental intervention will be needed to restore a functioning market. The SCV Home Team hopes the macro-economic experts can come up with as little intervention as possible yet still correct the excesses. It's a tall order in this, a general election year.]
"Many of the foreclosure properties, which are not nearly as numerous as in other parts of the state, already are on their way to being sold," Link said. "We expect resale prices to flatten out soon and firm up between now and Spring." [We hope!]
That relatively brief window of opportunity is when buyers will have the greatest opportunity to buy a home at a favorable price.
Activity throughout the Santa Clarita Valley picked up during August, a fact supported by the Association's statistics reporting pending escrows - a measure of future resale activity.
Pending escrows increased 89.3 percent during August compared to a year ago, suggesting that a growing number of people are getting off the fence and into the market.
There were 1,684 active listings throughout the Santa Clarita Valley at the end of August. That was down 825 listings for a drop of 32.9 percent compared to a year ago. Active listings also declined 5.3 percent from the July total.
At the current pace of sales the inventory represents a 6.0-month supply - right at the top of what industry leaders call a balanced market where neither the buyer nor the seller have a clear cut advantage in negotiations.
[Become a client of Ray Kutylo and the SCV Home Team for up-to-date analysis of market conditions.]
The 199 closed escrows were 13 sales higher than a year ago, but down 16.0 percent from this July when 237 homes sold.
While buyers generally are focusing more on single-family home opportunities, condominium sales increased 31.7 percent to 83 closed escrows during August.
"Lower prices were the most important factor driving increased sales activity, simply because buyers realize that they now have a chance of buying a home that was out of reach just a short time ago," said Doreen Chastain-Shine, president of the Association's Santa Clarita Valley Division. "The increase also could be related to the positive effects of being able to obtain a larger loan at a lower cost."
Chastain-Shine was referring to the fact that the July and August were the first months that saw the conforming loan limit at its new level of $729,000, which means loans up to that amount can be obtained at a lower interest rate than ever before.
The median price of homes sold during August decreased 19.6 percent to $450,000. That was $1 10,000 below the $560,000 median price of August 2007 and $9,000 higher than the $441,000 median posted this July.
The condo median during August came in at $269,500, down 25.6 percent from a year ago and off 5.4 percent from this July.
‘The real estate market will not find some level of normalcy until Washington resolves the current financial crisis, thus making more money available for home loans, and the limited supply of bank-owned properties on the local market work their way through the system," said Jim Link, the Association's chief executive officer. [The other way, of course, is to let the market find its own level through agreement of buyers and sellers on price. However, credit availability is a critical variable in the marketplace. The financial markets are so clogged by distrust and bad paper, that some measure of governmental intervention will be needed to restore a functioning market. The SCV Home Team hopes the macro-economic experts can come up with as little intervention as possible yet still correct the excesses. It's a tall order in this, a general election year.]
"Many of the foreclosure properties, which are not nearly as numerous as in other parts of the state, already are on their way to being sold," Link said. "We expect resale prices to flatten out soon and firm up between now and Spring." [We hope!]
That relatively brief window of opportunity is when buyers will have the greatest opportunity to buy a home at a favorable price.
Activity throughout the Santa Clarita Valley picked up during August, a fact supported by the Association's statistics reporting pending escrows - a measure of future resale activity.
Pending escrows increased 89.3 percent during August compared to a year ago, suggesting that a growing number of people are getting off the fence and into the market.
There were 1,684 active listings throughout the Santa Clarita Valley at the end of August. That was down 825 listings for a drop of 32.9 percent compared to a year ago. Active listings also declined 5.3 percent from the July total.
At the current pace of sales the inventory represents a 6.0-month supply - right at the top of what industry leaders call a balanced market where neither the buyer nor the seller have a clear cut advantage in negotiations.
[Become a client of Ray Kutylo and the SCV Home Team for up-to-date analysis of market conditions.]
Friday, October 03, 2008
Today's 'Daily Reckoning' Commentary
[The House of Representatives has voted to pass the Bailout Bill, and the President has signed it into law. The Real Blog has had some regular commentary about the state of the economy and the housing market over the last few years as my loyal readers well know. With the passage of the much-touted but little-understood Bailout Bill today, we take a step back and let another Blog, The Daily Reckoning, take a few shots at the wisdom of a Congress and Administration turning on the printing presses with a month to go before a national election. Want to know what $700 Billion Dollars will buy? Read on...]
Here at The Daily Reckoning...we stand back...aghast...agog...paralyzed by the whole spectacle... from the lunatic assumptions of the credit bubble...to the solemn farce now taking place in the U.S. Congress.
Yes, dear reader, we are suffering from senselessness overload...the absurdities are coming too fast for us now; we can’t keep up. We fear we are going into an irony-induced coma.
Could any scriptwriter have come up with such a preposterous story? Could any director have found such a clownish cast of characters?
It was only a few months ago that all the leading men and women of this drama claimed to believe in free enterprise so fervently they were willing to spend hundreds of billions of dollars forcing it on others. It was free enterprise that separated us from the barbarians and made the country rich, they said. But now, they’re turning many of these free enterprises over to the bureaucrats to run...and desperately trying to make sure that the others don’t go broke. It’s capitalism without the creative destruction. Capitalism with seatbelts, helmets, and airbags. Capitalism without bankruptcy. It’s like taking the crucifixion out of Christianity. What’s left is as empty and foolish as a Congressman’s head.
And then, it was only a few months ago that they were telling us that there was nothing to worry about...the subprime problem was contained...property prices had hit bottom...everything was fine. Really.
Then, two weeks ago, Ben Bernanke and Hank Paulson appeared before Congress and warned that if Congress didn’t put up $700 billion of taxpayers’ money pronto, the whole world economy could meltdown. Ben Bernanke, former head of the economics department at Princeton, and now head of the world’s biggest banking cartel – the Fed – told the
politicians:
“If we don’t do this, we may not have an economy on Monday.”
Of course, this alarm turned out to be as silly as his previous assurances. Monday came. The economy still functioned. And Congress got to work – Christmas treeing the bailout bill.
A colleague sends this handy inventory of a few of the gaudy balls so far, (as they appear in the actual bill):
Sec. 101. Extension of alternative minimum tax relief for nonrefundable personal credits. Sec. 102. Extension of increased alternative minimum tax exemption amount. Sec. 201. Deduction for State and local sales taxes. Sec. 202. Deduction of qualified tuition and related expenses. Sec. 203. Deduction for certain expenses of elementary and secondary school teachers. Sec. 204. Additional standard deduction for real property taxes for nonitemizers. Sec. 205. Tax-free distributions from individual retirement plans for charitable purposes. Sec. 304. Extension of look-thru rule for related controlled foreign corporations. Sec. 305. Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements; 15-year straight-line cost recovery for certain improvements to retail space. Sec. 307. Basis adjustment to stock of S corporations making charitable contributions of property. Sec. 308. Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands. Sec. 309. Extension of economic development credit for American Samoa. Sec. 310. Extension of mine rescue team training credit. Sec. 311. Extension of election to expense advanced mine safety equipment. Sec. 312. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. Sec. 314. Indian employment credit. Sec. 315. Accelerated depreciation for business property on Indian reservations. Sec. 316. Railroad track maintenance. Sec. 317. Seven-year cost recovery period for motorsports racing track facility. Sec. 318. Expensing of environmental remediation costs. Sec. 319. Extension of work opportunity tax credit for Hurricane Katrina employees. Sec. 320. Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone. Sec. 321. Enhanced deduction for qualified computer contributions. Sec. 322. Tax incentives for investment in the District of Columbia. Sec. 323. Enhanced charitable deductions for contributions of food inventory. Sec. 324. Extension of enhanced charitable deduction for contributions of book inventory. Sec. 325. Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds.
