Archive for March, 2009
Treasury, FDIC & Fed Bind Together to Draw Private Investors for Toxic Assets
Published March 24, 2009 Bailout , National News Leave a CommentTags: $2 Trillion Buyout, Toxic Assets
This morning Treasury Secretary Geitner revealed preliminary details to expand the government’s plan to partner with private investors to buy up as much as $2 Trillion in toxic bank assets such as mortgage backed securities and risky home loans.
Under the plan, private investors such as hedge funds and private equity groups would purchase distressed bank assets at auction – presumably at a discount. The FDIC would provide financing – up to 85% for the purchase of these assets. For the remaining 15% equity requirement – up to half – or 7.5% would come from Treasury (ie. “Bailout”) money, with the other 7.5% coming from the private investor. The NY Times diagram below gives a good example.
Personally, in a market where small investors are required to place 20 – 30% down for healthy real estate investments that are performing as intended in a relatively healthy local Austin economy, I find it unsettling that the government is willing to take on 92.5% of the risk and capital requirement for a “toxic” investment. Sure, the idea is that the asset is being purchased at a discount, it doesn’t really matter what you pay for a mortgage backed security if the homeowner on the other end of the line is not paying their mortgage.
Heck, if I can get a bank to loan me 92.5% of the purchase price AND GUARANTEE that they won’t come after me if I default (these are non-recourse), then I will happily sell everything I own that’s not nailed and leverage myself to the hilt to see which assets make some money. After all, if one of the investments turns out to be a dog with fleas, I can just hand it back to the government and let them deal with it, right?
The theory goes that the U.S. taxpayer will profit in the end from: A). Interest payments on the debt by the private investor and B). Future appreciation from the Treasury’s equity slice. I am skeptically optimistic that a public-private partnership is needed to move these assets and jumpstart the economy, but I also believe that the investor needs to be responsible for an EQUITABLE share of risk. Otherwise, we’re inviting an irresponsible buying frenzy that will create a secondary bubble, which is how we got here in the first place.
The plan is being modeled after the Troubled Asset Relief program which dispersed assets from during the S&L Bust in the late 80’s and early 90’s.
Under the plan, the FDIC loans would be non-recourse. If the asset underperforms and the investor walks, the asset goes back to the FDIC, who then would be stuck either carrying the loss or trying to liquidate the bad asset once again.
Fund giant Black Rock says it intends to invest in the plan and is exploring opportunities to create mutual funds for individual investors to buy into. It will be interesting to see how additional details unfold. Hopefully the government will provide significant oversight and restrictions in using its money. I’m all in favor of free market capitalism – let’s just not use taxpayer/government money to subsidize private investors’ risk taking.
Let us know your thoughts below!
Facts Surrounding the New Homebuyer Tax Credit
Published March 24, 2009 National News Leave a CommentTags: homebuyer tax credit
The article below provides great insight into the homebuyer tax credit. As always, consult your CPA before taking action.
by Tom Herman Mar 18, 2009
The Short Story: If you became a “first-time” homebuyer in 2008 or plan to become one by the end of the year, you may be eligible for a generous tax credit as part of the economic stimulus law. Here’s what you need to know to claim the credit. The recently enacted economic-stimulus law contains an unusually attractive new tax break for many homebuyers — if they can only figure out how it works.
The new law sweetens a provision known as the “first-time homebuyer credit.” In essence, if you meet certain qualifications, such as buying a home from Jan. 1 through Nov. 30 this year, you may be eligible for a tax credit of as much as $8,000. You also have a choice of claiming the credit on your federal income-tax return for 2008 or 2009. A credit is typically more valuable than a deduction, since it eliminates your taxes on a dollar-for-dollar basis — and in this case, you may get it even if you don’t owe any taxes. But Congress made the homebuyer-credit fine print so devilishly tricky that many Americans are likely to have to pay an expert for help in deciphering it. “We’ve had numerous calls because people are confused,” says Claudia Hill, owner of Tax Mam Inc., a Cupertino, Calif., tax-services firm. “The problem is when things are this complicated, many people don’t get the benefits that Congress intended for them.” Internal Revenue Service officials recently issued a revised form and instructions. Even so, Nancy Hays of H&R Block Inc., the Kansas City, Mo.-based tax-preparation company, describes the credit as “crazy complex.” Here are answers from IRS officials and tax advisers to some questions about the credit.
Q: Who can claim the credit?
A: In general, the IRS says you may be eligible if you bought your main home, located in the U.S., after April 8, 2008, and before Dec. 1, 2009 — and if you (and your spouse, if you’re married) haven’t owned any other main home during the three-year period ending on the date of purchase. That means you might be eligible even if you owned a home for many years before that period. However, there are numerous other qualifications.
Q: How much is the credit?
