That's OK. Bill Gross wants the US Government to start cutting checks to homeowners.
As a renter I feel very angry that this idea is even discussed. I don't get a mortgage interest tax deduction, so that means I would have to help pay for said bailout. I have to help pay for the outrageous HELOCs taken out to buy Hummers, boats, and plasma TVs. I have to pay because I didn't drink the housing Kool Aid because I thought home prices were ridiculous and renting was a much better deal.
I'm not confident anymore that Americans even deserve the traditional American ideals of "Life, Liberty, and the Persuit of Happiness". We'd rather just steal from each other, and especially taxpayers, than actually produce anything of value in exchange for currency.
Lets fight deflation. Print more money please. I promise this time I will open a business, buy equipment, and hire people. No more carrytrades,I promise,please,please.
How Low Will Housing Go?" comes from Jan Hatzius, Chief Economist of Goldman Sachs:
"Our working assumption has been that US home prices are about 15% overvalued. This relies on a simple "affordability" measure which essentially adjusts the home price/income ratio by the level of (nominal) mortgage rates. Depending on one's assumption about income growth, the likelihood of overshooting on the downside, and the length of the adjustment process, this suggests cumulative nominal home price declines of 5-15% in the next few years.
However, affordability is becoming an increasingly problematic concept because it ignores changes in credit availability and changes in nonconforming mortgage rates. Hence, it may be better to look at simpler price/income or price/rent ratios to get a sense of house price valuation. These paint a more dire picture.
I sent a text to my BofA contact as we were considering a road trip in September and I haven't heard back at all. I guess he's waist deep re-engineering things.
The credit crunch and liquidity crisis are symptomatic effects of the reduced value of underlying assets. The reduced value of underlying assets is a symptomatic effect of the consumer's inability to obtain credit. The consumer's inability to obtain credit is a sypmtomatic effect of the liquidity crisis.
ron, if it reaches 15% cumulative nominal price declines - that will be very painful. In real terms that is a decline of about 30%. Of course the bubble areas will see larger price declines than some other areas.
BTW, Goldman Sachs has also lowered their forecast for starts to 1.1 million.
The credit crunch and liquidity crisis are symptomatic effects of the reduced value of underlying assets. The reduced value of underlying assets is a symptomatic effect of the consumer's inability to obtain credit. The consumer's inability to obtain credit is a sypmtomatic effect of the liquidity crisis.
But this is not true.
This is the truth that Mozilo want us to think: Just inject more liquidity and all problems are solved.
Here is the real truth: It is not about "credit to the consumer" or even "credit to corporation"
the real truth is that the reduced value of underlying assets is a symptomatic effect of the consumer's inability to earn enough in relation to those assets prices.
It is about real earnings or infalted R/E prices. Either the consumer needs to earn more or R/E prices have tio come down.
In both cases I think that corporation will need to earn less.....
If it gets really bad, it's really difficult to imagine what the Federal government could do to stem the pain.
If they do find some way to spend lots of money on it (and who would be surprised if they do), and the Fed is simultaneously slashing rates, the dollar would really be in trouble.
That could be just as well. I brought this up a long time ago, no one here then thought it was likely, but clearly the one thing that would mitigate the home price depreciation is a heavy dose of inflation.
I am told that my theory about BofA's investment in CFC is wrong, and that the $2B investment in preferred is new capital, not a restructure of existing debt.
So that's one question answered. The other issue is, BofA now has substantially different interests than its peer syndicate lenders.
Not so. The oversupply of housing will put a lid on the rents. Besides
in the case of hyperinflation, you are better off investing in Gold and
of course Fertilizer. Real estate prices have overshot inflation for many years to come.
The CEO of CountryWide interview is replaying on CNBC, and Maria says something like "Why don't you just go borrow from the discount window?" Mozilo replies "CW is a bank, but it's not a bank. The mortgage side has no access to the discount window. The bank has access to the discount window, but doesn't have the assets."
And I thought....uh....why can't the CW bank borrow at the discount window instead of going to BoA (for $2B) and turn around to make a loan to the CW mortgage business itself, if it's such a good deal?
Is there a technical reason why CW bank cannot loan to CW mortgage, or is something fishy going on?
And if the answer is that CW bank CANNOT loan to CW mortgage because they are actually one entity that isn't really a bank at all, I can understand why there was a run on CW "bank" deposits.
you wont be saying mortgage interest deduction long after september.
Rep Frank will be removing thge AMT. All on committee intend to vote for this (after all elections around the corner). And to pay for the offset they will be removing the Mortgage interest deduction. Repubs do not have enough votes to hold it back...
Where is y'alls Steinbeckian sense of angst for those who were so innocently self-indulgent? Have a go at it. It will make you feel ever so noble in mind.
I wish we could come up with some better phrasing than "pre-" and "post-" turmoil. But I suppose we are stuck with it.
In 1917 their recent unpleasantness was dubbed "The Great War." That lasted almost a generation. Thereafter it was demoted to merely "WW-I." All those roman numerals are going to get confusing so I suggest we adopt the NOAA weather naming system. Thus in alphabetical order this recent event shall henceforth be known as "Turmoil Angelo." Next up; "Turmoil Ben." Feel free to add and don't forget to smile dammit.
Bob_in_MA said: "That could be just as well. I brought this up a long time ago, no one here then thought it was likely, but clearly the one thing that would mitigate the home price depreciation is a heavy dose of inflation.
That would be really bad for renters..."
I once posted a concept along the same vein, that anyone with a low fixed-rate mortgage is paying a fixed dollar amount for a place to live for as long as they live there, and inflation be damned.
Everyone thought Southwest Air was brilliant for buying cheap jet-fuel in the futures market, insuring that their cost was low for years into the future. It's the same situation for homeowners with low fixed-rate loans, but nobody "gets" that they'll enjoy a similar advantage for years to come.
I am still here but following less of the market and looking at other things.
Have you noticed that when asked about his contacts with the Fed Mozzilo answered only about few contacts he had with NY FED ? To me this means that he either has FOT MONTHS NOW ran like a cry baby to the san Fran Fed for help or that that he had been in contact with BB himself.
this is why he turned a generic FED contact questions to an answer about NY Fed. The guy is an artists and very smooth at his use of words - an expret how to create the imression he wants without actually lying.
you wont be saying mortgage interest deduction long after september.
Rep Frank will be removing thge AMT. All on committee intend to vote for this (after all elections around the corner). And to pay for the offset they will be removing the Mortgage interest deduction. Repubs do not have enough votes to hold it back...
Just a heads up......
Anonymous | 08.23.07 - 3:31 pm | #
Please post a link to the bill you referenced. Thanks.
knotRP: the problem is that CW bank does not have the right colaterals to post to the Fed at the window. It seems even the Fed require some colaterals to give more money.
So what does CW bank do with it's deposits if the bank assets are noty something you can deposit at the window as colateral ????
Yal from my previous post after everyone migrated here..
and along the lines of NotRP
Yal,
Mozilo on why take the Money from BoA and not from the Fed window:
"The assets that are colateral are not in the bank unit and we could not move them to the bank to be placed at the Fed window as colterla"
Mozilo on how safe the bank is:
"And the senior citizens should not forget that we also have access for the bank at the Fed window"
Spot on...thats why I was asking in the previous postings here, why did CFC go to BOA 1) when they were in a buy back, 2) window was 5.75 3)dividend was 7.25 4) they would make 700 million in one day ?????
so he says bank had no access to window yet bank is safe because of access to window, when banks have access to window thats why he was trying to convert..but fed allowed any way on unsecured paper..
Lance McD..
and then there was Tanta or CR or maybe Banker that reported back in 2006 that CFC avg daily operating cost was 16BB now i know there are less loans so that cuts some of the 16BB daily and some lay offs but the coast for operating still has to be in excess of 1/8 of that or 2 BB liquid everyday....
so I believe that they have bought 11.8BB plus what 2BB so even at 1BB per day they just bought two weeks operating to be able to take 1BB loss on paper and sell it quickly. And BOA just got their money...
But then it dawns on me...did BoA give to CFC Mortgage or bank...
and if bank does that mean CFC Bamk has liquidity problems as well
I cant tell from the 8K if the money went to bank or mortgage
And to pay for the offset [Congress] will be removing the Mortgage interest deduction.
Yeah right. Not only is the HMID a third rail of politics its' removal would be lucky to only trigger a depression. Try this troll on a Yahoo msg board. It is real annoying to have this noise on CR.
"It's the same situation for homeowners with low fixed-rate loans, but nobody "gets" that they'll enjoy a similar advantage for years to come."
That is only true, Seb, for early buyers who moved before prices rose. For those who paid to much, they will continue to pay for years to come.
But keep looking for a bright side, buddy.
BofA's $2b went to the bank for reserve requirements, that allows them to go to the discount window so they can transfer their MBS' to the bank in an orderly fashion.
I have to agree with Mr. Cote. Any politician even suggesting removing the MID would soon find themselves out of a job.
I would buy them repealing the AMT up to a certain income level to appease the federal employee constituents who are now getting pinched by the AMT at the upper income levels and two-income fed employee couples.
He said it in interview on TV Bloomberg or CNBC I believe on nightlife on Bloom
Didnt your daddy tell you never spend money you dont have.....
If you count on HMID, then you are aware that the AMT, depending on income level, will/can counter the HMID...
Though as we that work the halls of the Hill know that many homeowners in trouble (except those with Opt Arms not paying interest) could make promisory notes to the lender giving them (the note holder) the HMI returned...as payment on the delinquent home notes, however, since 90% off your new home poayment with 0 down is interest if they are not making the payments then they have no HMI to deduct...
Anonymous, uh, not going to happen. Whether it's good or bad policy doesn't matter, the chances are zero - and not worth discussing.
Robert Coté, I like the naming idea! Cat 5 Turmoil Angelo (randomly assigned name) struck on August 1st. This was the strongest turmoil of the year, surpassing Cat 4 Turmoil Nueva that struck in last February.
Mozilo was earlier on the Financial Entertainment Network saying CFC couldn't go to the discount window because they weren't a bank. Way above my pay grade. Maybe Tanta can take the elevator from her penthouse corporate suite and visit the sub-basement cubilce and explain it to me.
"Rep Frank will be removing thge AMT. All on committee intend to vote for this (after all elections around the corner)."
Ahh - yeah... This would be gubberment idiocracy as its most terrible. Please provide some specific references. This has got to be bunk. It would DESTROY housing. It would drop affordability by their tax bracket... NO WAY!
