Mar272014
Tax policy inflates house prices for the affluent
Home mortgage interest deduction encourages high wage earners to borrow more; capital gains tax exemption encourages wealthy to invest more in personal homes. The combined effect inflates house prices.
Politicians promote home ownership through a variety of subsidies and tax loopholes, ostensibly to promote a sense of community and quell civil unrest, the modern bread and circuses. A recent Republican tax reform proposal curtails homeownership subsidies, and the proposal is vigorously opposed by realtors, homebuilders, and lenders who benefit from the subsidies.
Supporters of the subsidies generally control the perception of their largess through planted stories in the financial media appealing to homeowners who rely on the subsidy to reduce their tax bills; however, those who want to reduce these subsidies recently gained press attention of their own, so the public is finally exposed to the truth about who these subsidies benefit and how much they cost.
Tax benefits that inflate house prices
There are two provisions in the tax code that strongly impact house prices: the home mortgage interest deduction and the capital gains tax exemption. Both tax loopholes make owning a family home more financially desirable by reducing tax burdens on carrying costs and disposition profits.
The home mortgage interest deduction benefits high wage earners who borrow most of the money to buy a personal residence, which most high wage earners do. This tax break doesn’t benefit the wealthy who pay cash directly, but since it makes debt cheaper for high wage earners, the tax break inflates house prices where high wage earners and the wealthy live.
The capital gains tax exclusion, a tax break that survives the reform with some modification, provides an incentive for the wealthy to invest in personal residences. Ordinarily, investing in an expensive personal home wouldn’t be a wise decision for a wealthy person because the property taxes are an expensive carrying cost (which most people ignore); however, since any gain on sale is potentially exempt from capital gains taxes up to a high threshold ($250,000 single, $500,000 married), wealthy owners gain an offset to their high carrying costs. Plus, it provides a financial justification for buying an opulent home.
The increased incentive for the wealthy to buy homes shows up in Coastal California. The housing market reports I publish show most of the beach communities as being overvalued today. Some of this overvaluation is due to the increasing wealth concentration among the 1% who buy properties in these areas, but some of the overvaluation is also caused by an increased incentive for the 1% to park money in these properties due to the capital gains tax break. My reports use the 1993 to 1999 period as a benchmark, and since the capital gains tax exclusion was passed in 1997, the impact wasn’t felt until after the benchmark was established.
The potential home ownership subsidy changes would flatten Coastal California house prices because house prices here rely on these subsidies. Reducing or eliminating the tax benefits would increase home ownership costs and thereby make home ownership much less desirable as an investment. Home ownership subsidies inflate house prices because of the investment incentive and introduce volatility to the system. Further the subsidies do little to increase home ownership rates or improve communities. Given the high cost to the government, $121 billion in 2013 for the home mortgage interest deduction alone, it’s a costly subsidy that should be eliminated or curbed.
Should Congress Limit the Mortgage-Interest Deduction?
March 16, 2014 8:35 p.m. ET 
Homeowners in the U.S. last year received a total of roughly $70 billion in federal tax breaks through the deduction. But discussions in Congress about a broad tax overhaul are heating up, and all sorts of tax deductions—including the mortgage-interest deduction—are being discussed by both parties.
Supporters of the mortgage-interest deduction say it encourages homeownership and gives the middle class a better shot at financial security. The deduction helps middle-income purchasers by making their mortgage payments more affordable and by helping these families build equity in their homes.
But critics say the deduction mainly benefits those with higher incomes. They say that it does nothing to help lower-income Americans who rent. In addition, they argue, in these tough budgetary times the government could put the forgone tax revenue to good use.
[full article explores both viewpoints]
The tax subsidy for mortgage interest does not make houses more affordable for the middle class because the value of this benefit gets priced in to the resale price of the house. Any financial market will find an equilibrium, so shortly after the tax break was put in place, house prices inflated to price in the benefit. The cost of ownership calculations available on properties on this site shows how the tax savings brings monthly costs back in line with rents. If this subsidy were eliminated, people wouldn’t be willing to borrow so much, and prices would fall to a new equilibrium.
Mortgage tax breaks trickle up, new study shows
Benefits said to help wealthier people acquire larger homes more than boost ownership
By Nick Timiraos March 24, 2014 9:43 AM
Federal tax benefits for homeowners primarily help wealthier people borrow more money to buy larger houses rather than boost homeownership, according to a new study. …
Policy makers have long supported homeownership in the tax code because it is viewed as having broad societal benefits, and they have been loath to curb the mortgage-interest deduction, which is popular with voters and strongly defended by the real-estate industry. But the new findings add to a growing body of economic research that suggests Americans don’t benefit broadly from the tax preferences, which the study estimates cost the government $175 billion annually in forgone revenue.
Most people don’t benefit, particularly those people in flyover country. Unless the debt is over $160,000, the borrower is better off with the standard deduction.
In addition to the mortgage-interest deduction, owners benefit from capital-gains avoidance when realizing a $250,000 gain from a home sale, a provision that benefits households in coastal markets with greater home-price appreciation.
Not everyone agrees that the tax code encourages purchases of larger homes. Robert Dietz, an economist at the National Association of Home Builders, said tax filings also show larger families tend to take larger deductions, and larger families need more space. …
LOL! Is that the best he could come up with? Larger families need more space? I guess that justifies a McMansion, right?
The research also found the tax benefits for owner-occupied homes generally accrue to a minority of households. Homeowners with incomes above $100,000 were between three and four times as likely to claim the tax benefit as those earning less than $100,000.
The mortgage-interest deduction is available only to those who itemize deductions on their tax returns, and few low-income households itemize because they generally can have a lower tax bill by taking the standard deduction. …
This may ultimately prove the downfall of this tax subsidy. When the lower half realize they are subsidizing the mortgages of the upper half, it won’t sit well with them. Right now, ignorance is maintaining their support, but with more articles like this one expounding the truth, lower wager 
earners might demand change.
Mr. Hanson’s study examined the sharp disparities in benefits by region and income. The average annual savings for households claiming housing tax benefits are $12,300 in San Francisco and $10,700 in Los Angeles, compared with $1,600 in Detroit and $2,900 in Dallas, the study found.
Meantime, residents in San Francisco who earn more than $100,000 save $8,000 annually from the mortgage-interest deduction, compared with savings of $3,700 for residents who earn less than $100,000. In Detroit, higher earners save more than $4,000, while those earning less than $100,000 save $1,600.
The study also found that suburban residents were twice as likely to benefit from the tax code as those in urban areas.
