Heads You Win, Tails US Loses!
Suppose that you could borrow money to make an investment on this basis:
If the investment increases in value, the profit is all yours, tax-free.
If it declines in value, the federal government will pay down your loan balance to the new market value, and the government will take the loss. Heads--you win, tails---the US taxpayer loses!
Too sweet a deal to be true? A US senator has proposed exactly this for homeowners whose property has declined in value below the mortgage balance. I call this the Mortgage Reduction Plan (MRP). The senator did not estimate the cost of MRP or propose new or higher taxes to pay for it. (1)
Since every family needs a home to live in, it is usually advantageous for the family to own the home. Since the Great Depression, home values have risen continuously, in some areas (such as Milwaukee's Brewers Hill) much faster than inflation. If a couple sells the home they have occupied, up to $500,000 of their capital gain on the sale is tax-free. The largest asset of the average American family is home equity : the market value minus the mortgage balance. You cannot spend your home equity, but you can borrow against it, and home-equity lines of credit have become increasingly popular over the past few years, especially since interest on mortgages is tax-deductible, and consumer credit interest is not.
But now most American homes are declining in value, due to the sub-prime mortgage fiasco and other economic factors. As long as the owners can afford to keep making their mortgage payments, this is a mere "paper loss", which does not affect their lifestyle. But if they suffer a sudden loss of income (due to job loss, business failure or the like) and can no longer make these payments, they may not be able to sell the house for enough to pay-off the mortgage, especially if they have also a home-equity loan.
Failure to make the mortgage payments as agreed gives the lender (usually a bank) the right to foreclose the loan and take possession of the home. However, lenders are reluctant to foreclose if they believe that the borrowers can bring their loans current within a reasonable time, such as about six months. That is because foreclosure is a long and expensive procedure, which leaves the bank owning an empty house that might be hard to sell. (2)
The bank might agree to accept smaller payments for a number of months, followed by higher payments later. The bank might also agree to allow the owners to sell the house for less than the mortgage balance, especially if the mortgage is insured. (3) If the homeowners have no chance of catching up on their mortgage payments, and no one wants to buy the house (even at a bargain price), the bank may be willing to accept a "deed in lieu of foreclosure", since that route reduces legal costs and delays.
But if the proposed Mortgage Reduction Plan passes, the borrowers will receive thousands of dollars of debt relief, the bank will avoid the cost and trouble of foreclosure, and the only loser is the US taxpayer, who must absorb the loss. If the MRP were designed to help the poor and the homeless, the cost to the Treasury might be justified, but the sole beneficiaries of the MRP are those who had qualified for home mortgages, mainly the working and middle classes. Lifelong renters and families that own their homes free of debt pay taxes too, but they would get nothing from this plan.
Now, what liberal flake proposed this big-government boondoggle?
Senator John McCain (R, Arizona).
----------------------------------------------------------------------------------
(1) Associated Press, July 19, 2008. (In Milwaukee Journal Sentinel, page 9A, below fold)
(2) If the mortgage is insured by the Federal Housing Administration (FHA), the FHA will buy the house from the bank for the mortgage balance plus costs of foreclosure.
(3) If the mortgage is insured by Mortgage Guaranty Insurance Corporation (MGIC) of Milwaukee, MGIC will re-imburse the bank for its net loss up to an amount determined by the policy.
R
If the investment increases in value, the profit is all yours, tax-free.
If it declines in value, the federal government will pay down your loan balance to the new market value, and the government will take the loss. Heads--you win, tails---the US taxpayer loses!
Too sweet a deal to be true? A US senator has proposed exactly this for homeowners whose property has declined in value below the mortgage balance. I call this the Mortgage Reduction Plan (MRP). The senator did not estimate the cost of MRP or propose new or higher taxes to pay for it. (1)
Since every family needs a home to live in, it is usually advantageous for the family to own the home. Since the Great Depression, home values have risen continuously, in some areas (such as Milwaukee's Brewers Hill) much faster than inflation. If a couple sells the home they have occupied, up to $500,000 of their capital gain on the sale is tax-free. The largest asset of the average American family is home equity : the market value minus the mortgage balance. You cannot spend your home equity, but you can borrow against it, and home-equity lines of credit have become increasingly popular over the past few years, especially since interest on mortgages is tax-deductible, and consumer credit interest is not.
But now most American homes are declining in value, due to the sub-prime mortgage fiasco and other economic factors. As long as the owners can afford to keep making their mortgage payments, this is a mere "paper loss", which does not affect their lifestyle. But if they suffer a sudden loss of income (due to job loss, business failure or the like) and can no longer make these payments, they may not be able to sell the house for enough to pay-off the mortgage, especially if they have also a home-equity loan.
Failure to make the mortgage payments as agreed gives the lender (usually a bank) the right to foreclose the loan and take possession of the home. However, lenders are reluctant to foreclose if they believe that the borrowers can bring their loans current within a reasonable time, such as about six months. That is because foreclosure is a long and expensive procedure, which leaves the bank owning an empty house that might be hard to sell. (2)
The bank might agree to accept smaller payments for a number of months, followed by higher payments later. The bank might also agree to allow the owners to sell the house for less than the mortgage balance, especially if the mortgage is insured. (3) If the homeowners have no chance of catching up on their mortgage payments, and no one wants to buy the house (even at a bargain price), the bank may be willing to accept a "deed in lieu of foreclosure", since that route reduces legal costs and delays.
But if the proposed Mortgage Reduction Plan passes, the borrowers will receive thousands of dollars of debt relief, the bank will avoid the cost and trouble of foreclosure, and the only loser is the US taxpayer, who must absorb the loss. If the MRP were designed to help the poor and the homeless, the cost to the Treasury might be justified, but the sole beneficiaries of the MRP are those who had qualified for home mortgages, mainly the working and middle classes. Lifelong renters and families that own their homes free of debt pay taxes too, but they would get nothing from this plan.
Now, what liberal flake proposed this big-government boondoggle?
Senator John McCain (R, Arizona).
----------------------------------------------------------------------------------
(1) Associated Press, July 19, 2008. (In Milwaukee Journal Sentinel, page 9A, below fold)
(2) If the mortgage is insured by the Federal Housing Administration (FHA), the FHA will buy the house from the bank for the mortgage balance plus costs of foreclosure.
(3) If the mortgage is insured by Mortgage Guaranty Insurance Corporation (MGIC) of Milwaukee, MGIC will re-imburse the bank for its net loss up to an amount determined by the policy.
R
Labels: foreclosure, mortgage, real estate
posted by Gerald S Glazer at 11:43 AM
3 comments