"the real truth is that the reduced value of underlying assets is a symptomatic effect of the consumer's inability to earn enough in relation to those assets prices.
It is about real earnings or infalted R/E prices. Either the consumer needs to earn more or R/E prices have tio come down.
In both cases I think that corporation will need to earn less.....
Yal | Homepage | 08.23.07 - 3:19 pm | # "
Yes. And doesn't the Fed really, really dislike wage inflation?
"But Yal the fed said they would take the MBS's at the window....
The bank does not have them. They are in the Mortgage unit of CW.
Angleo mumbled some regulation that prevent him from moving it from one to the other. I am sure he is working on ways to buypass it or toorginate from the banc.
Bob: That could be just as well. I brought this up a long time ago, no one here then thought it was likely, but clearly the one thing that would mitigate the home price depreciation is a heavy dose of inflation.
Define inflation.It's tough to separate inflation from growth - who knows what is real growth and what is hidden inflation.
In an textbook model, inflation will not affect valuation of assets. The rate of return demanded will increase to subsume earnings growth. That is if you can get a measure on inflation, so that you can demand a higher return.
If interest rates cannot track inflation - if inflation is hidden-, then asset prices rise, until the market catches on to the hidden inflation. Then rates demanded will rise, and valuations would fall.
So open inflation is bad for asset holders, and hidden inflation is good.
Leverage complicates all this. Interest costs rise at the same time that it decreases valuations to adjust the rate of return. Decreased values->selling to cover->.. it can't all be good.
Open inflation and leveraged assets - you have to really go through it to find out.
Why does everyone assume, with no evidence that I can see, that removal of the mortgage interest tax deduction would 'destroy' housing?
The UK had such a scheme, MIRAS. It was gradually phased out over several years and no longer exists. House prices did not plummet. The market was not destroyed, in fact it posted significant gains.
So I have provided a real world example of a housing market and economy very similar to that of the US removing a very similar scheme to the mortgage interest tax deduction and that it did not 'destroy' housing.
I thought we settled the "inflation solution question" long ago. There are too many ARMs for overt inflation to be an effective policy. Inasmuch as wage increases are inflationary that isn't possible either. The only solution to excess asset valuation is lower asset valuation.
Inflation may deflate debt, but it also raises mortgage rates and deflates home prices further. I don't see how inflation is a solution to a demand/supply mismatch combined with an affordability crisis. Every time mortgage rates go up, more prospective buyers get pushed out of the market.
Alec - ok. So the $2B was needed so that CW bank could handle (for a microsecond) the passing of MBS from CW mortgage to the Feds. Hmmm.
So if CW mortgage can't make good on the MBS it passed through CW bank to the Feds, CW mortgage may go nipples up, but CW bank is "ok" because the Feds have....what?.....made a no recourse loan to CW bank?
I had no idea the plan was to have all keys mailed to the Fed.
OT~ in my market numbers of listings go down somewhat in MLS over the last 2 weeks. Is this something you're seeing, too? Could it be the beginning of the seasonal de-listing of properties after summer school-holidays are over in Arizona?
I love Peter Orsgag at CBO, but most people would agree that spread product yields have widened plenty...
WASHINGTON, Aug 23 (Reuters) - Congressional Budget Office (CBO) Director Peter Orszag said on Thursday that key signals on the severity of a crisis in the U.S. mortgage debt markets so far have been "quite muted," but predicted short-term market turbulence.
Orszag forecast continued solid U.S. economic performance. He said an important sign of whether the mortgage debt crisis widens more broadly into financial markets will be whether high-quality bond-yield spreads versus Treasury notes rise sharply.
The CBO thus far has not seen this effect, he said.
"If you start to see triple-A rated bonds spiking, that would be a concern," Orszag said.
It is possible to have hyper-inflation and yet have declining asset values. It is disinflation with a bloated money supply. Simply put a government tries to expand the M way out of wack to relieve some pain. [aka German Bank policy 1923/24/25 to pay the loosers end of the War]. And perhaps now to grease the wheels of unknown debit and try to hold the designated interest rate bracket.
Lordy 146 Banks bid up the cost of only 40B from the EB last night!! There must be some pain going on. 146 Banks. Ya, I know that banking is fragmented in Europe 'cause I worked there for a time. But 146 Banks hat in hand paying whatever the cost (inflation, my boy!)in an extrordinary auction. 146 Banks who could not find friends in the open market.
I'm still at 725 for the target number of starts. With rising interest rates by 08, no less.
HMID or roll back Bush tax cuts and we still have a delta when we restructure the AMT to account for inflation and still be there to capture the wwealth from the original 145 folks it was intended (granted higher than 145). Start reading some congressional inquires to OMB regarding Frank restructuring AMT. The concren of loss of tax revenue and two areas where delta will be redduced.
Its right there...google it OMB has the notes as does other sites ...
come on first 5000 of HMI could still be allowed...first 500 it's up to them...
the pencils are sharpened and hard at work even during the break in the Frank office..
Also i believe the video clip is still on Bloomberg....
"No we are not opposed to rolling out the HMID, it is safe to say we are looking at several options"
CW the bank has strict limits on the transactions it can do with CW the unregulated mortgage company. That's to prevent the unregulated company from enriching itself at the expense of the bank. These transactions are governed by Regulation W (which implements Sections 23A and 23B of the Federal Reserve Act of 1933).
Transferring the mortgage company's mortgages to the bank would be covered by Reg W. For details: Materials | Regulation W
(which has a link to the text of the regulation).
Result is the mortgage company can't benefit from the window, which is only available to the bank. And the bank can't simply buy the mortgages from the mortgage company (who would determine the price to be paid for them?).
It's possible to structure around this, but it's not easy and usually involves making sure the bank is protected. The mortgage company can (and should) be allowed to fail.
Hence, it may be better to look at simpler price/income or price/rent ratios to get a sense of house price valuation. These paint a more dire picture.
price/rent ratios have disappeared in my part of Calif.(sonoma) currently homes in my development are being offered at 525K for a 2b/2b model Plus a $150.00 month HOA fees. Now rent is running between $1250 to $1400 month for these units. We have 2 units available to rent that have been open for 3 to 4 months now.
I expect over time that historical price/rent ratios will return, the idea that the last 5 years of RE HPA cannot be reversed by market forces is like believing in Santa Claus.
So the bank is "protected",
the motgage company may go NU,
and the Fed is not protected since
it's the ultimate MBS bag holder?
And all that dust was about coloring
inside the lines so that the bank
would never be drawn into being
responsible for putting the MBS
on the Fed?
There's been a fair amount of discussion around the fairness/equity of bail-out plans for homeowners.
Let's remove "owner" from the equation, shall we? What's important is that people have a home, a decent one, one that's commensurate with their purchasing power (i.e. their income).
The government CAN help secure those homes. The problem newly-minted renters will have is that the foreclosure process will destroy their credit rating, making potential landlords wary of renting to them.
A modest proposal: have Fannie or Freddie guarantee three months rent in exchange for an nominal insurance payment. This will make sure the foreclosure stigma does not get in the way of renting a home.
Now, isn't that a lot easier than a massive government bailout?
Fair disclosure: I am a renter. As far as I can tell it has not destroyed my life. Not yet anyway.
What I was suggesting is that if over-all inflation--imports, food, commodities, and wages--was 7+%, then nominal home prices might rise 2%. They'd still be down significantly in real terms, but the consequences of being under-water on your mortgage only matter in the sense of price deflation in nominal terms.
The dollar would fall, but theoretically exports would soar and might spur wage growth.
But I guess the problem, as with Japan, is that when you actually want inflation, you can't have it.
Exports likely would not soar as the rest of the world would be wallowing in the misery of overcapacity due to US consumers no longer buying their exports on credit...
Would certainly be a good idea. I don't think it has a snowball's chance in Cuba, even if it'd be great for me (renter in NYC, looking to buy).
But yes, UK did phase out their mortgage interest exemption with few problems. I also seem to remember a discussion with Dutch friends where they stated the Netherlands was also phasing theirs out, with some horribly complex form of gandfathering current owners (who are actually have 99 year leases from the city).
the real truth is that the reduced value of underlying assets is a symptomatic effect of the consumer's inability to earn enough in relation to those assets prices.
I agree with you wholeheartedly. In my rush to return to other important matters, I neglected to include that very important fact, though it did dawn on me right after I posted. Esprit d'escalier aside, the aforementioned cycle (including your correction) describes the reasons of what we are seeing these last few weeks, in financial markets.
"Why does everyone assume, with no evidence that I can see, that removal of the mortgage interest tax deduction would 'destroy' housing?"
In the first 10-15 years of a 30 year mortgage, when your payments are mostly interest, the tax deduction subsidizes your payments to the tune of 20-30 percent depending on tax bracket. It's an especially good subsidy for high-income taxpayers to buy as much house as possible.
I don't know that removing the MID alone would cripple the housing market, but it's definitely a price support. Without it, people buy less house. Consider it a virtual interest rate increase of up to a couple of percent.
DJ OCC: BOA Can't Convert Countrywide Securities Into Cmn Stock
By Damian Paletta
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Bank of America Corp. (BAC) can't convert its $2 billion investment in Countrywide Financial Corp. (CFC) into common stock, the Office of the Comptroller of the Currency said in its letter approving the investment.
"Our conclusion is subject to the condition that (Bank of America) will not exercise the right granted to holders of the Securities to convert the Securities into common stock of (Countrywide) so long as the Securities are held by (Bank of America) or any subsidiary" of Bank of America, OCC chief counsel Julie Williams wrote Wednesday in a letter obtained by Dow Jones Newswires.
Williams said this condition was enforceable under the law. The letter was addressed to Bank of America general counsel Timothy J. Mayopoulos.
Bank of America "represents it will not at any time exercise its right as holder of the Securities to convert them into (Countrywide) common stock," Williams wrote.
The $2 billion investment was approved quickly, as Bank of America approached the OCC about the investment within a week of receiving regulatory approval.
Williams also said that Bank of America's investment would not "confer voting rights" as long as the "yield is current and the issuer is not attempting to alter the holders' rights under the instrument."
And subsidized MI indirectly subsidizes rents (by producing fewer apartment renters). If the MI were somehow pulled out, I'd expect rents to jump as more folks would find motgages uneconomical for themselves.
