patrick.net

What's in it for:

Realtors (r)
Mortgage Brokers
Banks
Builders?

It's an excellent plan -- addresses the fundamental problem of getting people out from under a liability they cannot afford and back onto a less precarious financial footing and effectively speeds the foreclosure process. But the interested parties listed above are out of the transactions -- and not making money.

If you can get one of the groups on board -- maybe it has a chance.

I still hold that it runs into both broad Constitutional and specific legal complications that render it invalid. Even if such a plan is purely voluntary -- which it would need to be without the Constitutional problems -- then third parties will have incentive to cause all kinds of havoc.

This is one case where the market works just fine. Someone pointed out the end of last thread, in the worst hit parts of the midwest you still don't even approach a 30% vacancy rate. I'm talking about dead auto towns in the upper midwest, or closed steel mills, or little isolated farming towns that went from 15,000 to 8,000 in population. The market worked just fine there.

At a price everything is recycled. Empty houses are eventually bought, converted, torn down, or otherwise repurposed. In my old home town an entire development was built when the town was "booming" in the early 80s. Then it reversed, those houses went unsold, and eventually got bought by the local college for faculty housing.

Just let the damned market work. There is no way to coordinate a system-wide cram-down without government intervention. And the Fed gov't has no jurisdiction over foreclosures. That falls squarely under the states. (Foreclosures are not bankruptcies. Even that distinction will end up in the Supreme Court if you redefine "bankruptcy" to include "foreclosure". The reason the 2 are separate is precisely because of the Constitution's special treatment of land rights & usage).

This downsizing plan is what the market will cause to happen anyway. Of course, it will be a painful process for all those who bought more than they could afford.

Not a DeniisN cramdown issue, but interesting.

Someone (Harm?) once mentioned that maybe home loan applications could be compared to 1040s to catch tax cheats. Here is an example:

http://www.dailypress.com/business/dp-biz_taxevasion_0424apr24,0,2766508.story

In 1999, Rempas reported his income as $21,000 a month on an application for purchasing a home, the statement of facts said.

When he was first interviewed by investigators in late 2003, Rempas told investigators that he didn't file a tax return in 1999, 2000 and 2002 because he didn't earn enough money those years to have to file one.

Comparing 1040 income to the loan application is a part of the standard process. However, many lenders skipped this key due diligence step. They were selling their loans to wall st where no questions were being asked because the supply of money dwarfed the supply of MBS to buy. So why bother? They could sell more loans if they spent all of their time originating and no time validating.

However, to get the very best loan terms one must give better underwriting information.

Even during the lax lending of a few years ago there were many lenders who had very strict requirements for these prefered terms. The requirements included large down payments/existing equity and good documentation including copies of 1040s with your application, and authorization to pull 1040 transcripts directly from the IRS for verification. I used these programs to get the very best terms. If I had been willing to pay a little higher rates I could have skipped all that documentation.

Zephyr and Headset,
A timely discussion. Seems like independent, IRS bounty hunter could be a good paying gig.
San Francisco Assessor-Recorder Phil Ting called the nonreporting the "dirty little secret" of the real estate industry and said he believes there are many more unreported San Francisco property transactions. Under the San Francisco Whistleblower Complaint program, the tipster could receive an almost $60,000 reward.

"We know they are out there," said Ting, who said it took two years for investigators to unravel the real estate transaction in question. The watchdog program is modeled after an IRS initiative to catch federal tax scofflaws and is the only one of its kind at the local level, he said.
Now about that "primary residence" and capital gains exemption...

Now about that “primary residence” and capital gains exemption…

That "primary residence" rule also applies to the "don't 1099 me, bro" law. To get that tax break, the debtor must have lived in the collateral house as his primary residence. No second homes, vacation homes, or flip/rentals.

I wonder how many debtors will believe that since they put "primary residence" on the loan application, that will satisfy the IRS requirment.

It offers no value proposition to realtors, but it offers quite a bit of kick to the banks.

