subsidy on $700,000 mortgages

But Geithner & Obama are not really helping the home owners but the banks....

• Rewarding Bad Banks: Despite the helping families rhetoric, it is not what these mods are about. The various foreclosure abatements, mortgage mods and capital write-downs are little more than a game of kick the can down the road. All of these programs are part of a broad “Extend & Pretend” mind set. They are an extension of the FASB 157 rule changes that allows banks to hide their bad loans.

The entire set of proposals canbe described as “Whats good for the banks is good for America.” Only they are not. The various foreclosure programs are essentially a way the banks don’t have to take their write offs now. Avoid the hangover, have another shot of tequila, push the pain of into the future, regardless of economic cost.

Were the banks required to report their mortgages accurately and/or write them down, they would be revealed as insolvent.

~~~

Now we get to the ugly Truth: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar and at the expense of the middle class. These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics.

Herbert Spencer wrote, “The ultimate result of shielding men from the effects of folly is to fill the world with fools.” We have done precisely that.

http://www.ritholtz.com/blog/2010/03/more-foreclosures-please/

As part of the foreclosure-prevention plan announced today by the Obama administration, the federal government will offer to insure the mortgages of some borrowers who are now underwater.

So in addition to the government money going directly into the program, taxpayers could be on the hook for billions more if people who participate in the program go on to default on their loans.

The insurance will come from the Federal Housing Administration, which some observers have said may need a taxpayer bailout. The program announced today could make that possibility more likely.

The loans the FHA would insure under this program would be "exceptionally risky," Paul Willen, an economist at the Boston Fed, told me. The loans will only be the ones where the lender has decided that the borrower is likely to default unless there's a modification. "That's not a great sign about the borrower," Willen said.

The FHA already insures hundreds of billions of dollars worth of mortgages, and the value of loans it insures has risen rapidly in the past few years. It charges borrowers insurance premiums, which allows it to pay claims when people default. But its financial cushion has been deteriorating.

An audit of the FHA released last November found that the agency's reserves had fallen to 0.53% of its total portfolio -- well below the 2% minimum mandated by Congress.

The head of the FHA recently testified to Congress that an independent actuary "concluded that FHA's reserves will remain positive under all but the most catastrophic economic scenarios."

But a paper a group of economists published earlier this month suggested that the FHA may be underestimating the risks that could lead to a government bailout.

The bottom line, Willen said, is that the FHA will be in trouble if there's another significant decline in home prices. "What we should have learned form this crisis is we should be prepared for very bad outcomes," he said.

http://www.npr.org/blogs/money/2010/03/the_huge_potential_bailout_hid.html

Yet again, I knew it was RS.

Since RS is so opposed to subsidizing mortgages, I'm sure he'll voluntarily give up is government guaranteed one, and all the associated tax benefits.

Or is a subsidy only bad when somebody else gets it?

Stevejhx, remember when aboutready said that she wanted tax abatements ended retroactively for recent year condo purchasers but she wanted tax breaks to continue to go to rental developments so they could be passed on to tenants? Remember when she then said she was being sarcastic even though there was no indication of sarcasm?

The government should cease guaranteeing mortgages and stop manipulating the real estate market. What the current situation will bring us are delayed ultimate foreclosure, subsidies to banks who won't acknowledge their worthless assets, short sale fraud, and increased cost to the tax payers who wind up paying the banks and funding losses at the FHA and Fannie Mae. And lets not forget that by propping up real estate the government is making it more expensive for new home owners to buy.

http://activerain.com/blogsview/1550906/are-you-involved-in-short-sale-fraud-here-are-the-warning-signs-

So here's the deal. The listing agent either seeks out or is sought out by a seller in a desperate and hard time. They list the home with the agent as a short sale who then offers the seller a contract on the home from an investor. The contract is WAY below market value but the seller signs anyway not knowing what the market value of the home really is. That investor then starts negotiating with the bank either on behalf of the seller or the agent to get the sale accepted. Meanwhile, the agent RE-LISTS the home for sale but at a much higher price than the previously accepted contract...while the home is technically under contract with someone else. The seller is now the investor who has not yet closed on the home.

Just to recap: The seller is under contract with an investor who then relists a home they do not own with an agent who lists the home for a higher price. BUT WAIT, THERE'S MORE!!!

A buyer comes along and places an offer in on the higher asking price and the home is under contract. If the investor is successful, he will then negotiate as low as possible his contract, realize what he's getting on his contract and make a profit on the difference between the two. So at closing, the investor signs earlier and the investor's buyer signs later, transferring the house twice in a very short period (i.e. flipping).

If you're wondering...yes you read that right: a investor who didn't own the home just made a huge profit for doing absolutely nothing but by defrauding the seller and their mortgage company.

Any agent who is participating in this action should be quickly shown the door any their firm at the first knowledge that this is occurring since they are VIOLATING their fiduciary duties to the seller. After all, they stand to make a huge pay day for the hassle and the seller typically doesn't care because they don't receive anything monetarily from the short sale. The bank cares since they were screwed out of thousands of dollars that should have gone to cover the loss from the short sale.

Some banks have caught on to this practice and are putting provisions in place to prevent such fraud from occurring. Bank of America and Wells Fargo has in their short sale approval letters that the property cannot change hands over the next 30 days. On the buy side as well, most lenders (especially on FHA loans) will not lend on a home that has been owned by the seller for 3-6 months. Are you mad yet?

Here are the dangers of short sale fraud:
1. The investor doesn't make enough money on the sale, ties up the home, and it goes to foreclosure.
2. The buyer's loan is not approved because of an anti-flipping clause in their loan.
3. The bank sues Buyer, Seller, Agents and anyone they can connect to one of these transactions because they were defrauded out of THOUSANDS of Dollars.
4. Jail time is bad for business. Just ask this agent

http://www.inman.com/news/2010/03/9/short-sale-risk-property-flopping

ndustry groups representing appraisers say the Obama administration's short-sale incentive program lacks safeguards to prevent mortgage fraud, including so-called "property flopping" schemes in which real estate agents help investors obtain distressed properties at deflated prices.

In a letter to Treasury Secretary Timothy Geithner, four groups representing appraisers, including the Appraisal Institute and the American Society of Appraisers, urged the Obama administration to prohibit the use of broker price opinions (BPOs) when valuing properties eligible for the Home Affordable Foreclosures Alternatives (HAFA) short-sale incentive program.

"Generally speaking, real estate agents and brokers are not independent or properly trained valuation specialists," the groups said. "They have an inherent bias toward quick results and action, which produces a fee for themselves irrespective of whether the lender ... gets a fair return on the short sale."

http://www.mercedsunstar.com/2010/03/15/1350059/central-valley-counties-are-major.html

MODESTO -- Lenders are being warned there's a higher risk of mortgage fraud in Stanislaus County than anywhere else in the United States, and it's almost as bad in Merced and San Joaquin counties.

The risk of borrowers ripping off lenders is twice as high in the Northern San Joaquin Valley compared with the national average, according to mortgage application data analyzed by Interthinx.

"When you talk about mortgage fraud, you're talking about bank robbery without a gun," said Ann Fulmer, Interthinx vice president of industry relations. "It robs a community of its value and security." Interthinx analyzes mortgage applications for more than 1,100 lenders, running data through its computers to spot potential fraud.

Apparently, fraud is rampant in Stanislaus, where foreclosures are high and median home prices have fallen about 66 percent since 2005.

"Fraud flourishes in unstable markets," Fulmer warned. She said there was lots of mortgage fraud when the region's home prices soared several years ago, and now new scams are being used to push down prices. "Fraudsters are really adept entrepreneurs,"she said.

Computer analysis is getting more sophisticated, too, enabling Interthinx to spot suspicious trends.

"We are seeing a resurgence of schemes involving real estate agents," Fulmer said.

Interthinx has started publishing the Mortgage Fraud Risk Report for lenders, and the latest issue puts Stanislaus atop the list.

"It gives lenders an idea where they really need to pay attention," Fulmer said, "which allows them to take defensive action." Stanislaus' real estate insiders are well aware of this type of fraud.

Mortgage fraud comes in many flavors. Basically, mortgage fraud is any material misstatement, misrepresentation or omission used to obtain a real estate loan. Lenders are the victims.

That's different from predatory lending, in which borrowers are victimized by lenders or mortgage brokers who put them into overpriced loans.

The hottest form of mortgage fraud in the Northern San Joaquin Valley involves bogus property valuations.

Fulmer said a lot of the fraud involves the resale of foreclosed bank-owned homes and "short sales," in which homes facing foreclosure are sold for less than their outstanding mortgage.

Here's one way that scheme works, according to Fulmer: A bank repossesses a home, then hires a real estate agent to resell the property. That agent secretly creates a limited liability corporation that offers to buy the property for a very low price.

Meanwhile, other interested buyers also submit bids for the home, offering considerably more than the LLC's bid.

But the dishonest agent tells the seller (which in this case is the bank) only about the low bid from the LLC. It illegally keeps the other bids secret.

Figuring that the LLC's bid is the best deal available, the bank agrees to sell for the low price just to get the foreclosed home off its books.

Then the agent immediately resells the house on behalf of the LLC to one of the other bidders for the house.

http://www.thetruthaboutmortgage.com/how-short-sale-fraud-works/
here’s been a lot of talk about short sales lately, and considerable concern about related fraud.

Up in the hard-hit northern San Joaquin Valley region of California, the “hottest fraud” reportedly involves short sales, per an article in the Merced Sun Star.

The way it works is pretty simple:

A homeowner falls behind on mortgage payments, or simply tells the bank they can no longer keep up with payments.

They inform the lender that they’d like to execute a short sale because the current mortgage balance exceeds the value of the property; this is also known as being underwater or upside down.

This is pretty common, as nearly 25 percent of the nation is currently underwater, and 2.4 million mortgages in California alone are in negative equity positions.

Oh, and apparently 67 percent of California homeowners sold their homes last year because they couldn’t afford to pay the mortgage.

Anyways, the lender agrees to a short sale (assuming they receive an offer they deem acceptable), and hires a real estate agent to resell the property.

The real estate agent creates a limited liability corporation that offers to buy the property, but for a lowball price.

Meanwhile, legitimate offers from real buyers are kept a secret, and the real estate agent returns to the lender with just the one offer from the aforementioned LLC.

The lender (possibly reluctantly) accepts the short sale offer, and the property is sold to the LLC, which in turn flips the property to one of the real buyers (whose offers were never reported to the lender) for a much higher price.

There are probably many variations of the same scheme, and it’s very troubling considering the new streamlined short sale program has been setup to rely on real estate broker price opinions instead of appraisals.

The largest share of people helped by HAMP are those who have seen declines in their income. In this recession, that is where a great deal of taxpayer subsidy has gone, from "Cash for Clunkers" helping the auto industry to TARP helping financial institutions. What's the average income of Wall Streeters who have been helped by taxpayer $$?

ali r.
DG Neary Realty

A few things to ponder - the government should no longer subsidize frivolous spending by continuing the tax deductiblity of "home equity loans" (they are neither for the home or based on equity). Any refinancing of a mortgage (to "lock in", or to get a lower rate) should require that principal already paid off be maintained. The big secret about "under water" mortgages is that many, if not most, are due to one or more refinancings that added unpaid principal. The taxpayer is now being asked to essentially pay off the equivalent of credit card debt. When will this country finally take the medicine that this crisis requires and swallow the big bitter pill?

"The government should cease guaranteeing mortgages and stop manipulating the real estate market."