DJ OCC: BOA Can't Convert Countrywide Securities Into Cmn Stock
Right. They will stay bond holders, which means they'll get issued "new" stock if/whenever the company exits bankruptcy, because bond holders are first in line.
The HMID isn't always what it's cracked up to be -- many people misunderstand exactly how it works.
For married couples, Interest + RE Taxes + State Tax + Donations > $10,250 (the standard deduction for a couple). So for the typical house (not CA, NY, CT, etc) of $230,000 and a mortgage of $200,000 at 6%, MI is $12,000. Figure 2% RE tax ($4,600) and State Tax + donations of $3,400 -- you have a total Schedule A of $20,000. But without any of the housing expense, you have a deduction of $10,250. So the net deduction gain is $9,750. At a 20% marginal rate, the tax advantage is less than $2000.
I wish the Fed wouldn't accept MBS paper, and forced 'em to die screaming while requiring full disclosure of the bond contents somehow.
Privatizing gains but socializing losses is bad at any time.
Although the drop would come tomorrow and the fall would be far, the investor confidence would return quickly because central banks and PE investors would know what they're getting into.
Inflating away the problem won't work simply because wages will not keep up. Did your salary double or triple in the past 5 to 7 years? I doubt it, yet that's what housing prices did. With all the outsourcing and insourcing, I don't see wage inflation happening.
How about this for a nice little conspiracy theory:
The government bails out wall street with lower rates which leads to inflation but props up asset prices for the bond holders and makes the spreads better for hedgies. But, now, the bond holders and domestic banks which hold fixed mortgages are going to get hurt. So to encourage home owners to pay off their low interest mortgages early we phase out the Mortgage Interest Deduction?
So first we prop up home prices, then we help them deflate - each phase helps the large financial interests as they need it. Sounds good huh?
And the political cover is great. We are helping the little guy stay in his house now, and then later, it is 'we are sticking it to the rich guys with the big MI deductions'. Who can question that? Jump on the bandwagon everyone!
re: mortgagege interest deduction. I am personally in favor of phasing it out (encourages excess consumption) by starting out limiting it to some large number and decreasing over time. IIRC, using AMT as the reason to phase it out eliminates one of the major reasons AMT kicks in, correct?
Interesting in that the bank had, on Jun 30, over $70bn in loans held for investment and CFC held some $19bn in loans held for securitization (up from 7 bn on Dec 30). I posted the Dec 30 (10K) breakdown of those loans held for investment on another thread. Since the auditors are now setting up shop at the bank, my (total and complete) speculation is that the company is not able to sell loans to the bank and get what they want. And we know they cannot sell them anywhere else right now. I would love to be a fly on the wall on the discussions between the auditors and the bank on how those loans held for investment should be marked. Assuming the discussions are intense, one would have to commend the auditors for not leaking anything.
p.s. And if my wild speculation is correct, the company is sitting on some serious mark to market issues on the banking and the mortgage side. So even if they survive (which I hope they do - regardless of our opinions about Moz' most CFCers are fine people), they are going to take some earnings hits. IMHO, they have been postponing this for many months.
"the real truth is that the reduced value of underlying assets is a symptomatic effect of the consumer's inability to earn enough in relation to those assets prices."
e-man, I think this statement is illustrative of Minsky's financial instability thesis. To my mind, the current ponzi economy is premised on the Fed keeping down unit labor costs (the "real" inflation). That's why we have the highest level of GINI post WWII. But now we're caught in a bind: the assets can't retain their price because no one can "afford" them (through ponzi credit) anymore. But we can't raise wages because that's "real" inflation. Thus I agree: "Not sure how this will get resolved."
"...the tax deduction subsidizes your payments to the tune of 20-30 percent depending on tax bracket..."
This is kind of a myth. First off, you lose the standard deduction when you itemize. That's now $12,000 for a couple, so that needs to be subtracted.
Plus you have to assume the deduction allows some to bid up the price, so now everyone is paying 10+% more for homes then they would be if there were no deduction, so you are really just robbing Peter to pay Paul.
I think it's ridiculous that mortgage interest is deductible, it's a tax break for people who don't need it.
But I wouldn't bet on its repeal anytime soon and the poster who suggested it was being seriously considered was talking out of his hat.
"If you start to see triple-A rated bonds spiking, that would be a concern," Orszag said.
um, didn't RBSGC just say that spreads on option arm AAAs were around L+97? didn't thornburg just get pwnd pretty hard recently? didn't some Carlyle dorks in Guernsey just get pwnd on Agency CMO floaters because of spread widening?
Yes, the bank is protected (at least from going down with the mortgage company) and the mortgage company may fail. The Fed is the ultimate MBS bag holder but is also protected because it's very fussy about the advance rates on the MBS it will accept as collateral. See The Federal Reserve Bank Discount Window & Payment System Risk Website.
I don't understand your last question. This is definitely about drawing inside the lines (keeping the bank separate from the mortgage company), but not about keeping the bank from pledging mortgage it owns at the window.
MOM - certainly inflation won't fix demand/supply mismatch directly, but assuming inflation carries through to wages it could devalue "sticky" asking prices, so that real prices drop more quickly to a level where sales pick up. I agree this would likely cause havoc with interest rates, not to mention all the other ills associated with inflation. I like to view inflation as a sneaky way to transfer money away from those who save to those with debt (notably the gov.) Inevitably responsible savers will be forced to pay for this mess, like previous ones - after all, no one else has the resources.
For married couples, Interest + RE Taxes + State Tax + Donations > $10,250
So for the typical house (not CA, NY, CT, etc) of $230,000
and a mortgage of $200,000 at 6%, MI is $12,000.
Figure 2% RE tax ($4,600) and State Tax + donations of $3,400 --
you have a total Schedule A of $20,000.
But without any of the housing expense, you have a deduction of $10,250.
So the net deduction gain is $9,750.
At a 20% marginal rate, the tax advantage is less than $2000.
Now do the figures with a jumbo, property tax of 10K and a marginal tax rate of 28%...
If the mortgage side goes BK,
either the Fed or the bank side
eats any losses on the MBS,
since the mortgage side isn't
around to buy back.
From your last statement,
it sounds like the bank side
will be on the hook for any MBS
losses it passes through to
the Fed, if/when the mortgage
side can't.
Not if GWB buys into Bill Gross's plan for a Reconstruction Mortgage Corp. We'll just replace private debt with public debt and Bill and all his bondholder buddies who were pigging at the trough can keep their vacation home in Switzerland while the San Diego flipper now has to pay Uncle Scam.
All neat and tidy for Wall Street and the very indebted consumer.
Agreed. For upper income taxpayers, it's a huge benefit. And the Jumbo, $10k property and 28% payer also probably has substantial State Income Tax as well (NY, CA).
But for the average Joe/Jane, not always the huge benefit that folks expect (but always described as an amazing windfall -- I suspect that many people expect that they can deduct the interest paid from the tax owed).
BTW -- This site and your work and CR's work is simply amazing. Thank You, Thank You, Thank You.
The new FDIC quarterly banking profile released this week.
Home equity loans: Up 3.6% sequentially to $577 billion from $557 billion. I don't have data for just how large the lines of credit are, but given lower appraised home values, the total size of a mortgage loan and associated lines of credit for some homeowners may exceed the value of the property.
Reserves for losses: Up 3.3% at the end of the second quarter to $81.2 billion from $78.6 billion, and up 4.2% year over year. This line item will only be rising in the quarters ahead, as a direct drag on earnings.
30 to 89 days past due: Up 5.6% at the end of the second quarter to $74.4 billion from $70.5 billion, and up 34.9% year over year. The staging ground before becoming noncurrent continues to grow.
Noncurrent loans: Up 10.6% at the end of the second quarter to $66.9 billion from $60.5 billion, and up 36.2% year over year. If a bank can't collect, foreclosures occur and properties become other real estate owned.
Other real estate owned: After homes and properties are foreclosed, they go into this category. In the second quarter, it was up 14.8% sequentially and 53.1% year over year. These assets have moved to the cost side of the ledger as the bank pays real estate taxes and property insurance instead of earning fees and interest. This could become next year's headliner as banks write down OREO to appraised values.
Notional Amount of Derivatives: Was up 5.3% sequentially and 20.8% year over year to $153.8 trillion at the end of the second quarter. This is the category that investment banks are exposed to, as large banks and investment banking firms are involved with 75% of these structures. Derivative securities created from this tangled web of risk transfers are spread around the world to unsuspecting investors.
johnny M, e-man, yal: so to complete the loop:
a. the credit crunch and liquidity crisis are symptomatic effects of the decline in underlying asset values, b. The decline in underlying asset values is symptomatic of the homeowners inability to earn sufficient income to make necessary payments, and inability to access new credit because of a.
c. the homeowner's inabilty to earn sufficient income will be a result of the decline in asset values (40,000 laid off this week?)
Loans made from the Federal Reserve's little-used discount window shot up after the Fed eased borrowing conditions and invited banks to borrow last Friday, though a sizable chunk was soon repaid, new data from the Fed show.
I think I found the answer in the economist's latest article:
The Fed has been offering 85% of face value for AAA-rated paper presented at its discount window, even collateralised-debt obligations stuffed with subprime mortgages (as long as they are notyetimpaired).
So the MBS can take a 15% haircut without anyone at the Fed having to tap any tax payer or bank side reserves. It's a "sale at 15% discount" with a "buyback at full price if we don't go bankrupt" option. If the mortgage side goes BK, the bank side buys it back at the new price to make the Fed/tax payer whole again, and life goes on with the bank having a more viable MBS. How tidy.
15% must be the Fed's estimate of the expected losses.
"More than half of the $1.1 trillion in outstanding asset- backed paper comes due in the next 90 days, according to the Federal Reserve. Unless they find new buyers, hundreds of hedge funds and home-loan companies will be forced to sell $75 billion of debt, according to Zurich-based UBS AG, Europe's largest bank."
Sell more debt? If you can't roll Commercial paper, well? And just as Banks bulk on reserves, too.
My conclusion exactly. But how? You got a file of nice, tidy Commercial Paper, you cant roll it over at the existing rate (yield). So, you do a bit of cutting (paper now off just over 4% - somebody has to eat it). And you still can't sell it, so you decide to take on debt. You know that the CP rates are working and would be forced to sell the debt at something greater.
So, you have a bundle that yields L+2.4 and your debt is set at L+3 (because the underlying junk wont sell and a small premium is needed to catch interest).
So now that the rate for your paper is set, how about the timing. Do you do 30/60/90 days? 270 days? In this type of uncertain market, shorter is better. So you go thirty and in 29 days you are back to square one.
