Great comments regarding Legislation-- Does anyone know how to get these to decision makers?

I am new to blogging so I'm going to put a link to the Irvine housing blog and also copy and paste all of the comments below. I would like to thank everyone that has commented. Although I have not had any major sponsorship yet, some of the comments shared were the first I had heard with any level of opposition and are well taken.

If anyone knows how I can enable comments on here please let me know.

Thanks!

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comments from the Irvine housing blog below

link: http://www.irvinehousingblog.com/blog/comments/open-thread-11-1-2008/#comments

The proposal is not a fix for the foreclosure crisis. There is no fix. It does address the problem of saving for a house and the use of exotic financing, and I like that.
I also received an email from MalibuRenter:
As I was looking at your model of the cost of buying vs renting, I realized the potential of a simple policy change: make the standard deduction much larger. For example, instead of the current $10,200, go to $20,000 for a married couple. About 75% of all home mortgages are for $300k or less (see http://www.federalreserve.gov/pubs/bulletin/2008/pdf/hmda07draft.pdf , page 53). For someone with a new $300k loan at 6.5% and no other itemized deductions, they would no longer have to itemize. For people with a few other itemized deductions like income taxes and property taxes, they still might take the higher standard deduction with a $200-$250k loan. That would mean more than half of all mortgageholders would have no reason to itemize.

This has some nice implications. 1. For anyone whose itemized deductions including mortgage interest fits under the new limit, they are no worse off. Usually, they will be better off. Many more people with modest incomes will not have to keep records or have to understand the code in order to itemize. It is a way to both reduce and simplify taxes for people with modest incomes. 2. Paying off your loan earlier, or starting to pay faster, would not lower your income tax deductions for people under the $20,000 standard deduction. 3. There would be more incentive to refinance to lower interest loans, because the Federal Govt would subsidize less of the interest cost, frequently they would subsidize none of it. 4. There would be less marginal incentive toward larger homes, higher loan to value ratios, home equity loans, and cashout refis. 5. In general, homes would be financed with less leverage.
I like the idea. The following was my response:
This would also make interest-only loans less appetizing because you would get less bang for the buck. It would certainly be more politically feasible than trying to eliminate the HMID. I wonder, would this create a tipping point where you would have incentive to jack up your mortgage. Once you crossed the threshold, the larger your deduction the better. I suppose you could always lower the cap as well. You could make the window of opportunity to benefit from the HMID so small that only a small band of middle to upper income homeowners get any benefit. Also, for our new Democratic president and Congress, raising the personal exemption lowers the taxes on the most needy and trickles its way up to the middle class. They would like that.
The Home Mortgage Interest Deduction is a direct government subsidy of ownership that encourages excessive debt loads. It would be very difficult to get rid of politically, but since excessive debt was the primary cause of the house price collapse and huge lender losses, it is something that should be examined.

I have my own proposals for preventing the next housing bubble. The following is the last chapter of my book The Great Housing Bubble:
Preventing the Next Housing Bubble.pdf
When the new administration comes into office this January, the housing crisis will be one of the most important issues facing the new President. There will be many ideas floating around. Some of them good; most of them bad.
What do you think of these ideas? What do you think should be done?
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Astute Observations

