patrick.net

I doubt it. All of the bailout money will probably be recovered. In the end the government probably don't do too badly in the deal. Some of the mortgages will be lost, but there is at least some property backing these lost mortgages. This could obviously be disputed, but I'm still betting they get back a good amount of their TARP funds.

The difference between bank bail outs and helping home owners out, is that home owners won't ever repay that money to the government.

There are obvious problems with this. It would cause way too much public animosity for those who got nothing of the deal. It would probably flood the market with homes, as worried owners wanted to bail, now that they are "even". It would essentially devalue every persons home out there -- because now the government would have essentially reset every homes value to todays market rate, meaning more and more people would be fine with a lower house value, and could afford to sell at this new rate.

Every possible outcome I see from doing this leads us into unknown territory. Whenever we enter unknown territory, there are always those who make a fortune on the new "rules" of the money game. Those who try and mimic those rules create bubbles and get in on this new gold rush will cause new unforseen bubbles.

I could possibly see people mass selling to upgrade
Mass selling to avoid ever getting into this position again
Animosity from people who got far less out of the deal (most being 0 I'm guessing)
Whole new bubbles being created, unknown bubbles, but someone would figure out how to game this change.

As pkennedy points out, the bailout money isn't "Free" money. Congress has it's head so far up the asses of these bailed out companies, they are tripping all over themselve to pay it back and get rid of Government oversight. While it may get payed back without interest, it will get paid back. Maybe we should bail out these people, and then have a government worker oversee there finances until it's paid back.

Mr. Jones, I don't think it's a good use of tax payers money to buy beer and cigarettes, I'm removing that money from your weekly budget. Also eating out is way too expensive, your packing Peanut Butter and Jelly lunches for now on, Government figures for durable goods is down, I think you buying a new stove will help the economy in the long run, but we can't get one to match the color of your current kitchen applainces cause the manufacture has an over abundance of green stoves your getting one of them, etc. Lets see how good of an idea people think it is then.

Off topic here, but I just thought it would be funny to give people a basic math and logic assessment before they're given a mortgage.

If your cell phone contract costs you $125/month, how much do you spend per year on this?
If your gucci purse is 80% off of $5000, are you getting a deal worth buying?

Actually, we just need those 2 questions on an test.

The 745B number is very far from correct. The real number, as estimated by the IMF, is on the order of 4.1T by the end of 2010.

http://interestrateroundup.blogspot.com/2009/04/imf-credit-losses-to-hit-41-trillion.html

In order words: The premise of the posted question is false.

pkennedy says

I’m still betting they get back a good amount of their TARP funds.

Do consider the Goldman Sachs bit, where the TARP money was paid back with money laundered through AIG. Didn't GS get $13 billion from AIG bailout money to use to pay back GS's $10 billion TARP? Now GS can check the square and pay big bonuses, and GS's political allies can claim the money was "paid back" with a profit for the taxpayers. Note that even AIG, which doesn't even pretend to have paid back their bailout, is giving huge bonuses to the very department that caused the financial fallout. Obama's "Pay Czar" claims he powerless to stop it. Funny how the gov had the power to pay the TARP in the first place, plus void GM bondholder contracts, but must honor AIG bonus contracts to thier banking buddies.

Also, consider that big banks are borrowing from the gov at about 0%, and loaning that money back to the gov at 2%, which is just a slow bailout being used to help pay back the earlier lump sum bailouts.

All of the bailout money will be repaid??? Someone do the math and explain to me how AIG, Fanny, and Freddy are going to manage to do that in this millenium. I will admit it was a pretty slick move to launder the money for banks to repay their bailouts through AIG. With any luck this one will blow up in Paulson's and Geitner's face.

All that they need to do is revise the tax reform act of 1986 and allow investors unlimited deduction of passive losses. If they did this all of the excess housing would be sopped up in no time.

some more info here
http://www.tra1986.com/

toothfairy,

Unlimited deduction of passive losses is fundamentally a tax avoidance scheme.

If you allow a class of people unlimited tax avoidance, the consequences will be catastrophic.