Sec. 401. Permanent authority for undercover operations. (as related to tax provisions) Sec. 402. Permanent authority for disclosure of information relating to terrorist activities. (as related to tax provisions) Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit. Sec. 502. Provisions related to film and television productions. Sec. 503. Exemption from excise tax for certain wooden arrows designed for use by children. Sec. 504. Income averaging for amounts received in connection with the Exxon Valdez litigation. Sec. 505. Certain farming business machinery and equipment treated as 5-year property. Sec. 506. Modification of penalty on understatement of taxpayer’s liability by tax return preparer. Subtitle B—Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 Sec. 601. Secure rural schools and community self-determination program. Sec. 602. Transfer to abandoned mine reclamation fund. Sec. 702. Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados, and flooding. Sec. 704. Temporary tax-exempt bond financing and low-income housing tax relief for areas. Sec. 709. Waiver of certain mortgage revenue bond requirements following federally declared disasters. Sec. 710. Special depreciation allowance for qualified disaster property. Sec. 711. Increased expensing for qualified disaster assistance property.
Bernanke and company didn’t want to wait for the lighting ceremony and the back patting. Nowhere in the U.S. Constitution does it give the Fed the power to put each and every taxpayer on the line for about $2,000. But who cares about that? The Fed, on its own initiative, began passing out the cash. $49 billion on last Wednesday alone went to the banks. That same day, the Fed lent $146 billion to investment firms. By the time people went home for the weekend, $410 billion had passed from the Fed to private firms. The money was lent, says the Bloomberg report, at about 2.25% interest. By our calculation, that’s about half the rate of inflation...and precisely 1.4% less than the government’s cost of money, based on 10-year T-note yields.
Two weeks ago, Bernanke was asked by Barney Frank how much money he had available for this kind of rescue operation. He said he had $800 billion. Last week, he was lending it out at an average daily rate of $44 billion. Let’s see, at that rate, the Fed is probably about 5 days from going broke itself.
This should be interesting...when the Fed needs a bailout!
The Daily Reckoning is a free, daily e-mail service
brought to you by the authors of the NY Times Business Bestseller "Financial Reckoning Day", "Demise Of Dollar",
and "Empire Of Debt".
To learn more or subscribe, see:
http://www.dailyreckoning.com
Here at The Daily Reckoning...we stand back...aghast...agog...paralyzed by the whole spectacle... from the lunatic assumptions of the credit bubble...to the solemn farce now taking place in the U.S. Congress.
Yes, dear reader, we are suffering from senselessness overload...the absurdities are coming too fast for us now; we can’t keep up. We fear we are going into an irony-induced coma.
Could any scriptwriter have come up with such a preposterous story? Could any director have found such a clownish cast of characters?
It was only a few months ago that all the leading men and women of this drama claimed to believe in free enterprise so fervently they were willing to spend hundreds of billions of dollars forcing it on others. It was free enterprise that separated us from the barbarians and made the country rich, they said. But now, they’re turning many of these free enterprises over to the bureaucrats to run...and desperately trying to make sure that the others don’t go broke. It’s capitalism without the creative destruction. Capitalism with seatbelts, helmets, and airbags. Capitalism without bankruptcy. It’s like taking the crucifixion out of Christianity. What’s left is as empty and foolish as a Congressman’s head.
And then, it was only a few months ago that they were telling us that there was nothing to worry about...the subprime problem was contained...property prices had hit bottom...everything was fine. Really.
Then, two weeks ago, Ben Bernanke and Hank Paulson appeared before Congress and warned that if Congress didn’t put up $700 billion of taxpayers’ money pronto, the whole world economy could meltdown. Ben Bernanke, former head of the economics department at Princeton, and now head of the world’s biggest banking cartel – the Fed – told the
politicians:
“If we don’t do this, we may not have an economy on Monday.”
Of course, this alarm turned out to be as silly as his previous assurances. Monday came. The economy still functioned. And Congress got to work – Christmas treeing the bailout bill.
A colleague sends this handy inventory of a few of the gaudy balls so far, (as they appear in the actual bill):
Sec. 101. Extension of alternative minimum tax relief for nonrefundable personal credits. Sec. 102. Extension of increased alternative minimum tax exemption amount. Sec. 201. Deduction for State and local sales taxes. Sec. 202. Deduction of qualified tuition and related expenses. Sec. 203. Deduction for certain expenses of elementary and secondary school teachers. Sec. 204. Additional standard deduction for real property taxes for nonitemizers. Sec. 205. Tax-free distributions from individual retirement plans for charitable purposes. Sec. 304. Extension of look-thru rule for related controlled foreign corporations. Sec. 305. Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements; 15-year straight-line cost recovery for certain improvements to retail space. Sec. 307. Basis adjustment to stock of S corporations making charitable contributions of property. Sec. 308. Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands. Sec. 309. Extension of economic development credit for American Samoa. Sec. 310. Extension of mine rescue team training credit. Sec. 311. Extension of election to expense advanced mine safety equipment. Sec. 312. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. Sec. 314. Indian employment credit. Sec. 315. Accelerated depreciation for business property on Indian reservations. Sec. 316. Railroad track maintenance. Sec. 317. Seven-year cost recovery period for motorsports racing track facility. Sec. 318. Expensing of environmental remediation costs. Sec. 319. Extension of work opportunity tax credit for Hurricane Katrina employees. Sec. 320. Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone. Sec. 321. Enhanced deduction for qualified computer contributions. Sec. 322. Tax incentives for investment in the District of Columbia. Sec. 323. Enhanced charitable deductions for contributions of food inventory. Sec. 324. Extension of enhanced charitable deduction for contributions of book inventory. Sec. 325. Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds.
Sec. 401. Permanent authority for undercover operations. (as related to tax provisions) Sec. 402. Permanent authority for disclosure of information relating to terrorist activities. (as related to tax provisions) Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit. Sec. 502. Provisions related to film and television productions. Sec. 503. Exemption from excise tax for certain wooden arrows designed for use by children. Sec. 504. Income averaging for amounts received in connection with the Exxon Valdez litigation. Sec. 505. Certain farming business machinery and equipment treated as 5-year property. Sec. 506. Modification of penalty on understatement of taxpayer’s liability by tax return preparer. Subtitle B—Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 Sec. 601. Secure rural schools and community self-determination program. Sec. 602. Transfer to abandoned mine reclamation fund. Sec. 702. Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados, and flooding. Sec. 704. Temporary tax-exempt bond financing and low-income housing tax relief for areas. Sec. 709. Waiver of certain mortgage revenue bond requirements following federally declared disasters. Sec. 710. Special depreciation allowance for qualified disaster property. Sec. 711. Increased expensing for qualified disaster assistance property.
Bernanke and company didn’t want to wait for the lighting ceremony and the back patting. Nowhere in the U.S. Constitution does it give the Fed the power to put each and every taxpayer on the line for about $2,000. But who cares about that? The Fed, on its own initiative, began passing out the cash. $49 billion on last Wednesday alone went to the banks. That same day, the Fed lent $146 billion to investment firms. By the time people went home for the weekend, $410 billion had passed from the Fed to private firms. The money was lent, says the Bloomberg report, at about 2.25% interest. By our calculation, that’s about half the rate of inflation...and precisely 1.4% less than the government’s cost of money, based on 10-year T-note yields.