Astute Observation by CapitalismWorks
2008-11-01 08:27 AM
How much impact could loan modification have on the pace of the decline and the ultimate destination in terms of pricing. It seems that banks, recognizing the huge downside to foreclosing in such massive numbers, as working in earnest to modify loans.
From my perspective these efforts are not beneficial to us renters.
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Astute Observation by IrvineRenter
2008-11-01 08:45 AM
All these events are designed to slow the rate of price decline, and in that regard, they may have some impact. I still think it is trying to put out a forest fire with a garden hose. The number of distressed homeowners is much too large, and these programs do nothing to address affordability. The greatest declines for Irvine are in front of us rather than behind us. Irvine is not quite half way to the bottom, IMO. Some other areas are much farther along, and some of the most beaten down markets may actually be at the bottom.
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Astute Observation by dafox
2008-11-01 01:49 PM
IR- What would you classify Irvine as? Alt-A or Prime (I highly doubt its subprime)? I’m looking primarily in south Huntington and its still WAY out of affordable according to median incomes on the redfin/onboardnavigator demographics.
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Astute Observation by IrvineRenter
2008-11-01 02:20 PM
Ordinarily, I would say Irvine was Prime, but the prices were so high, and there was so much refinancing going on that much of it is now Alt-A.
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Astute Observation by Hormiguero
2008-11-01 08:36 AM
I think you guys are being a bit naive - the whole idea is to keep the taxpayer in a state of serfdom, with maximum debt and maximum income. that’s how you keep them on the treadmill paying for those congressional pensions. their worst nightmare is a citizen with a free and clear home, a nice pool of stable, balanced savings and a good long-term care insurance policy. a person like that doesn’t need to make much income, nor need much of anything from the federal govt, and that is their worst nightmare.
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Astute Observation by Surfing in Newport
2008-11-01 09:13 AM
Don’t forget that housing is the only asset you can sell at a profit and reinvest without paying taxes...and every 2 years you can even pocket a few hundred thousand tax free. The differences in capital gains treatment made investing in homes ripe for a bubble.
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Astute Observation by JoeSez
2008-11-01 06:52 PM
I disagree with motivations. Capital gains is only 15% - right? Tax rates we’re NOT major driver for the bubble.
People bought homes as financial investments because they could get highly leveraged on an asset, a home, with little exposure and lending standards were lax.
If capital gains was 0.0%, there would have been the same housing bubble.
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Astute Observation by brea
2008-11-01 10:35 AM
Why can’t we just keep things simple. When the prices fall, downpayments should be no problem for a disciplined saver. If someone is not disciplined, what are they going to do about the 30 years of payments. Downpayments are the test.
I am not a fan of savings accounts that lock the money into a specific purposes. What if you want or need to spend the money in a different way. What if your kid won’t go to college or you inherit the house of your dreams.
If they do this, there will be a guy that will go buy a house just so he can apply is tax free downpayment money, and then in the next breath pull it out in an equity withdrawal.
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Astute Observation by Landmark
2008-11-01 03:15 PM
Brea- I agree with you, when prices fall downpayments should not be a problem for many and they are not, however many need an extra push in this type of market.
In addition, in a perfect world the government would not tinker. However, that’s not the case, they have committed to tinkering. Since that’s the reality we’re dealing with, at least they could encourage and reward positive behavior rather than negative. If mine/our/your tax dollars are going to be used for this bailout, would you rather it make the situation better or worse? Would you prefer your money be given to those that were part of the problem when they bid up a home in the first places and took exotic loans they couldn’t afford or someone that was responsible and chose to save, sacraficed and waited? (see entire PDF version to understand the dangers of the curren proposals)
The question is not whether the goverment is going to get involved and use our taxes to do it. It’s how wisely they are going to use this money and who’s going to benefit.
There are hundreds/ thousands of potential buyers out there waiting for prices to come down to reasonable levels. The foreclosures need to flush through the system the quicker the better. Do you think that it’s possible that this or similar legislation may get these buyers into the market and help prevent legislation that rewards irresponsible behavior?
Great point regarding the equity withdraw, provisions would need to be added to prevent that.
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Astute Observation by brea
2008-11-01 04:15 PM
landmark,
Regarding your comment: “Would you prefer your money be given to those that were part of the problem when they bid up a home in the first places and took exotic loans they couldn’t afford or someone that was responsible and chose to save, sacraficed and waited?”
I would prefer that tax money not be used for anyone’s personal interest. So far, the modifications I have read about, don’t look like a windfall to the reckless borrower. I just don’t see were a banker/investor will give up anything unless it is in his own best interest to do so. The talk of the politicians just disgust me, but it may just be pandering to voters.
Your proposal is a separate matter. Why should income taxes not be paid on downpayments? It is income. We have deficits. In the case of retirement IRA’s, the withdrawals are taxed when the money is withdrawn. I assume the Home Equity Accounts would not be taxed when the money is pulled out at the house purchase, otherwise, you would just be postponing taxes for just a few years. Why bother. The while the housing market’s has been extreme, it will eventually return to a buyer’s market with prices tied to wages. That is when buyer’s should come back and they will.
