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Posts Tagged ‘homebuyers’

Supply-Side Economics | The CERF Blog

www.clucerf.org1/10/12

As early as the 1950s, Mundell proposed an economic policy program of tight monetary policy to stabilize the value of the currency and low tax rates to stimulate economic activity. During the late … The Reagan Scenario included a sharp drop in inflation, a recession in 1982 due to tight monetary policy, passage of the Kemp Roth tax cuts and an economic boom starting in 1983. … Inflation and interest rates are much lower and tax rates are lower as well. While a high …

The hidden dangers of low interest rates | David Cay Johnston

blogs.reuters.com1/10/12

Low rates also come at a cost, cutting income to older Americans and to pension funds. This forces retirees to eat into principal, may put more pressure on welfare programs for the elderly, and … If rates return to, say, 6.64 percent, the level they were in 2000, one year's interest costs would equal the individual income taxes for all of 2011 plus the first few weeks of 2012. Last week , rates took a step in that direction. The yield on the 10-year bond, a benchmark for other …

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President Obama’s recent claim to homeowners, that refinancing their mortgage loans at a lower rate, equates to a tax cut, doesn’t ring true for many tax experts.

Obama said at a recent press conference that the housing plan his administration had launched, had “already contributed to a spike in the number of homeowners who are refinancing their mortgages, which is the equivalent of another tax cut. The main message we want to send today is that there are 7 to 9 million people across the country who right now could be taking advantage of lower mortgage rates and that is money in their pocket”.

What Obama failed to mention however is that unlike the housing boom that led to the current financial crisis, this time, only borrowers with strong credit ratings and stable jobs will be able to save money if they refinance.

Obama’s announcement caused many tax analysts, including Gil Charney, who is an analyst for The Tax Institute at H&R Block to shout “foul”;

“While there could be overall savings by refinancing and lower monthly payments, there also could be reduced tax benefits as less interest is paid. Also refinancing could extend the period before the mortgage is fully paid off, so this might not be desirable for someone who wants to be mortgage-free. Therefore, someone about to make a financial decision should take their complete financial picture into account, not just their tax situation”.

In fairness to Obama, some analysts like Mark Steber, who is vice president of tax resources at Jackson Hewitt Tax Service did express a more supportive viewpoint, “While generally there is no tax advantage to refinancing at a lower rate, an individual can save on the total out of pocket costs each year over the life of the loan. Though a tax bill will actually increase after refinancing, the increase in taxes may be less than half of the total difference in interest paid, so the taxpayer may save more money than their taxes increase, therefore resulting in net savings”.

The Obama administration just announced two new programs, that it’s hoped will help homebuyers who are experiencing problems paying their mortgages.

The first program, which should be up and running within a month is intended to help borrowers that have second mortgages stay out of foreclosure, and it will make cash amounts up to $12,000 available to servicers, investors and borrowers who modify loan terms, and a government spokesperson said that as many as a two million participants in the mortgage-modification program may be eligible for the second-lien assistance.

An example of how the plan would work, would be borrower who had a $250,000 interest only, first mortgage and was paying 6% interest. If the housing expenses were equal to 40% of the borrowers income, then the government would pay $2,625 per year, for five years in order to reduce the payments. Moreover, if that same borrower also had a $43,942 second mortgage and was paying 8.6% interest, then the government might, and I say “might”, pay one half of the $2,336 annual cost for five years.

The government’s second plan, is intended to renew interest in the Hope for Homeowners program, which until now has attracted very little enthusiasm from either borrowers or lenders. The program is primarily aimed at borrowers who owe more on their mortgages than their homes are worth, and to make the plan more attractive, the government will now provide a $2,500 incentive fee to loan servicers, and also require them to consider the plan when reworking a mortgage.

Overall reaction to the plans seems favorable, with Laurie Goodman who is an analyst at the Amherst Securities Group LP saying, “The new measures may ease mortgage investors’ concerns that the biggest banks and servicers would be tempted to rework too many loans under the program, in order to bolster their home- equity portfolios. Certainly, it appears that the Treasury has listened to first-lien investors and the announcement goes a very long way toward addressing their objections”.

Treasury Secretary Timothy Geithner said in a statement, “Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system”.

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