Two weeks ago, Bernanke was asked by Barney Frank how much money he had available for this kind of rescue operation. He said he had $800 billion. Last week, he was lending it out at an average daily rate of $44 billion. Let’s see, at that rate, the Fed is probably about 5 days from going broke itself.
This should be interesting...when the Fed needs a bailout!
The Daily Reckoning is a free, daily e-mail service
brought to you by the authors of the NY Times Business Bestseller "Financial Reckoning Day", "Demise Of Dollar",
and "Empire Of Debt".
To learn more or subscribe, see:
http://www.dailyreckoning.com
What the Credit Crisis Means to Your Mortgage
[The Real Blog is always looking for articles that can help our friends and clients understand what is happening in the larger economy and housing market, and it applies to their particular situation. The following article outlines recent events, and how you can best position yourself as a potential buyer, seller, or homeowner.]
If there was any doubt left that the troubled US financial and credit markets are in full crisis mode, the historic events of September easily erased it. You've seen the headlines. You've heard the stories, but what does it all mean to you and your mortgage? This month, YOU Magazine will take a closer look at a September to remember and what it means to you - no jargon, no politics, just the facts.
What a Difference a Month Makes
September was a historic month in the financial markets. What started a year earlier as the subprime mortgage collapse had morphed into the perfect financial storm that wiped out some of the biggest financial firms on Wall Street. There was a general and genuine concern that the financial system was coming apart and could virtually shut down.
First, the Feds took over Fannie Mae and Freddie Mac, two government-sponsored mortgage giants that own or guarantee about five trillion dollars in home loans, or nearly half of the total US mortgage market.
Then Lehman Brothers, a prominent securities firm founded in 1850, filed for bankruptcy.
Bank of America, which earlier this year acquired Countrywide, acquired Merrill Lynch, another prominent financial firm.
The Feds were then forced to bail out insurance giant American International Group (AIG), the largest insurance company in America, which needed some $70 billion just to stay afloat.
By the end of the month, JP Morgan Chase, which bought out Bears Sterns in June, would also acquire Washington Mutual and, in a similar move, Citigroup would acquire Wachovia.
In the end, amidst the worst September in the financial markets since 2001, each of these prominent companies had failed to secure investor confidence as liquidity concerns forced their stock prices to levels that ultimately led to their demise, despite a major effort by the government and other central banks around the world to offer unprecedented financial support.
Throughout the month of September, the Federal Reserve not only injected billions into the financial market, the US Treasury was forced to guarantee nearly $2 trillion in money market mutual fund assets. The European Central Bank, Swiss National Bank, and Bank of England also pitched in a combined $90 billion in cash infusions.
Banks and Wall Street firms had essentially stopped loaning money to one another in recent weeks. That choked off the money being made available on Main Street in the form of mortgage loans, business loans, and other consumer borrowing.
To avoid further downward pressure on stock prices, the Securities and Exchange Commission banned naked short-selling and temporarily banned short-selling 799 financial companies for 10 days. Fannie Mae and Freddie Mac increased their purchases of illiquid assets, including mortgage-backed securities, that have been clogging up our financial system and further tightening the availability of credit.
Finally, to avoid an all-out credit freeze, a plan to create legislation for an unprecedented bailout of our financial system was put in place by representatives from the Federal Reserve, the US Treasury, the Bush Administration, Congress, and even the Presidential candidates – a controversial $700 billion plan that, had it passed, would have cost tax-payers for years to come.
The plan, however, came up 13 votes short of the 218 votes necessary for passage. The House vote shocked financial markets, which expected the house to approve the plan – a decision that sent the Dow Jones industrial average down more than 700 points, the largest intra-day drop in history.
At the time of the writing of this article, a new plan has already been announced in the Senate.
Create Your Own Plan
As promised, we will not delve into the politics of any of these decisions by the government to bailout said corporations or the financial and credit markets – or the merits of any new plan that might be put in place. What's done is done. We won't discuss who's to blame or what should or shouldn't be done about it. Whether it's right or wrong, moral or immoral, these actions or their implications are beyond the scope of this article.
Instead, we suggest that you put together your own financial plan to address your future. Just like your fingerprint, your financial situation, needs, and goals are unique and cannot be addressed or even encompassed by a single, one-size-fits-all solution. Whether you're looking to buy, sell, or refinance your home, you need to meet with a mortgage professional you trust right away to create a plan that best fits your individual needs as it relates to the opportunities available in today's turbulent market. What follows are merely suggested discussion topics you might want to consider depending on your individual needs.
Buying or Selling a Home
If you're looking to take advantage of lower home prices and historically low interest rates, credit is still widely available for borrowers who qualify. Qualifying for mortgages today simply means being prepared to provide documentation that supports your application. If you do have credit issues, you might want to consider government loans offered by the FHA, USDA, and VA.
If you're a first-time home buyer (someone who hasn't owned a home in the last 3 years), ask your mortgage professional about the new $7,500 tax credit. This incentive could be a valuable tool in helping you reach your homeownership dreams in today's buyer's market. There is one catch, however. This incentive is temporary, and expires in 2009, so don't wait.
It's important to note that Congress recently passed other legislation banning certain down-payment assistance programs (DAPs), so ask your mortgage professional about VA and USDA loans that, insured by the government, allow for 100% financing to qualified borrowers. There's currently a bill in the House to overturn the ban on DAPs, but congress is pretty busy right now and may not get to it before the end of the year. Some argue, this bill may never pass, so again, don't count on the government's help when you're planning your future.
For sellers it's important to understand these options as well. There are a lot of potential buyers looking to buy a home who may need creative financing options to get the deal closed. Make sure you're working with an experienced real estate agent and a mortgage professional who know how to market your property and make it stand out from the pack. In many instances, you won't have to lower your home price again to create an attractive package for home buyers.
Refinancing
September was one of the most volatile months in the financial markets in years. In one session, the Dow lost 504 points, which was the worst single-day drop since 2001. The Dow then had a two-day session advance of 779 points, the biggest since March 2000. Then, when the government's initial rescue plan was voted down, the Dow lost more than 700 points, the largest single-day decrease in history!
Mortgage interest rates, which are based on the performance of mortgage-back securities (see YOU Magazine April 2008), were so volatile in September that the market experienced price movements within days that used to take weeks or months to occur. In fact, mortgage rates reached six-month lows in September, bounced back in following weeks, only to fall again immediately after the government's rescue plan was voted down.
This volatility is a great advantage for many homeowners looking to refinance, as rates are still near historic lows. If you're connected with a mortgage professional who has access to and understands how changes in MBS pricing can affect mortgage rates on a daily basis, you may be able to secure a lower long-term rate as these short-term movements occur, depending on your situation. (See YOU Magazine July 2008 for an explanation of why bad news for stocks can be good news for mortgage rates).
Loan Modifications
Last month, YOU Magazine discussed loan modifications for homeowners struggling to make payments and/or avoid foreclosure. Print out that article and take it to your mortgage professional to discuss what options are best for your individual needs. If you've fallen behind with your payments or are currently in foreclosure, you may be able to benefit from an increased willingness of banks and lenders to work with you and help you keep your home.
ARMS
If you have an Adjustable Rate Mortgage (ARM) that is due to reset in the next 3 to 12 months, you need to know how any adjustments will affect your monthly mortgage payment. (See YOU Magazine August 2007 to learn how to understand the terms of your ARM.)