There is no justification for maintaining the home mortgage interest deduction in its current form. It’s merely a tax break for high wage earners who don’t need it, and they take this money, bid up house prices, and give most of it to a bank. The banks are the ones most interested in keeping the deduction alive because nearly all of it makes it way into their coffers.
Robert Shiller on Market Bubbles – And Busts
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“The spot price (not futures speculation-driven) of US Foodstuffs is the best performing asset in 2014 – up a staggering 19%”
The Real Inflation Fear – US Food Prices Are Up 19% In 2014
Imagine that; food prices are up, housing is up, health care is up, college tuition, etc. and yet middle class incomes and poor incomes have not increased. How in the world can that happen?
Ignorance? Or, perhaps malice?
Everyone has seen the 100-year US Dollar destruction chart; so here is the 200-year… a century without The Fed and a century with… which would you prefer?
http://www.zerohedge.com/news/2013-12-12/200-years-dollar-debasement
When choosing between debasement and deflation, politicians decided they preferred debasement, so the formed the federal reserve to do their dirtywork.
Too bad the Fed has taken it too far this time. The next credit crisis will be deflationary just like the others, with the exception that this one will be worse because the FED has shot off all the ammo.
Lee, the coming contraction will be deflationary only in real terms. No way in hell the Fed won’t fight this tooth and nail in nominal terms. It’s all they can do. It is their only weapon and the spineless people will beg for it. Fed ammo is infinite.
Can you name ONE debt crisis in the western world that was not deflationary? Not 3rd World.
And before you say the Weimar Republic, you need to understand that Germany suffered massively from that debacle during the Great Depression.
Why are you artificially limiting inflationary debt crises to what you are refering to as “not 3rd world”. The term and designation third world has only been around for a extrememly short time frame relative to the times of historical debt crisis.
And why artificially limit debt crisis to “western world”? Debt crisis have been occuring since the advent of money and certainly not been limited to the western world.
Can you name one rock and roll singer who had a number one hit in the USA under the age of 15 with bi-polar disorder who was born in Estonia? If you can’t, that means there were no Estonian rock and roll singers.
What was the Weimar Republic’s solution to depression? So why would you exclude the Weimar Republic?
matt138 – You are absolutely correct. The Fed only has one weapon, debt/money supply increase, but many methods to deliver it.
>>>What was the Weimar Republic’s solution to depression? So why would you exclude the Weimar Republic?
Because we’re not the Weimar Republic, and despite all the Bullshit from people like Peter Schiff, we’re not going to become the Weimar Republic.
>>>The Fed only has one weapon, debt/money supply increase, but many methods to deliver it.
And they’ve done it all the way to 0% interest rates and 80 billion a month in QE … THEY HAVE FAILED!
After 33 years of perpetually cheaper interest rates, these assholes at the Fed refused to let the economy do what it was suppose to do, RETRACT … and now we’re gonna pay the price. Free markets are the only real answer to sustaining natural growth in an economy … when you get centralized planers, who face political pressures, you get horrific situations like we’re in right now.
A debt crisis must be deflationary because the destruction of debt, if not recouped by collateral, results in a decrease in the money supply, deflation by definition. The federal reserve prints money specifically to counteract the destruction of money through debt deflation. That is one of their purposes.
Prior to the federal reserve, we deflation nearly as often as we had inflation or expansion. After the federal reserve, the number of bouts of deflation have reduced significantly.
Apparently, the ravages of deflation are more painful to politicians and the general public than inflation, or we wouldn’t have a federal reserve to do what it does. Deflation is certainly not appreciated by government because you can’t tax it. Inflation can be taxed through capital gains and property taxes, so governments favor it over deflation.
I think the accurate picture is to show this chart:
http://ionevoxxi.files.wordpress.com/2012/09/crb-index-chart.png?w=620&h=364
Further proof that another collapse in commodities is lurking.
Peter Schiff: Fed’s QE creating massive stock, real estate bubbles for 1%
It has long been argued since the beginning of the Federal Reserve’s quantitative easing program that bubbles are being formed and once they burst then the United States economy would be in worse shape than at the height of the Great Recession.
Peter Schiff, president of Euro Pacific Capital, told Yahoo! Finance on Tuesday that because of the central bank’s bond-buying initiative stocks and real estate are approaching a massive bubble territory. He stated that today’s stock market is starting to become a lot bigger than what the U.S. had in 2008 and in the 1990s.
Real estate bubbleThe difference in today’s stock market as opposed to previous ones is that a lot of people were participating, but now it has become a market for the one percent, says Schiff.
He’s lost a lot of credibility with Gold and the US Dollar. He’s really become Dogmatic with regard to these issues.
Hey Peter, we are the best house in a bad neighborhood.
Whether the bubble bursts or not is certainly debatable, but when you look at federal reserve policy, quantitative easing has done little other than inflate the value of assets held by the 1%.
What else was quantitative easing supposed to do?
You and I agree on that.
Lee, does the fed and gov embrace deflation or inflation as policy? what leads you to believe they will change policy? Is it in their best interest to do so?
All the governments and central banks around the world embrace inflation, and for the last 5+ years they have thrown everything except the kitchen sink to fight deflation. The world has done trillions in QE, yet where’s the inflation???? All I see is more speculation (bubbles) in assets and commodities.
Here’s what you have to ask yourself … HOW WELL IS THIS WORKING?
Japan has been at it for over 20 years, and they presently have 0 inflation in the face of QE that’s 3 times (per capita) what the Fed is doing.
So to answer your question, everybody, including America has limits. IMO, We are now approaching that limit. This is not the Weimar Republic.
If prices should be falling 10%, yet prices are rising 3%, is that not a 13% price increase due to money printing?
Also need to look at the qualitative aspect: idiots think the money printing has helped economy reach escape velocity and recovery. ‘All is well’ perception maintains faith in dollar and yen as well as flight from gold, even while quantitative analysis shows rising rates will eventually consume both countries’ tax revenues and both will end in currency crisis.
When the qualitative aspect picks up steam, no amount of money printing or curtailing of money printing will be able to stop a loss of faith.
Why isn’t the increased price in assets the result of inflation? The government wants you to think that inflation is only the rise in price of those items they choose. The government has redefined inflation to mean price increases.
Inflation is actually an increase in the money supply and prices increases are the result of inflation. The CPI is not a measure of inflation. The CPI is a manipulated and intentionally inaccurate measure of consumer price increases.
And why do you assume that the Fed’s intention is consumer price increase or middle or poor class income increase?
Yeah, there are no price increases if you exclude anything that increased in price.
You are certainly correct that this is not the Weimar Republic. The Deutschmarke was never the world’s reserve currency. Oil was not traded and negotiated only in Deutschmarkes.