Net proceeds are negative. You loose. You fail. You eat what you kill.
Or, do you take a what-ever hit and let it fall until there are buyers and forget the idea of issuing more debt?
Alan Mulally, Fords chief executive, has lent his voice to calls for the Federal Reserve to stimulate the economy, saying the housing crisis and credit turmoil had turned economic growth into a priority.
HMID gone? There would be a NAR hissy fit to end all hissy fits. Cap it at $25k most likely would be the outcome.
Wanna bet one of these names become prominent soon:
Felix
Gabrielle
Humberto
Ingrid
Jerry
Karen
Lorenzo
Melissa
Noel
Olga
Pablo
Rebekah
Sebastien
Tanya
Van
Wendy
Maybe not Sebastien- they spell it funny!
Almost a Tanta!!!
Lol!
I still say we are going to have to start doing something soon- and killing the AMT by messing up mortgage deductions is not going to fix this mess. It would have been a great solution in 2003 before the party got going...but not now.
DH - interesting FDIC numbers, so it looks like another 7 Trillion plus of notional derivates were created in the past quarter.
I wonder if we shall see this number go down in the next report, or stay even? It's all these crazy derivatives which are making this whole situation more dangerous. Someone needs to put the brakes on all this crazy finance.
Plus you have to assume the deduction allows some to bid up the price, so now everyone is paying 10+% more for homes then they would be if there were no deduction, so you are really just robbing Peter to pay Paul.
This is the dynamic that people miss. When you give a price subsidy to /everyone/ on a good with a demand curve like SFH, people will bid up the price of the good by the subsidy amount.
Same thing happens with vouchers to good private schools. Give everyone $5000 to send their kid to the best private school, and that school can & will raise tuition . . . $5000.
"This is kind of a myth. First off, you lose the standard deduction when you itemize. That's now $12,000 for a couple, so that needs to be subtracted."
Like others said, not like that on the coast with a big jumbo loan (about the only kind that works out here).
$600K mortgage, six percent interest, 30+ percent tax bracket, and you are doin' fine with that deduction. In the most inflated markets -- like the entire West Coast, Florida, and God knows where else -- it's a real incentive.
more like one of the reasons housing prices are where they are now in these hot markets.
Same thing goes with the 2001-2003 income tax cuts . . . give everyone $300 ~ $500/mo, and boom, housing can go up $100,000 since everyone can now afford $100,000 more.
"So I have provided a real world example of a housing market and economy very similar to that of the US removing a very similar scheme to the mortgage interest tax deduction and that it did not 'destroy' housing.
Anyone care to tell me why "it's different here"?
MadJock | 08.23.07 - 4:07 pm | # "
Ummmm...Yeah...Britain's main tax is a VAT. Ours is off income.
Boy this thread is making me pissed. Some of my favorite commentators are annoying me ...hard!
"I think it's ridiculous that mortgage interest is deductible, it's a tax break for people who don't need it.
But I wouldn't bet on its repeal anytime soon and the poster who suggested it was being seriously considered was talking out of his hat.
Bob_in_MA | 08.23.07 - 5:33 pm | # "
REALLY. Hmmm... so it's ok for a business to deduct 100% interest from op profits before taxes, but I should have to pay a tax on MY op profits before the BIGGEST interest rate cost I receive? PLUS I should be DOUBLE taxed because my State and Local property tax isn't included?
And don't give me "Renters don't get a break". Really? Who fixes the bloody toilet when a renter's breaks. Who fixes the damned roof? Who makes sure the yard is in good repair?
Sorry for the delay in responding -- had dinner with my daughter and her partner. (Trumps even my addiction to CR!)
You're almost right. The mortgage side can't pass the mortgages to the bank, so they never get to the Fed. There's a wall between the mortgage side and the bank. If the bank has mortgages of its own (probably not, but I haven't checked), then the Fed would eat the losses on the mortgages -- if there were losses, the bank managed to go under before defaulting and didn't have enough other unsecured assets to cover the deficiency at the Fed's priority in a bank failure (haven't checked that).
Not sure where the 85% figure comes from; that only applies to ABS (including CLOs) lacking a market price. The link I posted earlier has a link on to the advance rates, which are adjusted by duration and a substantial haircut for not having a market price. MBS, CLOs and CMOs all have to be AAA-rated. I don't think 85% is anyone's realistic estimate of the value -- recovery tables by rating category show lower historical average losses than the Fed's haircuts. The Fed's like a pawn shop in that regard, it adds a cushion to the market rates. (Not a pawn shop's big cushion, though, a little one, befitting a government agency.)
Yes, it's tidy. It's supposed to be. The haircuts protect the Fed from credit losses. There is a risk: the data assume that future performance will reasonably closely resemble the past, which incorporates an assumption that underwriting standards (and many other things) haven't changed in any respect material enough to affect the statistics. This may not be true; but unless you know how to correct for it the data are the best proxy for prediction that we've got, and according to the data the Fed's credit risk is minimal. Would it be better if the Fed didn't supply liquidity to banks, because it might include credit risk?
My allowance is much less the 10,500 POUNDS per year.
My point is that taxes in Britain are quite different from here. Between sales, State and Fed ~50% of my income is stolen from me yearly. The loss of the MIT in CA would be rather catastrophic.
Finally it would be exceptionally unfair.
Gov't: "You did your due diligence in making your decisions. But we've decided to change the rules, and now you're under water...eat shite dill hole."
Msean: My point is that taxes in Britain are quite different from here. Between sales, State and Fed ~50% of my income is stolen from me yearly.
So, what are all the brainwashed democrats in America and Britain going to do about it? Vote, vote, and vote til they die?
Gov't: "You did your due diligence in making your decisions. But we've decided to change the rules, and now you're under water...eat shite dill hole."
America is a nation ruled by laws and not by men. And men keep changing the laws! And what kind of men get to change the laws? Dishonest and some even convicted felons.
Enjoy the last decade, or two, of democracy while it lasts. Maybe, some should read Democracy: A God That Failed. It is a good book. Those who want more should read Wealth And Democracy.
I used dollar amounts, converted using approx $2:1 Pound.
While the numbers may be different, overall it's hardly a radically different tax scheme between the UK and the US. I 'lose' as much to taxes and fees here in CA as I did when living in the UK, although the distribution is different. E.g. - no need for healthcare payments in the UK, or I pay less direct tax but my NI payment is 11% not 6.25% (SS in the USA).
The housing market is equivalently 'free'. You may fear the retraction of the interest relief, but you have provided no factual backing to that.
The gradual removal of the MIT relief would allow for adjustment of prices and would not be catastrophic. Tax relief on credit card debt in the US was removed in the 80s but that didn't cause a consumer recession - from what I can see debt on CCs has skyrocketed.
Further - renters do not 'get a break' when the landlord fixes the toilet. That is part of the contract between tenant and landlord. If the landlord wants to charge more in rent to try to cover this better he is welcome to do so and the market will decide if his rent is fair. It's business and if the landlord doesn't like it, he can stop being a landlord - but there's plenty of them around so it seems they regard it as a cost of doing business. And I say this as a landlord myself.
thanks realty-based lawyer...going to ponder it a bit.
As for the other thread about changing MI deductions....the best way to seize up an economy is to either (A) make a lot of noise about changing all the rules that condition financial choices, or (B) actually start changing all the rules.
Can we put the contemplation of rule churn on hold for better times, perhaps?
Here in Omaha and in a 30% Fed & State income tax bracket, I like it just fine. Saves me $300/mo ish on a $1500 house payment. I'll like it even better when the tax decreases expire and I get closer to 40%. Note sure that eliminating the tax break would reduce prices here as it might in higher margin communites. Builders here operate on less than 10% margin.
Why do I have to go first?
Maybe we should call it "pre-reality" and "reality."
That's OK. Bill Gross wants the US Government to start cutting checks to homeowners.
As a renter I feel very angry that this idea is even discussed. I don't get a mortgage interest tax deduction, so that means I would have to help pay for said bailout. I have to help pay for the outrageous HELOCs taken out to buy Hummers, boats, and plasma TVs. I have to pay because I didn't drink the housing Kool Aid because I thought home prices were ridiculous and renting was a much better deal.
I'm not confident anymore that Americans even deserve the traditional American ideals of "Life, Liberty, and the Persuit of Happiness". We'd rather just steal from each other, and especially taxpayers, than actually produce anything of value in exchange for currency.
F@ck Bill Gross and f@ck the REIC.
Lets fight deflation. Print more money please. I promise this time I will open a business, buy equipment, and hire people. No more carrytrades,I promise,please,please.
from Big Picture:
How Low Will Housing Go?" comes from Jan Hatzius, Chief Economist of Goldman Sachs:
"Our working assumption has been that US home prices are about 15% overvalued. This relies on a simple "affordability" measure which essentially adjusts the home price/income ratio by the level of (nominal) mortgage rates. Depending on one's assumption about income growth, the likelihood of overshooting on the downside, and the length of the adjustment process, this suggests cumulative nominal home price declines of 5-15% in the next few years.
However, affordability is becoming an increasingly problematic concept because it ignores changes in credit availability and changes in nonconforming mortgage rates. Hence, it may be better to look at simpler price/income or price/rent ratios to get a sense of house price valuation. These paint a more dire picture.
Lee,
Don't get worked-up man. Bill Gross wants to run for the presidency. He is practicing his politics.
I sent a text to my BofA contact as we were considering a road trip in September and I haven't heard back at all. I guess he's waist deep re-engineering things.
The credit crunch and liquidity crisis are symptomatic effects of the reduced value of underlying assets. The reduced value of underlying assets is a symptomatic effect of the consumer's inability to obtain credit. The consumer's inability to obtain credit is a sypmtomatic effect of the liquidity crisis.
Rinse and repeat as necessary.
ron, if it reaches 15% cumulative nominal price declines - that will be very painful. In real terms that is a decline of about 30%. Of course the bubble areas will see larger price declines than some other areas.
BTW, Goldman Sachs has also lowered their forecast for starts to 1.1 million.
Best Wishes.
Pre-Turmoil is fine, but Post-Turmoil won't be accurate for a while...
That leaves us with "In-Turmoil" to describe today and the next year or so...
As we experience asset price deflation, we will surely experience
inflation in goods and services.
Invest in Pigs and Fertilizer now. MON,CF,SFD.