Remember, the Federal Reserve has held the line on rates for the last two meetings of the Federal Open Market Committee (FOMC), after 7 straight cuts to the Fed Funds rate in previous months' meetings. And while the Fed has no direct affect on long-term mortgage rates, their actions can directly affect rates for ARMs and certain credit cards and home equity lines of credit (HELOCs) that are tied to the prime rate – especially if the Fed begins a new financial policy of rate increases to address the growing concerns of our struggling economy. (See YOU Magazine April 2008 for more info on how the Fed affects mortgage rates).
In September, the volatility in the financial markets was not limited to the US. We live in a global economic environment, and financial markets throughout the world are more connected than ever.
Last month, we saw evidence of this in the London Interbank Offered Rate (LIBOR). Set by the British banks, this rate is considered one of the most important rates globally – especially in the US, where about 6 million ARMs, including almost all subprime ARMs and 41% of prime ARMS, are linked to the LIBOR. This rate, which experienced the largest one-day increase in 7 years last month, is beyond the reach of the Federal Reserve and its financial policies. If rates stay elevated, gains may follow in the 3- to 12-month Libor indexes, which are used to calculate US mortgage resets. This volatility was seen again as the initial Rescue Bill failed in the House.
In other words, create your own plan of success. Don't wait to be bailed out or rescued by the government or anyone else. If you have an ARM, take 10 minutes to discuss your options with a mortgage professional you trust. Changes in your credit in the last few years could help you secure a fixed-rate mortgage and avoid the volatility that surely awaits us as we face what could be one of the toughest financial meltdowns that most Americans have ever seen.
[The Real Blog Thanks Eric Mitchell of Metrocities Mortgage for forwarding this article to us! Eric, on of our trusted lenders, can be reached at 888-696-1344.
If there was any doubt left that the troubled US financial and credit markets are in full crisis mode, the historic events of September easily erased it. You've seen the headlines. You've heard the stories, but what does it all mean to you and your mortgage? This month, YOU Magazine will take a closer look at a September to remember and what it means to you - no jargon, no politics, just the facts.
What a Difference a Month Makes
September was a historic month in the financial markets. What started a year earlier as the subprime mortgage collapse had morphed into the perfect financial storm that wiped out some of the biggest financial firms on Wall Street. There was a general and genuine concern that the financial system was coming apart and could virtually shut down.
First, the Feds took over Fannie Mae and Freddie Mac, two government-sponsored mortgage giants that own or guarantee about five trillion dollars in home loans, or nearly half of the total US mortgage market.
Then Lehman Brothers, a prominent securities firm founded in 1850, filed for bankruptcy.
Bank of America, which earlier this year acquired Countrywide, acquired Merrill Lynch, another prominent financial firm.
The Feds were then forced to bail out insurance giant American International Group (AIG), the largest insurance company in America, which needed some $70 billion just to stay afloat.
By the end of the month, JP Morgan Chase, which bought out Bears Sterns in June, would also acquire Washington Mutual and, in a similar move, Citigroup would acquire Wachovia.
In the end, amidst the worst September in the financial markets since 2001, each of these prominent companies had failed to secure investor confidence as liquidity concerns forced their stock prices to levels that ultimately led to their demise, despite a major effort by the government and other central banks around the world to offer unprecedented financial support.
Throughout the month of September, the Federal Reserve not only injected billions into the financial market, the US Treasury was forced to guarantee nearly $2 trillion in money market mutual fund assets. The European Central Bank, Swiss National Bank, and Bank of England also pitched in a combined $90 billion in cash infusions.
Banks and Wall Street firms had essentially stopped loaning money to one another in recent weeks. That choked off the money being made available on Main Street in the form of mortgage loans, business loans, and other consumer borrowing.
To avoid further downward pressure on stock prices, the Securities and Exchange Commission banned naked short-selling and temporarily banned short-selling 799 financial companies for 10 days. Fannie Mae and Freddie Mac increased their purchases of illiquid assets, including mortgage-backed securities, that have been clogging up our financial system and further tightening the availability of credit.
Finally, to avoid an all-out credit freeze, a plan to create legislation for an unprecedented bailout of our financial system was put in place by representatives from the Federal Reserve, the US Treasury, the Bush Administration, Congress, and even the Presidential candidates – a controversial $700 billion plan that, had it passed, would have cost tax-payers for years to come.
The plan, however, came up 13 votes short of the 218 votes necessary for passage. The House vote shocked financial markets, which expected the house to approve the plan – a decision that sent the Dow Jones industrial average down more than 700 points, the largest intra-day drop in history.
At the time of the writing of this article, a new plan has already been announced in the Senate.
Create Your Own Plan
As promised, we will not delve into the politics of any of these decisions by the government to bailout said corporations or the financial and credit markets – or the merits of any new plan that might be put in place. What's done is done. We won't discuss who's to blame or what should or shouldn't be done about it. Whether it's right or wrong, moral or immoral, these actions or their implications are beyond the scope of this article.
Instead, we suggest that you put together your own financial plan to address your future. Just like your fingerprint, your financial situation, needs, and goals are unique and cannot be addressed or even encompassed by a single, one-size-fits-all solution. Whether you're looking to buy, sell, or refinance your home, you need to meet with a mortgage professional you trust right away to create a plan that best fits your individual needs as it relates to the opportunities available in today's turbulent market. What follows are merely suggested discussion topics you might want to consider depending on your individual needs.
Buying or Selling a Home
If you're looking to take advantage of lower home prices and historically low interest rates, credit is still widely available for borrowers who qualify. Qualifying for mortgages today simply means being prepared to provide documentation that supports your application. If you do have credit issues, you might want to consider government loans offered by the FHA, USDA, and VA.
If you're a first-time home buyer (someone who hasn't owned a home in the last 3 years), ask your mortgage professional about the new $7,500 tax credit. This incentive could be a valuable tool in helping you reach your homeownership dreams in today's buyer's market. There is one catch, however. This incentive is temporary, and expires in 2009, so don't wait.
It's important to note that Congress recently passed other legislation banning certain down-payment assistance programs (DAPs), so ask your mortgage professional about VA and USDA loans that, insured by the government, allow for 100% financing to qualified borrowers. There's currently a bill in the House to overturn the ban on DAPs, but congress is pretty busy right now and may not get to it before the end of the year. Some argue, this bill may never pass, so again, don't count on the government's help when you're planning your future.
For sellers it's important to understand these options as well. There are a lot of potential buyers looking to buy a home who may need creative financing options to get the deal closed. Make sure you're working with an experienced real estate agent and a mortgage professional who know how to market your property and make it stand out from the pack. In many instances, you won't have to lower your home price again to create an attractive package for home buyers.
Refinancing
September was one of the most volatile months in the financial markets in years. In one session, the Dow lost 504 points, which was the worst single-day drop since 2001. The Dow then had a two-day session advance of 779 points, the biggest since March 2000. Then, when the government's initial rescue plan was voted down, the Dow lost more than 700 points, the largest single-day decrease in history!
Mortgage interest rates, which are based on the performance of mortgage-back securities (see YOU Magazine April 2008), were so volatile in September that the market experienced price movements within days that used to take weeks or months to occur. In fact, mortgage rates reached six-month lows in September, bounced back in following weeks, only to fall again immediately after the government's rescue plan was voted down.