What about your mortgage interest deduction, RS? Ready to give that up, are you?

Ali
The best way to help a struggling home owner sitting on a $700,000 home they cannot afford is to expedite a sale/foreclosure and allow them to rent something more affordable. Keeping people in homes they cannot afford just turns them into zombie owners who cannot move or relocate in search of higher paying jobs.

doesn't it all depend on the nature of that pill? i personally don't have enough information to make a reasoned judgement. although i can be as skeptical as anyone about our government officials, i believe that they want a way out of this crisis as much as everyone else.

based on my limited knowledge, i can't see how letting the market for homes go into free fall would provide for the greater good. even those of us who have been more prudent in the use of debt would suffer the consequences. its hard to imagine that overall deflation wouldn't be the result.

Stevejhx. The mortgage tax deduction is a bunch of crock. Many home owners wind up doing the standard deduction, are limited in their ability to use it, and/or are not in the top tax bracket. And how many home buyers wind up purchasing too much house on account of it. The irony just stands out that we had the biggest bubble in an asset that was the "beneficiary" of gov't policy with regards to tax deductions and a tax payer ready to absorb loses on other people's mortgages.

any data of any kind? of course not.

http://www.taxfoundation.org/blog/show/1176.html

Not to anyone's surprise, the realty industry has come out against the tax reform panel's attempt to limit the federal government's subsidization of their industry. From the Charlotte Observer:

The National Association of Realtors is "extremely upset" at a federal panel's proposal to reduce the home mortgage interest deduction, its chief economist said recently at the group's annual convention.

"We're in shock," said David Lereah, who said the Realtors had been promised that housing and charitable deductions would be protected. "Now this Bush commission has put all the housing subsidies on the table."

The proposal, by the President's Advisory Panel on Federal Tax Reform, "is not a trial balloon," Lereah said. It's not something the panel floats, fully expecting to trade it away later in exchange for something it really wants from the real estate industry. (Full story.)

Ask any economist that does not speak for the homebuilding or real estate industry and he or she will tell you that the home mortgage interest deduction has little economic justification.

Unfortunately, much of the backlash against proposed reforms has been within an income-class-distributional framework. Many of the defenders claim that limiting the deduction would hurt middle-class homeowners. However, they seem to ignore a simple fact: in order to take the deduction, you must itemize when filing taxes. And who tends to itemize rather than take the standard deduction? High-income earners.

Over 90 percent of householders making over $200,000 in 2003 itemized, while less than 40 percent of households making under $50,000 in 2003 itemized. (See IRS Filing Statistics (Excel)).

Also, the Panel's recommendations do not eliminate the deduction. They merely scale it down, especially at the top end (i.e., high property values). The proposal actually expands the deduction for lower and middle income homeowners who do not itemize. If anything, the Panel's proposals would help the middle class.

Given the fallacy of the "middle-class homeowners will be hurt" defense of the mortgage interest deduction, it's our hope that all parties can look beyond the game of short-term winners and losers and support policies that improve the economic well-being of society as a whole.

Me: "What about your mortgage interest deduction, RS? Ready to give that up, are you?"

RS: "The mortgage tax deduction is a bunch of crock...."

Seems Mr. Freemarket Ms. Atlas Shrugged is All Free Market when it comes to everybody but himself.

Typical.

I'm fine with no mortgage deduction. And in fact had we listened to George W, we might have avoided this crisis... unfortunately the brokers and the home builders control government

http://www.nhi.org/online/issues/144/mansionsubsidy.html

For years, progressives have been denouncing “welfare for the rich” – government subsidies to big business, pork-barrel Pentagon contracts to weapons makers, huge tax breaks for wealthy individuals and, most recently, colossal no-bid contracts for post-Katrina reconstruction to politically connected companies like Halliburton. No one was shocked when Republicans proposed cutting funds for Medicaid and Section 8 housing vouchers, while preserving – even expanding – subsidies for the affluent.

So it came as a surprise to some observers in November when President George W. Bush’s Advisory Panel on Federal Tax Reform recommended scaling back one of the largest subsidies for the rich – tax breaks for wealthy homeowners.

The tax reform panel catalyzed a public debate over homeowner tax breaks that housing activists, including the National Housing Institute and the late Cushing Dolbeare of the National Low-Income Housing Coalition, have been advocating for decades. Since the 1980s, NHI has produced reports, op-ed columns in major newspapers and articles in Shelterforce focusing attention on what we call the “mansion subsidy,” because most of the tax breaks benefit the very wealthy with expensive homes.

The news leaked out on October 7, following a meeting of the task force, and for the next few weeks the issue of homeowner tax breaks was a major news story. Reporters, columnists and editorial writers spilled a lot of ink reporting on the task force’s deliberations and its potential recommendation to revise the tax break for homeowners. The proposal to scale back the mortgage interest deduction was just one of many possible recommendations the task force had under review, but it was the one that generated the most headlines.

Real estate industry lobby groups – like the National Association of Homebuilders, the National Association of Realtors and the Mortgage Bankers Association – complained that wiping out or scaling back the deduction would hurt existing homeowners, reduce the overall homeownership rate and damage the economy. Economists and tax experts argued that reforming the mortgage interest deduction would have no disastrous consequences for homeownership rates or housing costs and would mainly reduce tax breaks for the very rich. Others said that the homeowner tax breaks not only distort the housing market, but divert capital away from other economic sectors. A few major newspapers endorsed the idea of scaling back the deduction. For example, USA Today editorialized: “It mostly benefits people who don’t need it.”

The President’s panel reviewed several ideas before delivering its final report to the Bush Administration on November 1. One suggestion was to scrap the mortgage interest deduction – which allows write-offs on first and second loan amounts up to $1.1 million – and replace it with a 15 percent credit. The richest homeowners can now deduct 35 percent.

Another idea was to reduce the ceiling on mortgages eligible for tax breaks to $300,000 to $350,000. They also floated the idea of varying the ceiling to account for varying housing costs in different parts of the country. Panel member James Poterba, an economics professor at the Massachusetts Institute of Technology, suggested capping mortgage interest rate deductions at current Federal Housing Administration mortgage limits, which range from around $190,000 to about $310,000, depending on the locality. When politicians and housing industry lobbyists from high-cost states complained, they revised the proposal to range from $227,000 to $412,000. (The nation’s median home price is now $268,000).

In exchange for these losses of tax benefits, the advisory panel suggested eliminating the alternative minimum tax, adding $100,000 to the $500,000 tax-free exclusion on home sale profit, lowering capital gains tax rates, cutting the number of tax brackets and providing a variety of other simplifications to the federal tax code.

Bush created the task force in January 2005 to suggest changes in the tax code. The goals were to make the code simpler and fairer, although there was considerable disagreement over what these terms mean. Bush insisted that the panel’s proposal be “revenue neutral,” meaning that any losses in government revenues would have to be offset by other tax code changes. The nine-member panel, co-chaired by former Senators Connie Mack (R-FL) and John Breaux (D-LA), did not include any representatives of housing advocacy or progressive tax reform groups.

One member of the group – Charles Rossotti, the IRS commissioner from 1997 to 2002 – said that, “everything’s on the table.” But when Bush announced the task force in January, he specifically mentioned that the panel should take account of the “importance of homeownership” in its recommendations. Some viewed this as a signal to the powerful real estate industry that Bush wouldn’t challenge tax breaks for wealthy homeowners.

In fact, many of the media reports on the task force’s recommendations focused on the political realities of challenging what the real estate industry views as a “sacred cow.” The Washington Post, the Los Angeles Times, conservative columnist Robert Novak and liberal columnist (and Secretary of Labor under Clinton) Robert Reich declared that, whatever the merits of the task force proposals, any effort to tinker with the homeowner deductions were “dead on arrival” because of the political influence of the real estate industry. Most of the news reports got the basic facts right about who benefits from the mortgage deduction, but, with some notable exceptions, the press tended to accept the real estate industry’s view that the current mortgage interest deduction promotes homeownership.

In a nation that values homeownership, no one wants to make it harder for families to buy a home, so by framing the debate in these terms, the real estate industry made it appear that the proposed reforms would undermine the “American Dream” of homeownership.

The real estate industry claims that the tax break was initially put into the tax code to promote homeownership. But there is no evidence to support this. According to political scientist Christopher Howard, author of The Hidden Welfare State: Tax Expenditures and Social Policy in the United States (Princeton University Press, 1997), the 1913 individual income tax bill allowed taxpayers to deduct from their total income “specific sources of incomes (such as gifts, inheritances and interest on state and local bonds) and specific expenses in order to generate a lower level of taxable income.” And when Congress added mortgage interest payments as a deductible expense in 1939, it was because so many Americans during that time were engaged in farming, and it was simpler to allow them to include their housing expenses with their deductible farm expenses. Over the years many advocates for the deduction have revised history, translating the action as a conscious push for homeownership, when it really was born out of a much simpler agenda.

Of the hundreds of tax breaks (what economists call “tax expenditures”) for corporations and individuals in the nation’s tax code, the largest are the subsidies for homeowners. The two major homeowner tax breaks cost the federal government almost $90 billion last year – $70.1 billion for the mortgage interest deduction and $19.3 billion for the property tax deduction – according to a report by the Congressional Joint Committee on Taxation. That would be ok if most of it helped middle- and working-class people. But it doesn’t. Those with the highest incomes and the most expensive homes (including second homes) get the largest subsidy.

Most Americans think that federal housing assistance is a poor people’s program. In fact, less than one-fourth of all low-income Americans (those who have Section 8 rental vouchers or who live in government-assisted developments) receive federal housing subsidies. In contrast, almost two-thirds of wealthy Americans – many living in mansions – get housing aid from Washington.

More than half (53.7 percent) of last year’s $89.5 billion homeowner subsidies went to the 11.8 percent of taxpayers with incomes over $100,000. More than one-fifth (20.6 percent) went to the wealthiest 2.3 percent of taxpayers with incomes over $200,000.

Wealthy households are most likely to own homes and to itemize deductions. Half of all homeowners do not claim deductions at all. Tenants, of course, don’t even qualify. As a result, 62 percent of households with incomes above $200,000 receive a mortgage interest tax break, averaging $7,219. In contrast, only 3.5 percent of households with incomes between $10,000 and $20,000 receive any subsidy, averaging $317. If anything, these tax deductions help push up housing prices artificially, especially at the upper end, because homebuyers include the value of the tax subsidy in their purchase decision. This leads wealthy homeowners to buy bigger houses than they would without the tax breaks.

In recent years, many middle-class families have found it more and more difficult to buy a home. Contrary to the rhetoric of the real estate industry, these deductions aren’t the salvation of the middle class. Only one-third of the 52 million households with incomes between $30,000 and $75,000 receive any homeowner subsidy.

As a result, a wealthy corporate executive is more likely to receive a much bigger homeowner tax break than a garment worker, a construction worker or a school teacher. The current system subsidizes the rich to buy huge homes without helping most working families buy even a small bungalow.

The real estate industry – homebuilders, realtors and mortgage bankers – argues that the homeowner tax break is the linchpin of the American Dream. This is nonsense. Neither Australia nor Canada has a homeowner deduction, and their homeownership rate (about two-thirds of all households) is about the same as ours.

Indeed, a report by the Congressional Research Service released in August 2005 noted that, “other homeownership subsidies, like down-payment assistance programs, are proven to be more effective at increasing homeownership among lower-income families and are less expensive than the mortgage interest deduction.”