Imagine bank A telling its defaulting homeowner couple Jones, hey, you have a choice of choosing from MY portfolio of smaller foreclosed (or near foreclosure) homes and take over that loan, then I promise not to screw up your FICO for your future lending and job search. If you want to migrate to another bank's foreclosed home, I will charge you a splitting fee.

However, I have a feeling that downsizing doesn't solve the problem of many homeowners in default. They simply cannot afford ANY loan payment. American homedebtors generally have very thin margin of error (aka very little savings), when they lose their jobs, light bulb goes out. It is no longer an issue of the size of the debt load, but the existence of it.

I think DennisN's idea has a better chance of becoming an industry standard before the bubble got so big.

Idea is reasonable but will not work. Complications at every step of process. Market will fix the problem. Markets have all factors in how they work, models & patches can't possibly figure out all factors.

Market will fix the problem. Markets have all factors in how they work, models & patches can’t possibly figure out all factors.

Absolutely!!! :)

They simply cannot afford ANY loan payment. American homedebtors generally have very thin margin of error (aka very little savings), when they lose their jobs, light bulb goes out. It is no longer an issue of the size of the debt load, but the existence of it.

I don't think job loss is the drive behind many loan defaults (unless loss of moonlighting job as HELOC Extraction Specialist). For the majority with jobs but just overstretched, a scheme that puts them into a cheaper home may work. If they cannot afford "ANY" loan payment, they could not pay rent either.

Your comment is awaiting moderation

What did I do?

The idea certainly outlines the rational behaviour of how we could get out of the housing crush with a minimum of the afformentioned problems: vacancy, vandalism, tax problems, bank problems, creadit score problems, etc.
Of course there is absolutely nothing rational about housing. Even large families will say things like, "Hey, even though I am going under in my upper tranch, there is just no way way you can make me move to a lower tranch. I would rather move in with my brother/sister/parents/friends/pets than live THERE and go to THAT school."
People NEED the market if only to come back to reality on what they can afford.
I've been wondering how speculators can be wrung out of real-estate - ummm which is obviousdly happening now. But for the "Fortress" a nice littl job-scare sholud be pretty effective. HP, CISCO, Apple, Adobe, Yahoo, Google all announcing they are heading for cheaper diggs would make people realize that maybe that second home bought on speculation of equity appreciation was not such a good idea. Never mind the fact that RE specualtion squeezed everyone else looking for a home close to work.

In my opinion The Government already has way too much input in the market for housing at many different levels (local zoning, "affordable" housing laws, etc etc).. Some of it is inevitable, some necessary, all of it distorts Mr. Market, to the detriment of most of us.

I say NO, to more power for the government to "help". If this bubble has finally exploded into a million foreclosures, let it burn! If the FEDs have to take over or recapitalize some banks to save the system, fine. I'll find a way to swallow it, as long as they make sure to wipe out the shareholders. But Mr and Mrs Serial Re-Fi must be wiped out!

Comparing 1040 income to the loan application is a part of the standard process. However, many lenders skipped this key due diligence step.

I would love to see such lenders and "independent" mortgage brokers per-walked, taken in front of a judge, and summarily banned from coming within 100ft of a mortgage transaction ever again. Unfortunately, our criminal justice system is no longer in the business of actually delivering justice.

Is it really possible to collect a reward for turning in a tax cheat?

If so, then there are hundreds of thousands of renters who stand to benefit by turning in the shady owners of their McRentals. I think practically every owner of the 50% McMansions rented out on my block are claiming them as primary residences. (Us bitter renters know because they ask us to do silly things like "please just keep the water bill in my name and pay it on my behalf").

I wonder if such renters actually have an obligation to report these guys else risk being an accomplice to tax evasion?

...yes, I'm just trying to stir something up. I know, in reality, the IRS could give two shits about going after all these guys. They'd much rather harass the small biz owner trying to wade through the interminable maze of payroll taxes.

Randy,

I thought one could get more tax deductions on a rental? Are you suggesting that these landlords are NOT reporting their rental income?

That's something. How do these landlords receive payments? Enforce contracts?

