CBO: Write-downs won't stop housing slump

From where I sit, Congress appears headed toward approval of some version of the Frank-Dodd plan to encourage banks to write down mortgages and then have the federal government guarantee them, in hopes of avoiding hundreds of thousands of foreclosures. But would the policy work? Would it help the overall economy?

Enter the Congressional Budget Office: "U.S. lawmakers' plans to aid troubled homeowners would likely help prevent many foreclosures but wouldn't stop the freefall in home prices or stabilize the economy, a congressional report said on Friday."

More, from the AP: " 'Such actions could help reduce the number of foreclosures... (but) would significantly shift the risk involved in mortgage losses from the current lenders and investors to taxpayers,' said a report from the CBO, which gives nonpartisan research advise to lawmakers."

Read the CBO report here.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: AP

Comments

[Cal]

Privatize profits, socialize losses.

Capitalism, schmapitalism.

[adoptivefather]

Everybody is focused on the tail when in fact the US faces a huge resource crisis. Take a look at US population compared to oil production.

1970 200 million people vs 9.6 million barrels oil produced per day

2007 300 million people vs 5.0 million barrels oil produced per day

2032 400 million people vs 2.8 million barrels produced per day

Info below is from International Energy Agency

"......Oil demand in the U.S., the world's biggest energy consumer, is now set to fall this year from 2007, the IEA said. U.S. demand is seen at 25.18 million barrels a day in 2008, versus 25.55 million barrels a day last year. For the first three months of this year, the IEA slashed U.S. oil demand estimates by a hefty 670,000 barrels a day against the same period last year."

The trends are unsustainable and will cause economic collapse. Houses near strategic centers will fare much better than houses in remote locations that require massive amounts of energy to support.

My advice is to reduce your economic dependency on oil. Buy or rent where you can walk or bike.

[Raul]

Politicians have to pay back. Everyone knows they are not helping the small guy. That is just propaganda. And we do not want them, to help the small guys. We are even smaller, we are renting, and we are happy, no shame on it. We know BIG GUYS make big contributions, now is pay back.

[tedson]

I recently filled out an online quiz to see how much house I could afford. If I put down a $50,000 and make $50,000 a year, I could buy a $189,000 house.

[Fred]

And that's why congress is dumb.

[somedude]

If we save just one house from becoming affordable, it will all be worth it.

[E]

The reality will set in that the only reason that housing prices were pushed into the stratosphere is due to the fact that a person could qualify based on a teaser rate ARM or Neg-Am loan in the first place. As soon as one fool bought into a neighborhood and outbid all the other people on a house using a "ponzi" loan, it artificially resets the "comps" in the neighborhood so that the neighbors also have to use toxic financing or you end up with someone making 150k a year that actually thought that 500k in Watts was all they could afford as they didn't realize that their 30 year fixed fully amortizing loan mentality was competing with financially suicidal loans. Now those people are stuck in "less than desirable" neighborhoods.

Writing down a loan resets the comps in a way also as it shows what people can actually afford. Maybe if they wrote down enough of them the delusional sellers in the 1-1.5m houses will realize that they are never going to be able to command that amount.

[Pat]

How do I get a job where I can get paid to state the obvious?

[subprimetax]

America needs to change the United States Tax Code to eliminate incentives and subsidies for investors who purchase and hold single family homes in the United States.

My main point:

Do not give investors a better deal under the tax code than taxpayers who want to own and live in their own single family homes. Better yet, do not give investors any tax deductions for single family home investments. We do not need to encourage speculative investment in the single family housing market through tax breaks.

The Tax Code has had a very large part in the current housing bubble. This fact has not received much coverage in the popular media. I believe that our federal leadership must take aggressive action to correct this situation. Why should wealthy investors be encouraged to use single family homes as rental investments, with tax breaks that are subsidized by Taxpayers who want to buy a house but can’t afford it?

Current situation:
Investors are presently encouraged through the United States Tax Code to purchase single family homes. Investors are willing to pay more than a homeowner that lives in his own house. This makes economic sense under the present United States Tax Code.
This drives up the price of single family houses for obvious reasons – due to federal tax subsidies, an investor pays less each month for a single family house than a Taxpayer who occupies his or her own house due to tax deductions.

Why will investors pay more than a Taxpayer who occupies his or her own single family house? Because investors can deduct expenses related to owing a home that they rent out as “rental property”. Thus, through the United States Tax Code, investors in single family houses are subsidized by all other Taxpayers, including renters. How ironic that in the United States of America, the low income Taxpayer who rents a house subsidizes the wealthy investor who owns the very house that the low income Taxpayer would like to own. This doesn’t seem like a fair way to run our great country.

Investors can deduct virtually all expenses related to purchasing, maintaining and renting a single family house.