Housing subsidies for the rich are virtually an entitlement, but for the poor it is a lottery. While the tax code provides $48.1 billion in homeowner subsidies for families with incomes above $100,000, the entire U.S. Department of Housing and Urban Development budget is only $32 billion, which provides housing assistance for less than one-quarter of the nation’s poor. And while the number of poor people has increased, the Bush Administration is cutting housing subsidies for low-income families. The gap between housing subsidies for the rich and the poor has been widening.

No one wants to eliminate existing homeowner subsidies for middle-class families. But the current system – which subsidizes the rich to purchase huge homes without helping most working families become homeowners – is in desperate need of reform.

For years, the Congressional Budget Office, in its annual report on budget options, has examined the impact of reducing tax breaks on expensive homes. In its February 2005 report, it noted that lowering the ceiling on the amount of principal eligible for the mortgage interest deduction from the current $1 million to $500,000 would affect only 700,000 homeowners (less than 1 percent of all homeowners) and raise $2.7 billion next year and more in subsequent years.

Despite these realities, the real estate industry has been successful in protecting the mortgage interest deduction from reform. When the tax break has been vulnerable, it is typically from conservative forces that want to scale it back to reduce the federal budget deficit or impose a regressive flat tax. A progressive reform of the mansion subsidy would require a broad grassroots coalition of housing activists, labor unions, community groups and others, who see it as part of a comprehensive challenge to government give-aways to big business and the wealthy.

In the unlikely event that President Bush supports his panel’s proposals to scale back the mansion subsidy, and Congress adopts it, how would those savings be used? No doubt Bush and his fellow Republicans would want to use the funds to reduce the deficit, now bloated due to tax breaks for the rich and the war in Iraq. But why not use the money to expand the number of families who receive Section 8 housing vouchers? Or to help more working families become homeowners by providing them with downpayment assistance? Or to add a housing component to the popular Earned Income Tax Credit, which would be tied to local housing prices?

The current way we distribute housing subsidy funds is wasteful and unfair. As a nation, we have the resources to assist the millions of poor and working-class families who cannot afford market-rate rents or home prices. Let’s stop subsidizing the rich to live in mansions and help working families achieve the right to decent affordable housing.

Copyright 2005

whew...i'm glad we settled this.

http://www.taxfoundation.org/podcasts/podcast20091202.mp3

http://www.riversidershouldfinallyshutup.com/

http://query.nytimes.com/gst/fullpage.html?res=9B05E1D7163EF930A35752C1A9639C8B63&sec=&spon=&pagewanted=all

The panel had a powerful rationale behind its proposal: many economists say the real estate subsidy is one of the tax code's most unfair features, overwhelmingly benefiting the affluent and pulling investment from the rest of the economy into the housing sector.

But for millions of homeowners, what no doubt matters most about the plan is how it affects their bottom line. And for many of them, especially those living in houses in expensive markets in California and the Northeast, the answer is clear: If it becomes law, the value of their homes will almost certainly fall.

The pain that would be caused by putting an end to deductions for mortgage interest and property taxes explains a lot of the motivation behind the attacks that greeted the panel's proposals.

''I think the short-run prospects of Congress adopting these are very low,'' said Joel B. Slemrod, the director of the Office of Tax Policy Research at the University of Michigan. ''They take away a lot of the deductions and credits that people have gotten used to, and we know that losers cry louder than winners sing.''

The plan by the presidential panel would reduce the mortgage deduction on homes in two ways.

First, it would limit the amount of the mortgage eligible to be deducted, cutting it from the current cap of a little more $1 million to as low as $227,000 in cheaper housing markets like Springfield, Ohio, to as high as $412,000 in places like New York and many of its suburbs.

Second, families would receive a credit equal to 15 percent of the interest paid on a mortgage below the cap, rather than a deduction that can be worth as much as 35 percent for taxpayers at the high end of the income scale.

Just about everybody involved in the housing and real estate market has raised objections to this proposal. In a statement released Monday, the National Association of Realtors estimated that home prices across the nation would fall by 15 percent, with ''a devastating effect on the nation's housing economy.'' The Mortgage Bankers Association called the proposals ''a tax increase for a lot of working Americans.''

Even supporters of the changes acknowledge that house prices would fall. ''Almost any economic analysis will conclude that there will be some downward effect on prices, especially at the top of the market,'' said James Poterba, an economist at the Massachusetts Institute of Technology who is on the president's panel. ''The question is how large it will be.''

The elimination of the deduction for state and local taxes, including property taxes, also has the potential to bring down house values, especially in high-tax states like New York, California and New Jersey, where homes are selling at record-high prices.

One way to estimate the total impact is to calculate how the change would affect a household's monthly housing payments. If home buyers try to keep their monthly house payment steady, an analysis by Dean Baker, co-director of the Center for Economic Policy Research in Washington, suggests, prices could fall by more than 20 percent in higher-priced markets like New York City. Even in cheaper markets, homes that are priced above the average could take a substantial hit.

http://www.slate.com/id/2130017/

Why the left should embrace the Bush tax commission's most radical proposal.
By Jason FurmanPosted Thursday, Nov. 10, 2005, at 12:13 PM ET

Last week, President Bush's critics interrupted their feeding frenzy about wars, floods, hurricanes, torture, and indictments to briefly savage his tax reform commission, particularly its proposal to scrap the mortgage-interest deduction.

The commission targeted the mortgage-interest deduction for several reasons. They say it is an unwarranted subsidy for housing that diverts capital from more productive uses in the business sector. The commission was also trying to find a way to limit the Alternative Minimum Tax from encroaching on middle-class families without raising income tax rates.
Related in Slate

Outside economics departments, these arguments have been less than persuasive. The proposal has been savaged by critics who insist that scrapping the deduction would raise their taxes, lead to plunging house prices, and in the worst case, send the economy spiraling into recession. Some progressives even suggest that having failed to take away their Social Security benefits, the Bush administration is now trying to evict them from their homes.

Although the commission's two comprehensive tax-reform proposals should be rejected because they are costly and regressive, progressives should rush to embrace many of commission's specific ideas, particularly the mortgage proposal. That's because the plan will increase tax breaks for homeownership for the plurality of American families, likely increasing homeownership and making the tax system more fair.

One of the goals of our tax system is to encourage homeownership, based on the theory that homeownership has benefits that go beyond individual homeowners, making people into better citizens and better neighbors, reducing crime, and keeping neighborhoods cleaner. Whatever the merits of this view (and the evidence for important "externalities" for homeownership is uneven), our current tax system actually does an extremely bad job of encouraging homeownership.

This year the federal government is providing $200 billion in subsidies for housing, including $150 billion of tax breaks. The mortgage-interest deduction alone is $69 billion of that, making it one of our biggest government programs. Families get to take an itemized tax deduction on the interest from home mortgages of up to $1 million. The richer you are, the better the deal. For every $1,000 in deductions, a family in the 35-percent bracket would see its taxes go down by $350, while a family in the 15-percent bracket would see its taxes go down by only $150. And families taking the standard deduction wouldn't get any tax break at all.

As Gene Steuerle and his co-authors at the Urban Institute have documented, more than 80 percent of the major tax incentives for housing go to the top 20 percent of Americans (they get an average annual tax break exceeding $2,000) while less than 5 percent go to the bottom 60 percent (who get an average annual tax break of less than $50). Nearly half of all families with mortgages do not get any housing tax benefit at all.

This fact alone should be enough to give progressives pause when they tout the mortgage-interest deduction as a great boon to the average American. But it's worse: Only a small portion of this housing-tax break could conceivably be construed as supporting the goal of helping American families own their own homes. Since the mortgage cutoff is so much higher than the cost of buying a basic home, the bulk of the subsidies end up encouraging families who would have bought a home anyway to buy a larger house and/or to borrow more against it.

The commission proposes to scrap the mortgage-interest deduction and replace it with a "Home Credit" that allows families to reduce their taxes by 15 percent of mortgage interest on borrowing up to $227,000 to $412,000 (the limit is set at 125 percent of the median sales price for each county). Any family with $1,000 of mortgage interest would see its taxes go down by the same $150, regardless of their tax bracket. And the credit would be extended to nonitemizers who currently get no benefit.

Extending the mortgage-interest credit to all taxpayers would extend the tax benefits to all but 12 percent of families with mortgages, according to estimates by the commission. The fraction of typical families (those making $40,000 to $50,000) getting a tax break for their mortgage interest would jump from less than 50 percent under current law to more than 99 percent under the commission proposal. More than 20 million families would get a tax cut from the plan.

Despite these large benefits, the media coverage has focused almost exclusively on a smaller number of families that would see their taxes go up under the commission's plan. The commission estimates that 85 percent to 90 percent of new mortgages in 2004 would have been unaffected by the lower mortgage limit (an even larger fraction of existing mortgages would be unaffected). That's fewer than 5 million people with mortgages large enough to be affected by the proposed cap. Some additional high-tax-bracket families would see their existing deduction curbed by the conversion to a credit.

Some more affluent families would lose not just because of their reduced tax breaks but also because it would likely drive down the value of their homes. One of the reasons there is so much scaremongering is that elites in places like New York and Washington, D.C., are disproportionately represented in this 5 million. Many of these elites would probably be surprised to learn that the median value of owner-occupied houses was only $140,000 in 2003, the most recent year for which data are available.

Admittedly, the tax breaks curbed by the proposal are larger than the new tax breaks. This is how it will add tax revenue and perhaps help fund an AMT fix. To the degree that the savings are plowed back into other tax cuts, some of the families losing their mortgage breaks might even see their taxes go down.

Extending tax benefits to so many people would, if anything, increase homeownership, albeit modestly. Curbing tax breaks at the top would not hurt homeownership either: The more affluent would just buy slightly smaller homes and borrow less against them. The effects on house prices are ambiguous and are unlikely to be very large. It is likely to drive up the median house price as more families could enter the housing market, while it would drive down prices at the top end of the market as richer homeowners lose their subsidy.

More important, the mortgage tax credit would end a tax system that discriminates between different homeowners and would make the overall burden of taxes more progressive. In effect, it would pay for a working-family tax cut by raising taxes on some high-income families. I can see why President Bush isn't rushing to embrace his commission's housing proposal, but progressives certainly should.

http://www.slate.com/id/2116731/pagenum/all/

There's a cancer at the heart of our increasingly complex tax code. A special deduction that disproportionately benefits the wealthy and distorts economic activity has grown rapidly in size and could cost taxpayers nearly $100 billion annually by 2009. Eliminating it would allow us to reduce levies on income and rationalize the system. According to Martin Sullivan, a contributing editor of Tax Notes, its existence "means the economy has less business capital, lower productivity, lower real wages, and a lower standard of living."

But the once-modest deduction has evolved into a very large and highly inefficient rent subsidy. The deduction plainly causes distortions. People are willing to pay more for houses and buy bigger houses than they otherwise would because they can deduct the interest from their taxes. "When Americans invest the bulk of their life savings in housing, that's a redistribution of capital from the productive business sector," said Sullivan.

What's more, the expansion of the deduction seems occasionally to have more to do with stimulating the financial-services industry than with allowing Americans to turn their homes into assets. Consider the growth of interest-only mortgages. With the deduction, the government is effectively subsidizing your monthly payment. But you're not building any equity, you're just paying rent. It's hard to say how an interest-only loan encourages home "ownership."

Then there are home-equity loans. The proceeds from home-equity loans can be used to pay for an addition or repairs, but also for a television or for a trip to Jamaica. And the taxpayer foots a portion of the bill. What does this have to do with encouraging homeownership?