This volatility is a great advantage for many homeowners looking to refinance, as rates are still near historic lows. If you're connected with a mortgage professional who has access to and understands how changes in MBS pricing can affect mortgage rates on a daily basis, you may be able to secure a lower long-term rate as these short-term movements occur, depending on your situation. (See YOU Magazine July 2008 for an explanation of why bad news for stocks can be good news for mortgage rates).
Loan Modifications
Last month, YOU Magazine discussed loan modifications for homeowners struggling to make payments and/or avoid foreclosure. Print out that article and take it to your mortgage professional to discuss what options are best for your individual needs. If you've fallen behind with your payments or are currently in foreclosure, you may be able to benefit from an increased willingness of banks and lenders to work with you and help you keep your home.
ARMS
If you have an Adjustable Rate Mortgage (ARM) that is due to reset in the next 3 to 12 months, you need to know how any adjustments will affect your monthly mortgage payment. (See YOU Magazine August 2007 to learn how to understand the terms of your ARM.)
Remember, the Federal Reserve has held the line on rates for the last two meetings of the Federal Open Market Committee (FOMC), after 7 straight cuts to the Fed Funds rate in previous months' meetings. And while the Fed has no direct affect on long-term mortgage rates, their actions can directly affect rates for ARMs and certain credit cards and home equity lines of credit (HELOCs) that are tied to the prime rate – especially if the Fed begins a new financial policy of rate increases to address the growing concerns of our struggling economy. (See YOU Magazine April 2008 for more info on how the Fed affects mortgage rates).
In September, the volatility in the financial markets was not limited to the US. We live in a global economic environment, and financial markets throughout the world are more connected than ever.
Last month, we saw evidence of this in the London Interbank Offered Rate (LIBOR). Set by the British banks, this rate is considered one of the most important rates globally – especially in the US, where about 6 million ARMs, including almost all subprime ARMs and 41% of prime ARMS, are linked to the LIBOR. This rate, which experienced the largest one-day increase in 7 years last month, is beyond the reach of the Federal Reserve and its financial policies. If rates stay elevated, gains may follow in the 3- to 12-month Libor indexes, which are used to calculate US mortgage resets. This volatility was seen again as the initial Rescue Bill failed in the House.
In other words, create your own plan of success. Don't wait to be bailed out or rescued by the government or anyone else. If you have an ARM, take 10 minutes to discuss your options with a mortgage professional you trust. Changes in your credit in the last few years could help you secure a fixed-rate mortgage and avoid the volatility that surely awaits us as we face what could be one of the toughest financial meltdowns that most Americans have ever seen.
[The Real Blog Thanks Eric Mitchell of Metrocities Mortgage for forwarding this article to us! Eric, on of our trusted lenders, can be reached at 888-696-1344.
Ghosts of the Great Depression
[The Real Blog reads a lot from diverse sources. One source is The Daily Reckoning, a blog of contrarian economic views. While definitely not mainstream, or perhaps because it is not mainstream, Bill Bonner of TDR has had quite a few direct hits on the state and direction of the economy. While we do not think that the economy is headed to a depression, the issues are serious and one month before a very important national election may not be the ideal time to formulate far-reaching economic policy in the US Congress. ~~ Ray Kutylo of The Real Blog.]
GHOSTS OF THE GREAT DEPRESSION
by Bill Bonner
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate ... It will purge the rottenness out of the system...values will be adjusted, and enterprising people will pick up the wrecks from less competent people...”
That is the advice from a ghost – U.S. Treasury Secretary Andrew Mellon. But this is 2008, not 1928...the climate has changed. This week began with heavy weather – and then got worse. Over on the continent, Fortis was going under. And in British waters, the government had a rescue helicopter hovering over Bradford and Bingley. The Baltic Freight Index ran aground on the coast of Brazil, after the Chinese refused to kowtow to Vale’s new price demands for its iron ore. Shipping costs went down by 25% last week – 10% on Friday alone. Apparently, the Chinese turned off their heavy factories before the Olympics; now, they can’t seem to find the switch to get them going again. Then, by Friday, the railroads were in crash mode too. Housing prices are falling faster than ever in the United States. In Britain, the average house is falling by 93 pounds per day; the average wage is only 65 pounds per day.
We do not usually give advice to governments. To be fully transparent about it, none has ever asked. It is enough to try to advise Daily Reckoning readers. If we were to save the entire world’s financial system, at least we would want something in exchange...say, a signed photo of our president with a thank you note. Still, in the spirit of public service we undertake to unclog the following drain:
Taking into account even the most “severe assumptions” on default rates, Barron’s columnist Jonathan Laing calculated that Paulson’s bailout plan would have given the feds positive carry [the difference between the cost of borrowing money and what you earn from it] of at least 7% or 8%. He figured that the government would have ended up with a $75 billion profit in two years.
But even with the hope of profit before it, the House of Representatives rejected the plan...and then, the hurricane winds blew even harder. The world’s stock markets had their worse day ever. The choice is clear, warned a flange of kibitzers, either a bailout bill or a Great Depression. Most likely, today, Congress will vote for the former and get something close to the latter.
By Wednesday, scores of commentators had been to the cemetery. Most were channeling Franklin Roosevelt. He “understood that his first job was to restore confidence,” wrote David Brooks in the New York Times. Over in the Financial Times, Martin Wolf even quotes Roosevelt’s puerile remark that “the only thing we have to fear is fear itself”. What about 25% unemployment, one is tempted to ask?
“[W]e might have done nothing. That would have been utter ruin. Instead we met the situation with proposals...of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic... Some of the reactionary economists urged that we should allow the liquidation to take its course until we have found bottom... We determined that we would not follow the advice of the bitter-end liquidationists...”
That quotation comes neither from Paulson nor Bernankes, but from another ghost. Herbert Hoover has gotten the reputation for being a “do nothing” president. Would it were so. When the Herbert Hoover passed the baton to Roosevelt, his can-do meddling had already helped turn a financial crisis into a Great Depression. You see, ghosts are often morons too.
Poor Andrew Mellon was shouldered aside in the early ’30s. Then, Hoover got to work. His first improvement is known to us by two knuckleheads who turned it into law – Misters Smoot and Hawley. The idea was to protect U.S. business by imposing higher tariffs on foreign trade. A group of 1,000 economists, bankers and other notables realized that blocking trade at the onset of an economic slump would be suicide. They urged him to veto the bill. But Hoover believed in tariffs as he believed in almost all other forms of government interference. He signed the bill with approval.
He called on the Fed to provide “an ample supply of credit at low rates of interest,” and initiated a program of public works – including the Hoover Dam, a massive lump of concrete that blocks the Colorado River. He threatened federal regulation of the New York Stock Exchange and attacked short selling.
Hoover’s chief concern seemed to be to hold up the price of labor. He cut off immigration, in an effort to keep out wage competition. Then, he got the business community to pledge that it would not reduce wages. Since the cost of labor was then too high for the closely shaved profit margins, businesses could not hire. Unemployment rose.
Roosevelt was a better politician, which is to say – he was more shameless. He attacked Hoover for spending too much money – won the presidency – and then spent more. He began so many agencies and projects – from the AAA (Agriculture Adjustment Act) to the CCC (Civilian Conservation Corps) to the SSA (Social Security Act) – he practically ran out of alphabet. He also imposed wage and price controls, as well as limits to executive salaries.