Does America want to end up with all single family homes owned by a group of wealthy investors who are subsidized by low income Taxpayers? How about foreign governments purchasing single family houses in America as investments? Here in the Sacramento area there is news coverage of Chinese government officials touring new housing developments, with the implication that a foreign government might end up renting single family homes in America to American Taxpayers. Further, these foreign governments would be receiving tax subsidies from American Taxpayers under the present United States Tax Code. Can this be fair? Is that what Americans want?

My proposal:
Drive investors out of the single family home market.

Change the United States Tax Code as follows. For single family homes purchased in future periods, no deductions should be permitted for investors. This means, no depreciation expense deductions, no repair expense deductions, no deduction for business expenses such as insurance, utilities, etc.
This would put investors on an even footing with American families that want to own and occupy their own single family homes.

Further proposals: There should be no tax deductions given to investors in single family homes for any expenses. This means no deductions for interest expense and real estate taxes. Any gain from the sale of a single family home by an investor should be treated as ordinary income, subject to social security tax. Any loss on the sale of a single family home by an investor should be non-deductible.

Advantages: Investors would no longer bid up the price of single family homes to speculative levels. Millions of American Taxpayers who have been bid out of the single family home housing market by speculative investors would be able to live the American dream – owing their own home. Single family home neighborhoods would no longer be filled with transient renters who have no financial stake in the quality of life in their area. This would serve to stabilize our neighborhoods and protect American families.

Other: Investors should still be able to receive favorable tax benefits for investments in apartment complexes and multiple family dwellings. Investors could still receive tax breaks for investments in stocks, bonds, and any other commodity except single family houses.

To emphasize my main point, investors should not receive a single dime of Taxpayer subsidy to own single family houses as rental property.

I realize that this might not be a popular political position, but America needs someone to do the right thing. In the long run, all Americans will benefit from getting investors out of the single family home market. If more Americans own their own homes, everybody wins.

The present American housing crisis might have been prevented, or at least minimized, if speculators had not been encouraged by the United States Tax Code to buy and rent out single family homes.

Single family homes are the backbone of America. Get investors out of the single family home market.

[sean]

Let the free market work!

Housing is simply going through a much needed price correction. Speculators drove prices way too high. Just like the dot com crash, prices are now finding their true equilbrium.

The people being foreclosed on had no business "buying" a home in the first place. They led to his inflation and consequent bubble that we have now.

They can simply rent, regroup and get their act together. The responsible people should NOT be burdened by their gambling.

Constantly contact ALL congressmen who are for a bailout and voice your displeasure.

Barney Franks - 202-225-5931
Chris Dodd - 202-224-2823
Diane Feinstein - 202-224-3841
Barbara Boxer - 202-224-3553

Keep telling these people to butt out and let the free market work.

[rickstar1]

These Congressional bills won't work. They are like trying to stop a falling 747 from hitting earth by pulling the throttle. Might slow down the arrival of the coming destruction, but won't prevent it. The truth is the government is trying to push back the coming decline in property tax revenue as far as they can... milking every last cent from homeowners. We will be in a free-fall for at least 2 years. Buckle your seatbelts!

[Giacomo]

Our "lawmakers" are attention-seeking, not problem-solving. It would all be laughable, except that it's dangerous -- designing legislation is the midst of a crisis is likely to do more harm than good.

We should all be writing to our representatives (it's easy, they all have websites) to tell them that we DON'T appreciate their fumbling attempts to "rescue" the irresponsible among us. The market will sort it out.

[Geek Seek]

As a renter, homeowner, and investor, my soul recoils from anything resembling a bailout. Problem is, Wall Street and Co. have created the classic "this is doomsday, you have to do something about it now" scenario.

Fun game: use everyone's greed and aspirations for a better life to generate huge profits on the way up, then after the little *pop* at the top use the now very rational fear to dump the risk onto those oh-so-malleable taxpayers. (Oh and don't forget to short the market on the way down for some extra juicy juice).

I'm curious. Folks are always complaining here that the blog is full of bitter renters. Peter, can you do a little poll asking how many of the commenters are renters and how many are homeowners?

[Kathy]

"'Such actions could help reduce the number of foreclosures... (but) would significantly shift the risk involved in mortgage losses from the current lenders and investors to taxpayers" --- that pretty much sums it up right there, and is exactly why this is foundationally wrong.

Also, I have not heard Barney Frank or Christopher Dodd address what happens to the neighborhood home values when any of these loans is "written down" in principal. How is that going to be calculated into the area's median price, or will it? Won't potential buyers have the right to know that?

[D]

Prices fell for 15 years in a row in Japan.
You people have a long wait ahead of you.

[Laker]

E,
You should add FRAUD. I don't know all areas but i do know the valley pretty good. There is fraud on every street. Prices here are all bases on fraudulent comps. The problem is that as you said, there were some people that do make $200,000-300,000 household income that bought $1,000,000 house and could pay the mortgage. Most buyers however, used the teaser ARMS, neg AM, or if lucky IO loans. Nobody used fixed rates to buy these...