Art, collector autos, upper end real estate, yachts, stocks, etc. have increased in price in the time frame, 5 years, you cite. Heck, even gold has appreciated by over 40% in that 5 years.
Rising Incomes are inflation.
The last 5 years:
The Fed has done 4 trillion in QE, yet no inflation.
The Govt borrowed 7 trillion, yet no inflation.
The Fed made the overnight rate 0-.25%, yet not inflation.
Meanwhile, the true barometer to inflation according to people like you is Gold. People like you say that Gold is money. I say the reason why we have money, is because Gold is not money. Gold has been hammered since it’s become apparent that we do not have any inflation.
IMO, The outcome of this war is already set in stone, now we just get to watch it happen. BTW, just so you know the Fed lost.
The country as a whole probably is close to peak debt and lowering of the rates only allowed so much more debt to be piled on. Since the debt was an increase in consumption in the past now the debt has to be repaid in the future. Since there is interest attached to the debt the amount to be repaid in the future is greater than what was consumed in the past. This will cause deflationary pressure as even greater amount of current and future consumption are lost.
“What else was quantitative easing supposed to do?”
Quantitative easing was supposed to spur the economy and put ordinary citizens back to work. Nobody outside the 1% gives a crap about asset values, but they do care about having a job. Politicians supported quantitative easing ostensibly to put people back to work.
I’m assuming you meant “supposed to do” to mean “what they would have us believe”, because I don’t see how increasing the money supply *the way it was done* via QE was *ever* going to put anyone back to work.
A New Deal series of TVA / Hoover dam infrastructure projects might have accomplished that, but little of the $700B stimulus earmarked for “shovel-ready projects” was never spent by my understanding. We had little stimulus, mostly bailouts.
Yes, sarcasm is problematic in prose because there is no voice inflection to pull it off.
What they were telling the general public was public relations nonsense.
Got it. Funny, though, how often I’ve heard it said that it has just been proven that the government cannot stimulate growth as Keynesians say it can. As if it has been tried…
Game ain’t over yet. We’re only in the 6th inning…
Criminals at Bank of America Settle with FHFA for $9.3B
Bank of America has agreed to a multibillion settlement with the Federal Housing Finance Agency (FHFA) to resolve allegations of securities fraud related to loans sold to Fannie Mae and Freddie Mac at the height of the housing bubble.
The settlement resolves four lawsuits filed in September 2011 against BofA, Countrywide, and Merrill Lynch, the latter two of which were acquired by the megabank in 2008. The agency’s original complaint alleged misrepresentations of mortgage loan quality in regard to private-label residential mortgage-backed securities (RMBS) purchased by the GSEs between 2005 and 2007. Allegations of common law fraud were made in the Countrywide and Merrill Lynch cases.
According to announcements made by all parties involved, under the agreement, BofA will make an aggregate payment of approximately $9.33 billion, $3.2 billion of which will go toward the repurchase of certain RMBS at fair market value. In return, the bank will be released from FHFA’s pending lawsuits and will be cleared from “certain other claims related to the private-label RMBS in dispute.”
The settlement covers approximately $57.5 billion (in purchase cost) of RMBS purchased by the GSEs, according to a release from BofA.
FHFA Director Mel Watt celebrated the settlement, saying in a statement that it “represents an important step in helping restore stability to our broader mortgage market and moving to bring back the role of private firms in providing mortgage credit.”
“Many potential homeowners will benefit from increasing certainty in the marketplace and that is very much the direction we should be taking,” he added.
The suit with BofA is just one of more than a dozen the agency filed against banks in 2011 as part of its efforts to recover losses Fannie and Freddie suffered through the crash. Of 18 suits filed, FHFA now has claims remaining in seven.
In addition to the FHFA agreement, Freddie Mac also announced a separate settlement with BofA concerning claims related to reps and warranties on single-family loans underlying five Freddie Mac Structured Pass-Through Certificates (“T-Deals”). In exchange for a payment of $134 million, the enterprise has agreed to release the bank from existing and future loan repurchase obligations for those mortgages.
“We are pleased that we have resolved this matter with one of our largest seller/servicer customers and counterparties,” said Freddie Mac CEO Donald Layton. “This settlement is an equitable outcome that allows both Freddie Mac and Bank of America to put these issues behind us and focus on the future.”
As for BofA, it expects its Q1 2014 income to take a cut of about $3.7 billion as a result of the settlement—and that’s not the only litigation expense on its radar. Lawyers for the bank appeared in U.S. District Court in March to argue for the penalty phase of a fraud case decided last October, when BofA was held liable for allegedly reckless loans made by Countrywide before its acquisition. While the government is pushing for $2.1 billion in fines—a far cry from the $864 million originally sought—BofA says it should be penalized for the amount of profit it made from selling the loans: $0.
Investor Purchases Fall in February
“Meanwhile, a key source of demand over the past two years—institutional investors purchasing single family homes as rentals—is starting to decline, and it’s not yet clear if that diminishing demand will be filled by first-time homebuyers and move-up buyers,” Blomquist said.
Institutional investors made up 5.9 percent of all U.S. residential property sales, up from 5.0 percent in January, yet down from the February, 2013 figure of 7.2 percent. Institutional investor sales in February declined for the third consecutive month on a year-to-year basis after 19 consecutive months of year-over-year increases.
“Since Fannie Mae inventory is mostly comprised of completed home foreclosures with FHA loans, investors target these properties because they tend to be smaller homes that make for better rental property investments,” said Sheldon Detrick, CEO of Prudential Detrick/Alliance Realty. “There is very little Fannie Mae inventory left, which coincides with the fact that institutional investors have slowly backed out of the market.”
What is Causing the Decline in Short Sales?
Consequences stemming from the expiration of the Mortgage Forgiveness Debt Relief Act may be surfacing, according to a perspective piece written by CoreLogic’s Kathryn Dobbyn. The piece found that throughout 2012 and into 2013, short sales had been steadily declining, partly due to rising home prices.
Dobbyn is careful to note that, “While two data points do not make a trend, this negative trajectory appears to have picked up pace in 2014 with short sales dropping 0.6 percentage points from 5.2 percent of total sales in December 2013 to 4.6 percent in January 2014.”
Preliminary February data would suggest that short sales will continue to decline, quite precipitously to 2.2 percent. However, REO-sales have not declined in a similar fashion, moving instead with normal seasonal patterns, according to the CoreLogic analyst.
Dobbyn attributes the decline, not to home price appreciation or other factors, but to nascent effects of the expiration of the Mortgage Forgiveness Debt Relief Act.