I suppose you were being tongue-in-cheek?

no I was not tongue in cheek, unlimited losses are already legal for a class of people you just have to be considered a "real estate professional".

toothfairy,

are you saying that "professional" real-estate investors (how are they defined?) can ascribe to themselves unlimited PAPER LOSSES, up to and including the entire purchase price of a property, WITHOUT having to sell anything?

This would be analogous to me ascribing myself a loss on some stock that is currently worth less than what I paid, but without having to sell it. It is not legal to do that for stock.

Why would it be legal for real estate? And who decides what the current value is? Can you take losses that are not real because the roof depreciates, eeven though we all know the value is in the land these days?

Can you find a wikipedia link that describes this racket?

I've heard some mumbo-jumbo about "taking writedowns" or depreciations before. My guess it has something to do with creating a fake loss to offset taxes on some other current income, and then delaying paying taxes on the gain relative to the fake loss. Even better if you can wait for more Republicans to get elected and enact some tax windfall that protects your gain, such as the 250k * 2 cap gains exclusion on real estate.

I read an estimate that it would cost the GOVT $745 Billion to bail out all underwater homeowners to BREAK-EVEN

Worse than that. Since 2000 we've borrowed an additional FIVE TRILLION, secured by housing.

Back in 2007 I was saying 10% of this is certainly dead loss, 20% probable, 30% entirely possible.

Now the possible is the certain and 50% is entirely possible -- $2.5T of lending losses.

That seems like a lot but divided over 20 million borrowers it's only $125,00 per loss.

The powers that be really need to keep interest rates low. But they also need to keep people in their jobs.

The solution is obvious but . . . rich people aren't going to like it.

justme,

it's not the capital losses on value of the property. It's passive losses, like if your rental income is less than your expenses then you'd be able to use that real estate as a tax shelter and deduct the loss from your personal income tax.

It gets complicated, and I'm not an accountant.
look up passive losses on the IRS web page.

E-man, I would definitely vote for that increase in that limit. I guess the downside is that low cost rental property might get really hard to come by.

>> I would definitely vote for that increase in that limit. I guess the downside is that low cost rental property might get really hard to come by.

You are basically saying that you want a system where you can overpay for the property (so that rent does not cover the mortage), but get a subsidy from the other taxpayers to cover the hole in your budget with pre-tax income.

To me, that sounds like a system of subsidizing rental property owners at the expense of everyone else. Remind me again why this is a good idea?

All it does is to distort the market value of rental property upwards. Some people benefit from that, but the general public certainly does not. I'd vote NO! Any passive losses should be disallowed. If you sell the property, you can book a capital loss if any, but that should be IT.

First of all, Capital loss is NOT capped at 3k. subtracting capital loss against *regular income* is. If you gain 100k in the stock market and lose 100k in the stock market, you can take the 100k loss immediately against the gain, just not against income.

There is always a reason for these rules, namely to close loopholes. People swindle other taxpayers by engineering fake losses in selling capital holdings at non-open-market sweetheart prices to friends and associates, then would use the loss to reduce the income tax.

Then do the reverse or equivalent reverse transaction later. Nice racket f you could do it.

>> if you want to disallow passive loss @100%

I don't think I said that. You can take the loss *when you sell*, but not before. If you want to take it earlier, it should be severely restricted. Maybe not 100%, or maybe not 3k, but 25k should be plenty for a year.

This is a question of fairness, and to avoid big fat loopholes.

justme, if you want that tax break there's nothing stopping you from owning rental property.

I think that solution is more fair than doing selective bailouts.

E-man,

Far be it for me to teach people illegal tax avoidance, but consider the following simple scenario:

Three friends all own houses worth 400k each, but for which they paid 300k. A sells to B, B sells to C ,and C sells to A. all for a sweetheart price of 200k. All of ABC get to book a 100k loss, while at the same time getting a new and equivalent house. Afterwards, all 3 have the same amount of house, but also have 100k loss that they want to use to offset some other gain, say income or some other capital gain.

In summary: free money from the honest taxpayers (suckers).

It is not necessarily easy to get such schemes past the IRS, but with enough strawmen and intermediaries, just about anything is possible. And THAT is why one has rules against such loopholes.