I think practically every owner of the 50% McMansions rented out on my block are claiming them as primary residences.
I guess I've never quite understood what's going on... but undeclared rental income would be quite a trick. I always thought it had to do with either loan terms (requiring it to be a primary residence) or building up a paper trail to claim it as a "primary residence" when sold. And 5% or 10% of $500k would be a nice chunk of change....

Best global warming website I have seen:

http://www.globalwarminghoax.com/

Sorry... OT.

astrid isn't around anymore, but has anyone else observed an increase in seed prices? In the last few days I've read five different articles on people planting huge gardens (or "microfarms") and selling produce at the local markets. Some people even claim to be making money at it.

Perhaps my dream of a gardener society is gathering steam? :o

OO, You asked about rental accounting. I am a landlord. There are tax deductions for rentals which are not available as a homeowner. A rental property is a business. Basically all of the costs of owning the property are the cost of doing business. All of the rent is revenue. Like any business I pay income tax on the profit (excess of revenue over costs). But I do get to deduct an allowance for depreciaition of the structure. So my costs include a notional amount for diminishing life of the structure (but not the land). Upon sale of the property, that depreciated balance becomes taxable income (recaptured).

If a landlord cheats on his taxes by not declaring the income, he must also forego all of the deductions except interest and property tax. This would be advantageous since rent should exceed the other expenses. If the landlord has no other property, and is renting his principal residence, then the IRS would not be likely to see any clues to this sham. His tax return would appear as though he lived in a house with a mortgage.

None of this would reduce the landlord's contractual right to collect the rent, or otherwise enforce the rental contract.

HARM, Failing to collect 1040 info might be imprudent, but it is not required. The mortgage brokers are only required to collect the tax info if the lender requires it. So if the lender is happy to skip that step (or allow the broker to skip that step) then no crime or violation has occurred.

It is a federal crime to commit fraud in applying for a home loan. So if the lender requires the info and the broker (or borrower) fakes it or provides materially false information, then a crime has occurred.

It is not a crime to conduct business in a manner that others may consider imprudent. The criminal justice system generally has no jurisdiction over foolish business decisions.

http://angryrenter.com/

All we hear these days is whining from reckless home borrowers and their banks.

But did you know that renters are 32 percent of American households? And that homes in foreclosure are less than 2 percent?

So why is Congress rushing to bailout high-flying borrowers and their lenders with our tax dollars?

Unfortunately, renters aren't as good at politics as the small minority of homeowners (and their bankers) who are in trouble. We don't have lobbyists in Washington, DC. We don't get a tax deduction for our rent and we don't get sweetheart government loans.

Quite simply, we are just Angry Renters. And now it is our time to be heard: no government bailouts!

Sign the Petition to Congress
WHEREAS: Most Americans rent or own their home outright, and the vast majority of homes (98%) are not in foreclosure.

WHEREAS: Both banks and borrowers should be reponsible for their actions, and the government should not reward reckless behavior.

WHEREAS: It is wrong to force all taxpayers-- including renters who are already subsidizing home owners through the tax code-- to pay for additional bailouts for big banks and home flippers.

BE IT RESOLVED: That Congress should not pass any bailout programs that reward risky borrowing and lending. Let the free market sort it out!

===
Sign the Petition : We Will Deliver the Next Batch to Congress on May 1st
14,917 People Have Signed So Far

http://angryrenter.com/open_letter.php

CCWD ponders foreclosure aid for customers
Published: April 24, 2008
By HOYT ELKINS

Calaveras County Water District directors Wednesday tried to decide if it is in the best interest of the district and its ratepayers to offer fee waivers or other forms of relief to customers facing foreclosure on their homes.

Weighing in on the issue were the district's finance director, its customer service supervisor and its general counsel, all of whom agreed a carefully worded resolution would be needed to enact relief, and a carefully crafted form would be required to apply for it.

At issue is whether current district policy makes homeowners in the foreclosure process eligible for suspension or abatement of water service, or if the district could provide assistance in the form of waiver of fees or penalties.