“This act, which has been subsequently renewed and extended twice, allowed borrowers to exempt the amount of forgiven mortgage debt from their income, making the short sale a more attractive option for borrowers trying to avoid foreclosure,” Dobbyn said.
Dobbyn writes that the expiration of the act, which would create hefty taxable income for a borrower if they proceeded with a short sale, likely made borrowers considering such a move think twice.
Expiration of the act had other consequences as well. “With the forgiven debt now taxable income, a loan modification with a principal reduction presents a more complicated decision for both the borrower and the servicer,” the piece said. The increased taxable income could place more stress on an already distressed homeowner, leading servicers to look for other avenues to help trouble borrowers—actions such as a rate reduction or principal forbearance.
While Congress could still decide to extend the act further, with legislation pending in both the House and the Senate, the uncertainty of the extension is putting negative pressure on the volume of short sales and principal reductions.
Question for the mortgage industry folk and/or underwriters – Are large imminent tax bills considered in the origination process? The example above is a loan mod, but what if it were a refi? Does the creditor consider how the tax on principal forgiven might affect the borrower’s finances?
Or, another example is, a borrower who sells a ton of stock (short and long term gains) to obtain the 20% downpayment. e.g. In January 2014 a borrower sells stock to receive a $100k short term gain. The borrower’s income level suggests a tax bill well above a third in April 2015 (if estimated quarterly payments aren’t made). Do underwriters consider this factor?
Housing Barometer: Recovery ‘Staggering’; Headwinds Persist
Recovery in the housing market is stumbling back to solid ground, thanks to a rise in home prices and existing home sales, as well as a drop in foreclosures, according to the latest Housing Barometer report released Wednesday by Trulia.
However, growth in these sectors is dragging disproportionally weaker growth in young adult employment and stagnation in the new home construction sector in its wake, and worsening conditions for borrowers and investors keeps the road to overall recovery bumpy.
The strongest growth is in the value of homes being sold, according to Trulia’s chief economist, Jed Kolko. Though homes nationally were—by Trulia’s measure—5 percent undervalued in the first quarter of 2014, this is a vaulting improvement over the 15 percent undervaluation at the bust’s 2011 low point and the 10 percent undervaluation just a year ago.
Similarly encouraging is the fact that rising home prices and an improving economy are shrinking delinquency and foreclosure rates. According to Kolko, the delinquency/foreclosure rate was 63 percent back to normal in February, up from 42 percent one year earlier. More foreclosures are also being completed and sold, particularly in Florida, New York and New Jersey, where a judicial-foreclosure process can take years.
Holding up total recovery, however, is the steady-but-agonizingly-slow growth of employment among adults age 25 to 34, who are key to creating new households. Nearly 76 percent of these adults work, which is up not even one full percentage point from last year, Trulia reported.
Similar stagnation plagues the new construction sector, which Trulia found to be only 44 percent of the way to where it should be—a 1 percentage point drop from last year.
Further complicating recovery is a tri-level worsening of conditions for buyers and investors. First, though it remains cheaper to buy a home than to rent in the 100 largest metros, rising home prices mean declining affordability and, thus, a bigger challenge for first-time buyers.
Purchase Mortgage Index Down 17% from Last Year
A sharp drop in refinance application volume last week more than offset a pickup in purchase applications, resulting in a net loss, the Mortgage Bankers Association (MBA) reported in its Weekly Mortgage Applications Survey.
MBA’s Market Composite Index, a measure of mortgage application volume, dropped 3.5 percent on a seasonally adjusted basis for the week ending March 21. The decline followed a revised 0.2 percent increase (originally reported as a 1.2 percent decrease) the week prior.
Unadjusted, the index fell 3 percent week-over-week.
In purchase volumes, MBA detected a 3 percent increase on a seasonally adjusted basis, driven largely by a 4.0 percent gain in conventional purchase applications (compared to government share, which was mostly flat). The unadjusted Purchase Index also climbed 3 percent week-over-week but settled 17 percent lower than the same week last year.
On the other hand, the Refinance Index plummeted 8 percent compared to the previous week, including an 8.1 percent drop in conventional refinance applications and a 5.8 percent decline in government refinances—the latter decline bringing government refinance applications down to their lowest level since July 2011.
The refinance share of total mortgage activity for the week was 54 percent, the lowest since April 2010.
Contributing to the drop in refinance demand was an increase in mortgage rates to their highest point since January. According to MBA’s metrics, the average rate for a 30-year fixed-rate mortgage rose to 4.56 percent, with points increasing to 0.29 from 0.26 (including the origination fee) for 80 percent loan-to-value ratio mortgages.
Why did residential sales decline for fourth month straight?
Residential properties sold at an estimated annual pace of 5,083,241 in February, a 0.2% decline from January but up 7% from February 2013, according to the latest report from RealtyTrac.
February marked the fourth consecutive month where sales activity has fell on a monthly basis. This includes single-family homes, condominiums and townhomes.
There were monthly declines in 31 states, and year-over-year declines in six – including Massachusetts, California, Arizona and Nevada. Twenty-one of the nation’s largest 50 metropolitan areas likewise suffered sales volume declines, including Phoenix, Orlando, Las Vegas and Detroit, among others.
“Supply and demand have reached a bit of a standoff in this uneven real estate recovery,” said Daren Blomquist, vice president at RealtyTrac. “The supply of distressed properties — which buyers and investors have come to rely on over the past few years — is evaporating quickly in most markets, but that dwindling supply is not being adequately replenished by non-distressed homeowners listing their homes or by new homes being built.”
Blomquist noted that some of the volume decline is from institutional investors, a primary driver over the past two years. Investor activity has declined in the last several months.
“It’s not yet clear if that diminishing demand will be filled by first-time homebuyers and move-up buyers,” he said.
“Supply and demand have reached a bit of a standoff”
This is the second time he’s used a statement that reminds me of something IR has said. I wonder if he’s a reader of this blog.
I’ve had lunch with Daren. Apparently, back when I was writing for the IHB, I have big following at RealtyTrac. I recently contacted him to take a look at my calculations hoping to pique their interest. I imagine he still reads every once in a while.
However sensible curtailing these breaks might be, when one considers the powerful lobbies which are lined up against it, I don’t believe this has a hope in hell of becoming law.
Then, let’s consider the risks. Taking these breaks away clearly changes the value calculation *as well as affordability*, as some, would tip into delinquency without the tax refund generated by the previous year’s break (yet another disadvantage for first time buyers is that in the first year of home ownership, one is paying out interest, but is not yet enjoying the refund cash flow).