By the way, there is a term "non-arms-length transaction" which is relevant in describing the above type of scenario.

toothfairy,

>> justme, if you want that tax break there’s nothing stopping you from owning rental property.

Really? How do you know I can afford the down payment? How do you know that tax breaks that are available to select groups of people are fair? I'm sure there are zillions of people who would like to be wealthy landlords, but cannot. What will you tell them?

Ace,

Not true, any new capital gain your friend gets can be offset by the carried-over losses *immediately*, not just 3k/year. You are assuming that this person will never again have a capital gain in coming up with the sinister-sounding prognosis of 333 years.

Your friend likely had a realized gain after exercising his options and getting the stock. His mistake was if he did not sell enough of the stock to pay the taxes on the gain immediately. If he had, he would have been ok.

I realize this is a tough situation to be in, but it is avoidable. I do have some sympathy for your friend.

E-man, You are welcome.

I'll think about your proposal :-). How about you post some good examples of properties within 25 miles of the fortress which will be cash flow positive with 10k down?

justme says

E-man,
I’ll think about it :-). How about you post some good examples of properties within 25 miles of the fortress which will be cash flow positive with 10k down?

You need to be more specific than that, justme. East Palo Alto is technically less than 1mi from the "fortress" of Palo Alto. Probably cash flow positive but not what you were getting at. How about a property in a town that you as a landlord would actually live in? I guess there's always wiggle room for the question, but hopefully E-man or someone else gets the spirit of the question and can post something cashflow positive in a nice area.

> If your gucci purse is 80% off of $5000, are you getting a deal worth buying?

Can I flip the purse for a quick profit, and do you offer 0% down financing? ;o

E-man says

@ justme,
If you live in the Bay Area and has $10k, I can help you acquire investment property. Of course, it will have to cash flow. I don’t mind sharing the wealth. There’s plenty of wealth for all of us.
Thanks for example above.

E-man: I'm interesting in this idea. Can you really buy a property with 10K around Bay area and eveb better with cash flow? Do you see any around your area? I will go in if you can find one.:=)

E-man, you were supposed to find ones in areas where you would actually live. Hayward???

Those areas are street specific - maybe ok - definitely a step up from Hayward. Generally, you get what you pay for, so if we're talking good deals, there's probably a reason (ie no one really wants to live there). I've seen some decent condo prices in Fremont, but usually when we look at them, there's a reason why the prices are low.

If the HOA is in trouble though, aren't you asking for trouble too?

Watch out for HOAs. When I bought my condo on Maui the dues were $265 a month, roughly 60% of neighboring condo complexes. However this condo complex is converted apartments and has fewer amenities since no short-term/vacation rental customers. This is where the locals who work on the island live. I believed the lack of expensive amenities was why the HOA dues were so low.

Wasn't a year later the HOA had to do an audit and build reserves (due to HI state law change, or board turnover, or lawsuit or something). Turns out they hadn't been properly forecasting for long-term maintenance like roofs, parking lot repaving, etc. They'd just been collecting/spending on the regular daily stuff like landscaping, staff and a little bit for long term items. Dues nearly doubled to $435, and currently are $535.

Once you buy into a condo or other HOA deal, you've just become a business partner WITH THAT HOA. They have the legal authority to raise HOA dues or require special assessments as needed. If the books aren't in order, if the associations legal bills go up due to lawsuits, if the complex's insurance goes up due to natural disaster, YOU MUST PAY WHAT THE HOA DEMANDS. Your only option other than payment is to default or sell ASAP. As we've seen in the last couple years, selling ASAP isn't always possible.

All told I still have my Maui condo 7 years later. Rent increases during that time have mostly covered HOA dues increases and property tax bill increases (no prop 13 in Hawaii, property taxes more than doubled in first 5 years). I've always run a loss on that property after depreciation. And the stupid thing is right back to the purchase price I paid in '03. Ah well, in another 23 years it'll be paid off and I can go park my butt there. Then I'll have to decide whether to spend my days posting on forums or sitting on the beach. (yes, possible to do #1 while at #2 but salt water and sand don't do good things to today's electronics).

Actually, rents are a lot higher than when I bought, rates are lower, and prices are almost exactly the same... Hmm, any stated-income lenders out there?