What's more, it's remarkably unprogressive. One of the biggest obstacles to homeownership is the inability to come up with a down payment. The deduction doesn't help you there. Taxpayers who don't itemize deductions—generally people in the lower income brackets—don't receive any benefit from the home-mortgage deduction. And the more you borrow, and the higher your tax bracket, the more valuable the deduction becomes.

So, what would happen if the home-mortgage deduction were slowly phased out? For the sectors of the housing market where homeowners tend not to itemize deductions, the impact would probably be minimal. At the higher end, housing prices might be expected to adjust, but not to crash. Consider a home buyer in the 25 percent tax bracket with an 8 percent mortgage. Thanks to the interest deduction, he effectively pays 6 percent on the mortgage. Losing the deduction would have the same effect on his personal finances and mentality as a rise in mortgage rates from 6 percent to 8 percent would. A bummer? Certainly. But such moves have happened frequently without causing crises. And if the elimination of the deduction were accompanied by a reduction in rates elsewhere, it would be a wash for many homeowners. The real harm would come to the home-building industry.

And that's the real reason we shouldn't bet the house on eliminating or reducing the mortgage deduction. The home-building, home-selling, and home-buying industries, which claim to speak for homeowners, would bitterly oppose such a move. And so it's no surprise that earlier this year, when President Bush penned instructions to the advisory panel on tax reform, he told them to "recognize[e] the importance of homeownership."

I agree with much that Riversider has posted.

Many bought too much house because the $ was cheap & ez & they rationalized because of the tax deduction. Now, we're gonna subsidize these people as if they were naughty kids. We should not have bailed out Wall St either. Basta to the Nanny State!! And, Basta to the systems who encourage reckless behavior. NINJAs & all that crap: anyone who did that was asking for trouble. It used to be 'there ain't no free lunch', now, it's like there's free 3 squares a day, just like prison: the state will take care of us.

far too easy to criticize---everything and anything. the pervasive problem remains: one person's giveaway is another's entitlement. of course, its outrageous to bail out anyone. but i, for one, don't really know the impact of letting the chips fall....also interesting ethics surrounding the protection of the greater good.

http://www.npr.org/templates/player/mediaPlayer.html?action=1&t=1&islist=false&id=125229165&m=125229130

i actually listened to this.

his response to the question as to the risk of drastically lowering everyone's property values even further was to inform us that he owns two properties and he is willing to accept that they will go down in value.

that's nice of him but responsible policy makers have to think beyond themselves. as i said earlier, no one wants to reward past bad practices---the question is what would happen without trying to cushion this fall.

oh well, I guess I should have bought a more expensive house and gotten bailed out. My mortgage balance is $220,00. Shame on me. I should have borrowed an extra $500k.

Welcome to Moral Hazard.

http://online.wsj.com/article/SB123569898005989291.html

Obama & George Bush agree on this one...

The president's budget seeks to raise $318 billion over the next decade by lowering the value of itemized tax deductions for the wealthy -- including interest paid on home mortgages. Households that currently pay income taxes at the 33% and 35% rates would only be able to claim deductions at the 28% rate. That means that for every $1,000 in deductions, a household in the top tax bracket would realize a tax savings of $280, down from the current $350. The proposal wouldn't take effect until 2011.

President Obama faces an uphill battle as he proposes changes to the value of tax deductions, especially the home mortgage interest deduction. Hear Journal reporter Nick Timiraos explain how this deduction works, what the changes will be and why this is such a significant move.

The mortgage-interest deduction for owner-occupied homes is estimated to cost the government $100 billion this year, making it the largest government subsidy for housing and one of the most expensive tax deductions.

The real-estate industry, which has long squelched efforts to tamper with the mortgage-interest deduction, warned Thursday that any rollback could undermine an already decimated housing market. "It's an awful policy to recommend at this time," said Lawrence Yun, chief economist for the National Association of Realtors. "The source of economic problems is falling home prices, and this proposal raises additional uncertainty" about where and when prices would set a floor, he said.

But many economists have long argued that the deduction doesn't actually have a significant impact on home ownership, and instead mainly subsidizes the cost of buying a home for the richest Americans, who would buy homes even without it. Some have blamed the mortgage-interest deduction, in part, for spurring borrowers to take out larger mortgages in order to maximize their subsidy.

"One of the costs of the deduction has become painfully obvious to the extent that we have encouraged borrowers to bet so heavily on housing. That now looks foolish," said Edward L. Glaeser, a Harvard economist.
More

Nearly 80% of the benefits from mortgage-interest and property-tax deductions go to the top 20% of taxpayers in terms of income, according to Urban-Brookings Tax Policy Center, while only 3.5% of the benefits go to people in the bottom 60% of income earners. Most lower- and middle-income homeowners don't qualify for the deductions because they don't itemize deductions on their tax returns. During the presidential campaign, Mr. Obama proposed a 10% mortgage-interest tax credit for homeowners who don't itemize.

In 2007, households with adjusted gross incomes of at least $200,000 accounted for 30% of all mortgage-interest deductions, by dollar value.

The proposal to cap the deduction could have an outsized effect on higher cost-of-living housing markets such as California, New York and Florida, which have a higher share of affluent homeowners. Already, some of those states have borne the brunt of home-price declines, and government efforts to improve mortgage financing and stem foreclosures have bypassed borrowers in high-cost markets with loans that are too big for government backing.

But economists have also faulted the mortgage-interest deduction for inflating prices in supply-constrained markets such as Manhattan and coastal California. "If supply is fixed, a demand subsidy will just push up prices, making housing less affordable for ordinary Americans," says Mr. Glaeser.

The proposal, which would also curb deductions on charitable giving, could face an uphill battle in Congress and among powerful lobbies. The real-estate industry strongly opposed a 2005 proposal from a White House tax-overhaul panel to convert the deduction to a 15% tax credit. That proposal also called for lowering the $1 million mortgage ceiling on the deduction to the size of an average mortgage for each housing market.

Some of President Obama's top economic advisers have called for a refundable tax credit that would replace the current mortgage-interest deduction. If Mr. Obama's budget proposal were to pass, tax experts say that could establish a beachhead for a more expansive overhaul later. "This is probably the easiest way politically to start down that track -- to limit it for high-income people," says Gerald Prante, an economist at the Tax Foundation, a nonpartisan Washington research group.

http://www.npr.org/templates/player/mediaPlayer.html?action=1&t=1&islist=false&id=120668836&m=120668805

Question regarding the OP: wasn't there already in place a similar program, except it had both a high end and a low end cut-off point on the income? (i.e. the new payment had to be "affordable" in addition to the old one being "unaffordable")

http://nrd.nationalreview.com/article/?q=YjU3ZTIyYjI5MTRkNjRiYWVhNTkzODU2NjVlYTMyMjc=

When it comes to “affordability,” the real-estate lobby has a wonderful talent for doublespeak. Criticizing Obama’s mortgage-interest-deduction proposal, National Association of Home Builders chairman Joe Robson complained that the move would “increase the cost of housing for many middle-class families.” But then he added that the proposal “will only further undercut the housing market” and “exert more downward pressure on home values.” Translation: Down is up. Of course a tax break would save homebuyers some cash; but “more downward pressure on home values” would save them a whole bunch more, and the most important factor working to “increase the cost of housing for many middle-class families” hasn’t been federal taxes, but rising house prices.

Another Gov't contribution to causing the housing bubble....

“Tonight, I propose a new tax cut for homeownership that says to every middle-income working family in this country, if you sell your home, you will not have to pay a capital gains tax on it ever — not ever.”

— President Bill Clinton, at the 1996 Democratic National Convention

Ryan J. Wampler had never made much money selling his own homes.

Starting in 1999, however, he began to do very well. Three times in eight years, Mr. Wampler — himself a home builder and developer — sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales.

And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business. Those gains were all taxed at rates of up to 20 percent.

The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. “When you give that big an incentive for people to buy and sell homes,” said Mr. Wampler, 44, a mild-mannered native of Phoenix who has two children, “they are going to buy and sell homes.”

Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for “fueling the mother of all housing bubbles.”

By favoring real estate, the tax code pushed many Americans to begin thinking of their houses more as an investment than as a place to live. It helped change the national conversation about housing. Not only did real estate look like a can’t-miss investment for much of the last decade, it was also a tax-free one.

Together with the other housing subsidies that had already been in the tax code — the mortgage-interest deduction chief among them — the law gave people a motive to buy more and more real estate. Lax lending standards and low interest rates then gave people the means to do so.

Referring to the special treatment for capital gains on homes, Charles O. Rossotti, the Internal Revenue Service commissioner from 1997 to 2002, said: “Why insist in effect that they put it in housing to get that benefit? Why not let them invest in other things that might be more productive, like stocks and bonds?”

The provision — part of a sprawling bill called the Taxpayer Relief Act of 1997 — exempted most home sales from capital-gains taxes. The first $500,000 in gains from any home sale was exempt from taxes for a married couple, as long as they had lived in the home for at least two of the previous five years. (For singles, the first $250,000 was exempt.)

Mr. Wampler said he never sold a home simply because of the law’s existence, but it played a role in his decisions and also became part of his stock pitch to potential customers who were considering buying the homes he was building in the desert. He would point out that the tax benefits would increase their returns on a house, relative to stocks.

many economists say the net effect of the law was clearly to inflate the real estate market. Dean Baker, co-director of the Center for Economic and Policy Research, a liberal policy group in Washington, criticized the exemption as “a backward policy” that “helped push more money into housing.”

A spokesman for Mr. Clinton declined to comment for this article.

Perhaps the most detailed analysis of the provision has been the study by a Federal Reserve economist, Hui Shan, who did the analysis while at M.I.T. Ms. Shan looked at homeowners with significant equity gains, before and after 1997, and compared the likelihood of their selling their house. Her study covered 16 towns around Boston and took into account a host of other factors, like the general rise in home prices at the time.

Among homes that had appreciated less than $500,000, she concluded that the change caused a 17 percent increase in sales in the decade after 1997. Before the law changed, many people apparently avoided paying the tax by simply staying in their homes.

Geo Hartley, a lawyer who has lived in Los Angeles and Washington over the last two decades, captures the divergent effects that the law appears to have. Mr. Hartley, who is 59 and single, said he found the old law “weird,” because it led him to buy bigger houses than he wanted.

Since the law changed, Mr. Hartley has bought smaller homes. But he has also moved more frequently, knowing that most of the gains on his houses would not be taxed. He lived in one house in Los Angeles for a full decade before 2000. Since then, he has moved three times, making a handsome — and mostly tax-free — profit each time.

“It’s part of the thinking that gets you more motivated to buy and sell property,” said Mr. Hartley, who now lives in a town house in Washington that he is trying to sell, “and have the American dream of owning a home.”

http://www.nytimes.com/2008/12/19/business/19tax.html?_r=2&pagewanted=1&ref=business

The Taxpayer Relief Act of 1997 (TRA97) significantly changed the tax treatment
of housing capital gains in the United States. Before 1997, homeowners were subject to
capital gains taxation when they sold their houses unless they purchased replacement
homes of equal or greater value. Since 1997, homeowners have been allowed to exclude
$500,000 of capital gains when they sell their houses. Such drastic changes provide a
good opportunity to study the lock-in effect of capital gains taxation on home sales.
Using ZIP-code-level housing price indexes and data on sales of single-family houses
from 1982 to 2006 in 16 affluent towns within the Boston metropolitan area, this pa-
per finds that TRA97 reversed the lock-in effect of capital gains taxes on houses with
low and moderate capital gains. However, TRA97 may have generated an unintended
lock-in effect on houses with capital gains over the maximum exclusion amount. In
addition, this paper exploits legislative changes in capital gains tax rates to estimate
the tax elasticity of home sales during the post-TRA97 period.