A: That depends on when you bought the home and other factors, such as your income and the home’s price. If you bought during the 2008 period and qualify for the credit, the maximum credit is generally $7,500. But it’s only half that amount if you’re married and filing separately from your spouse. Even though it’s called a credit, it’s really an interest-free loan. You generally have to repay it over a 15-year period, without interest, in 15 equal installments, the IRS says. (There are several exceptions to this repayment rule. We warned you this was tricky.) The rules are more generous if you buy a new home during the 2009 period and meet all the qualifications. In that case, the maximum amount generally is $8,000, or half that amount if you’re married filing separately. More important, you don’t have to repay the credit at all unless that home “ceases to be your main home within the 36-month period beginning on the purchase date,” the IRS says. Initially, there was some confusion about whether the $8,000 maximum credit would apply if someone bought a home in 2009 and chose to claim the credit on their return for 2008. It’s now clear the $8,000 maximum limit does indeed apply, says Mark Luscombe, principal tax analyst at CCH, a Wolters Kluwer business. Naturally, though, “this doesn’t help people who actually bought homes in the 2008 qualifying period, and who are limited to a $7,500 credit that must be repaid,” he says. Additionally, the credit generally is limited to the amounts mentioned above — or 10% of the home’s purchase price, whichever is less. For example, if you bought a new home this year for $70,000, the maximum amount of the credit would be limited to 10% of that amount, or $7,000.
Q: How do the income limits work?
A: You may be eligible for the full amount of the credit if your adjusted gross income, with certain modifications, is $75,000 or less — or $150,000 or less if married and filing jointly. However, the credit begins to disappear, or “phase out,” if your income exceeds those amounts. You can’t claim the credit at all if your income is $95,000 or more, or $170,000 or more if married and filing jointly, the IRS says.
Q: What if I built a new home? How does that work?
A: You are considered having purchased it “on the date you first occupied it,” the IRS says.
Q: I own more than one home. How do I figure out which is my “main” home? And does it have to be a house?
A: The IRS says your main home is “the one you live in most of the time.” No, it doesn’t have to be a house. It can be “a house, houseboat, house trailer, cooperative apartment, condominium, or other type of residence.”
Q: Are there are other qualifications?
A: Yes. You can’t claim it if your home is located outside the U.S. You also aren’t eligible if you’re a nonresident alien, if you inherited the home or got it as a gift, or if you acquired it from a “related person,” such as your spouse, parents or grandparents.
Q: Will the credit help me if I don’t owe any tax?
A: Yes. The credit “may give you a refund” even if you owe no tax, the IRS says.
Q: What form do I use?
A: Form 5405. The IRS recently revised it and posted it on its Web site ( www.irs.gov ), along with instructions. Dean Patterson , an IRS spokesman, says “programming is being done to electronically process Form 5405″ to claim the $8,000 credit for homes bought in 2009. The IRS “will be able to process these returns electronically beginning March 30″ this year, he says.
Q: Where do I put the credit on my Form 1040?
A: Line 69.
Q: I’ve already filed my return for 2008. Can I still claim it? If so, how?
A: Yes. File what’s known as an “amended” return. Use Form 1040X, and attach Form 5405.
Q: If I buy this year, should I claim the new credit on my 2008 or 2009 tax return?
A: That can be tricky, and you may need to consult a tax pro. In general, most people who buy this year and qualify for the new credit probably will want to take it on their tax return for 2008, says Tax Mam’s Claudia Hill. “They’ll get their money more quickly,” she says. But some people might be better off claiming the credit on their 2009 returns. These would include eligible homebuyers who buy this year, whose financial circumstances changed during 2009 and who might qualify for a larger credit on their returns for 2009 than the prior year. An example would be someone whose income was too high to get any of the credit for 2008 but who recently lost his job and thus would be eligible for the full credit on his 2009 return, to be filed next year.
2008 Total Building Permits: 14,250
Nine years ago, during the tech bust, some builders felt that Austin was too crowded and left. The bloom is back on Austin’s yellow rose now; it moved up the leader board to become the sixth largest home building market last year. Job creation explains the move. While other markets lost employment, Austin added 17,400 jobs last year, 2.3 percent growth rate. It helps that Austin is home to both a major university, The University of Texas, and the state capital. Existing homes cost a little bit more in Austin than other Texas markets, roughly $188,600, but that’s still below the national average. Also, Austin is one of the few metro areas in the country where median prices actually rose in 2008–2.7 percent. Amazingly, Austin now generates more home building activity than Chicago, which has six times more people. Read the whole story here: http://www.builderonline.com/local-markets/the-healthiest-housing-markets-for-2009.aspx?cid=BLDR090217002&page=14
Last week the Obama Administration unveiled two unprecedented mortgage plans. Their purpose was to put money back in people’s pockets and to prevent foreclosures. Since their reach is sweeping (they will inevitably have some impact on your neighborhood), I wanted to make sure you were aware of them.
- The first plan is called the “Home Affordable Refinance” (who names these things?!). This plan allows homeowners to refinance into lower rates that were previously not available to them because of declining home values. The loan can be as much as 105% of the home’s current value and—with strong credit—the rate would be the same as an 80% loan. The loan in question must be currently owned or guaranteed by Fannie Mae or Freddie Mac. It doesn’t necessarily matter what type of loan it is, or who payments are mailed to, there are all sorts of ways a loan can end up with these entities.
- The second plan (“Home Affordable Modification”) creates a loan modification process for borrowers faced with foreclosure. This process will allow them to reduce their payment to a level equal to 31% of their monthly gross income. The thinking is that any foreclosure in a neighborhood reduces the values of all the other homes, hurting the majority of homeowners. Putting politics aside, stabilizing home prices will be a critical component of any economic recovery.
At this point many of the specifics have not been worked out, but April 6th is earliest someone can get approved for these programs. As I learn more, I’ll pass it on.