Customer Service Supervisor Douglas Wilson told the board that 159 homes served by the district have gone to foreclosure between January 2007 and the middle of this month. He identified three types of foreclosure customers: those trying to save their homes; those who live in their homes, don't pay the mortgage and eventually abandon their homes, and, finally, those who have left their homes and are not paying the mortgage.

Among the first two types, Wilson said, a high percentage continue to pay for water service even though they are not paying the mortgage. For those not paying their water and wastewater bills, fees and penalties continue to accrue until they eventually go to collection. Wilson said only about half of the money owed is recovered by the district, and also noted that liens against the property can take years to collect.

Joe should be offered the H house to rent until the bank can sell it or Joe can do a lease option. If Joe is a satisfactory tenant and pays his rent on time, Joe can buy the H house after he has paid the equivalent in rent to the loss the bank took on his original house.

"WHEREAS: It is wrong to force all taxpayers– including renters who are already subsidizing home owners through the tax code– to pay for additional bailouts for big banks and home flippers."

We do not subsidize homeowners - we subsidize borrowers.

And who pays? Mostly the debt-free homeowners.

Eliminate the mortgage deduction and there would be no material subsidy.

My goodness, I am away for a day and find my idea has morphed into its own thread.

While only a partial solution, I was striving to avoid taxpayer's dollars being used to keep the failing homedebtor in the exact same house that caused the problem in the first place. The plan would permit a large portion of note holders to receive full-payment on assumed mortgages by people who would have to prove they could actually afford to make the payments on the lower-tranch house. By making the homedebtor stand the normal "show us the 1040s" scrutiny, the note holders would have more faith in the notes being paid than by the original "liar loan" debtors. And the pushed-down people would at least become homeowners of a more modest but still real house.

What's odd is that it is not laughable to argue my scheme makes more sense than those proposed by various members of Congress and other government agencies. Who hired these guys?

I don't think there is any real solution at present, but it would be possible to at least try to come up with some form of reasonable mitigation scheme, even if it only applied to a percentage of failing homedebtors.

I think Randy and I need to debate Con Law some more.

Ever since Wickard v. Filburn held the commerce clause is pretty damn broad, the Congress has gotten away with an awful lot. Heck due to the time-lag of the Supreme Court holding any given law unconstitutional, you can get any emergency legislation up and working for several years (until the crisis passes) before it's struck down. See for example FDR's "National Recovery Act" which I'm sure he knew was unconstitutional but which was in force for a couple of years before being stuck down.

OT aside...

During celebrations of the U.S. Bicentennial on July 11 [1976], the Constitution exchanges salutes with the Royal Yacht Britannia in Boston Harbor.....Queen Elizabeth II and Prince Philip are conducted on a tour of the frigate by Captain Tyrone G. Martin and Navy Secretary William Middendorf. When the queen is shown one of the Constitution's 24-pounders, which bears a monogram of George III, she turns to Prince Philip and says, "We really must talk to the Secretary about these foreign arms sales when we get home."

The mortgage deduction is a counterproductive policy. It is intended to encourage homeownership, but ironically increases the total true cost for lower income and most first-time buyers.

The tax deduction is of very little value to someone in a low tax bracket. Most first-time buyers are in a very low tax bracket, so their benefit is small. But the high income buyers are in a high tax bracket and benefit greatly from the tax shelter. This lowers their effective cost of buying and enables them to pay more, bidding up the prices. This gives higher income buyers a real cost advantage over lower income buyers. The same house payment will actually cost a low income person more than it would cost a high income person - on the same house!

It is understandable that a person with more money can afford to pay more. But our tax policy enables the higher income buyer to actually pay less after tax for the same house!

Dennis

I agree on your point re: common law and the delay for federal statues being struck down. I'm not so sure about how long such might take given the current Supremes. It really depends upon how motivated the opposition is, and how well funded & connected they are. It's possible they could get the thing reversed in less than 2 years in the current environment, or so I read it. I'm no lawyer, just a neophyte with too much experience being dragged into court.

I agree with Zephyr that the qualified mortgage interest deduction is the largest counterproductive policy in this whole mess. Although the cap gains exemption is much more significant, most people don't make day-to-day purchase decisions based on that perk. Most people are "how much a month" buyers. So they are very susceptible to the deduction because it makes their monthly costs lower, at the cost of other taxpayers.