http://8583880486882111174-a-1802744773732722657-s-sites.googlegroups.com/site/huishanspersonalhomepage/files/shan_TRA97.pdf?attachauth=ANoY7cpd674Jxiw8jzenrcv3v6uRpedUjrE_fSo6ZxtOP3lAKUq0mHdCtr_TtUwDiC-Zel3jQyrhWV_BAkj0Wiz0SX-WHixo0jdmDlD98va89RfiSUdYoN6EaypDPYOq9j6qaTJtTrXUO2GsZMhU7xm85G7u07tOkezdbUaEnsN5H9Ge0RRjgoQyDO8JaUFnpnDwYqVe2ZlJFRXCeofCzpvVfH8fjEMq_yT6Qea8Kh10eRFeL3r1Jf8%3D&attredirects=0

for someone purchasing a home under 400k, how will the new proposed tax changes affect them? from my understanding, mortgage interets will still be deductible for low end purchases.

Why do we subsidize mortgage interest. It's a fact of life that a subsidy raises prices. That 400k property would cost less.

so we take the PV of the lost interest deductions and subtract that from the price?

Not clear, as the deduction increases the pool of buyers bidding up prices. I would say the effect is much larger than your calculation would suggest..

On another note, the whole concept of flipping can be traced to Bill Clinton's 1997 250K/500K capital gains exclusion on real estate which also bid up prices.

http://www.nytimes.com/2006/03/05/magazine/305deduction.1.html?pagewanted=print

homeownership in the U.S. is about the same as it is in Canada, Australia and England, where interest isn't deductible. Another reason is just common sense. If you want to increase homeownership, you have to do something so that renters become owners. But just over two-thirds of all taxpayers, including most renters, don't itemize their deductions, generally because they don't earn enough; they simply take the "standard deduction." The mortgage deduction doesn't help them.

Marco, if your friend doesn't itemize the deduction is moot.

"And in fact had we listened to George W, we might have avoided this crisis."

FUNNIEST THING EVER SAID.

Yes! IT'S BILL CLINTON'S FAULT! Whatever bad happened under Bushie's Watch IS BILL CLINTON'S FAULT!

Like 9/11?

Why not blame Chester A. Arthur for that one, while you're at it?

Think about it, Would we have Condo Flippers without the 250K/500K exclusion? I don't think so...

http://www.gmacrealestate.com/second-homes/taxes/taxpayer-relief-second-homes.cfm

After Congress passed the Taxpayer Relief Act of 1997, second home owners and prospective owners should have sent candy and flowers to their representatives and senators. The reason is twofold – moving into a second home that was previously rental property is not a taxable event, and homeowners can sell their primary residence every two years and pay no tax on gains less than $500,000 for couples and $250,000 for singles.

In practical terms, imagine owning a home as well as an inherited lake house. A married couple can sell the original permanent residence with a $450,000 gain on the sale and not pay a penny of tax on that windfall. This couple moves into the lake house and remains in the one-time second home for more than 24 months. Once two years of residency has been established that couple can sell the lake house at another large gain and so long as the gain is below the $500,000 threshold that gain is completely tax-free as well.

All this "free" money is completely above board thanks to the Taxpayer Relief Act of 1997. The one place you might face a tax hit on a rental second home converted into your primary residence is in the depreciation claimed on the real estate when it was a rental. For this law the cut-off date is May 6, 1997. Any depreciation taken before that date is forgiven, depreciation claimed after the date is subject to "recapture" by the IRS and will be taxed.
Meeting the Requirements
The key to meeting residency requirement for the Taxpayer Act of 1997 is owning and using the home as the main residence for no less than two of the five years immediately previous to the date of sale. For a couple only one person is required to meet that requirement. For example if you take a short-term or uncertain job in another city and your spouse elects to stay behind, you can purchase a second home and once you’ve lived in it for two years either home you own can be sold with the tax break. Or if you move to a new city, you can keep your previous primary residence as a rental and sell it anytime within the next three years retaining the tax break on up to a $500,000 capital gain.

The Act and 1031 Exchanges
Things are a little trickier when the second home is involved in a 1031 exchange. The tax deferred 1031 exchange is designated only for investment property, so any second homes acquired through a 1031 exchange need to be investment rental homes for a period of time before being converted to a personal residence. There’s no set time limit for how long you must let the property remain a rental, but a good rule of thumb is have two years of taxes showing the second home as a rental before moving in to start the two year residency process.

Search for Second Homes for Sale
To search for a selection of second homes for sale, please visit the website of a GMAC Real Estate Office that serves the area where you'd like to buy a second home. To learn more about buying Second Homes or Vacation Homes, explore the rest of this section, or contact a GMAC Real Estate Agent.

http://www.businessweek.com/bwdaily/dnflash/jul2005/nf20050726_4208_db013.htm

t seems that everyone from Wall Street to Main Street to Capitol Hill is watching the biggest housing-market boom in history with awe and dread. Awe because trillions of dollars in new wealth has been created ($5 trillion since 1996) and the home-ownership rate has reached a record 69% of U.S. households. Dread because the boom is attracting so much speculative investing that a growing number of market watchers fear that a bust is inevitable and will end in economic catastrophe.

What accounts for the housing boom? Economists have cited a number of fundamental factors, including low interest rates, favorable demographics, and restrictions on development. But the unappreciated force that may have infected a strong housing market with home-buying mania is bad tax policy. Specifically, I mean the Taxpayer Relief Act of 1997, signed by President Clinton.

Under a set of easily met limitations -- mainly that a home has been a primary residence for two out of the past five years -- a family can exempt the first $500,000 in profit on the sale of the home from capital-gains taxes. The comparable figure for a single filer is $250,000.

MONEY PIT. In sharp contrast, capital gains on stocks and bonds carry a 15% levy (the capital gains tax rate had been 20% until the tax law change of 2003.). The powerful lure of tax-free profit is one reason that home prices have risen at a nearly 7% annual rate, vs. about 4% for the stock market since 1997. Sell a home with a $500,000 profit and owe Uncle Sam nothing. But realize a $500,000 gain on Nextbreakthroughtechnology.com and the federal government takes 15%. That's the kind of math most people can figure out.

The issue goes way beyond tax fairness. A growing number of economists are deeply concerned that residential real estate is absorbing far too many economic resources. Money is pouring into concrete foundations rather than high-tech innovation. "Residential investment accounted for 35% of private investment in the past year, a level not seen since the early 1970s," notes Martin Barnes, the perceptive financial-market observer at Bank Credit Analyst.

"We're overinvesting in housing as a nation," says Mark Zandi, chief economist at economic-consulting firm Economy.com. And we have the 1997 tax-law change to thank, because that created much of the economic incentive to buy, flip, and buy again every two years.

UNBALANCED CODE. As much as possible, the tax code shouldn't bias investment decisions. As it is, the tax code is too heavily weighted in favor of housing. The Urban Institute calculates that the government provides about $147 billion in subsidies to homeowners, including the mortgage-interest deduction and capital gains exemption.

"The most politically successful segment in society are homeowners, builders, and realtors," says William Ahearn of the Washington, D.C.-based Tax Foundation. "The tax code is more slanted toward that group's favor than any other group."

Sure, calls by columnists for Congress to treat the home like any other investment typically flounder. The home-mortgage deduction is sacrosanct on Capital Hill, regardless of how many tax economists testify against it every year.

But the capital-gains law is different. It's only eight years old. Action ought to be taken before this bit of policy becomes as enmeshed as the tax break for mortgage interest. Besides, no policymaker is really happy with the froth in the real estate market.

STOCK SHIFT. Congress could level the investment playing field by treating capital gains on real estate, stocks, bonds, and other assets the same. I say levy the same 15% rate on all capital gains -- regardless of how they're realized.

Doing so would also reduce the incentive for speculative investment in real estate and remove some disincentive to investing in the stock market. My guess is that investors would shift more of their money into Corporate America, especially innovative companies that create the wealth of the future.

What's more, in an era of federal red ink as far as the eye can see, the revenue from home sales would help restore some fiscal sanity in Washington. People can be pretty smart with their money when given the chance. I say give them that chance.

Every Real Estate broker in this country should have a picture of Bill Clinton above his bed..

Under a set of easily met limitations -- mainly that a home has been a primary residence for two out of the past five years -- a family can exempt the first $500,000 in profit on the sale of the home from capital-gains taxes. The comparable figure for a single filer is $250,000.

MONEY PIT. In sharp contrast, capital gains on stocks and bonds carry a 15% levy (the capital gains tax rate had been 20% until the tax law change of 2003.). The powerful lure of tax-free profit is one reason that home prices have risen at a nearly 7% annual rate, vs. about 4% for the stock market since 1997. Sell a home with a $500,000 profit and owe Uncle Sam nothing. But realize a $500,000 gain on Nextbreakthroughtechnology.com and the federal government takes 15%. That's the kind of math most people can figure out.

If you try to hold "Nextbreakthroughtechnology.com" long enough to be a long term capital gain, you might end up with a lost instead.

"Would we have Condo Flippers without the 250K/500K exclusion? I don't think so..."

First, flippers don't get that exclusion because you need to live in the residence for 2 of the past 5 years. Second, prior to the exclusion (which has been eaten away by inflation), all gains were tax free if you reinvested them in another property, mirroring the current (stupid) exemption from capital gains on investment real estate.

So that's another dumb thing you say.

And people would read more of your posts if you just copied the first paragraph or two and then the link. I just skim over all of that garbage you post.

Really, RS, you need to drop your Vienna School novels, walk over to your closest library branch, take out a copy of Samuelson's textbooks. It would be a good way to start learning about the world in a non-fictionalized way.

Please.... we all know people who bought stayed for two years and repeated. Forgive the liberal use of the word flipper.

i don't know anyone who did that.

http://mindonmoney.wordpress.com/2010/01/18/destructive-oscillation/

Almost unnoticed by the meltdown reconstruction commentators was another powerful incentive added in the late 90’s, an incentive that drove people to “flip” houses rather than live in them. The capital gains tax on houses, formerly exempted once in lifetime (and then for only $125K), was changed to once every two years, and to $500K for a married couple filing jointly.

Using a top combined income tax rate of 50% for couples earning in the mid-six figures per year, that exemption gave a couple that could afford to finance and improve a high-end house cosmetically in a “hot” area the potential to make the equivalent of a half million dollars a year in ordinary earned income. Not only that, they could do it over and over again, and pay no taxes whatsoever.

this is factually incorrect....see above post from steve---prior to the 250/500K exclusion you could sell a property and shelter your gain by buying another property of equal or greater value....endlessly.

http://themessthatgreenspanmade.blogspot.com/2007/12/clinton-housing-bubble.html

Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search of half-millionaire status from an investment they could understand and self deceptively believe to be low risk; thank you for fueling the mother of all housing bubbles; thank you for enabling so many of us who bought second or third homes, and homes before construction began, which we then sold to someone else who dreamed of riches from owning homes long enough to sell to another fool.

Unlike the latest housing bubble, the stock market "excesses" of the 1990s financed thousands of new ventures, some of which found innovative ways to manage the proliferation of new technologies. The result: astonishing, long-term increases in productivity still evident in the most recent quarter.

Expenditures on housing construction are not "improvements" yielding increased productivity and future new wealth to be divided with the poor. They are more akin to satisfying government-subsidized vanity.

Mr. Smith, a professor of law and economics at George Mason University, is the 2002 Nobel Laureate in economics.

Also, it's hard to argue against the wisdom of Adam Smith. To wit, "What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?" - Adam Smith, 1763.