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Astute Observation by Landmark
2008-11-01 06:42 PM
Brea--- Frist, again, I agree- tax money should not be used for personal interest. However, we have a problem that was started with housing. The general belief is that it will end with housing. If people believe that and goverment is set on doing anything they can to shore up the housing market there has to be better plan that modifying loans through principle reduction. “So far, the modifications I have read about, don’t look like a windfall to the reckless borrower.” -I do not do loan modifications, so I cannot speak to the average modification, however I have heard numerous stories of modification that I would consider reckless. For example, a good friend of mind lives in Victorville, he’s a vice principle, makes over 100k/year, bought a new home for circa 400k. His neighbor bought his home at a similar time for a similar price. His neighbor went to the bank for a modification, they said no because he was making his payments. So he quit making his payments and asked them again a few months later. They took $100,000 off of his principle. What makes this even worse is that his neihbor quit making his mortgage payment but kept paying his payment on his quads and “toys”. I would consider that a “windfall to a reckless borrower” do you agree? I have heard at least 1/2 dozen stories like that. Guess what my friend wants--- a modification.
Great point regarding the money when it is pulled out of the home. My thought is that it would be treated similar to a 1031 exchange. If the money is then put into another home it can be tranferred tax free. However, once the home is sold taxes will be paid.
In addition, I do not think that legislation should go on forevor, I believe the government is trying to create a softer landing and avoid a major catostrophe. If we are in as bad of a spot as they are saying and something needs to be done I think we need to explore every avenue.
Do you have any ideas besides do nothing. Which again, I tend to agree with you that the market will work itself out and the goverment should only step in if the situation is incredibly extreme.
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Astute Observation by IrvineRenter
2008-11-01 04:09 PM
Mortgage equity withdrawal is one of the big problems with this proposal. As I read it, someone could pay down their mortgage, get a tremendous retroactive tax break, then HELOC the money right back out again after they got their check from the government.
The best solution to that problem would be to tax HELOC money. In fact, I think HELOC money should be taxed as income since defaulting on it is not taxed now. The way our current tax system is set up, people are strongly encouraged to take on this debt. The money is essentially tax free, and the service on the debt is tax deductible.
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Astute Observation by brea
2008-11-01 04:50 PM
IR,
I am torn between reading your book and reading this site. What I have read is very interesting and useful. I am so glad you wrote it.
I hate when politicians make sweeping rules just to look like they care. IMO, this tax relief on debt forgiveness could have been handled on a case by case basis. When they can’t pay, harass them and then write it off.
Based on the IRS website:
http://www.irs.gov/irs/article/0,,id=179073,00.html
HELOC money used to improve the home, would qualify for the tax relief. When they bought cars and still claim they used it to improve the home, they are cheating. Maybe they will audit some of the returns. I still believe that we need to tax income and not loans. The real issue it that they get relief from the forgiveness of debt and isn’t that why we are in deep trouble now.
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Astute Observation by JoeSez
2008-11-01 06:47 PM
Case-by-case relief is ideal but apparently impractical. The financial system has repackaged these loans as investments and apparently it is hard to find paperwork and expensive to do case-by-case assessment.
The problem with NOT doing anything is debtors can’t cope and walk away from **all** their debt. We all lose in that scenario.
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Astute Observation by zoiks
2008-11-01 11:26 AM
Yeah, right, what we need is a more complicated tax code. How about we simplify the tax code to “zoiks pays no taxes, every one else can eff off”.
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Astute Observation by Gray
2008-11-01 11:31 AM
Feeling so special after the robocall? Just wait for national TV on November 7th, this would be a “special” experience: http://www.cnnbcvideo.com/index.html?nid=fY3TWTZfHXOfejIU2sfzwjkzMjc4OQ--&referred_by=13429144-ae0dQ5x
Sry, IR, I couldn’t resist! :D
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Astute Observation by IrvineRenter
2008-11-01 02:23 PM
That is really funny. LOL!
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Astute Observation by brea
2008-11-01 02:35 PM
Thanks for that laugh. That was great.
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Astute Observation by Dean
2008-11-01 11:35 AM
Probably the best thing to do is figure out a way to keep as many fully-employed, tax-paying families in their homes as possible, while limiting the assistance to pure price speculators. I seriously doubt that there is much to be gained “helping” renters by letting prices fall all the way to their natural price support levels.
That said, now really is the time to take some steps to prevent another bubble from inflating. Here are my thoughts: 1) I like the idea of a “luxury tax” or cap on the interest deduction. I’d set it at the interest on $415,000 for sole property, $533,850 for a home owned jointly by a married couple and bump the cap $26,000 for every dependent under 17. 2) This would encourage equity. Let’s take an average sizes house of 2,300 square feet, assume a per square foot rental price in the area of $2.00 and the 30 year average Irvine rent multiple of around 200. That house has a market price of $920,000. A married couple with one child would only able to write off the interest on the first $559,000 in debt, or 60% of the market price. If they are going with a traditional 20% down, then it raises the effective interest rate on the last $184,000 borrowed from, say, 6% to 8%. That would slow the use of leverage. 3) As long as mortgages are being converted into securities and re-sold, there needs to be a method for folks to do work-outs with a third-party. Bankruptcy courts are not ideal, but it is better than having mass foreclosures.