What was the result of all these good intentions? Instead of a panic and quick recovery – a la 1921 – the U.S. economy went into a long, hard on-again, off-again depression that put a quarter of the workforce out of a job. It might have lasted until the ’50s had it not been for the biggest public works program of all time came along – WWII.
And now the ghosts of the Great Depression haunt the Capitol, while today’s Smoots and Hawleys vote on a new plan. They’ve pledged a new bailout program by the end of the week. When last we looked world markets were turning up their faces, hopefully...like a girl expecting a kiss. What they’re more likely to get is a good fright.
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.
Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:
Mobs, Messiahs and Markets http://www.agorafinancialpublications.com/Mobs.html
To learn more or subscribe, see:
http://www.dailyreckoning.com
GHOSTS OF THE GREAT DEPRESSION
by Bill Bonner
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate ... It will purge the rottenness out of the system...values will be adjusted, and enterprising people will pick up the wrecks from less competent people...”
That is the advice from a ghost – U.S. Treasury Secretary Andrew Mellon. But this is 2008, not 1928...the climate has changed. This week began with heavy weather – and then got worse. Over on the continent, Fortis was going under. And in British waters, the government had a rescue helicopter hovering over Bradford and Bingley. The Baltic Freight Index ran aground on the coast of Brazil, after the Chinese refused to kowtow to Vale’s new price demands for its iron ore. Shipping costs went down by 25% last week – 10% on Friday alone. Apparently, the Chinese turned off their heavy factories before the Olympics; now, they can’t seem to find the switch to get them going again. Then, by Friday, the railroads were in crash mode too. Housing prices are falling faster than ever in the United States. In Britain, the average house is falling by 93 pounds per day; the average wage is only 65 pounds per day.
We do not usually give advice to governments. To be fully transparent about it, none has ever asked. It is enough to try to advise Daily Reckoning readers. If we were to save the entire world’s financial system, at least we would want something in exchange...say, a signed photo of our president with a thank you note. Still, in the spirit of public service we undertake to unclog the following drain:
Taking into account even the most “severe assumptions” on default rates, Barron’s columnist Jonathan Laing calculated that Paulson’s bailout plan would have given the feds positive carry [the difference between the cost of borrowing money and what you earn from it] of at least 7% or 8%. He figured that the government would have ended up with a $75 billion profit in two years.
But even with the hope of profit before it, the House of Representatives rejected the plan...and then, the hurricane winds blew even harder. The world’s stock markets had their worse day ever. The choice is clear, warned a flange of kibitzers, either a bailout bill or a Great Depression. Most likely, today, Congress will vote for the former and get something close to the latter.
By Wednesday, scores of commentators had been to the cemetery. Most were channeling Franklin Roosevelt. He “understood that his first job was to restore confidence,” wrote David Brooks in the New York Times. Over in the Financial Times, Martin Wolf even quotes Roosevelt’s puerile remark that “the only thing we have to fear is fear itself”. What about 25% unemployment, one is tempted to ask?
“[W]e might have done nothing. That would have been utter ruin. Instead we met the situation with proposals...of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic... Some of the reactionary economists urged that we should allow the liquidation to take its course until we have found bottom... We determined that we would not follow the advice of the bitter-end liquidationists...”
That quotation comes neither from Paulson nor Bernankes, but from another ghost. Herbert Hoover has gotten the reputation for being a “do nothing” president. Would it were so. When the Herbert Hoover passed the baton to Roosevelt, his can-do meddling had already helped turn a financial crisis into a Great Depression. You see, ghosts are often morons too.
Poor Andrew Mellon was shouldered aside in the early ’30s. Then, Hoover got to work. His first improvement is known to us by two knuckleheads who turned it into law – Misters Smoot and Hawley. The idea was to protect U.S. business by imposing higher tariffs on foreign trade. A group of 1,000 economists, bankers and other notables realized that blocking trade at the onset of an economic slump would be suicide. They urged him to veto the bill. But Hoover believed in tariffs as he believed in almost all other forms of government interference. He signed the bill with approval.
He called on the Fed to provide “an ample supply of credit at low rates of interest,” and initiated a program of public works – including the Hoover Dam, a massive lump of concrete that blocks the Colorado River. He threatened federal regulation of the New York Stock Exchange and attacked short selling.
Hoover’s chief concern seemed to be to hold up the price of labor. He cut off immigration, in an effort to keep out wage competition. Then, he got the business community to pledge that it would not reduce wages. Since the cost of labor was then too high for the closely shaved profit margins, businesses could not hire. Unemployment rose.
Roosevelt was a better politician, which is to say – he was more shameless. He attacked Hoover for spending too much money – won the presidency – and then spent more. He began so many agencies and projects – from the AAA (Agriculture Adjustment Act) to the CCC (Civilian Conservation Corps) to the SSA (Social Security Act) – he practically ran out of alphabet. He also imposed wage and price controls, as well as limits to executive salaries.
What was the result of all these good intentions? Instead of a panic and quick recovery – a la 1921 – the U.S. economy went into a long, hard on-again, off-again depression that put a quarter of the workforce out of a job. It might have lasted until the ’50s had it not been for the biggest public works program of all time came along – WWII.
And now the ghosts of the Great Depression haunt the Capitol, while today’s Smoots and Hawleys vote on a new plan. They’ve pledged a new bailout program by the end of the week. When last we looked world markets were turning up their faces, hopefully...like a girl expecting a kiss. What they’re more likely to get is a good fright.
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.
Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:
Mobs, Messiahs and Markets http://www.agorafinancialpublications.com/Mobs.html
To learn more or subscribe, see:
http://www.dailyreckoning.com
Thursday, October 02, 2008
What they said about Fannie and Freddie...
from The Wall Street Journal, October 2, 2008
www.wsjonline.com
House Financial Services Committee hearing, Sept. 10, 2003:
Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .
Rep. Maxine Waters (D., Calif.), speaking to Housing and Urban Development Secretary Mel Martinez:
Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Gregory Meeks, (D., N.Y.): . . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn't for you I don't think that we would be here in the first place.
And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job. . .
Ofheo Director Armando Falcon Jr.: Congressman, Ofheo did not improperly apply accounting rules; Freddie Mac did. Ofheo did not try to manage earnings improperly; Freddie Mac did. So this isn't about the agency's engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that. . . . I have been asking for these additional authorities for four years now. I have been asking for additional resources, the independent appropriations assessment powers.
Congresspeople don't want to remember. This is not a matter of the agency engaging in any misconduct. . . .
Rep. Waters: However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week's hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs. We should be enhancing regulation, not making fundamental change.
Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .
Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?
Mr. Raines?
Mr. Raines: No, sir.
Mr. Frank: Mr. Gould?
Mr. Gould: No, sir. . . .
Mr. Frank: OK. Then I am not entirely sure why we are here. . . .
Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.
* * *
Senate Banking Committee, Oct. 16, 2003:
Sen. Charles Schumer (D., N.Y.): And my worry is that we're using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission. And I don't think there is any doubt that there are some in the administration who don't believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.
Mr. Raines: But more importantly, banks are in a far more risky business than we are.
* * *
Senate Banking Committee, Feb. 24-25, 2004:
Sen. Thomas Carper (D., Del.): What is the wrong that we're trying to right here? What is the potential harm that we're trying to avert?
Federal Reserve Chairman Alan Greenspan: Well, I think that that is a very good question, senator.