IF GROVER CLEVELAND DIDN'T HAVE THOSE INTERRUPTED 2 TERMS IN OFFICE, WE'D BE ABLE TO COUNT OUR PRESIDENTS RIGHT, AND THEN GEORGE W. COULD BLAME CLINTON, because 43 - 1 = 42!

This housing mess came from Clinton's administration. It's also Bush's fault for not intervening Clinton's action.

"This housing mess came from Clinton's administration."

Did it? You mean the Dick Armey "Tea Bag" Deregulation? Or the Alan Greenspan "Irrational Exuberance" Fed? Or the Harvey Pitt "No-Seeum's" SEC?

Please. There's plenty of blame to go around and surely Bill Clinton bears some of it, but the bulk - THE BULK - clearly belongs to the Atlas Shrugged I Got My Economics from a Novel crowd.

Led by Down By the Riversider.

The evidence suggests Clinton. How Ironic the same economic brains are in charge of fixing the problem. It's like hiring arsonists to run put out the fire..

"The evidence suggests Clinton."

The evidence suggests Ayn Rand.

Because if Bill Clinton is responsible for things that happen 8 years after he left office, why not blame Ronald Reagan for Monica Lewinsky?

Because the incentives that led to the current bubble were largely put in place during the Clinton administration.
1) Forcing GSE'S to purchase sub-prime mortgages
2) 250k/500k Capital gains exclusion tax relief act of 1997
3) Financial Services modernization act
4) Commodity Futures modernization act
5) SEC hasn't been properly funded since 1993

True you could blame Carter for CRA
BASEL for poor capital standards

Institutions and individuals respond to incentives. And the incentives were to invest in real estate and for banks to originate risky loans and sell them back To Fannie Mae & Freddie Mac

You are forgetting (or twisting the truth) that W wanted America to be the "Ownership Society". He went on to say, "I believe owning a home is an essential part of economic security."

And yes, Steve, some people want to blame everything on Big Bill. Bitterness runs deep.

W in 2002:

"But I believe owning something is a part of the American Dream, as well. I believe when somebody owns their own home, they're realizing the American Dream. They can say it's my home, it's nobody else's home. And we saw that yesterday in Atlanta, when we went to the new homes of the new homeowners. And I saw with pride firsthand, the man say, welcome to my home. He didn't say, welcome to government's home; he didn't say, welcome to my neighbor's home; he said, welcome to my home. I own the home, and you're welcome to come in the home, and I appreciate it. He was a proud man. He was proud that he owns the property. And I was proud for him. And I want that pride to extend all throughout our country.

One of the things that we've got to do is to address problems straight on and deal with them in a way that helps us meet goals. And so I want to talk about a couple of goals and -- one goal and a problem.

The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it.

We are here in Washington, D.C. to address problems. So I've set this goal for the country. We want 5.5 million more homeowners by 2010 -- million more minority homeowners by 2010. Five-and-a-half million families by 2010 will own a home. That is our goal."

Yes, clearly, this is all Big Bill's fault.

Yea, he made the speech, 95% of the housing goals were set before his admin.

ah...facts are not your friend.

columbiacounty, good call, except how come you don't say the same about aboutready who has shown herself a liar on streeteasy? Remember when she said that tax abatements for condo owners ought to be eliminated retroactively and then when called on her hypocrisy because she wants a tax benefit to be factored into her rental, she said that she was just being sarcastic, contrary to all of the evidence in black and white?
Remember that big lie by aboutready? How come you never had a problem with aboutready's lies?

I understand the gripe that the rich get to write off a more in the form of deductions. But the same gripe can be made that they have to pay more in taxes. Why not just have a flat income tax? That seems like the real problem. Why do the "wealthy" have to pay 33-35% in federal taxes while others pay 10%,15%,25%,28%? It's a much bigger penalty to the wealthy than the deduction is a benefit.

The flat tax is disproportionately cumbersome on the lower income earners. The few bucks the wealthy save don't really mean much to them in the big picture, but those same dollars to lower income earners mean everything.

That doesn't mean it's fair.

"Because the incentives that led to the current bubble were largely put in place during the Clinton administration."

And exactly WHO controlled Congress at that time?

fairness is very subjective

"Yet again, I knew it was RS.

Since RS is so opposed to subsidizing mortgages, I'm sure he'll voluntarily give up is government guaranteed one, and all the associated tax benefits.

Or is a subsidy only bad when somebody else gets it?"

I'm with RS. A subsidy is bad if its a bad subsidy. This is one. Prices rose to match the subsidy, so there isn't much benefit, but now we have to pay it for everyone.

Its a stupid, stupid subsidy.

the evidence suggests Barney Frank and ACORN.

"That doesn't mean it's fair."

Okay, then how about everyone receives the same salary too. Then it will be fair.

"the evidence suggests Barney Frank and ACORN."

1 member from the minority party has ZERO power. I am pretty sure ACORN doesn't get congressional votes and certainly didn't have as much power as the Republican house majorities from '94 to 2008.

> as much power as the Republican house majorities from '94 to 2008

Uh, how many years do the Democrats need to be in power before their supporters notice (or at least stop trying to pass the buck).

2006. Really, people. This is 3rd grade stuff. From alpo and perfitz, maybe, but come on guys!

and, even before that, pretending Frank wasn't involved... sad..

its wikipedia, but its true and I don't have time to post the set of articles AGAIN. Please, people, really.

In 2003, while the ranking Democrat on the Financial Services Committee, Frank opposed a Bush administration proposal, in response to accounting scandals, for transferring oversight of Fannie Mae and Freddie Mac from Congress and the Department of Housing and Urban Development to a new agency that would be created within the Treasury Department. The proposal, supported by the head of Fannie Mae, reflected the administration's belief that Congress "neither has the tools, nor the stature" for adequate oversight. Frank stated, "These two entities...are not facing any kind of financial crisis.... The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

Frank's campaign contributions from them totalled $42,350 between 1989 and 2008.

There are TONS of quotes from him going off on anyone who tried to point out a problem.

Saying that everyone receives the same salary makes it fair is not even close to saying that everyone should pay the same % of the salary they earn.

True. Too bad we don't have even that... we have a progressive system, where if you make more you not only pay more, you pay a larger percentage of your income.

ironically, when folks are polled they say 1) the rich need to pay more and that 2) folks should be paying the same % of income past welfare-levels.

They don't get that those two things are absolutely contradictory. The left has convinced them of a fallousy, that the rich are not paying more. But they are, in spades.... actual, and %. The top 1% pay for most of everything.

its so much fun to talk about how much the top 1% pay in taxes. how much of the national income do they receive? who wants to trade out of the bottom 99% into the top 1% and take on that tremendous tax burden? or better yet, who wants to do the reverse?

Of course nobody would trade out of the top 1% but that is irrelevant. I am not in the top 1%, not even close but I don't think they should be taxed to death.

I think the top 5% pay about 55% of taxes and earn about 31% of income. Top 1% pays about 1/3 of all income tax. Top 50% pay almost all income tax.

irrelevant?

really?

nope....I am in the top 1% and i accept the fact that I have to pay for it. in a perfect world (which we certainly don't have) i would really like to pay less. but i wouldn't trade my situation with anyone.

sorry didn't see what you said, could you repeat?

"The flat tax is disproportionately cumbersome on the lower income earners. The few bucks the wealthy save don't really mean much to them in the big picture, but those same dollars to lower income earners mean everything."

Which is exactly why most places have totally eliminated taxes......... not.

First off Larry Summers was the architect of Financial deregulation and he worked for Bill Clinton. If there's any doubt that Obama is Clinton Act II with regards to the banks and how he's not really serious about fixing deregulation( hope I'm wrong), think about who he hired to supervise the banks, "Patrick Parkinson"

http://www.federalreserve.gov/boarddocs/testimony/1999/19990518.htm
Testimony of Patrick M. Parkinson
Associate Director, Division of Research and Statistics
On modernization of the Commodity Exchange Act
Before the Subcommittee on Risk Management, Research, and Specialty Crops, Committee on Agriculture, U.S. House of Representatives
May 18, 1999

I am pleased to be here today to present the Federal Reserve Board's views on whether it is necessary to modernize the Commodity Exchange Act (CEA). The Board believes that modernization of the Act is essential. The reauthorization of the Commodity Futures Trading Commission (CFTC) offers the best opportunity to make the necessary changes. If this opportunity is lost, the Board is concerned that market participants will abandon hope for regulatory reform in the United States and take critical steps to shift their activity to jurisdictions that provide more appropriate legal and regulatory frameworks.

The Need for Modernization of the CEA
The key elements of the CEA were put in place in the 1920s and 1930s to regulate the trading on exchanges of grain futures by the general public, including retail investors. The public policy objectives were, and are, clear: to deter market manipulation and to protect investors.

The objective of the Grain Futures Act of 1922 was to reduce or eliminate "sudden or unreasonable fluctuations" in the prices of grain on futures exchanges. The framers of the act believed that such price fluctuations reflected the susceptibility of grain futures to manipulation. During the latter part of the nineteenth century and the early part of the twentieth century, attempts to corner the markets for wheat and other grains, while rarely successful, often led to temporary, but sharp, increases in prices that engendered large losses to short sellers of futures contracts who had no alternative but to buy and deliver grain under their contractual obligations. Because quantities of grain following a harvest are generally known and limited, it is possible, at least in principle, to corner a grain market. Furthermore, because grain futures prices were widely disseminated and widely used as the basis for pricing grain transactions off the exchanges, price fluctuations from attempts at manipulation had broad ramifications for the agricultural sector and, given the relative size of the agricultural sector at the time, for the economy as a whole.

The Commodity Exchange Act of 1936 introduced provisions to protect retail investors in agricultural futures. Retail participation in these markets had been increasing and was viewed as beneficial, but retail investors may lack the knowledge and sophistication to protect themselves effectively against fraud or to manage counterparty credit exposures effectively. Safeguards against fraud and counterparty losses were intended to foster their participation in these markets.

While the objectives of the CEA have not changed since the 1930s, what are now called the derivatives markets have undergone profound changes. On the futures exchanges themselves, financial contracts now account for about 70 percent of the activity, and retail participation in most financial contracts is negligible. Outside the exchanges, enormous markets have developed in which banks, corporations, and other institutions privately negotiate customized derivatives contracts, the vast majority of which are based on interest rates or exchange rates.

The Board believes that the application of the CEA to the trading of financial derivatives by professional counterparties is unnecessary. Prices of financial derivatives are not susceptible to, that is, easily influenced by, manipulation. Some financial derivatives, for example, Eurodollar futures or interest rate swaps, are virtually impossible to manipulate, because they are settled in cash, and the cash settlement is based on a rate or price in a highly liquid market with a very large or virtually unlimited deliverable supply. For other financial derivatives--for example, futures contracts for government securities--manipulation of prices is possible, but it is by no means easy. Large inventories of the instruments are immediately available to be offered in markets if traders endeavor to create an artificial shortage. Furthermore, the issuers of the instruments can add to the supply if circumstances warrant. This contrasts sharply with supplies of agricultural commodities, for which supply is limited to a particular growing season and finite carryover.

In addition, professional counterparties simply do not require the kind of investor protections that the CEA provides. Such counterparties typically are quite adept at managing credit risks and are more likely to base their investment decisions on independent judgment. And, if they believe they have been defrauded, they are quite capable of seeking restitution through the legal system. Nor is there any obvious public policy reason to foster direct retail participation in financial derivatives markets.