If values and affordability falls, some who are at the margins in terms of affording their current payment will go under, and some who are marginally underwater will throw in the towel. While the feds don’t car about CA RE, they do care about this impact this would have on banks.
Plus, if you believe the feds care about growth (personally I don’t think that they care very much, and in fact could make a compelling argument that corner we’ve painted ourselves in with QE makes any substantial growth dangerous and that therefore thee feds are studiously avoiding growth), then a substantial fall in values would make new construction uncompetitive with existing inventory thus curtailing home starts, and construction is normally a key component of any recovery.
I can’t see it happening.
Unfortunately, every one of your objections is accurate, and it will create a serious headwind in getting any measure passed.
Even more unfortunate, it means the banks won. We are going back to the status quo the inflated the housing bubble and imperiled the banks in the first place.
The banks declared checkmate a long time ago. Game over.
Imperiling the banks? Quite the opposite, re-inflating the prices *without* a bubble (it isn’t a bubble if it never bursts) is how the bank’s are to be saved. This should be followed by a long torturous real-term decline to the mean.
Governance rule no. 1 :the best theft is the one which remains unnoticed.
“…I can’t see it happening….”
But the federal government is broke and needs money.
The key to getting rid of subsidies (like the HMID) is to phase in the change very slowly. I believe such as scenario could play out.
Time will tell.
“But the federal government is broke and needs money.”
Allow me to challenge that. Our government can’t go broke printing the world’s reserve currency. Full stop.
I think we can agree that the government needs the cash flow, but only if we assume that there is an imperative to reduce the debt – not the deficit, but the debt – and I don’t believe that there is.
I don’t know the answer, so I’ll ask the question: If we ceased QE at the end of this year, (joke) and interest rates do whatever they do, what do think the 2016 deficit look like? If we have spiraling deficit, that is where the government might do something radical, but i that case I would expect to see them squeeze the middle class and make dramatic budget cuts rather than disabling an entitlement that benefits the wealthy disproportionately, one that is considered lifeblood to a cornerstone industry.
” Our government can’t go broke printing the world’s reserve currency.”
And if the dollar does not retain it’s status as the world’s reserve currency?
Then there is no bet that isn’t off 🙂
“… if we assume that there is an imperative to reduce the debt – not the deficit, but the debt – and I don’t believe that there is…”
I think your core argument has much merit and is well thought out.
Despite many arguments that support the belief that our current government is morally and ethically corrupt, I still believe many in government who want to do the right thing.
But even the 1% must realize that the 99% must prosper on some level for the 1% elite to live their lifestyles.
it is currently impossible to do the right thing.
a gov that can promise goodies, by way of printing press, to rich – middle – poor voters is incapable of doing the right thing.
there is only one solution to enforce financial discipline, ie the right thing, and that is return to a gold standard. nothing else will stop this runaway spending.
you bring to mind not one, but count ’em two Solzhenitsyn quotes:
Government is more self-serving folly than corruption – “It is not because the truth is too difficult to see that we make mistakes… we make mistakes because the easiest and most comfortable course for us is to seek insight where it accords with our emotions – especially selfish ones.”
Got to leave the sheeple with just enough that don’t come to eat us: “You only have power over people so long as you don’t take everything away from them. But when you’ve robbed a man of everything, he’s no longer in your power – he’s free again.”
I learned something today. I had never heard of Aleksandr Solzhenitsyn. I looked up his quotes . I like how he thinks.
And I would add, particularly of the bailout state.
“(yet another disadvantage for first time buyers is that in the first year of home ownership, one is paying out interest, but is not yet enjoying the refund cash flow).”
Ever heard of adjusting withholding allowances on your W-4?
http://www.irs.gov/pub/irs-pdf/fw4.pdf
Home mortgage interest, and state and local taxes (income and property) is included on line 1 of page 2.
Touche.
To curtail or eliminate the MID, you’ll need to squeeze into a grand bargain where everyone interest group is taking a hit. A grand bargain isn’t politically feasible alone, but then when you consider the conflicts surrounding the MID, it makes any change extremely unlikely. The conflict is that Democrats are the most interested in “eliminating tax loopholes.” However, the major metro areas that would vastly disproportionately be affected by any change to the MID, are heavily represented by Democrats. I doubt even Maxine Waters would support a full elimination of the MID!
Funny though – there’s probably no better time to consider eliminating it than today when most borrowers are locked in extremely low rates. Removing a $50k MID from a higher earner’s 1040 is a serious tax increase. Removing a $15k MID? Not so much. That’s the difference between paying 6%+ on 100% financing in the bubble run-up, and paying 4% on < 80% LTV.
The grand bargain is the only way this works, particularly if they can reduce marginal rates. Everyone benefits from that.
The best time to eliminate the MID is when rates are high. I know this sounds crazy, but bear with me. The only way to get rid of the MID is to grandfather existing mortgages. If you grandfather them when rates are high, as rates fall the deduction falls. But if you grandfather the MID deduction when rates are low, then as rates rise the impact of the loss of the MID is even greater.
Falling rates would naturally offset the impact of no MID since prices rise as rates fall.
Rising rates would naturally multiply the impact of no MID since prices fall as rates rise. As rates rise the interest rises and the MID rises. So this mitigates the effect of rising rates.
If your goal is to flatten the housing markets again, then eliminate the MID now — it couldn’t be a worse (or better) time, depending on your Perspective.
Very clever.
I presume that when you say “The only way to get rid of the MID is to grandfather existing mortgages” you mean to say that this is the only politically acceptable way? That may be true, but if existing mortgages are grandfathered, those owners become owners that will never ever sell while they still have a mortgage, because they would be trading to a mortgage which would not be grandfathered. And then you have the prop 13 disaster at a national level – not a very good outcome.
Prop 13 is perpetual. Mortgage terms are limited. Moreover, the MID decreases with amortization. As loan balances fall and wages rise, the MID is less of a factor 20 years out (a fact many realtors no doubt know). If you were to phase out the MID over a 15 year period at the next cyclic peak at 10% rates, progressive reductions would minimize the impact to discretionary income, the economy, and housing prices. This is the only economic and politic possibility that I can see happening.
“…the MID is less of a factor 20 years out (a fact many realtors no doubt know)…”
Also, Realtors (at least in the short term), would support this idea, simply because it would create a last minute buying hysteria [so buyers could get grandfathered in before the law took effect].
Consider that the best time to eliminate the HMID, if grandfathered in, would actually be when interest rates are low because low interest rates amortize faster. The benefit to grandfathered mortgage holders would decline more quickly in early years making them more amenable to a sale 7 to 10 years in than they otherwise would be.