Bill Gross will offer his salary and PIMCO's 900BL assets to be the first one that pays for the bail out.
Further, he will offer refuge to already foreclosed households in his mansion.
All this before offering other's money for the bail out. What a nice guy!
e-man this sounds deep:
The credit crunch and liquidity crisis are symptomatic effects of the reduced value of underlying assets. The reduced value of underlying assets is a symptomatic effect of the consumer's inability to obtain credit. The consumer's inability to obtain credit is a sypmtomatic effect of the liquidity crisis.
But this is not true.
This is the truth that Mozilo want us to think: Just inject more liquidity and all problems are solved.
Here is the real truth: It is not about "credit to the consumer" or even "credit to corporation"
the real truth is that the reduced value of underlying assets is a symptomatic effect of the consumer's inability to earn enough in relation to those assets prices.
It is about real earnings or infalted R/E prices. Either the consumer needs to earn more or R/E prices have tio come down.
In both cases I think that corporation will need to earn less.....
If it gets really bad, it's really difficult to imagine what the Federal government could do to stem the pain.
If they do find some way to spend lots of money on it (and who would be surprised if they do), and the Fed is simultaneously slashing rates, the dollar would really be in trouble.
That could be just as well. I brought this up a long time ago, no one here then thought it was likely, but clearly the one thing that would mitigate the home price depreciation is a heavy dose of inflation.
That would be really bad for renters...
I am told that my theory about BofA's investment in CFC is wrong, and that the $2B investment in preferred is new capital, not a restructure of existing debt.
So that's one question answered. The other issue is, BofA now has substantially different interests than its peer syndicate lenders.
It sure has been a hell of an August to remember and it's over yet!
Bob-in-MA
Not so. The oversupply of housing will put a lid on the rents. Besides
in the case of hyperinflation, you are better off investing in Gold and
of course Fertilizer. Real estate prices have overshot inflation for many years to come.
The CEO of CountryWide interview is replaying on CNBC, and Maria says something like "Why don't you just go borrow from the discount window?" Mozilo replies "CW is a bank, but it's not a bank. The mortgage side has no access to the discount window. The bank has access to the discount window, but doesn't have the assets."
And I thought....uh....why can't the CW bank borrow at the discount window instead of going to BoA (for $2B) and turn around to make a loan to the CW mortgage business itself, if it's such a good deal?
Is there a technical reason why CW bank cannot loan to CW mortgage, or is something fishy going on?
And if the answer is that CW bank CANNOT loan to CW mortgage because they are actually one entity that isn't really a bank at all, I can understand why there was a run on CW "bank" deposits.
you wont be saying mortgage interest deduction long after september.
Rep Frank will be removing thge AMT. All on committee intend to vote for this (after all elections around the corner). And to pay for the offset they will be removing the Mortgage interest deduction. Repubs do not have enough votes to hold it back...
Just a heads up......
Where is y'alls Steinbeckian sense of angst for those who were so innocently self-indulgent? Have a go at it. It will make you feel ever so noble in mind.
COUNTRYWIDE HOME LOAN SUCKS!
I wish we could come up with some better phrasing than "pre-" and "post-" turmoil. But I suppose we are stuck with it.
In 1917 their recent unpleasantness was dubbed "The Great War." That lasted almost a generation. Thereafter it was demoted to merely "WW-I." All those roman numerals are going to get confusing so I suggest we adopt the NOAA weather naming system. Thus in alphabetical order this recent event shall henceforth be known as "Turmoil Angelo." Next up; "Turmoil Ben." Feel free to add and don't forget to smile dammit.
Bob_in_MA said: "That could be just as well. I brought this up a long time ago, no one here then thought it was likely, but clearly the one thing that would mitigate the home price depreciation is a heavy dose of inflation.
That would be really bad for renters..."
I once posted a concept along the same vein, that anyone with a low fixed-rate mortgage is paying a fixed dollar amount for a place to live for as long as they live there, and inflation be damned.
Everyone thought Southwest Air was brilliant for buying cheap jet-fuel in the futures market, insuring that their cost was low for years into the future. It's the same situation for homeowners with low fixed-rate loans, but nobody "gets" that they'll enjoy a similar advantage for years to come.
Sebastia
I am still here but following less of the market and looking at other things.
Have you noticed that when asked about his contacts with the Fed Mozzilo answered only about few contacts he had with NY FED ? To me this means that he either has FOT MONTHS NOW ran like a cry baby to the san Fran Fed for help or that that he had been in contact with BB himself.
this is why he turned a generic FED contact questions to an answer about NY Fed. The guy is an artists and very smooth at his use of words - an expret how to create the imression he wants without actually lying.
Oh, are we in the intermission?
Mmmmm.... concession....
https://secure47.cedant.com/premont/Merchant2/graphics/00000001/ProfiteerAnt.jpg
you wont be saying mortgage interest deduction long after september.
Rep Frank will be removing thge AMT. All on committee intend to vote for this (after all elections around the corner). And to pay for the offset they will be removing the Mortgage interest deduction. Repubs do not have enough votes to hold it back...
Just a heads up......
Anonymous | 08.23.07 - 3:31 pm | #
Please post a link to the bill you referenced. Thanks.
knotRP: the problem is that CW bank does not have the right colaterals to post to the Fed at the window. It seems even the Fed require some colaterals to give more money.
So what does CW bank do with it's deposits if the bank assets are noty something you can deposit at the window as colateral ????
Yal from my previous post after everyone migrated here..
and along the lines of NotRP
Yal,
Mozilo on why take the Money from BoA and not from the Fed window:
"The assets that are colateral are not in the bank unit and we could not move them to the bank to be placed at the Fed window as colterla"
Mozilo on how safe the bank is:
"And the senior citizens should not forget that we also have access for the bank at the Fed window"
Spot on...thats why I was asking in the previous postings here, why did CFC go to BOA 1) when they were in a buy back, 2) window was 5.75 3)dividend was 7.25 4) they would make 700 million in one day ?????
so he says bank had no access to window yet bank is safe because of access to window, when banks have access to window thats why he was trying to convert..but fed allowed any way on unsecured paper..
Lance McD..
and then there was Tanta or CR or maybe Banker that reported back in 2006 that CFC avg daily operating cost was 16BB now i know there are less loans so that cuts some of the 16BB daily and some lay offs but the coast for operating still has to be in excess of 1/8 of that or 2 BB liquid everyday....
so I believe that they have bought 11.8BB plus what 2BB so even at 1BB per day they just bought two weeks operating to be able to take 1BB loss on paper and sell it quickly. And BOA just got their money...
But then it dawns on me...did BoA give to CFC Mortgage or bank...
and if bank does that mean CFC Bamk has liquidity problems as well
I cant tell from the 8K if the money went to bank or mortgage
Lance McD
But Yal the fed said they would take the MBS's at the window....
So what gives?
And to pay for the offset [Congress] will be removing the Mortgage interest deduction.
Yeah right. Not only is the HMID a third rail of politics its' removal would be lucky to only trigger a depression. Try this troll on a Yahoo msg board. It is real annoying to have this noise on CR.
giacutter,
nothing on paper yet...this is from Frank....et al.
very ano
anonymous, you are either completely full of shit, or telling only part of the story.
"It's the same situation for homeowners with low fixed-rate loans, but nobody "gets" that they'll enjoy a similar advantage for years to come."
That is only true, Seb, for early buyers who moved before prices rose. For those who paid to much, they will continue to pay for years to come.
But keep looking for a bright side, buddy.
BofA's $2b went to the bank for reserve requirements, that allows them to go to the discount window so they can transfer their MBS' to the bank in an orderly fashion.
I have to agree with Mr. Cote. Any politician even suggesting removing the MID would soon find themselves out of a job.
I would buy them repealing the AMT up to a certain income level to appease the federal employee constituents who are now getting pinched by the AMT at the upper income levels and two-income fed employee couples.
Cote'
He said it in interview on TV Bloomberg or CNBC I believe on nightlife on Bloom
Didnt your daddy tell you never spend money you dont have.....
If you count on HMID, then you are aware that the AMT, depending on income level, will/can counter the HMID...
Though as we that work the halls of the Hill know that many homeowners in trouble (except those with Opt Arms not paying interest) could make promisory notes to the lender giving them (the note holder) the HMI returned...as payment on the delinquent home notes, however, since 90% off your new home poayment with 0 down is interest if they are not making the payments then they have no HMI to deduct...
wait till Sept
Anonymous, uh, not going to happen. Whether it's good or bad policy doesn't matter, the chances are zero - and not worth discussing.
Robert Coté, I like the naming idea! Cat 5 Turmoil Angelo (randomly assigned name) struck on August 1st. This was the strongest turmoil of the year, surpassing Cat 4 Turmoil Nueva that struck in last February.
Best to all.
--
Pretty soon we will start getting "further concessions" from CR!
Jas
--
DH: Why do I have to go first?
Desperation, maybe?
But one thing is proven -- you had nothing to say.
Jas
Mozilo was earlier on the Financial Entertainment Network saying CFC couldn't go to the discount window because they weren't a bank. Way above my pay grade. Maybe Tanta can take the elevator from her penthouse corporate suite and visit the sub-basement cubilce and explain it to me.
"Rep Frank will be removing thge AMT. All on committee intend to vote for this (after all elections around the corner)."
Ahh - yeah... This would be gubberment idiocracy as its most terrible. Please provide some specific references. This has got to be bunk. It would DESTROY housing. It would drop affordability by their tax bracket... NO WAY!
Coventree Fails to Renew C$4.89 Billion in Notes
"the real truth is that the reduced value of underlying assets is a symptomatic effect of the consumer's inability to earn enough in relation to those assets prices.
It is about real earnings or infalted R/E prices. Either the consumer needs to earn more or R/E prices have tio come down.
In both cases I think that corporation will need to earn less.....
Yal | Homepage | 08.23.07 - 3:19 pm | # "
Yes. And doesn't the Fed really, really dislike wage inflation?
Cat 4 Turmoil Nueva that struck in last February.
That was the last "named" Turmoil of the 06-07 season. We started over on Memorial Day.
BTW, "Turmoil Ben" was also randomly assigned.
... the one thing that would mitigate the home price depreciation is a heavy dose of inflation.
I can also imagine that a heavy dose of inflation would crush some lenders, include some S&L's.
Who wants to be stuck as the lender on a fixed 30 yr. mortgage at 5-6% when inflation is >10%?
Hyperinflation is no solution to this mess.
"But Yal the fed said they would take the MBS's at the window....