Most professional counterparties in financial derivatives markets view the regulatory protections imposed by the CEA as unnecessary and burdensome. Although to date there is no clear-cut evidence of a significant migration of activity to other jurisdictions, should the next CFTC reauthorization not provide for modernization of the regulation of financial derivatives, this could change--perhaps quickly. Rapid advances in technology are making electronic trading systems increasingly attractive, both as an alternative to open outcry trading on exchanges and as an alternative to the use of telephones and voice brokers in the over-the-counter (OTC) markets. Such electronic trading systems might develop in the United States, but if the United States continues to impose what market participants perceive as unnecessary regulatory burdens, such systems could instead develop abroad. In particular, much of the existing activity in financial derivatives consists of transactions between large global financial institutions, all of which already have substantial operations in London. Regulatory burdens on financial derivatives transactions in the United Kingdom are generally perceived to be significantly lighter than those currently imposed by the CEA, yet participants have considerable confidence in the integrity of the UK markets. If unnecessary regulatory burdens in the United States prompt global institutions to join, or even develop, a London-based electronic trading system for financial derivatives, the United States would suffer a serious and perhaps irreversible blow to its international competitiveness in financial services.

Modernizing the CEA: OTC Derivatives
In the Board's view, then, significant changes in the CEA are appropriate and the time to make those changes is in the next CFTC reauthorization. In the case of privately negotiated derivatives transactions between institutions, the Board has supported exclusion of such transactions from coverage under the CEA in the past and continues to do so. In these markets, private market discipline appears to achieve the public policy objectives of the CEA quite effectively and efficiently. Counterparties to these transactions have limited their activity to contracts that are very difficult to manipulate. A global survey conducted by central banks and coordinated by the Bank for International Settlements revealed that, as of June 1998, 97 percent of OTC derivatives were interest rate or foreign exchange contracts. The vast majority of these OTC contracts are settled in cash rather than through delivery. Cash settlement typically is based on a rate or price in a highly liquid market with a very large or virtually unlimited deliverable supply--for example, LIBOR or the spot dollar-yen exchange rate.

To be sure, some types of OTC contracts that have a limited deliverable supply, such as equity swaps and some credit derivatives, are growing in importance. However, unlike agricultural futures, for which failure to deliver has additional significant penalties, costs of failure to deliver in OTC derivatives are almost always limited to actual damages. Thus, manipulators attempting to corner a market, even if successful, would have great difficulty inducing sellers in privately negotiated transactions to pay significantly higher prices to offset their contracts or to purchase the underlying assets.

Finally, the prices established in privately negotiated transactions are not used directly or indiscriminately as the basis for pricing other transactions. Counterparties in the OTC markets can be expected to recognize the risks to which they would be exposed by failing to make their own independent valuations of their transactions, whose economic and credit terms may differ in significant respects. Moreover, they usually have access to other, often more reliable or more relevant, sources of information on valuations. Hence, any price distortions in particular transactions would not affect other buyers or sellers of the underlying asset.

Professional counterparties to privately negotiated contracts also have demonstrated their ability to protect themselves from losses from counterparty insolvencies and from fraud. In general, they have managed credit risks effectively through careful evaluation of counterparties, the setting of internal credit limits, and judicious use of netting and collateral agreements. In particular, they have insisted that dealers have financial strength sufficient to warrant a credit rating of A or higher. This, in turn, provides substantial protection against losses from fraud. Dealers are established institutions with substantial assets and significant investments in their reputations. When they have engaged in deceptive practices, the professional counterparties that have been victimized have been able to obtain redress under laws applicable to contracts generally. Moreover, the threat of legal damage awards provides dealers with strong incentives to avoid misconduct. A far more powerful incentive, however, is the fear of loss of the dealer's good reputation, without which it cannot compete effectively, regardless of its financial strength or financial engineering capabilities.

The effectiveness of these incentives was confirmed in a 1995 survey of end-users of OTC derivatives that was conducted by the General Accounting Office. When asked if they were satisfied with derivatives dealers' sales practices, 85 percent of users of plain vanilla derivatives and 79 percent of users of more complex derivatives indicated satisfaction. The great majority of the remainder responded neutrally rather than indicating that they were dissatisfied.

Modernizing the CEA: Centralized Execution or Clearing of Financial Derivatives
Recently, some participants in the OTC markets have shown interest in utilizing centralized mechanisms for clearing or executing OTC derivatives transactions. For example, the London Clearing House plans to introduce clearing of interest rate swaps and forward rate agreements in the second half of 1999, and several entities are developing electronic trading systems for interest rate and foreign exchange contracts. Such mechanisms could well reduce risk and increase transparency in derivatives markets. However, their development in the United States is being impeded by the specter that the CEA might be held to apply to transactions executed or settled through such mechanisms. Application of the Act not only is perceived as entailing unnecessary regulatory burdens, but also, because of the exchange trading requirement of the Act, it raises questions about the legal enforceability of the contracts traded or cleared.

Provided that participation is limited to professional counterparties acting as principals, the Board believes financial derivatives executed or cleared through such centralized mechanisms should nonetheless be excluded from the CEA. The use of such mechanisms would not make these transactions any more susceptible to manipulation than when the transactions are bilaterally executed and cleared. Nor would their use impair the demonstrated ability of professional counterparties to protect themselves from losses from fraud.

Because clearing concentrates and often mutualizes counterparty risks, some type of government oversight of clearing systems may be appropriate. However, it is not obvious that regulation of such clearing facilities under the CEA would always be the best approach. For example, the Board sees no reason why a clearing agency regulated by the Securities and Exchange Commission should not be allowed to clear OTC derivatives transactions, especially if it already clears the instruments underlying the derivatives. Likewise, if a clearing facility were established in the United States for privately negotiated interest rate or exchange rate contracts between dealers, most of which were banks, oversight by one of the federal banking agencies would seem most appropriate.

Modernizing the CEA: Harmonizing Regulation of the OTC Markets and Futures Exchanges
Beyond question, the centralized execution and clearing of what to date have been privately negotiated and bilaterally cleared transactions would narrow the existing differences between exchange-traded and OTC derivatives transactions. However, that is not a reason to extend the CEA to cover OTC transactions. As we have argued, doing so is unnecessary to achieve the public policy objectives of the Act. Moreover, as the economic differences between OTC and exchange-traded contracts are narrowing, it is becoming more apparent that OTC market participants share this conclusion; their decision to trade outside the regulated environment implies they do not see the benefits of the Act as outweighing its costs.

Instead, the Federal Reserve believes that the futures exchanges should be allowed to compete in offering such services to professional counterparties, free from the constraints and burdens of the CEA. The conclusion that centralized mechanisms for professional trading of financial derivatives do not require regulation under the Act is valid even if those centralized mechanisms are operated by entities that also operate traditional futures exchanges.

If an exchange chooses to clear professional transactions in financial derivatives through the same clearing house that clears its traditional CEA-regulated contracts, then the clearing should be regulated by the CFTC. But exchanges should be allowed to choose to establish a separate clearing system for such transactions that would be overseen by another regulator. In general, with respect to such transactions, the exchanges should have the same options and be subject to the same constraints as competing service providers.

Summary
To sum up, the Commodity Exchange Act was designed in the 1920s and 1930s to regulate the trading of grain and other agricultural futures by the general public, including retail investors. Since then, what are now called the derivatives markets have undergone profound changes. Both on futures exchanges and in the OTC markets, financial derivatives now account for the great bulk of the activity. Counterparties to financial derivatives transactions are predominantly institutions and other professional counterparties; retail participation in most of these markets is negligible. Financial derivatives are not susceptible to manipulation and professional counterparties do not need the protections that retail investors do.

The Board believes that privately negotiated derivatives transactions between professional counterparties should be excluded from the Act. Furthermore, the exclusion should apply to centrally executed or cleared transactions, provided that any clearing system is subject to official oversight. Futures exchanges should be allowed to compete as operators of such trading or clearing systems, free from the burdens and constraints of the Act.

and in 2005
http://www.federalreserve.gov/boarddocs/testimony/2005/20050908/default.htm

Chairman Shelby, Senator Sarbanes, and members of the Committee, thank you for the opportunity to testify on the Commodity Futures Modernization Act of 2000 (CFMA) and on regulatory issues that have arisen in the context of the reauthorization of the Commodity Futures Trading Commission (CFTC). The chairman's invitation letter requested that the testimony and written statement provide an overall evaluation of the CFMA and address three specific regulatory issues: (1) legislative measures to address fraud in certain retail foreign currency transactions; (2) portfolio margining for security futures products; and (3) futures on narrow-based securities indexes.

Overall Evaluation of the CFMA
The Federal Reserve Board believes that the CFMA has unquestionably been a successful piece of legislation. Most important, as recommended by the President's Working Group on Financial Markets in its 1999 report, it excluded transactions between institutions and other eligible counterparties in over-the-counter financial derivatives and foreign currency from regulation under the Commodity Exchange Act (CEA).1 As the Working Group argued, regulation of such transactions under the CEA was unnecessary to achieve the act's principal objectives of deterring market manipulation and protecting investors. Such transactions are not readily susceptible to manipulation and eligible counterparties can and should be expected to protect themselves against fraud and counterparty credit losses. Exclusion of these transactions resolved long-standing concerns that a court might find that the CEA applied to these transactions, thereby making them legally unenforceable. At the same time, the CFMA modernized the regulation of U.S. futures exchanges, replacing a one-size-fits-all approach to regulation with an approach that recognizes that the regulatory regime necessary and appropriate to achieve the objectives of the CEA depends on the nature of the underlying assets traded and the capabilities of market participants. Together, these provisions of the CFMA have made our financial system and our economy more flexible and resilient by facilitating the transfer and dispersion of risk. Consequently, the Board believes that major amendments to the regulatory framework established by the CFMA are unnecessary and unwise.

Nonetheless, the Board supports some targeted amendments to the CEA to address persistent problems with fraud in retail foreign currency transactions and to facilitate the trading of security futures products and futures on security indexes.

Fraud in Retail Foreign Currency Transactions
In its 1999 report, the President's Working Group concluded that, to address problems associated with foreign currency "bucket shops," the CEA should be applied to transactions in foreign currency futures if they are entered into between a retail customer (an individual or business that does not meet the definition of an eligible counterparty) and an entity that is neither federally regulated nor affiliated with a federally regulated entity. The CFMA included provisions that were largely consistent with the Working Group's recommendation.

The CFMA has allowed the CFTC to take numerous enforcement actions against retail foreign currency fraud. However, the CFTC has continued to encounter certain difficulties in this area. These difficulties have stemmed from two sources. First, the CFTC's authority is limited to foreign currency futures, and some entities have fraudulently marketed contracts that, although similar to futures, have characteristics that have led some courts to conclude that they are not futures and that the CFTC has no jurisdiction. Second, some perpetrators of fraud have taken advantage of the CFMA's exclusion from CFTC jurisdiction of retail foreign currency futures offered by futures commission merchants (FCMs) and their affiliates. These perpetrators have set up thinly capitalized FCMs and used affiliates of those FCMs or unregulated unaffiliated entities to fraudulently solicit retail customers.

The Board believes that fraud undermines the functioning of financial markets and that some governmental entity must have the authority to protect retail investors in foreign currencies by taking enforcement action against entities that are defrauding them. Although the states have an important role to play in combating fraud, the President's Working Group concluded in 1999 that the CFTC is the appropriate federal regulator and should have clear authority to pursue retail fraud by foreign currency bucket shops. Consequently, the Board supports targeted amendments to the CEA that address the specific difficulties that the CFTC has encountered in taking enforcement action in this area. It is critical that those amendments be carefully crafted to avoid creating legal or regulatory uncertainty for legitimate businesses providing foreign exchange services to retail clients. The Board would be opposed to extending any new CFTC authority to retail transactions in other commodities without further careful consideration and demonstrated need. Provisions crafted to avoid creating uncertainty for legitimate foreign currency businesses are unlikely to provide the same protection to a much wider range of businesses.