Then again, I think all income taxes (business and personal) should be eliminated. I believe a national use tax would be sufficient for governmental budgetary concerns. I can dream.

It's been a year or two since we dragged the MID out from underneath its rock and gave it a sound thrashing. The MID is really just a gift from the government to the banks. Joe Howmuchamonth can now afford ~10-15% more house (per month), and so house prices and interest rates immediately shifted accordingly. It's breakeven for borrowers, less for tax coffers and more for banks and homebuilders.

The MID is probably irreversible. Taxpayers like it when their house prices rise, and complain bitterly when they fall. If we really want to stimulate the economy, assist bank recovery and get homebuilders roaring back to life, all we need to do is make mortgage interest a tax credit instead of a tax deduction.

One time I told my co-worker that there is no MID in Canada, she looked at me in disbelief and said "That is so un-American".

btw, as I promised, I raided TJ today and walked away with 20 packs of multigrain pasta, hardly making a dent at the inventory on shelf.

However, the rice section right next to the different assortments of pasta which was fully stocked, was almost empty. There were probably 5 or 6 bags of brown rice scattering around three shelf compartments which were reserved for rice.

Is it really possible to collect a reward for turning in a tax cheat?

I'm not sure about that one. Even better than a "bounty" system is a "private attorney general" system. These are statutes that give private individuals who uncover malfeasance to privately sue the perp and split the fines with the government. :)

An example I'm familiar with is in patent law for the offense of "false marking" - basically fraudulently claiming an item is patented when in fact it isn't. See 35 US Code sec. 292, which offers a fine of not more than $500 "for every such offense". Part (b) states "Any person may sue for the penalty, in which event one-half shall to the the person suing and the other to the use of the United States." :) :)

The reason it has been a long time since we revisited the HMID is because when we do I end the argument with the same logic. I repeat it here because it also touches on the idea of rightsizing housing choice.

The Home Mortgage Deduction is -not- a subsidy. The HMID serves to remove the difference between business and private property treatment. Were the HMID to be reduced for typical families it would only serve to push the rich into complex tax avoidance schemes involving shell businesses holding title and the rich merely occupying the residence.

As long as the home mortgage interest deduction is viewed as a subsidy and not as the extra tax anti-investment burden it truly is there can be no rational housing policy debate.

The implication behind all this is that there exists outside of stated and revealed preference data a "correct size" for a residence. I'm as unwilling to presume such an arbitrary number as I am to presume the correct number of children. Face it, the two differ only in degree not kind. This is the steep part of the slippery slope that started with CAFE standards and gas guzzler vehicle taxes. People don't even blink at those anymore to the point that no doubt some will respond with anger.

McMansions are indeed a burden on previously constructed neighborhoods and oftentimes municipalities but they are burdens directly attributable to several new urbanist preferred outcome distortions and not some emotional gut response to any perceived excess. Tax policy isn't the problem or solution. West Germany used to tax propety based on the number of rooms, this led to homes with no closets which were classified rooms. The same avoidance schemes are the only predictable outcome of trying to control housing form.

Housing is a hybrid of both a consumable product and an investment vehicle and thus defies absolutist claims of either characteristic. Any further attempt to seperate the two will also devolve into a game of tax avoidance. As much as the current no limits deduction is unfair it is also less unfair than any other possible alternative.

Oh, and happy 600th post!

I don't know who said a tax deduction should phase out with the size of the house. I believe the argument made is whether or not it should exist. Many here say it should die an ugly death, but aren't holding their breath.

I don't see how the treatment the tax code affords business owned property is relevant in determining whether or not HMID is a good thing, unless you want to argue that it (or its equivalents) should be eliminated for both. There are many tax issues a business gets to deal with in a different way than I do. Maybe we should decide that everybody is a business. I get to depreciate my body as it ages. Until that happens, such comparisons don't help. I see the question as a "simple" one: is the deduction somehow a public good or not?