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Astute Observation by Landmark
2008-11-01 03:27 PM
Dean--- I agree--- if a fully employed family can afford their payment by refinancing into a 30 year fixed, fully ammortized loan, at 5 or 6% but as a result of too little equity the banks won’t help them a govermnent gaurantee could be in order.
For most others, they may need to short sell, or may be faced with foreclosure and have to rent. This will not be the end of the world for them. As I repsonded to Brea above, if the goverment weren’t committed to being involved that would be plenty, however, since the goverment seems to be committed, there has to be better options than what they are proposing.
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Astute Observation by Dean
2008-11-01 04:47 PM
I’d be a bit more generous. Anyone who put their own cash money into a purchase and has lost 100% of that equity plus some of the bank’s money should have a chance to get the principal brought down. Also, the interest rate could get tweaked to a fixed rate that matches an appropriate percentage of their W2 income.
Clearly, there need to minimums. Like, say 10% of the purchase price. Also, there needs to be some kind of real penalty. Like, no further access to credit for, like, seven years. No new Lexus, or fancy colored AmEx Cards, would be a real penalty for OC debtors. That would keep folks in their homes, the broader economy out of free-fall and punish the irresponsible.
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Astute Observation by Landmark
2008-11-01 06:51 PM
Dean-- you are more generous than me. First, I do not see any room for principle write down without creating more issues than it solves. Although, I agree with your comment regarding a penalty or consequence. Second, I do not think it’s fair to give a certain percentage of the poppulation and special interest rate because they bought when they shouldn’t have and took a loan when they shouldn’t have. Many people are renting and gave up on buying as a result. Are those people going to be given special rates when they choose to buy based upon their W2 income?
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Astute Observation by brea
2008-11-01 12:34 PM
I like MalibuRenters’s idea of increaseing the standard deduction. A 20k deduction would be apropriate of the high cost of living areas, but that would be to high for the midwest and such.
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Astute Observation by MalibuRenter
2008-11-01 05:37 PM
I’m ok with the idea that in some cities and states almost everyone would be below the standard deduction. People who live in expensive places would have an added complexity in their lives: itemizing for their taxes.
I’ve had some related discussions with IrvineRenter. Under the current tax code, in places where most people have lower tax rates, or where most of them have mortgage interest below the standard deduction, the price to rent ratios should be lower.
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Astute Observation by WEJ
2008-11-01 02:14 PM
Couldn’t all the modifications backfire and encourage otherwise solvent borrowers to stop paying? If I’m living next door to a guy who has his loan written down by $100,000 I’d want to get in on that action, even if I were otherwise able to continue making payments on a higher loan.
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Astute Observation by Landmark
2008-11-01 03:29 PM
Exactly-- if you download the PDF- you are example 1 and you’re are not alone. Modifications only make the problem worse.
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Astute Observation by MalibuRenter
2008-11-01 05:30 PM
IR writes, regarding increasing the standard deduction “I wonder, would this create a tipping point where you would have incentive to jack up your mortgage. Once you crossed the threshold, the larger your deduction the better.”
While I am not sure how many people would be astute enough to run the calculations, an interesting thing occurs. If you have a mortgage which is just moderately over the standard deduction limit, you won’t get an interest deduction in a few years. Why?
1. Assuming a fixed rate amortizing loan, the amount of your fixed payment which is interest drops over time.
2. The higher standard deduction would also rise over time.
The combination of these two can act pretty fast. For example, take a couple with at $400k mortgage at 6% and no other itemized deductions. The first year the interest is about $24k. By the 5th year it’s $22,672. If inflation is 3.5% per year, the standard deduction the 5th year is $22,950. They are no longer getting any tax break for their mortgage interest.
Take another example, $500k loan and similar terms. By the 9th year, they get no break for their mortgage interest either.
For any loan size, the mortgage interest deduction gets smaller each year, until it reaches zero.
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Astute Observation by MalibuRenter
2008-11-01 05:44 PM
IR - I hadn’t realized the full effect of my proposal on bank liquidity and foreclosures. It’s starting to sound even better.
For someone who isn’t getting any marginal benefit from itemizing their mortgage interest, the aftertax return on paying down their mortgage is the same as the pretax return. That means a return of 5.5-8.0%. In the current investment environment, that’s pretty good.
If more people start paying down their loans, they also increase bank liquidity, are less likely to have their loans go underwater, and are less likely to default on their mortgages.
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Astute Observation by Rebarbarian
2008-11-01 06:49 PM
For every government action there is an equal and opposite market reaction.
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