There are other macroeconomic forces at play: as rates fall, wages rise; as rates rise, wages stagnate. When rates are rising, the economy is not expanding, and may even be contracting, and will adversely impact wage growth. Is this the right economic environment to remove a deduction? If the goal is to make the impact of rising rates worse, then I guess this is the perfect time remove the MID. If you leave the MID in place, at least the deduction is rising as rates are rising.
Adding to macroeconomic effects, you have the more obvious explicit effect on monthly payments when rates are rising and purchasing power is falling. A buyer that has a 4% mortgage may amortize more quickly than a 10% mortgage, but their purchasing power drops by 30% as rates rise to 7%. A 10% mortgage holder’s purchasing power rises by 30% as rates fall to 7%.
As rates fall the MID is being phased out by the fact that interest is less and less a component of the monthly payment. So buyers will miss this less. If rates were zero, there would be no MID, because there would be no interest.
As rates rise, the interest is more and more a part of the monthly payment, and consequently the MID is higher. This makes the fact that the rates are rising more bearable to the average household. Sure my payment is higher, but I pay less tax, too. If you eliminate the MID now, I guarantee that any rise in rates will have an even more devastating effect on housing prices. Perhaps that is the goal?
The MID would work a lot better if all mortgages were ARMs. This would make more sense too: as my interest expense rise due to rising rates, my deduction would rise. As my interest expense fell due to falling rates, my deduction would rightly fall as well.
and… comicality ensues…
Spot The Crushing Impact Of The Tropical Vortex On February Pending Home Sales
Moments ago, the always laughable realtor advertising agency known as the NAR, reported that its agents were not making as much money as they had hoped, when pending home sales in February tumbled by 10.2%, well below expectations of a -9.0% drop, and below the January decline of -9.3%. Why? Here is what the cuddly Larry Yun, NAR chief economist, said was the culprit: “Contract signings for the past three months have been little changed, implying the market appears to be stabilizing. Moreover, buyer traffic information from our monthly Realtor survey shows a modest turnaround, and some weather delayed transactions should close in the spring.”
In other words, the February collapse was further aggravated by ongoing harsh weather in February. That’s fine – we even went so far as showing where the regional sales moves were in February. What is quite visible on the chart below is that the largest collapse in February activity was in Southern states, which is clearly due to the Tropical Vortex.
Wait…what?
http://www.zerohedge.com/news/2014-03-27/spot-crushing-impact-tropical-vortex-february-pending-home-sales
The entire weather meme was an embarrassing joke. The NAr should be ashamed they put out such an obvious lie that it doesn’t pass even a cursory examination. I’m glad to see ZeroHedge humiliating them, as they deserve.
The weather meme is so odd. I’ll allow it as an excuse for poor performance, only if you also discount your positive results when the weather was great during the period.
Flood insurance uncertainty was a problem in the coastal Southern states. The ZeroHedge chart also shows a decline in the NorthEast which would back up the weather claims.
Nonsense! A pancaking yield curve (now sitting at Sep 2009 levels) invalidates all ”because of the weather” claims. Period!
btw… it typically snows every winter in the Northeast.
It’s your choice to ignore reality.
I know facts and data are anathema to permabears, but unfortunately, facts are stubborn things.
One of the Coldest Winters in 20 Years Shatters Snow Records
http://www.accuweather.com/en/weather-news/record-breaking-cold-winter-we/24831365
The 2013-14 winter season is one of the coldest winters in 20 years, according to AccuWeather Senior Meteorologist Dave Dombek.
“It’s probably the coldest the Northeast has seen since 1993-94,” he said in early March.
With snowfalls approaching annual all-time record highs in many of the major metropolitan areas across the country, the winter season has shattered expense records in the North.
Toledo, Ohio, experienced their snowiest winter ever, with a record breaking snowfall of 84.8 inches. Weather data for the city has been collected since the late 1800s, according to AccuWeather.com Meteorologist Brian Edwards.
“It’s impressive,” he said. “Everybody is way above normal.”
This year, Cincinnati and Dayton, Ohio, were both hit with more than a 220 percent of their average annual snowfall. Cincinnati has received 47.1 inches, making it the fourth-snowiest winter on record for the city.
With about a 230 percent of the average annual snowfall, Detroit was slammed with 90.7 inches of snow, and Chicago got 80 inches this season, making it the third-snowiest winter on record for both cities.
In addition to the snowstorms walloping the Midwest, cities in the Northeast have also approached all-time highs in snowfall totals as well as experienced record-breaking cold spells.
Philadelphia experienced a 314 percent of their average annual snowfall, with a total of 67.6 inches of snow, making it the third-snowiest winter on record, while Norfolk, Va., and Washington, D.C., were hit with more than double their annual average in snow this year.
Problem is, you’re misconstruing the data; ie.,
http://www.motherjones.com/files/201312-201402_0.png
Indeed, facts are stubborn.
Mother Jones is a global warming alarmist website, not an unbiased source of weather reporting. That speaks volumes.
Uh.. the data is from the National Climate Data Center, posted on MJones. The fact that you accredited MJones as the source of the data instead of the source (NCDC) who actually generated the data is what speaks volumes.
Clearly you see the US government as unbiased then. Let’s review their findings for the recently concluded Winter:
http://www.ncdc.noaa.gov/sotc/national/2014/2
Climate Highlights — winter (December 2013 – February 2014)
• Below-average temperatures dominated east of the Rockies, with the coldest conditions occurring across the Midwest. Seven Midwestern states were much colder than average and had a top ten cold winter season, though no state was record cold.
• The persistent cold during winter resulted in 91 percent of the Great Lakes being frozen by the beginning of March… This was second largest ice cover for the Great Lakes since records began in 1973, and only surpassed by the Great Lakes ice cover in 1979.
• Above-average precipitation was observed in the Northern Rockies, and parts of the Midwest, Mid-Atlantic, and Northeast. Across these regions, numerous winter storms brought heavy snowfall. Detroit had its snowiest winter on record, while New York, Philadelphia, Chicago, and Boston each had one of their ten snowiest winters.
• According to NOAA data analyzed by the Rutgers Global Snow Lab, the winter average snow cover extent for the contiguous U.S. was 1.42 million square miles, which was 170,000 square miles above the 1981-2010 average. This marked the 10th largest seasonal snow cover extent in the 1966-present period of record.
