Archive for debt

Mortgage Income Tax Deduction is JUST a Subsidy to Banks

Posted in Financial Literacy, Just the Facts, Uncategorized with tags , , , , on August 22, 2011 by marcitz

For years there has been a religious like devotion to the Mortgage Income Tax Deduction (MITD) and its benefit for the home buyer.  In stark economic truth it is actually bad for home buyers (twice) and great for banks.  This is further proof of how stacked the economy is in favor of the banks.  So the banks exploitation of society hasn’t been going on for 10 years, its been going on for over 60.  Here is the mathematical and social proof.

  • The MITD applies to interest only.
  • It allows a home buyer to pay more in monthly interest payments because they will get some of that back as part of MITD.
  • So consumers are willing to pay more interest which means they are willing to pay more for a house (because they can support a larger loan principle).
  • The interest goes to the bank who profits by the uptick in interest payments.
  • The buyer pays more for a house.
  • The taxpayer (who is also the home buyer) pays for that payment to the bank out of their own taxes (cause tax dollars are diverted to the MITD)

Its that simple and we’ve been falling for it since the end of World War II.

Here are some numbers:

  • Let’s say (without the MITD) the you have $2000 to spend on a mortgage per month you’ll buy a certain amount of house.
  • If you add the MITD you can now buy about $2500 of house (assuming you have 20% tax rate, not realisitic but makes the math simple for this exercise).
  • Your spend $2500 and you get $500 back with the MITD.  So what happens is a person is now willing to spend 25% more on the same house because they can afford 25% more in monthly INTEREST payments.  Since houses are basically bidding processes enough people compete such that the price goes up to absorb the entire deduction.
  • At the end of the day the person is no better off and actually is worse off because they scrape to find the extra $500 per month and then get relief at tax time with a big check the makes them whole (losing any interest they could have earned on that $500 in the interim and possibly incurring financing charges because they needed to get that $500 cash flow somehow in the interim, lets say through credit card debt.)
  • In the meantime the bank collected that $500 extra a month and they didn’t need to give it back. That came from the government (AKA the taxpayer).
  • Hence the buyer gets to pay more for a house and more for his taxes overall.

So next time you brag about your mortgage income tax deduction remember you just helped make a bank wealthier at your own personal expense (both as a buyer of house who paid more than you needed to and as a taxpayer who financed it).

1 Comment »

What the Economy Needs Now is More/Faster Foreclosures

Posted in Just the Facts, Stories with tags , , , , , , , , , , , on April 15, 2010 by marcitz

Recently I read the following quote about how to “save” the housing market and the overall economy:

Indeed, Casey Mulligan, an economics professor at the University of Chicago, argued that both the Bush and Obama administrations had focused too much on making house payments affordable, based on income levels, and not enough on reducing debt.

Here’s a great way to reduce debt, GET OUT OF IT. 

For some reason all those people who are walking away for their houses (or are threatening to do so) seem to understand that much better than the government who keeps trying to keep people in debt.  Further proof that people understand this is shown by the high rate (>50%) of re-defaults by people who were already helped once. (high recidivism rate). 

Given that the public is embracing this approach to solving their own problems maybe the solution should be making it EASIER for people to actually walk away.

Here is why this is a potentially great (and new-fangled) solution.  At the heart of the current logjam is that different people are upset about approaches to saving the economy for different reasons.  Here are the most prevalent of those arguments:

  • Bailouts help the evil banks by having the government make their bad (or worse yet fraudulent) investments almost whole.
  • Bailouts reward individuals who were irresponsible.
  • Not propping up housing prices will keep unemployment high because any economic recovery will be hampered.
  • Taxpayer money shouldn’t be used to help those (individuals OR banks) who took egregious risk with no downside.

So if we look at making it easier for people to walk away everyone gets a sense of satisfaction (but also has to contribute to the pain). Specifically:

  • Banks will have more foreclosures on their hands (pain) but they won’t have the overhead of formal foreclosure proceedings because the owner willing ceded the property (benefit).  Also they won’t face increasing pressure from the government to abrogate contracts (and deal with the lawsuits that will inevitably follow) with their investors.
  • Homeowners who walk away give up the asset they treasured (pain) but get to move on to a life where they don’t have day-to-day financial worries of this magnitude (benefit).  Also they can quickly make amends for that one-time lapse in judgement like a hangover cure or the morning-after pill.
  • Unemployed homeowners get the added benefit of being able to go where the jobs are and NOT be stuck in a house they can’t afford in an area where they can’t work.   Their pain and their benefit is having to relocate.
  • Taxpayers – In the short-term home prices will drop (pain) but will quickly recover as a new wave of buyers can finally jump in and this won’t cost them a single nickel (benefit).