The bank does not have them. They are in the Mortgage unit of CW.
Angleo mumbled some regulation that prevent him from moving it from one to the other. I am sure he is working on ways to buypass it or toorginate from the banc.
Bob:
That could be just as well. I brought this up a long time ago, no one here then thought it was likely, but clearly the one thing that would mitigate the home price depreciation is a heavy dose of inflation.
Define inflation.It's tough to separate inflation from growth - who knows what is real growth and what is hidden inflation.
In an textbook model, inflation will not affect valuation of assets. The rate of return demanded will increase to subsume earnings growth. That is if you can get a measure on inflation, so that you can demand a higher return.
If interest rates cannot track inflation - if inflation is hidden-, then asset prices rise, until the market catches on to the hidden inflation. Then rates demanded will rise, and valuations would fall.
So open inflation is bad for asset holders, and hidden inflation is good.
Leverage complicates all this. Interest costs rise at the same time that it decreases valuations to adjust the rate of return. Decreased values->selling to cover->.. it can't all be good.
Open inflation and leveraged assets - you have to really go through it to find out.
Why does everyone assume, with no evidence that I can see, that removal of the mortgage interest tax deduction would 'destroy' housing?
The UK had such a scheme, MIRAS. It was gradually phased out over several years and no longer exists. House prices did not plummet. The market was not destroyed, in fact it posted significant gains.
So I have provided a real world example of a housing market and economy very similar to that of the US removing a very similar scheme to the mortgage interest tax deduction and that it did not 'destroy' housing.
Anyone care to tell me why "it's different here"?
I thought we settled the "inflation solution question" long ago. There are too many ARMs for overt inflation to be an effective policy. Inasmuch as wage increases are inflationary that isn't possible either. The only solution to excess asset valuation is lower asset valuation.
Inflation may deflate debt, but it also raises mortgage rates and deflates home prices further. I don't see how inflation is a solution to a demand/supply mismatch combined with an affordability crisis. Every time mortgage rates go up, more prospective buyers get pushed out of the market.
"Why does everyone assume, with no evidence that I can see, that removal of the mortgage interest tax deduction would 'destroy' housing?"
Because in the US people prefer paying 3X to Mozillo than 1X to the goverment.
Alec - ok. So the $2B was needed so that CW bank could handle (for a microsecond) the passing of MBS from CW mortgage to the Feds. Hmmm.
So if CW mortgage can't make good on the MBS it passed through CW bank to the Feds, CW mortgage may go nipples up, but CW bank is "ok" because the Feds have....what?.....made a no recourse loan to CW bank?
I had no idea the plan was to have all keys mailed to the Fed.
OT~ in my market numbers of listings go down somewhat in MLS over the last 2 weeks. Is this something you're seeing, too? Could it be the beginning of the seasonal de-listing of properties after summer school-holidays are over in Arizona?
Thanks, O-Joe
But the question remains:
Will it be adjusted by price declines,
or by dollar depreciation.
I love Peter Orsgag at CBO, but most people would agree that spread product yields have widened plenty...
WASHINGTON, Aug 23 (Reuters) - Congressional Budget Office (CBO) Director Peter Orszag said on Thursday that key signals on the severity of a crisis in the U.S. mortgage debt markets so far have been "quite muted," but predicted short-term market turbulence.
Orszag forecast continued solid U.S. economic performance. He said an important sign of whether the mortgage debt crisis widens more broadly into financial markets will be whether high-quality bond-yield spreads versus Treasury notes rise sharply.
The CBO thus far has not seen this effect, he said.
"If you start to see triple-A rated bonds spiking, that would be a concern," Orszag said.
DH
It is possible to have hyper-inflation and yet have declining asset values. It is disinflation with a bloated money supply. Simply put a government tries to expand the M way out of wack to relieve some pain. [aka German Bank policy 1923/24/25 to pay the loosers end of the War]. And perhaps now to grease the wheels of unknown debit and try to hold the designated interest rate bracket.
Lordy 146 Banks bid up the cost of only 40B from the EB last night!! There must be some pain going on. 146 Banks. Ya, I know that banking is fragmented in Europe 'cause I worked there for a time. But 146 Banks hat in hand paying whatever the cost (inflation, my boy!)in an extrordinary auction. 146 Banks who could not find friends in the open market.
I'm still at 725 for the target number of starts. With rising interest rates by 08, no less.
O-Joe
I saw listings locally (SFV in CA) decline mildly for the first 2 weeks of August, the last week has seen a jump back above the previous peak.
HMID or roll back Bush tax cuts and we still have a delta when we restructure the AMT to account for inflation and still be there to capture the wwealth from the original 145 folks it was intended (granted higher than 145). Start reading some congressional inquires to OMB regarding Frank restructuring AMT. The concren of loss of tax revenue and two areas where delta will be redduced.
Its right there...google it OMB has the notes as does other sites ...
come on first 5000 of HMI could still be allowed...first 500 it's up to them...
the pencils are sharpened and hard at work even during the break in the Frank office..
Also i believe the video clip is still on Bloomberg....
"No we are not opposed to rolling out the HMID, it is safe to say we are looking at several options"
jeez guys....
CW the bank has strict limits on the transactions it can do with CW the unregulated mortgage company. That's to prevent the unregulated company from enriching itself at the expense of the bank. These transactions are governed by Regulation W (which implements Sections 23A and 23B of the Federal Reserve Act of 1933).
Transferring the mortgage company's mortgages to the bank would be covered by Reg W. For details:
Materials | Regulation W
(which has a link to the text of the regulation).
Result is the mortgage company can't benefit from the window, which is only available to the bank. And the bank can't simply buy the mortgages from the mortgage company (who would determine the price to be paid for them?).
It's possible to structure around this, but it's not easy and usually involves making sure the bank is protected. The mortgage company can (and should) be allowed to fail.
Hence, it may be better to look at simpler price/income or price/rent ratios to get a sense of house price valuation. These paint a more dire picture.
price/rent ratios have disappeared in my part of Calif.(sonoma) currently homes in my development are being offered at 525K for a 2b/2b model Plus a $150.00 month HOA fees. Now rent is running between $1250 to $1400 month for these units. We have 2 units available to rent that have been open for 3 to 4 months now.
I expect over time that historical price/rent ratios will return, the idea that the last 5 years of RE HPA cannot be reversed by market forces is like believing in Santa Claus.
realty-based lawyer,
So the bank is "protected",
the motgage company may go NU,
and the Fed is not protected since
it's the ultimate MBS bag holder?
And all that dust was about coloring
inside the lines so that the bank
would never be drawn into being
responsible for putting the MBS
on the Fed?
There's been a fair amount of discussion around the fairness/equity of bail-out plans for homeowners.
Let's remove "owner" from the equation, shall we? What's important is that people have a home, a decent one, one that's commensurate with their purchasing power (i.e. their income).
The government CAN help secure those homes. The problem newly-minted renters will have is that the foreclosure process will destroy their credit rating, making potential landlords wary of renting to them.
A modest proposal: have Fannie or Freddie guarantee three months rent in exchange for an nominal insurance payment. This will make sure the foreclosure stigma does not get in the way of renting a home.
Now, isn't that a lot easier than a massive government bailout?
Fair disclosure: I am a renter. As far as I can tell it has not destroyed my life. Not yet anyway.
What I was suggesting is that if over-all inflation--imports, food, commodities, and wages--was 7+%, then nominal home prices might rise 2%. They'd still be down significantly in real terms, but the consequences of being under-water on your mortgage only matter in the sense of price deflation in nominal terms.
The dollar would fall, but theoretically exports would soar and might spur wage growth.
But I guess the problem, as with Japan, is that when you actually want inflation, you can't have it.
Exports likely would not soar as the rest of the world would be wallowing in the misery of overcapacity due to US consumers no longer buying their exports on credit...
Anon-
Would certainly be a good idea. I don't think it has a snowball's chance in Cuba, even if it'd be great for me (renter in NYC, looking to buy).
But yes, UK did phase out their mortgage interest exemption with few problems. I also seem to remember a discussion with Dutch friends where they stated the Netherlands was also phasing theirs out, with some horribly complex form of gandfathering current owners (who are actually have 99 year leases from the city).
Yal,
the real truth is that the reduced value of underlying assets is a symptomatic effect of the consumer's inability to earn enough in relation to those assets prices.
I agree with you wholeheartedly. In my rush to return to other important matters, I neglected to include that very important fact, though it did dawn on me right after I posted. Esprit d'escalier aside, the aforementioned cycle (including your correction) describes the reasons of what we are seeing these last few weeks, in financial markets.
Not sure how this will get resolved.
Best regards,
"Why does everyone assume, with no evidence that I can see, that removal of the mortgage interest tax deduction would 'destroy' housing?"
In the first 10-15 years of a 30 year mortgage, when your payments are mostly interest, the tax deduction subsidizes your payments to the tune of 20-30 percent depending on tax bracket. It's an especially good subsidy for high-income taxpayers to buy as much house as possible.
I don't know that removing the MID alone would cripple the housing market, but it's definitely a price support. Without it, people buy less house. Consider it a virtual interest rate increase of up to a couple of percent.
DJ OCC: BOA Can't Convert Countrywide Securities Into Cmn Stock
By Damian Paletta
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Bank of America Corp. (BAC) can't convert its $2 billion investment in Countrywide Financial Corp. (CFC) into common stock, the Office of the Comptroller of the Currency said in its letter approving the investment.
"Our conclusion is subject to the condition that (Bank of America) will not exercise the right granted to holders of the Securities to convert the Securities into common stock of (Countrywide) so long as the Securities are held by (Bank of America) or any subsidiary" of Bank of America, OCC chief counsel Julie Williams wrote Wednesday in a letter obtained by Dow Jones Newswires.
Williams said this condition was enforceable under the law. The letter was addressed to Bank of America general counsel Timothy J. Mayopoulos.
Bank of America "represents it will not at any time exercise its right as holder of the Securities to convert them into (Countrywide) common stock," Williams wrote.
The $2 billion investment was approved quickly, as Bank of America approached the OCC about the investment within a week of receiving regulatory approval.
Williams also said that Bank of America's investment would not "confer voting rights" as long as the "yield is current and the issuer is not attempting to alter the holders' rights under the instrument."
-By Damian Paletta, Dow Jones Newswires, 202-862-9241; Damian.Paletta@dowjones.com
And subsidized MI indirectly subsidizes rents (by producing fewer apartment renters). If the MI were somehow pulled out, I'd expect rents to jump as more folks would find motgages uneconomical for themselves.