———————————————–
So to summarize their findings:
1. Seven Midwestern states had their top 10 coldest Winter.
2. The Great Lakes almost completely froze over. (It takes cold ass weather to do that. Ask our blogger.)
3. Detroit had snowiest Winter on record.
4. NY, Philly, Chicago, and Boston had top 10 snowiest Winters.
5. The 10th largest U.S. snow cover in the past 48 years.
“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” – John Adams
Maybe we’re losing the plot by looking at national figures.
In SoCal, we were among the regions to bust, recover and then possibly stall. Going into the winter, most of the country was lagging behind CA in the reflation race, and the unusually harsh weather surely contributed. I would expect that from here CA plateaus while a lot of other areas which remain further off their peaks may show some continued growth. In that scenario, the national figures will represent growth we are no longer seeing out here.
Facts aren’t stubborn things, they’re stupid things. Who needs facts when you have ethos and hyperbole to fall back on? Facts are unimportant; it’s how you twist the facts to win the argument. Sarcasm, however, is priceless.
Nice post. You’ve certainly got his # 😉
I didn’t intend to get his number. I just thought it would be funny to throw a Reagan misstatement into the mix to demonstrate some of the hypocrisy we are all prone to now and then.
he-he-he-he
We may have had the coldest winter in many years, particularly in the Northeast, but that doesn’t mean that was the cause of the decline in sales. Perhaps it was the alignment of planets, or any of a number of coincidental events.
The Midwest also had a cold winter, but sales were up there. The cold weather theory explains nothing about why sales were down in the south were cold weather was not an issue.
The North East had a top 10 snow year, which means lots of blizzards. It wasn’t necessarily due to the cold, but rather the abundance of snowy weather, that their sales fell.
As I said before, the coastal South East had flood insurance problems that hurt things. When your insurance rates are more than your mortgage it might dissuade you from buying, or being able to sell.
Don’t agents have Zillow dedicated web pages now?
Zillow: Real estate agents still deserve 6%
The relationship between Zillow (Z) and real estate agents has had its issues over the years. But Zillow’s CEO Spencer Rascoff told CNBC that he thinks real estate agents are still a “very integral part of the transaction” and still deserve their 6% commission.
“Agents take 6% because they provide a lot of value in the transaction, much like investment bankers provide a lot of value with IPO’s,” Rascoff said.
Rascoff said that with the rise of website like his own, the homebuyer can obtain as much information about a property as a real estate agent can, so the role of the real estate agent has changed.
“The profile of a successful agent has changed to be more of a transactional consultant,” he said. “(A successful agent) is someone that’s a great negotiator instead of just an information gatekeeper.”
Couple of basic questions I would like to have answered before I die.
1) The mystery of the great pyramids.
2) Why real estate agents charge a percentage of transaction $.
I would love to hear from any current working agents who read this blog to answer questions posted below!
“…Agents take 6%…”
OK. Does that mean an agent provides *triple* the value when selling a $1.8mm home vs a $600k home? Please explain.
When I visit my attorney he doesn’t charge a percentage.
When I visit my doctor he doesn’t charge a percentage.
I can’t think of one other single professional who charges a transaction percentage.
Why are real estate agents so special?
“…because they provide a lot of value in the transaction…”
Please explain what “a lot of value in the transaction” really is.
Please explain what information a real estate agent provides that I can’t discover myself (Primarily via the Internet).
I am not an agent.
You and a prospective agent can negotiate any fee structure you both agree to. I have never been involved and a real estate transaction in which the two agents made 3% each or one agent made 6%. Actually, I have never been involved in a real estate transaction in which there was more than one agent.
Shadow banking system blowup will probably cause the next Great Recession
The Federal Reserve Bank of New York is on a blog-publishing tear at the moment.
The latest post is the fifth in a series of twelve Liberty Street Economics. The subjects are all on large and complex banks and nonbanks. The daily posts are short, concise and fascinating reads, especially today.
Today, the post by Samuel Antill, David Hou, and Asani Sarkar offers some thoughts on the shadow bank sector. The title is foreboding enough to get the attention: The Growth of Murky Finance.
And the point is basically this: shadow banks are growing, we can’t regulate them without tons more dough and manpower and if and when they blow up just remember, “We told you so.”
Wait, isn’t there a whole new slate of regulation in Dodd-Frank meant to stop this?
Isn’t there a Consumer Financial Protection Bureau to prevent these greedy, unregulated fat cats from growing out of control?
Yes, but it isn’t enough apparently, and it never will be, the blog suggests.
“While new regulations such as the Dodd-Frank Act impose restrictions on financial activities and increase their costs, especially those of large firms,” the researchers say, “our paper suggests that there may be limits to what regulation can achieve.”
Well, that’s a real confidence builder.
And it continues.
“On average, the financial sector has accounted for about 50% of the asset values of publicly listed firms, but roughly 70% of total business sector liabilities. Hence, one reason to worry about the size of this sector is its high representation among private firms that have virtually no transparency.”
The only reasonable way to read that is to infer an excessive amount of risk in the sector; especially when factoring such an excessive share of business liabilities.
Words such as “Murky,” “Worry,” and “no transparency,” all hint at the potential for the same blinding crash the pro-cyclical credit crisis brought.
However, there is some relief, but you have to wait for it.
In the conclusion the authors pull up:
“Although the policy response to the growth and vulnerabilities of the financial sector has been to enhance supervision and regulation of large firms and visible financial sectors, our paper documents that, historically, growth has occurred mainly in areas outside the current regulatory ambit. If financial transactions migrate out of regulated sectors, as expected by some, then this trend is likely to persist. We need to improve our knowledge of these opaque financial sectors in order to understand what risks (if any) they pose to the economy.”
Oh, so these firms may not pose a risk after all?
The Federal Reserve is basically saying that they don’t know the risk — fair enough.
And if another Great Recession is coming, this will be it.
And when it does, remember the Federal Reserve told you so.
I agree that the MID is unfair… just like many other aspects of the tax code. Why do I have to pay the same tax rate as someone in the mid-west? Their cost of living is lower so they have more ability to pay taxes which is the cornerstone of the progressive tax policy. The MID helps coastal areas with higher wages but lower standards of living to pay taxes based on their real ability to pay.
I agree that everyone should be able to take advantage of the MID, and shouldn’t be limited by the standard deduction. So eliminate the standard deduction. Make everyone itemize. Problem solved. Every homeowner then gets the benefit of the deduction no matter how little they make, so long as they are paying interest to a bank. This will make the banks happy and encourage home ownership at the lower end. The move up market will be energized.
The standard deduction paints with a broad brush and gives low income households a far greater deduction than they would have by itemizing. Isn’t it a bit odd to argue unfairness that high-income households benefit from the MID while claiming that the standard deduction, which disproportionately benefits low-income households, is the reason that the MID doesn’t benefit low-income households? Isn’t this just an argument that high-income households shouldn’t have high incomes?