What we're trying to avert is we have in our financial system right now two very large and growing financial institutions which are very effective and are essentially capable of gaining market shares in a very major market to a large extent as a consequence of what is perceived to be a subsidy that prevents the markets from adjusting appropriately, prevents competition and the normal adjustment processes that we see on a day-by-day basis from functioning in a way that creates stability. . . . And so what we have is a structure here in which a very rapidly growing organization, holding assets and financing them by subsidized debt, is growing in a manner which really does not in and of itself contribute to either home ownership or necessarily liquidity or other aspects of the financial markets. . . .
Sen. Richard Shelby (R., Ala.): [T]he federal government has [an] ambiguous relationship with the GSEs. And how do we actually get rid of that ambiguity is a complicated, tricky thing. I don't know how we do it.
I mean, you've alluded to it a little bit, but how do we define the relationship? It's important, is it not?
Mr. Greenspan: Yes. Of all the issues that have been discussed today, I think that is the most difficult one. Because you cannot have, in a rational government or a rational society, two fundamentally different views as to what will happen under a certain event. Because it invites crisis, and it invites instability. . .
Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . .
* * *
Senate Banking Committee, April 6, 2005:
Sen. Schumer: I'll lay my marker down right now, Mr. Chairman. I think Fannie and Freddie need some changes, but I don't think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don't undo Fannie and Freddie.
* * *
Senate Banking Committee, June 15, 2006:
Sen. Robert Bennett (R., Utah): I think we do need a strong regulator. I think we do need a piece of legislation. But I think we do need also to be careful that we don't overreact.
I know the press, particularly, keeps saying this is another Enron, which it clearly is not. Fannie Mae has taken its lumps. Fannie Mae is paying a very large fine. Fannie Mae is under a very, very strong microscope, which it needs to be. . . . So let's not do nothing, and at the same time, let's not overreact. . .
Sen. Jack Reed (D., R.I.): I think a lot of people are being opportunistic, . . . throwing out the baby with the bathwater, saying, "Let's dramatically restructure Fannie and Freddie," when that is not what's called for as a result of what's happened here. . . .
Sen. Chuck Hagel (R., Neb.): Mr. Chairman, what we're dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of -- the best we can say is, "It's no Enron." Now, that's a hell of a high standard.
http://online.wsj.com/article/SB122290574391296381.html?mod=djempersonal
www.wsjonline.com
House Financial Services Committee hearing, Sept. 10, 2003:
Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .
Rep. Maxine Waters (D., Calif.), speaking to Housing and Urban Development Secretary Mel Martinez:
Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Gregory Meeks, (D., N.Y.): . . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn't for you I don't think that we would be here in the first place.
And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job. . .
Ofheo Director Armando Falcon Jr.: Congressman, Ofheo did not improperly apply accounting rules; Freddie Mac did. Ofheo did not try to manage earnings improperly; Freddie Mac did. So this isn't about the agency's engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that. . . . I have been asking for these additional authorities for four years now. I have been asking for additional resources, the independent appropriations assessment powers.
Congresspeople don't want to remember. This is not a matter of the agency engaging in any misconduct. . . .
Rep. Waters: However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week's hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs. We should be enhancing regulation, not making fundamental change.
Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .
Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?
Mr. Raines?
Mr. Raines: No, sir.
Mr. Frank: Mr. Gould?
Mr. Gould: No, sir. . . .
Mr. Frank: OK. Then I am not entirely sure why we are here. . . .
Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.
* * *
Senate Banking Committee, Oct. 16, 2003:
Sen. Charles Schumer (D., N.Y.): And my worry is that we're using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission. And I don't think there is any doubt that there are some in the administration who don't believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.
Mr. Raines: But more importantly, banks are in a far more risky business than we are.
* * *
Senate Banking Committee, Feb. 24-25, 2004:
Sen. Thomas Carper (D., Del.): What is the wrong that we're trying to right here? What is the potential harm that we're trying to avert?
Federal Reserve Chairman Alan Greenspan: Well, I think that that is a very good question, senator.
What we're trying to avert is we have in our financial system right now two very large and growing financial institutions which are very effective and are essentially capable of gaining market shares in a very major market to a large extent as a consequence of what is perceived to be a subsidy that prevents the markets from adjusting appropriately, prevents competition and the normal adjustment processes that we see on a day-by-day basis from functioning in a way that creates stability. . . . And so what we have is a structure here in which a very rapidly growing organization, holding assets and financing them by subsidized debt, is growing in a manner which really does not in and of itself contribute to either home ownership or necessarily liquidity or other aspects of the financial markets. . . .
Sen. Richard Shelby (R., Ala.): [T]he federal government has [an] ambiguous relationship with the GSEs. And how do we actually get rid of that ambiguity is a complicated, tricky thing. I don't know how we do it.
I mean, you've alluded to it a little bit, but how do we define the relationship? It's important, is it not?
Mr. Greenspan: Yes. Of all the issues that have been discussed today, I think that is the most difficult one. Because you cannot have, in a rational government or a rational society, two fundamentally different views as to what will happen under a certain event. Because it invites crisis, and it invites instability. . .
Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . .
* * *
Senate Banking Committee, April 6, 2005:
Sen. Schumer: I'll lay my marker down right now, Mr. Chairman. I think Fannie and Freddie need some changes, but I don't think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don't undo Fannie and Freddie.
* * *
Senate Banking Committee, June 15, 2006:
Sen. Robert Bennett (R., Utah): I think we do need a strong regulator. I think we do need a piece of legislation. But I think we do need also to be careful that we don't overreact.
I know the press, particularly, keeps saying this is another Enron, which it clearly is not. Fannie Mae has taken its lumps. Fannie Mae is paying a very large fine. Fannie Mae is under a very, very strong microscope, which it needs to be. . . . So let's not do nothing, and at the same time, let's not overreact. . .
Sen. Jack Reed (D., R.I.): I think a lot of people are being opportunistic, . . . throwing out the baby with the bathwater, saying, "Let's dramatically restructure Fannie and Freddie," when that is not what's called for as a result of what's happened here. . . .
Sen. Chuck Hagel (R., Neb.): Mr. Chairman, what we're dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of -- the best we can say is, "It's no Enron." Now, that's a hell of a high standard.
http://online.wsj.com/article/SB122290574391296381.html?mod=djempersonal
Selling a Principle Residence Formerly Used for Investment Purposes?
Amendment to IRC §121 May Reduce the $250,000/$500,000 Exclusion
Internal Revenue Code (“IRC”) §121 allows taxpayers selling a principal residence to exclude $250,000 of gain from taxation (or, $500,000 for married taxpayers, filing jointly) as long as they have lived in the residence for 2 out of the preceding 5 years.
Alternatively, for taxpayers selling investment/rental property, while they may not exclude gain from taxation, they can nonetheless defer payment of taxes by completing their disposition as an exchange under IRC §1031.
While the rules for excluding gain from taxation or deferring payment of taxation may seem fairly straightforward under the above code sections, they become more complicated if the property was used as both a principal residence and for investment/rental purposes.
Fortunately, in February of 2005, the IRS issued Revenue Procedure 2005-14 clarifying that taxpayers are entitled to take advantage of both the §121 capital gains exclusion and the §1031 capital gains deferral. However, Rev. Proc. 2005-14 only addresses situations wherein the property being sold is investment property formerly used as a principal residence; it does not address how to apply §121 to situations when the property being sold is a principal residence formerly used for investment purposes.