Right. They will stay bond holders, which means they'll get issued "new" stock if/whenever the company exits bankruptcy, because bond holders are first in line.
The HMID isn't always what it's cracked up to be -- many people misunderstand exactly how it works.
For married couples, Interest + RE Taxes + State Tax + Donations > $10,250 (the standard deduction for a couple). So for the typical house (not CA, NY, CT, etc) of $230,000 and a mortgage of $200,000 at 6%, MI is $12,000. Figure 2% RE tax ($4,600) and State Tax + donations of $3,400 -- you have a total Schedule A of $20,000. But without any of the housing expense, you have a deduction of $10,250. So the net deduction gain is $9,750. At a 20% marginal rate, the tax advantage is less than $2000.
Thoughts?
I wish the Fed wouldn't accept MBS paper, and forced 'em to die screaming while requiring full disclosure of the bond contents somehow.
Privatizing gains but socializing losses is bad at any time.
Although the drop would come tomorrow and the fall would be far, the investor confidence would return quickly because central banks and PE investors would know what they're getting into.
Inflating away the problem won't work simply because wages will not keep up. Did your salary double or triple in the past 5 to 7 years? I doubt it, yet that's what housing prices did. With all the outsourcing and insourcing, I don't see wage inflation happening.
How about this for a nice little conspiracy theory:
The government bails out wall street with lower rates which leads to inflation but props up asset prices for the bond holders and makes the spreads better for hedgies. But, now, the bond holders and domestic banks which hold fixed mortgages are going to get hurt. So to encourage home owners to pay off their low interest mortgages early we phase out the Mortgage Interest Deduction?
So first we prop up home prices, then we help them deflate - each phase helps the large financial interests as they need it. Sounds good huh?
And the political cover is great. We are helping the little guy stay in his house now, and then later, it is 'we are sticking it to the rich guys with the big MI deductions'. Who can question that? Jump on the bandwagon everyone!
re: mortgagege interest deduction. I am personally in favor of phasing it out (encourages excess consumption) by starting out limiting it to some large number and decreasing over time. IIRC, using AMT as the reason to phase it out eliminates one of the major reasons AMT kicks in, correct?
re: BoA $2bn. Almost certainly went to the CFC side (not bank) per Mozillo comments on CNBC. My thereory reposted from There ya have it - they COUDNT go to the window! [General] - MarketTicker Forums is
Interesting in that the bank had, on Jun 30, over $70bn in loans held for investment and CFC held some $19bn in loans held for securitization (up from 7 bn on Dec 30). I posted the Dec 30 (10K) breakdown of those loans held for investment on another thread. Since the auditors are now setting up shop at the bank, my (total and complete) speculation is that the company is not able to sell loans to the bank and get what they want. And we know they cannot sell them anywhere else right now. I would love to be a fly on the wall on the discussions between the auditors and the bank on how those loans held for investment should be marked. Assuming the discussions are intense, one would have to commend the auditors for not leaking anything.
p.s. And if my wild speculation is correct, the company is sitting on some serious mark to market issues on the banking and the mortgage side. So even if they survive (which I hope they do - regardless of our opinions about Moz' most CFCers are fine people), they are going to take some earnings hits. IMHO, they have been postponing this for many months.
"the real truth is that the reduced value of underlying assets is a symptomatic effect of the consumer's inability to earn enough in relation to those assets prices."
e-man, I think this statement is illustrative of Minsky's financial instability thesis. To my mind, the current ponzi economy is premised on the Fed keeping down unit labor costs (the "real" inflation). That's why we have the highest level of GINI post WWII. But now we're caught in a bind: the assets can't retain their price because no one can "afford" them (through ponzi credit) anymore. But we can't raise wages because that's "real" inflation. Thus I agree: "Not sure how this will get resolved."
"...the tax deduction subsidizes your payments to the tune of 20-30 percent depending on tax bracket..."
This is kind of a myth. First off, you lose the standard deduction when you itemize. That's now $12,000 for a couple, so that needs to be subtracted.
Plus you have to assume the deduction allows some to bid up the price, so now everyone is paying 10+% more for homes then they would be if there were no deduction, so you are really just robbing Peter to pay Paul.
I think it's ridiculous that mortgage interest is deductible, it's a tax break for people who don't need it.
But I wouldn't bet on its repeal anytime soon and the poster who suggested it was being seriously considered was talking out of his hat.
"If you start to see triple-A rated bonds spiking, that would be a concern," Orszag said.
um, didn't RBSGC just say that spreads on option arm AAAs were around L+97? didn't thornburg just get pwnd pretty hard recently? didn't some Carlyle dorks in Guernsey just get pwnd on Agency CMO floaters because of spread widening?
KnotRP,
Yes, the bank is protected (at least from going down with the mortgage company) and the mortgage company may fail. The Fed is the ultimate MBS bag holder but is also protected because it's very fussy about the advance rates on the MBS it will accept as collateral. See The Federal Reserve Bank Discount Window & Payment System Risk Website.
I don't understand your last question. This is definitely about drawing inside the lines (keeping the bank separate from the mortgage company), but not about keeping the bank from pledging mortgage it owns at the window.
MOM - certainly inflation won't fix demand/supply mismatch directly, but assuming inflation carries through to wages it could devalue "sticky" asking prices, so that real prices drop more quickly to a level where sales pick up. I agree this would likely cause havoc with interest rates, not to mention all the other ills associated with inflation. I like to view inflation as a sneaky way to transfer money away from those who save to those with debt (notably the gov.) Inevitably responsible savers will be forced to pay for this mess, like previous ones - after all, no one else has the resources.
The problem is out of control indebtedness, a problem which, unfortunately, includes the consumer.
The indebtedness is unwinding. When it is through unwinding, it will be a different country.
Now do the figures with a jumbo, property tax of 10K and a marginal tax rate of 28%...
If the mortgage side goes BK,
either the Fed or the bank side
eats any losses on the MBS,
since the mortgage side isn't
around to buy back.
From your last statement,
it sounds like the bank side
will be on the hook for any MBS
losses it passes through to
the Fed, if/when the mortgage
side can't.
Correct?
arbogast
Not if GWB buys into Bill Gross's plan for a Reconstruction Mortgage Corp. We'll just replace private debt with public debt and Bill and all his bondholder buddies who were pigging at the trough can keep their vacation home in Switzerland while the San Diego flipper now has to pay Uncle Scam.
All neat and tidy for Wall Street and the very indebted consumer.
Tanta,
Agreed. For upper income taxpayers, it's a huge benefit. And the Jumbo, $10k property and 28% payer also probably has substantial State Income Tax as well (NY, CA).
But for the average Joe/Jane, not always the huge benefit that folks expect (but always described as an amazing windfall -- I suspect that many people expect that they can deduct the interest paid from the tax owed).
BTW -- This site and your work and CR's work is simply amazing. Thank You, Thank You, Thank You.
Ed S., thanks. Tanta (my co-blogger) and tenta are different people.
Best Wishes.
I wish the Fed wouldn't accept MBS paper, and forced 'em to die screaming while requiring full disclosure of the bond contents somehow.
I think this is just high quality GSE paper that already has an "implict" government backing (WTH does that mean?).
I don't think they're rescuing anyone by taking bad paper. Please tell me if I'm wrong - I want to know.
Just in from Richard Suttmeir at Rightside.
The new FDIC quarterly banking profile released this week.
Home equity loans: Up 3.6% sequentially to $577 billion from $557 billion. I don't have data for just how large the lines of credit are, but given lower appraised home values, the total size of a mortgage loan and associated lines of credit for some homeowners may exceed the value of the property.
Reserves for losses: Up 3.3% at the end of the second quarter to $81.2 billion from $78.6 billion, and up 4.2% year over year. This line item will only be rising in the quarters ahead, as a direct drag on earnings.
30 to 89 days past due: Up 5.6% at the end of the second quarter to $74.4 billion from $70.5 billion, and up 34.9% year over year. The staging ground before becoming noncurrent continues to grow.
Noncurrent loans: Up 10.6% at the end of the second quarter to $66.9 billion from $60.5 billion, and up 36.2% year over year. If a bank can't collect, foreclosures occur and properties become other real estate owned.
Other real estate owned: After homes and properties are foreclosed, they go into this category. In the second quarter, it was up 14.8% sequentially and 53.1% year over year. These assets have moved to the cost side of the ledger as the bank pays real estate taxes and property insurance instead of earning fees and interest. This could become next year's headliner as banks write down OREO to appraised values.
Notional Amount of Derivatives: Was up 5.3% sequentially and 20.8% year over year to $153.8 trillion at the end of the second quarter. This is the category that investment banks are exposed to, as large banks and investment banking firms are involved with 75% of these structures. Derivative securities created from this tangled web of risk transfers are spread around the world to unsuspecting investors.
johnny M, e-man, yal: so to complete the loop:
a. the credit crunch and liquidity crisis are symptomatic effects of the decline in underlying asset values, b. The decline in underlying asset values is symptomatic of the homeowners inability to earn sufficient income to make necessary payments, and inability to access new credit because of a.
c. the homeowner's inabilty to earn sufficient income will be a result of the decline in asset values (40,000 laid off this week?)
Loans made from the Federal Reserve's little-used discount window shot up after the Fed eased borrowing conditions and invited banks to borrow last Friday, though a sizable chunk was soon repaid, new data from the Fed show.
Fed's Credit Window Does Brisk Business - WSJ.com
I think I found the answer in the economist's latest article:
The Fed has been offering 85% of face value for AAA-rated paper presented at its discount window, even collateralised-debt obligations stuffed with subprime mortgages (as long as they are notyetimpaired).
So the MBS can take a 15% haircut without anyone at the Fed having to tap any tax payer or bank side reserves. It's a "sale at 15% discount" with a "buyback at full price if we don't go bankrupt" option. If the mortgage side goes BK, the bank side buys it back at the new price to make the Fed/tax payer whole again, and life goes on with the bank having a more viable MBS. How tidy.
15% must be the Fed's estimate of the expected losses.
Commercial Paper Has Biggest Weekly Drop Since 2000 (Update3) - Bloomberg.com
Re Commercial Paper
Value Loss
Inability to place
And this:
"More than half of the $1.1 trillion in outstanding asset- backed paper comes due in the next 90 days, according to the Federal Reserve. Unless they find new buyers, hundreds of hedge funds and home-loan companies will be forced to sell $75 billion of debt, according to Zurich-based UBS AG, Europe's largest bank."