How can this be accomplished?  The government needs to create a “credit amnesty” program where people have a fixed time  (6 – 12 Month period) to walk away from their houses without any penalty on their credit reports and no taxes on forgiven debt.  Just write it off and start over.  They also need to find a way to faciliate faster foreclosures.  Finally (and there would be some additional taxpayer pain in this) the government could offer tax credits for moving expenses.  This has two benefits.  One it facilitates the move for both sellers (underwater homeowners) and buyers (to pick up those homes that are now available but in a different area), not to mention it funds jobs for movers.

The added bonus to this plan, like King Solomon dividing the baby,  is that the truly committed long-term homeowner will surface.  They are the ones that will, of their own accord, make whatever sacrifice is needed to keep their home.  Those that aren’t committed will simply take the opportunity to walk away and start anew, also a laudable goal.

Granted I’m not the biggest fan of this idea but in the spirit of shared sacrifice its the best I’ve seen so far and much better than any artificially cramming down of interest rates and principle balances.  So I vote for this.

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

13 Comments »

Killing the Myths of Homeownership

Posted in Just the Facts with tags , , , , , , , , , , , , , , , , , , , , , on April 16, 2009 by marcitz

Recently I read an article in The Economist that had many incorrect assumptions that shows just how far the myth of homeownership has permeated society.  Here are some of the common myths and corrections along with actual articles from other sources to back up the key points.

Myth #1  - Home ownership encourages “forced savings” because home owners have to pay off their mortgage.

ABSOLUTELY NOT! That is exactly what home equity lines and continuous refinancings were all about. Spending your savings as opposed to accumulating it and making yourself a “renter with an option to eventually own”.  A person very close to me has just refinanced a 30 year mortgage after 21 years effectively turning it into a 51 year mortgage and unless the almighty intervenes they won’t be paying it off in this life.

Myth #2 – The mortgage income tax deduction is good for homeowners.

ABSOLUTELEY NOT!  It just encourages people to raise the price of the house to eventually eliminate the advantage of the benefit (NOTE: Any increase in income chasing a, somewhat constrained, good means that prices get bid up and income tax deductions raise effective income). Its a zero sum game that only raises your interest payments in the end (because the principal needed is more due to larger home prices) which means the bank actually makes more money (remember they are the bad guys nowadays).

Eliminate the deduction and new home buyers (current homeowners would, truthfully, be screwed) would see lower prices commensurate with the decline in the kickback from the government. That means lower interest costs and more money, net, in their pocket (again current homeowners would see their housing values fall)

Myth #3 – Homeowners benefit from many social advantages.

Sorry but  there are NONE and actually some social disadvantages, including worse sex.  Study after study done as recently as last January show that there is practically NO social benefit of homeowning vs. renting.  In fact home-owners had been those leading the charge AGAINST racial integration in their neighborhoods. Turns our renters are actually more relaxed, less racist, more social and, yup, have better sex. Additionally these housing bailouts are a tad racist/classist and are bad for current homeowners in the long run. Don’t believe me check out these links:

Recently published study by Wharton  (Its a long academic study but just read the first paragraph)

The American McDream from the San Francisco Chronicle (renters have better sex, too)

Understanding how Obama’s Plan Hurts 100 MILLION US Citizens from watchingmarcitz.com (this shows how home bailout programs have a dark underbelly)

How the Crash Will Reshape America from The Atlantic (why renting is actually the answer to the problem we now face)

The Advantages of Renting from National Public Radio

Myth #4 – The market is finally finding a bottom

Take a lesson from the movie Titanic. The ship has just temporarily stabilized before its violent rush to the bottom as shown here.

Myth #5 – Once you pay off your mortgage your house is free (rent goes on forever)

Not exactly:

  • Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent (including changing from time-to-time)
  • Maintenance. That also goes on forever and that is variable (roof = $15,000) and unpredictable. So it also behaves like rent but much more violent in its swings. Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.
  • Your mortgage may go up depending on how you financed it. A very large percentage of mortgages done in the past 8 years were adjustable-rate. That could swing way above rent or way below depending on the interest rate environment.

See more myths in this follow-up post.

Got a really fucked computer?  Get it repaired online at support.com

27 Comments »

Obama Administration Says NO to Bankruptcy Loan Modifications

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , on March 15, 2009 by marcitz

So Congress has been trying to push a law that will allow bankruptcy judges to modify the terms of mortgages including reducing interest rates and “cramming-down” loan principal.  Many have opposed this because it violates contract law.  The highly justified fear is that if the government can just violate any contract at will then contracts of any kind (past, present or future) will no longer have any value.   Up until this morning the Obama administration has signaled that it supports these in-bankruptcy modifications.  That all changed on the Sunday morning talk show circuit when Larry Summers, head of President Obama’s National Economic Council, came out in strong defense of contract law.