Now, pursuant to the Housing Assistance Tax Act of 2008, taxpayers selling a principal residence formerly used for investment purposes, have specific guidance on the application of §121. Specifically, IRC §121 has been amended, effective January 1, 2009. Again, the amendment only affects taxpayers who are selling a principal residence (“qualified use”), which they formerly used for investment (“non-qualified use”). The central point of the §121 amendment is that these taxpayers are not entitled to the full §121 exclusion because the prior investment use is considered “non-qualified” use and any gain allocated to the period of non-qualified use may not be excluded under §121.
How to determine the amount of gain that is not eligible for exclusion
The period of non-qualified use (period not used as a principal residence) must be divided by the total years of ownership to determine the amount of the gain that is not eligible for exclusion under §121.
Any period of non-qualified use before January 1, 2009 should not be included in the calculation. And, depreciation should also be excluded from the calculation and is simply taxed at the applicable recapture rate.
Summary of the rules under §121 amendment
Sale of residence that was formerly investment property – the taxpayer is entitled to only a prorated portion of the $250,000/$500,000 exclusion.
Non-qualified use prior to January 1, 2009 is disregarded, except for purposes of meeting the 5 year rule under HR 4520, if applicable.
Gain resulting from depreciation is taxed and is disregarded for purposes of determining the prorated amount of the exclusion
The application of the amendment is illustrated by the following examples:
Example 1: Taxpayer acquires an investment property, rents it for 3 years and then occupies it for 5 years as his principal residence (no use prior to 2009) before selling it and realizing $350,000 of gain of which $40,000 is from depreciation deductions.
$40,000 of gain is depreciation and is excluded from the calculation. The remaining $310,000 is subject to the prorata calculation as follows:
3 (years of non-qualified use) =
3 (37.5%) x $310,000=$116,250
8 (years total ownership)
8
Thus $116,250 is not eligible for exclusion and is taxed at the applicable capital gains rate. $40,000 of gain is from depreciation and is taxed at the applicable recapture rate. The remaining gain of $193,750 may be excluded from taxation under §121.
Example 2: Taxpayer acquires an investment property in 2007, rents it until 2010, and then occupies it for three years as his principal residence before selling it in 2013, realizing $400,000 of gain. The two years prior to January 1, 2009 are disregarded (but included for determining the five year period).
1 year non-qualified use (disregard 2007, 2008) =
1 (16.66%) x $400,000=$66,640
6 years of total ownership
6
Thus, $66,640 is not eligible for exclusion and is taxed at the applicable capital gains rate. $250,000 of the remaining gain may be excluded under §121, with the balance of the gain, $83,360 taxed at the applicable capital gains rate. In sum, $250,000 is not taxed and $150,000 is taxed.
Taxpayers selling a principal residence after January 1, 2009, which was formerly used as an investment/rental property should consult with their tax or legal advisors regarding the application of the amendment to §121 to their particular situation.
Note 1:
If property was originally acquired as part of a 1031 exchange, H.R. 4520 mandates that the property must be owned by the taxpayer for at least 5 years in order to get the §121 exclusion (note: this is in addition to having lived in the property for 2 of the preceding 5 years.)
This article provided by:
Old Republic
The Meza Team
450 North Brand Blvd #800
Glendale, CA 91203
W: (800) 388-4853
M: (562) 572-1479
http://www.ortc.com
Internal Revenue Code (“IRC”) §121 allows taxpayers selling a principal residence to exclude $250,000 of gain from taxation (or, $500,000 for married taxpayers, filing jointly) as long as they have lived in the residence for 2 out of the preceding 5 years.
Alternatively, for taxpayers selling investment/rental property, while they may not exclude gain from taxation, they can nonetheless defer payment of taxes by completing their disposition as an exchange under IRC §1031.
While the rules for excluding gain from taxation or deferring payment of taxation may seem fairly straightforward under the above code sections, they become more complicated if the property was used as both a principal residence and for investment/rental purposes.
Fortunately, in February of 2005, the IRS issued Revenue Procedure 2005-14 clarifying that taxpayers are entitled to take advantage of both the §121 capital gains exclusion and the §1031 capital gains deferral. However, Rev. Proc. 2005-14 only addresses situations wherein the property being sold is investment property formerly used as a principal residence; it does not address how to apply §121 to situations when the property being sold is a principal residence formerly used for investment purposes.
Now, pursuant to the Housing Assistance Tax Act of 2008, taxpayers selling a principal residence formerly used for investment purposes, have specific guidance on the application of §121. Specifically, IRC §121 has been amended, effective January 1, 2009. Again, the amendment only affects taxpayers who are selling a principal residence (“qualified use”), which they formerly used for investment (“non-qualified use”). The central point of the §121 amendment is that these taxpayers are not entitled to the full §121 exclusion because the prior investment use is considered “non-qualified” use and any gain allocated to the period of non-qualified use may not be excluded under §121.
How to determine the amount of gain that is not eligible for exclusion
The period of non-qualified use (period not used as a principal residence) must be divided by the total years of ownership to determine the amount of the gain that is not eligible for exclusion under §121.
Any period of non-qualified use before January 1, 2009 should not be included in the calculation. And, depreciation should also be excluded from the calculation and is simply taxed at the applicable recapture rate.
Summary of the rules under §121 amendment
Sale of residence that was formerly investment property – the taxpayer is entitled to only a prorated portion of the $250,000/$500,000 exclusion.
Non-qualified use prior to January 1, 2009 is disregarded, except for purposes of meeting the 5 year rule under HR 4520, if applicable.
Gain resulting from depreciation is taxed and is disregarded for purposes of determining the prorated amount of the exclusion
The application of the amendment is illustrated by the following examples:
Example 1: Taxpayer acquires an investment property, rents it for 3 years and then occupies it for 5 years as his principal residence (no use prior to 2009) before selling it and realizing $350,000 of gain of which $40,000 is from depreciation deductions.
$40,000 of gain is depreciation and is excluded from the calculation. The remaining $310,000 is subject to the prorata calculation as follows:
3 (years of non-qualified use) =
3 (37.5%) x $310,000=$116,250
8 (years total ownership)
8
Thus $116,250 is not eligible for exclusion and is taxed at the applicable capital gains rate. $40,000 of gain is from depreciation and is taxed at the applicable recapture rate. The remaining gain of $193,750 may be excluded from taxation under §121.
Example 2: Taxpayer acquires an investment property in 2007, rents it until 2010, and then occupies it for three years as his principal residence before selling it in 2013, realizing $400,000 of gain. The two years prior to January 1, 2009 are disregarded (but included for determining the five year period).
1 year non-qualified use (disregard 2007, 2008) =
1 (16.66%) x $400,000=$66,640
6 years of total ownership
6
Thus, $66,640 is not eligible for exclusion and is taxed at the applicable capital gains rate. $250,000 of the remaining gain may be excluded under §121, with the balance of the gain, $83,360 taxed at the applicable capital gains rate. In sum, $250,000 is not taxed and $150,000 is taxed.
Taxpayers selling a principal residence after January 1, 2009, which was formerly used as an investment/rental property should consult with their tax or legal advisors regarding the application of the amendment to §121 to their particular situation.
Note 1:
If property was originally acquired as part of a 1031 exchange, H.R. 4520 mandates that the property must be owned by the taxpayer for at least 5 years in order to get the §121 exclusion (note: this is in addition to having lived in the property for 2 of the preceding 5 years.)
This article provided by:
Old Republic
The Meza Team
450 North Brand Blvd #800
Glendale, CA 91203
W: (800) 388-4853
M: (562) 572-1479
http://www.ortc.com
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