And why not let renters deduct a portion of their rent? This always pissed me off when I was renting. If you want to increase tax revenues, increase discretionary spending by decreasing tax burdens. This will benefit the local tax base by increasing sales tax revenue since 50% of residents rent. And since more federal tax dollars leave California than are spent here, there is a net benefit to coastal California.
There seems to be some conflict amongst the different references regarding the amount of revenue the MID is actually costing the Treasury. Is it 70B, 121B, or 175B? And cutting a deduction is the same as increasing taxes, which runs right into the tax rate paradox: the more you cut personal income taxes, the more revenue the government takes in. So an increase of 70-175B in MID non-deductions will lower housing prices in coastal areas, and Treasury revenues will fall due to less discretionary spending by the wealthy and the recession that results.
Why is it that the writers in all these articles know so little and don’t raise any of the issues? I understand there is always a certain amount of pandering to their base, but geez, get a clue!
Great points. It is an extremely complex topic. “Fairness” is in the eye of the beholder, but when nobody understands the income tax code, it makes getting to a genuine fairness discussion impossible.
I feel it is erroneous to assume that income tax can be fair. Income tax is not designed to be fair. It is designed to capture the largest portion of revenue for the state, enlist votes for politicians, and enrich the already wealthy.
So what’s the problem?
I didn’t really understand the tax code until I took Federal Income Taxation in law school. My wife is a CPA and I don’t think she understands the “why” as well as I do (although she certainly has me on the “what” and the “how”).
So it isn’t surprising that your average person has difficulty comprehending such an intentionally obtuse set of rules. I doubt that most of the law makers understand what they’re voting on. At least I hope they don’t.
I think you’re missing part of the reason for a progressive income tax. The poor already pay a large portion of their income in taxes because they can’t avoid sales tax, gas tax, and they pay property taxes indirectly through their rent. The standard deduction “recognizes” the taxes already paid and doesn’t tax them twice on it. If you eliminate the standard deduction, the tax code would be very regressive regardless of what you do with marginal tax rates because the poor would be taxed twice on what little earnings they have.
I think we would be far better off raising the standard exemption and curbing tax breaks to the point nobody itemizes. It would be a flat tax with progressive rates, which is where we are headed with the proposed tax reform.
Increasing the standard deduction is the politically easier way of reforming the tax code. Once the standard deduction is high enough it would remove all the others.
Exactly. That’s why I believe the final compromise may not touch deductions much at all. If politicians just raise the standard deduction, they can render all tax breaks worthless. Once that happens, then they can eliminate them without opposition.
Renters do pay property tax through their rent. Is this fair? Well the renters are part of the community as well, so they should be responsible for paying for some of its upkeep. Should they get a deduction for paying this? Absolutely. They deserve it more than the owner does.
I’m not sure I understand how the poor are being taxed twice. High income households also pay sales tax and gas tax. They don’t get to deduct these if they itemize, but the poor do through the standard deduction. High income households have to pay higher income tax rates, higher property tax amounts, capital gains taxes, taxes on dividends and interest, the corporations they have shares in are taxed at the corporate rate, and then they are taxed at the individual rate on the dividends.
Getting to deduct some of the interest they pay to support the financial sector is the least the IRS can do. The massive amounts of interest the high income earners pay through mortgage interest enables all the low income earners to get loans since the cost of servicing those loans can’t be covered by such low principal/interest rates. So in a way, the low income homeowners are also benefiting from the MID even though they don’t get the deduction.
The poor can avoid paying sales tax by not buying something they can’t afford. If they can’t afford to pay 9% tax how can they afford to pay 100% of the cost? The sales tax is more of a flat tax, where the amount of tax increases the more you spend in proportion to the amount spent.
It’s only regressive if the low income households buy exactly the same thing as the high income households. So if I make 10k per year and I buy that new Tesla for 60k, my sales tax is the same as the 200k household that buys it. This is regressive taxation! I pay 60% of my income in sales tax for that one purchase. They only pay 3%. Outrageous!
I can’t see how this is regressive unless you assume that the poor spend a higher percentage of their gross income on necessities than the high income households. If this is the case, then we should revisit our discussion on the 43% DTI. Groceries aren’t subject to sales tax.
They can avoid paying large amounts of their income in gas tax by carpooling, or taking the bus. I carpool everyday, and I can afford to drive myself, but I choose not to for other benefits like… not having to drive.
If we raise the standard exemption, then any income below the exemption will only be subject to the sales and gas tax. If this is the case I expect to see a surge in cash transactions and electric vehicle sales. And how does this make these supposedly regressive taxes less regressive?
Bond investors demand more second lien and HELOC deals
Capital markets advisory group MountainView Capital is reporting that investors want more secondary deals involving home equity lines of credit and other second lien mortgages.
And they say they have the stats to prove it.
An analysis of secondary activity in 2013 noted fewer HELOCs packed into bonds. This is in spite of heightened investor demand and growth in second-lien originations.
“Second lien trading activity during 2013 was light and down from 2012 levels, both in total unpaid principal balance and number of transactions,” said Jonas Roth, a managing director at MountainView Capital Group and report author. “This was primarily due to a finite number of sellers, and 2014 looks like more of the same.”
And Roth should know.
MountainView advised 10 second-lien deals, involving $604.5 million of UPB, during 2013.
In 2012, the company was an advisor on 13 deals, involving $619.3 million of UPB.
Despite the drift downward, investor risk appetite is still strong. Non-performing second liens had higher demand than performing second liens.
Secured, non-performing second lien loans trade between 1% and 5% of current UPB.
Unsecured, non-performing seconds trade in the 10 to 50 basis point range.
The overall dwindling supply of second-lien loans has some investors starting to model non-performing first liens, based on the fear that they cannot invest the capital they raised, according to MountainView.
“Bright spots for 2014 are that there are more niche buyers with state-specific inquiries, significantly more capital on the sidelines looking for product, and stronger pricing versus what we have seen in the past,” said Roth.
The cartoon is inaccurate as one can only deduct mortgage interest up to $1M. A $1M loan would be approximately $6K/month in interest payments. So the rich only get richer by borrowing up to $1M. Interest over $1M is not deductible.
You are correct. It takes a higher interest rate than what we have today in order to pay $10,000 a month in interest. I originally made that cartoon in 2007 when I knew a family that borrowed $1,000,000 on their first mortgage at about 6% and $100,000 on a HELOC at 9% to finance their home. They were paying nearly $8,000 per month in interest. I thought that was astonishing.