Portfolio Margining for Security Futures
The CFMA gave the Board authority to prescribe regulations establishing initial and maintenance margins for security futures products or to delegate that authority jointly to the CFTC and the Securities and Exchange Commission (SEC). The Board delegated its authority to the commissions in a letter dated March 6, 2001. The letter indicated that the Board concluded that delegation is appropriate because it believes that the most important function of margin regulations is prudential--that is, to protect margin lenders from credit losses. In the case of security futures, the lenders are broker-dealers and FCMs, and the commissions are responsible for all other aspects of prudential regulation of those firms.

Portfolio margining is a method for setting margin requirements that evaluates positions as a group or portfolio and takes into account the potential for losses on some positions to be offset by gains on others. Specifically, the margin requirement for a portfolio is typically set equal to an estimate of the largest possible decline in the net value of the portfolio that could occur under assumed changes in market conditions. Portfolio margining is an alternative to "strategy-based" margining. With strategy-based margining, the potential for gains on one position in a portfolio to offset losses on another position is taken into account only if the portfolio implements one of a designated set of recognized trading strategies. The margin requirements for recognized strategies are set out in the rules of self-regulatory organizations. Each strategy is viewed in isolation; the remainder of the portfolio and other strategies are not taken into account.

The Board has supported the use of portfolio margining for some time. For example, in 1998 the Board amended Regulation T to allow securities exchanges to develop portfolio margining as an alternative to strategy-based margining, subject to SEC approval. In its 2001 letter delegating its authority over margins for security futures products jointly to the CFTC and the SEC, the Board requested that the commissions, either jointly or individually, report to the Board annually on their experience exercising the delegated authority and to include in those reports an assessment of progress toward portfolio margining for securities futures products. The Board continues to believe that portfolio margining is both more risk-sensitive and more efficient than strategy-based margining.

Unfortunately, to date no progress has been made toward portfolio margining of security futures products. Because the CFMA stipulates that margin requirements for security futures products must be consistent with margin requirements on comparable securities options, progress for security futures requires progress on options. Although margin requirements for options have for many years been portfolio-based at the clearing level, customer margins were until very recently strictly strategy-based. However, in July the SEC approved rule changes that create a two-year pilot program that would permit portfolio margining of options and futures positions in broad-based stock indexes held by customers with a minimum account equity of $5 million or more. If this pilot program were adopted as a margining system available to all customers for a broader range of products, significant progress toward portfolio margining of securities futures products would become possible.

The Commodity Exchange Reauthorization Act of 2005, which the Senate Agriculture Committee approved in July, proposes to make progress on portfolio margining (1) by eliminating the need for margins required on security futures to be consistent with those required on comparable options and (2) by substituting CFTC oversight of security futures margins for joint regulation by the CFTC and the SEC under delegation from the Board. This approach would be a marked departure from the regulatory regime for security futures that was established by the CFMA. The Board believes that it is appropriate for the Congress to spur progress toward portfolio margining for security futures but that this can be accomplished without changing so fundamentally the regulatory regime for security futures margins. For example, the Congress could spur more-rapid progress toward portfolio margining for both security futures products and options by requiring the commissions to jointly adopt regulations permitting the use of risk-based portfolio margin requirements for security futures products within a short but reasonable time period and requiring the SEC to approve risk-based portfolio margin requirements for options within the same period.

Futures on Narrow-Based Securities Indexes
The CFMA distinguished between futures on broad-based security indexes, which are subject to the exclusive jurisdiction of the CFTC, and futures on narrow-based securities indexes, which are considered security futures products and, as such, are subject to joint CFTC and SEC jurisdiction. Some futures exchanges argue that the definition of a narrow-based index in the CFMA was drafted with reference to the U.S. equities markets and that, in any event, the definition unnecessarily restricts the trading of futures on indexes of U.S. debt obligations and foreign securities.

The 2005 Reauthorization Act would address those concerns by requiring the CFTC and the SEC to jointly promulgate a revised definition of a narrow-based securities index that would better reflect capitalization, trading patterns, and trade reporting in the underlying markets. Such a definition would permit futures on indexes of U.S. debt obligations and foreign securities to trade as broad-based indexes if the indexes are not readily susceptible to manipulation.

Although the Board does not have a strong interest in this issue, it favors taking another look at the appropriateness of applying the existing definition of a narrow-based index to indexes of foreign securities. First, for many years several futures on foreign equity indexes have been trading abroad and have been offered to customers in the United States. Although these indexes would be considered narrow-based indexes under the existing definition, we see no evidence that these indexes have been susceptible to manipulation. Second, the provision in the 2005 Reauthorization Act can be seen as simply reiterating an existing requirement in the CFMA that the CFTC and the SEC jointly adopt rules that define narrow-based indexes based on foreign securities.

http://www.businessweek.com/magazine/content/10_05/b4165028377344.htm

When the definitive chronicle of America's Great Recession is written, Patrick M. Parkinson will merit more than a footnote. Rewind to the late 1990s. Federal Reserve Chairman Alan Greenspan wanted derivatives kept free of government oversight. He relied on Parkinson, then a midlevel manager in the Fed's division of research and statistics who was especially knowledgeable about how derivatives worked, to help make his case. As Parkinson told Congress in 1999, it was "unnecessary" for the government to supervise over-the-counter derivatives because the companies that trade them "are quite adept at managing credit risks and are more likely to base their investment decisions on independent judgment."

They won the fight when a Republican-controlled Congress passed the Commodity Futures Modernization Act of 2000. "[Parkinson] understood all of the complex derivatives, their pros, their cons, and their difficulties," Greenspan told Bloomberg BusinessWeek. Seven years later, derivatives played a central role in igniting the worst recession in half a century. After a year of emergency interventions, temporary backstops, and stimulus spending, Congress and the Obama Administration are at work on legislation to permanently fix the financial system.

And Parkinson? He's had a change of heart—and been promoted. Fed Chairman Ben Bernanke in October put Parkinson in charge of monitoring the nation's biggest banks as the director of the Banking Supervision & Regulation Div. Parkinson also spent part of last year helping the White House produce a new road map for financial regulation that forces many derivatives to trade on open exchanges or regulated electronic systems. That plan would give the Fed the role of super-regulator of the most important financial companies—a position Parkinson will hold if Congress approves.

His critics are dumbfounded. "We're not only putting the fox in charge of the henhouse," says Lynn Turner, the chief accountant at the Securities & Exchange Commission from 1998-2001, "we're giving him a bottle of barbecue sauce."

“Atlas Shrugged” Sets a New Record!

January 21, 2010

Irvine, CA--Ayn Rand’s “Atlas Shrugged” sold more than 500,000 copies in 2009, more than double the previous record set in 2008, reports Penguin USA, publisher of the four American editions. For the first time, combined annual sales of Ayn Rand’s four novels totaled more than 1,000,000 copies.

“The explosion in sales of ‘Atlas Shrugged’ more than a half century after its initial publication is truly remarkable,” said Dr. Yaron Brook, president of the Ayn Rand Institute. “Annual sales of ‘Atlas Shrugged’ have been increasing for decades to a level never seen in Ayn Rand’s lifetime.

“People are discovering the prescience of Ayn Rand’s writing. They’re seeing the policies of ‘Atlas Shrugged’ villains Wesley Mouch and Cuffy Meigs acted out by our government officials today. They’re looking for answers on how to stop government intrusion in our lives. ‘Atlas Shrugged’ provides those answers, and many more.”

First published in 1957, “Atlas Shrugged” continues to draw media attention, including a recent episode of “Stossel” on Fox Business Network dedicated to the novel. More than 7,000,000 copies of “Atlas Shrugged” have been sold since it was first published.

repeat. repeat. you put this up earlier.

if i recall you find this hack "intriguing" although you disavow just enough without any specificity to be part of a real conversation.

she was a horrible self-centered bitch with dubious habits and little grasp of economic realities and possibilities. good idol for you RS.

Note to self :Ayn Rand and Champagne socialist do not get along

so you're poor? or are you a champagne libertarian?

note to self, i don't get along with those who have no empathy.

not surprised in the slightest you worship at the alter of rand. shows a singular lack of sophistication in thought.

altar. although alter is interesting, no?

Oh, there the toilet whore is.

2 week vacation done already?

Or are you still on vacation and you lied when you said you wouldn't be (and hadn't in the past been) posting while on vacation?

aboutready
30 minutes ago
ignore this person
report abuse
...
note to self, i don't get along with those who have no empathy.
...

Note to all, all streeteasy posters must have empathy for aboutready because her mother died and her daughter had asthma.

This rule does not reply in the reverse, aboutready is entitled to curse and scorn you and anyone else, whether you had a family illness or death, or not.

Riversider, keep it short.

Aboutready is a toilet whore. You don't need to provide many links or essays on it. She provides ample evidence herself, if you give her an hour or two.

Actually , I'm a Prosecco libertarian.

columbia, maybe then the 4 of us are related?

hfscomm1, interesting comment, I tend to agree with you:

hfscomm1
26 minutes ago
stop ignoring this person
report abuse

aboutready
30 minutes ago
ignore this person
report abuse
...
note to self, i don't get along with those who have no empathy.
...

Note to all, all streeteasy posters must have empathy for aboutready because her mother died and her daughter had asthma.

This rule does not reply in the reverse, aboutready is entitled to curse and scorn you and anyone else, whether you had a family illness or death, or not.

(04/01) A prominent mortgage desk put out a commentary casting doubt on the
latest White House plan to stem foreclosures.
"We're supposed to believe that this latest effort to build an artificial
floor under home prices will perform better than the Hope Now Alliance announced
by President Bush in October 2007; better than the revised Hope Now program
announced two months later; better than Hope for Homeowners, which was passed by
Congress and signed by Mr. Bush in 2008; better than the foreclosure moratoriums
promoted by Fannie Mae, Freddie Mac and Representative Barney Frank into early
2009; better than the $127 billion that taxpayers have thus far poured into Fan
and Fred, much of it for foreclosure relief; better than the Federal Reserve's
purchase of $1.25 trillion in mortgage-backed securities; better than last
year's expansion of the 2008 First-Time Home Buyer Tax Credit to up to $8,000;
better than the billions in stimulus dollars that have been spent "to restore
neighborhoods hardest hit by concentrated foreclosures," according to the White
House; better than the $1.5 billion announced earlier this year to state housing
finance agencies in the electorally hard-hit areas of Arizona, California,
Florida, Michigan and Nevada, and $600 million more this week for other states
certified as political disaster areas; and certainly better than Mr. Obama's
year-old Home Affordable Modification Program to offer mortgage modifications to
troubled borrowers or his companion program to offer generous refinancing. We
could go on, but you get the joke, even if the housing market hasn't."
SFW: RMBS: Traders tend to doubt the new White House plan 91) ☆ Page 2/3
In the commentary, the desk suggests that if Washington had just let
housing prices fall on their own, while painful, they would have found a natural
bottom. In that scenario, pain would have been very severe for quickly for some
homeowners who bought more expensive homes than they could afford, but the pain
might actually be over by now.
"Instead we are heading toward year five of the housing recession, with
Washington proposing even more ideas to prolong the agony. One senior banking
regulator" calls it "extending and pretending," the trader wrote.