Sell more debt? If you can't roll Commercial paper, well? And just as Banks bulk on reserves, too.
Im confused!
DH,
What is your investing argument for the agriculture chemical/fertilizer industry? What is the link to housing?
I suppose this means the Fed is The New Rating Agency (tm), and it's put a floor in the price of AAA assets at 15% off current prices.
Confused too, for a few seconds, and then I realized what it was actually saying:
"unless they find new buyers...[they] will be forced to sell debt".
i.e. if we cannot sell this junk, we'll have to sell debt on our own good names to get cash for operations, and hold the junk.
Clyde,
Sorry, the link requires subscription.
As far as my fertilizer investment goes, its just an inflation play.
I thought that if indiv investors like me participate in the discussions, Then (smart)Professionals like you might decide to teach us something.
I am always looking for your posts.
KnotPR
My conclusion exactly. But how? You got a file of nice, tidy Commercial Paper, you cant roll it over at the existing rate (yield). So, you do a bit of cutting (paper now off just over 4% - somebody has to eat it). And you still can't sell it, so you decide to take on debt. You know that the CP rates are working and would be forced to sell the debt at something greater.
So, you have a bundle that yields L+2.4 and your debt is set at L+3 (because the underlying junk wont sell and a small premium is needed to catch interest).
So now that the rate for your paper is set, how about the timing. Do you do 30/60/90 days? 270 days? In this type of uncertain market, shorter is better. So you go thirty and in 29 days you are back to square one.
Net proceeds are negative. You loose. You fail. You eat what you kill.
Or, do you take a what-ever hit and let it fall until there are buyers and forget the idea of issuing more debt?
My thoughts open to others...
Clyde,
I forgot to mention MON,CF,and SFD
also have superb balance sheets and cashflow with little debt.
Alan Mulally, Fords chief executive, has lent his voice to calls for the Federal Reserve to stimulate the economy, saying the housing crisis and credit turmoil had turned economic growth into a priority.
FT.com / Companies / Automobiles - Ford chief calls for Fed push on growth
HMID gone? There would be a NAR hissy fit to end all hissy fits. Cap it at $25k most likely would be the outcome.
Wanna bet one of these names become prominent soon:
Felix
Gabrielle
Humberto
Ingrid
Jerry
Karen
Lorenzo
Melissa
Noel
Olga
Pablo
Rebekah
Sebastien
Tanya
Van
Wendy
Maybe not Sebastien- they spell it funny!
Almost a Tanta!!!
Lol!
I still say we are going to have to start doing something soon- and killing the AMT by messing up mortgage deductions is not going to fix this mess. It would have been a great solution in 2003 before the party got going...but not now.
Someday this war's gonna end...
DH - interesting FDIC numbers, so it looks like another 7 Trillion plus of notional derivates were created in the past quarter.
I wonder if we shall see this number go down in the next report, or stay even? It's all these crazy derivatives which are making this whole situation more dangerous. Someone needs to put the brakes on all this crazy finance.
Plus you have to assume the deduction allows some to bid up the price, so now everyone is paying 10+% more for homes then they would be if there were no deduction, so you are really just robbing Peter to pay Paul.
This is the dynamic that people miss. When you give a price subsidy to /everyone/ on a good with a demand curve like SFH, people will bid up the price of the good by the subsidy amount.
Same thing happens with vouchers to good private schools. Give everyone $5000 to send their kid to the best private school, and that school can & will raise tuition . . . $5000.
"This is kind of a myth. First off, you lose the standard deduction when you itemize. That's now $12,000 for a couple, so that needs to be subtracted."
Like others said, not like that on the coast with a big jumbo loan (about the only kind that works out here).
$600K mortgage, six percent interest, 30+ percent tax bracket, and you are doin' fine with that deduction. In the most inflated markets -- like the entire West Coast, Florida, and God knows where else -- it's a real incentive.
it's a real incentive
more like one of the reasons housing prices are where they are now in these hot markets.
Same thing goes with the 2001-2003 income tax cuts . . . give everyone $300 ~ $500/mo, and boom, housing can go up $100,000 since everyone can now afford $100,000 more.
"So I have provided a real world example of a housing market and economy very similar to that of the US removing a very similar scheme to the mortgage interest tax deduction and that it did not 'destroy' housing.
Anyone care to tell me why "it's different here"?
MadJock | 08.23.07 - 4:07 pm | # "
Ummmm...Yeah...Britain's main tax is a VAT. Ours is off income.
Misean
Britain's main tax is VAT? That's not the case.
VAT is 17.5% on goods and services, excluding essential goods and services (food, books, children's clothes etc) and low rate on electricity/gas (5%).
Personal allowance is ~$10,500 per person. Median income is around $47k. National Statistics Online
Base income tax is 22%, moving to 40% at ~$70k per year or more. Taxes : Directgov - Money, tax and benefits
National Insurance (pension + healthcare) is 11% up to around $50k per year.
Local regions have Council Tax, which can be anywhere from a few hundred $ to a few thousand $ per year.
The amount raised from VAT is a fraction of what gets raised from income tax, CGT, and other sources.
Boy this thread is making me pissed. Some of my favorite commentators are annoying me ...hard!
"I think it's ridiculous that mortgage interest is deductible, it's a tax break for people who don't need it.
But I wouldn't bet on its repeal anytime soon and the poster who suggested it was being seriously considered was talking out of his hat.
Bob_in_MA | 08.23.07 - 5:33 pm | # "
REALLY. Hmmm... so it's ok for a business to deduct 100% interest from op profits before taxes, but I should have to pay a tax on MY op profits before the BIGGEST interest rate cost I receive? PLUS I should be DOUBLE taxed because my State and Local property tax isn't included?
And don't give me "Renters don't get a break". Really? Who fixes the bloody toilet when a renter's breaks. Who fixes the damned roof? Who makes sure the yard is in good repair?
Grrrrrr!
KnotRP,
Sorry for the delay in responding -- had dinner with my daughter and her partner. (Trumps even my addiction to CR!)
You're almost right. The mortgage side can't pass the mortgages to the bank, so they never get to the Fed. There's a wall between the mortgage side and the bank. If the bank has mortgages of its own (probably not, but I haven't checked), then the Fed would eat the losses on the mortgages -- if there were losses, the bank managed to go under before defaulting and didn't have enough other unsecured assets to cover the deficiency at the Fed's priority in a bank failure (haven't checked that).
Not sure where the 85% figure comes from; that only applies to ABS (including CLOs) lacking a market price. The link I posted earlier has a link on to the advance rates, which are adjusted by duration and a substantial haircut for not having a market price. MBS, CLOs and CMOs all have to be AAA-rated. I don't think 85% is anyone's realistic estimate of the value -- recovery tables by rating category show lower historical average losses than the Fed's haircuts. The Fed's like a pawn shop in that regard, it adds a cushion to the market rates. (Not a pawn shop's big cushion, though, a little one, befitting a government agency.)
Yes, it's tidy. It's supposed to be. The haircuts protect the Fed from credit losses. There is a risk: the data assume that future performance will reasonably closely resemble the past, which incorporates an assumption that underwriting standards (and many other things) haven't changed in any respect material enough to affect the statistics. This may not be true; but unless you know how to correct for it the data are the best proxy for prediction that we've got, and according to the data the Fed's credit risk is minimal. Would it be better if the Fed didn't supply liquidity to banks, because it might include credit risk?
really Madjock,
My allowance is much less the 10,500 POUNDS per year.
My point is that taxes in Britain are quite different from here. Between sales, State and Fed ~50% of my income is stolen from me yearly. The loss of the MIT in CA would be rather catastrophic.
Finally it would be exceptionally unfair.
Gov't: "You did your due diligence in making your decisions. But we've decided to change the rules, and now you're under water...eat shite dill hole."
This makes the deal look much more sensible.
Would this explain why the OCC has to approve the conversion if it takes place?
BTW, thank you for this site.
dryfly et al,
What do those of you in "flyover country" think of the HMID, since it's basically a tax break for coastal properties?
Msean: My point is that taxes in Britain are quite different from here. Between sales, State and Fed ~50% of my income is stolen from me yearly.
So, what are all the brainwashed democrats in America and Britain going to do about it? Vote, vote, and vote til they die?
Gov't: "You did your due diligence in making your decisions. But we've decided to change the rules, and now you're under water...eat shite dill hole."
America is a nation ruled by laws and not by men. And men keep changing the laws! And what kind of men get to change the laws? Dishonest and some even convicted felons.
Enjoy the last decade, or two, of democracy while it lasts. Maybe, some should read Democracy: A God That Failed. It is a good book. Those who want more should read Wealth And Democracy.
Jas
Misean
I used dollar amounts, converted using approx $2:1 Pound.
While the numbers may be different, overall it's hardly a radically different tax scheme between the UK and the US. I 'lose' as much to taxes and fees here in CA as I did when living in the UK, although the distribution is different. E.g. - no need for healthcare payments in the UK, or I pay less direct tax but my NI payment is 11% not 6.25% (SS in the USA).
The housing market is equivalently 'free'. You may fear the retraction of the interest relief, but you have provided no factual backing to that.
The gradual removal of the MIT relief would allow for adjustment of prices and would not be catastrophic. Tax relief on credit card debt in the US was removed in the 80s but that didn't cause a consumer recession - from what I can see debt on CCs has skyrocketed.
Further - renters do not 'get a break' when the landlord fixes the toilet. That is part of the contract between tenant and landlord. If the landlord wants to charge more in rent to try to cover this better he is welcome to do so and the market will decide if his rent is fair. It's business and if the landlord doesn't like it, he can stop being a landlord - but there's plenty of them around so it seems they regard it as a cost of doing business. And I say this as a landlord myself.
thanks realty-based lawyer...going to ponder it a bit.
As for the other thread about changing MI deductions....the best way to seize up an economy is to either (A) make a lot of noise about changing all the rules that condition financial choices, or (B) actually start changing all the rules.
Can we put the contemplation of rule churn on hold for better times, perhaps?
tj,
Here in Omaha and in a 30% Fed & State income tax bracket, I like it just fine. Saves me $300/mo ish on a $1500 house payment. I'll like it even better when the tax decreases expire and I get closer to 40%. Note sure that eliminating the tax break would reduce prices here as it might in higher margin communites. Builders here operate on less than 10% margin.