According the the New York Times:

Mr. Summers, who also appeared on CBS’s “Face the Nation” suggested, however, that the government’s ability to require…scaled back was restricted by preexisting contracts, even though he did not specify what those restrictions may be.

“We are a country of law,” said Mr. Summers, one of several economic officials to hit the Sunday-morning talk show circuit. “There are contracts. The government cannot just abrogate contracts.”

Ok, now for a little truth telling.  Dr. Summers was actually talking about the bonuses being given to AIG employees but isn’t the sentiment the same?  After all, last time I checked a mortgage is a contract and by Dr. Summers own admission the government cannot “abrogate” them yet that is what congress wants to do. 

As an invisible renter I am sure you are thrilled because you want your shot to buy a house at a fair price and by NOT allowing in-bankruptcy loan modifications you will get your chance.  So please don’t forget to call and email Dr. Summers to thank him for his support of contract law (I just talked with his office) and for signaling that the Obama administration will now veto any in-bankruptcy loan modification legislation that Congress may propose.

Dr. Lawrence Summers  

Or is that not what he meant to say…

P.S.  See how the New York Times also seems to have come out against housing bailouts in this analysis of an article by Joe Nocera.

11 Comments »

RENTER ALERT – Stop the New York Times from Hurting You

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , , , , on March 6, 2009 by marcitz

Dear Invisible Renters,

The New York Times today published an editorial in which it supports a law winding its way though congress to force banks to cram-down (AKA reduce) the principle balances on home mortgages and we must stop it.  This is ridiculous for many reasons stated in a letter below you can send to key departments and people at the Times.  Addresses and a draft letter are below:

Dear New York Times,

Why are you making homes less affordable to 68% of your New York readers and neighbors, who are renters, by encouraging the cram-downs of mortgage principle?  This is bad for everyone in the long run:

  • For Renters this will hold housing at unrealistic and high levels longer making it impossible for us to become responsible homeowners if we so choose (feel free to continue renting anyway its a valid lifestyle choice no matter what society says)
  • For the New York Times - 68% of your New York City readership are renters and this action is an attack on the majority of your readers.
  • For the Economy  by keeping people in homes they can’t afford we’ll only prolong the agony as we have a continuous stream of higher than normal foreclosures over years as opposed to in one big (and yes painful) lump.  By getting it over quickly you will see buyers come back into the market because they know we’ve reached the real (not a weak unsustainable subsidized) bottom AND homes will be much more affordable.

Here are some other things you need to know:

  • Housing prices will continue to fall at least another 10-15 points (ask any economist).  So what does that mean if a house is reset to a lower level only to find its not the LOWEST level.  Will there be another cram down?  Won’t those people only default later (after having received the first, now unsuccessful cram-down) for the same reasons you are stating now?
  • Housing prices will get another kick in the pants in two years when interest rates have to start going up again (to combat inflation from all this money being printed and flushed down the economy) so this will only get worse and require more cram-downs. Remember people tell you to buy when interest rates are low so the flip side is…

Why trash contract law in this country to delay the inevitable. 

Thank you for listening

3 Comments »

Renters of the World UNITE!

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , on March 1, 2009 by marcitz

Tell us a story about a Really Fucked Homeowner (RFHO)  (deadbeat neighbor, relative or something you read) who got in over their head and share it with others  so we can get rid of the pro homeowner bias in the United States.  Also please post this on other blogs and comments to articles. Read on to see why…

Homeownership is the “American Dream” – or is it YET another bubble?  I’m an invisible renter (politically, financially and socially all renters are) who decided it wasn’t part of my “American Dream” yet society continues to lionize the homeowner at the expense of the renter. 

How invisible are we?  When politicians says “lower house prices hurt us all” they forget the 100 million renters that they help.  Its time to wake up and realize that while homeownership is good for some its not good for all (same goes for high house prices) and public policy and perception needs to adapt to that harsh reality.   Oh and if homeownership is so great why not give renters a chance to try it out by letting prices fall to their natural level?

Why am I doing this?  Well to paraphrase Dean Vernon Wormer of Faber College – its time for someone to prick this bubble and that prick is ME! 

Welcome to ReallyFuckedHomeowner.com where we see the dark side of homeownership and the bright side to renting as an alternative lifestyle.    Please share your stories of a really fucked homeowner (RFHO) or feel free to rant about anti-renter government policies so we can get past anti-renter bias. 

Please NO names or specific addresses of the RFHOs.  Oh and don’t forget to let the government know how you feel.  Also please tell your renter friends (or even rational homeowner friends) about this site.

52 Comments »

Follow

Get every new post delivered to your Inbox.