I put on my blog an amazing example of a house in Tarzana (Corbin ave) close to ventura bl. This house was sold Feb 07, 2006 $640,000 and after 11 months resold Jan 05, 2007 for $1,330,000 .......
THAT IS FRAUD, and specifically this whole street comps are doubled with not justification. If i was to buy there, the RE agents will use that COMP to justify the inflated asking prices....
I'm sure it is pretty much the same in other areas. Seller want $800,000, then a buyer comes, and offers to pay $1,300,000. The seller takes the check from the bank, and kicks back $200,000 to the buyer...everybody's happy. the sellers walks (runs) away with $1,000,000, the buyer (straw) gets $200,000 cash, and never pays a dime in mortgage...lives rent free for a year. Currently this house is about to get foreclosed....SO senator Dodd wants to save this house from getting foreclosed????
I start to think that our senators are more corrupt than the buyer/seller/ appraiser of this house...

[Valley Observer]

So much indignation on display! I agree a lot of people made stupid decisions. That said, today's economy is complex and full of interrelationships we hardly begin to see, so that keeping the financial sector viable is unfortunately critical. For example, hands up those who bought any fresh fruit or vegetables in the past couple of weeks. That produce came from Mexico or Ecuador or Chile or New Zealand someplace like that, and required a huge interconnected system of production, transportation and finance to make its way to the local Albertsons. That's the same financial system that gave us the real estate bubble -- it also does sme useful things when it's not being too creative. So let's not cut off our nose to spite our face. It might be fun, and would make us feel better, to watch the financial CEOs, Greenspan, the real estate brokers who didn't tell the plain truth, and our neighbors who over-committed, all roast on a spit, but a financial Armageddon will do more harm than good.

[Valley Observer]

Subprimetax complains that "Investors can deduct virtually all expenses related to purchasing, maintaining and renting a single family house." Well, that's like any business. Deduct your expenses, pay tax on the net income not the gross income. What's so wrong with that?

[Geek Seek]

Stop with all the bad news. It's actually a great time to buy in Florida! Check out the video.

http://www.youtube.com/watch?v=bZXbZDbCze8

c/o calculatedrisk.blogspot.com

[Bots]

Thinking about starting a website named AmericanCommie.com. In similar fashion to http://realestaterecord.blogspot.com/, a place where commies like Frank and Dodd can be called out. I say bring back McCarthyism! I'm tired of all this socialist $#!^ !

[arroyogrande]

"today's economy is complex and full of interrelationships we hardly begin to see...a financial Armageddon will do more harm than good."

How do you reconcile these two thoughts? How can you conclude that the result will be "Armageddon" if even the "experts" that got us in the mess in the first place don't even understand these complex financial interactions? And how do you or these "experts" know that intervention will not prolong and exacerbate a downturn? The incessant calls to "just do something before it's too late" sound almost like extortion using fear mongering...save overextended homebuyers, or we all will suffer dire consequences!

Also, if the system is so complex and FRAGILE, why waste time and resources (including tax $$$) to artificially prop it up even longer? If it's so fragile, it's not sustainable to begin with. Kind of like a pyramid or Ponzi scheme. Hmmmm...

- arroyogrande

[David Pearson]

To subprimetax: Your suggestion would result in significantly increased rents for houses and apartments whose physical condition are likely to decline.

But at least you could have your pound of flesh, eh?

[ANONYMOUS]

The phenomenal part of this whole disaster is that there were so many idiots willing to sign up for teaser rates which would reset past affordability. You'd think that would be a couple of people, not, what is seeming like now, a vast majority or at least a major segment.

[NoCal SC]

Hey ValleyObserver,

I buy fresh fruits every week, none of which come from New Zealand, Chile, or Mexico. It's called your local famers' market. We live in freaking California, not Minnesota. We can have fresh stuff that's grown locally all year round. No, I don't eat peaches or grapes in January, but I eat plenty well shopping for produce exclusively at my farmer's market.

[Laker]

David Pearson,
You so wrong, if landlords could, they would increase the rents 10 times...
Do you really thing they care about the poor renters???
Even without rent control, there is a supply and demand !!!!
If there is high demand, the landlord will increase the rent because there are willing renter to pay that.
However, if there are vacant unit, the landlord will decrease the rent so he could find willing renter that will agree to pay,.
ECON 101, Supply and Demand.

[MBWatcher]

Hey thanks Peter for the link to the CBO report; I am such a geek I will surely read it cover to cover.

I had been wondering what kind of advice our congressfolk were getting regarding their semi-baliout proposals. Thanks

[Laker]

Not to topic, but has someone went to the REDC auction last weekend and know what was the highest (winning ?) bid for 22950 Burbank Blvd in Woodland Hills??
Thank much.

[left of lefty]

Laker,

$760k, plus 5%.

[Laker]

Thanks left of lefty.
that was an interesting property that i believe was on the MLS with asking price of $825,000....
So from your info, i get that someone paid $798,000.
That is only $25,000 less than asking price. I'm sure he could have offered that and the bank would agree.
REDC is waste of time.