Psychological insight into the housing crash from Peter C:
Patrick:
As you know, George W. Bush signed a bill into law last year which I call the “Deadbeat Specuvestor’s Tax Relief Act of 2007.” It makes forgiven mortgage debt not count as income. So if a bank forgives some houseflipper who paid $500,000 for a house that the bank can only sell for $200,000, he doesn’t have to pay taxes on his $300,000 windfall. That’s $100,000 in taxes that you and I have to pay instead.
Anyway, even though California state passed no such law, our State Franchise Tax Board is NOT trying to collect the income tax on this very real income (even though Anna Eshoo called it “surprise income”, it’s as real as any other.) I can’t find any law or ruling excusing these deadbeats from their state tax burden.
Letters to my state reps. about it have gone unanswered, or have been replied to with form letters. (Sally Lieber, for example, must have quickly scanned and saw the word “mortgage” because the letter said something like “Sally Lieber is doing everything she can to keep your home prices high!”)
Now the State is talking about raising MY (and your) state income taxes when they’re not even trying to collect what’s owed to them. That’s outrageous. Can you raise this issue on your forum? There are billions of dollars in taxes that CA is owed by deadbead houseflippers and they’d rather tax me and you than get it from these get-rich-quickers.
Thanks.
Robert S.
From http://seekingalpha.com/article/88725-is-the-u-s-banking-system-safe
“Wells Fargo decided to extend its charge-off policy in the 2nd quarter from 120 days to 180 days, in an effort to give troubled borrowers more time to reach a loan workout. A skeptical person might think that they did not change this policy out of the goodness of their hearts.
Maybe, just maybe, they changed this policy to reduce their write-offs for the 2nd quarter, to beat analyst expectations.
There are many stories of people who are still living in houses, twelve months after making their last mortgage payment. Their banks have not started foreclosure proceedings.”
Ah, Wells Fargo’s great profits lately make a bit more sense now. They are still just pretending they are going to get paid.
Dear Patrick,
After many years of saving and prudence, I have helped my parents find
and purchase a home in the Central California town of Los Banos.
Arguably, we could have waited a bit longer. After much wrangling they
found a house at a very reasonable price and can now live in it
comfortably, having paid for it with the money they saved (not
borrowed). They paid $143,000 for a home that was last sold for about
$450,000. It was a mere coincidence that they happened to know the
couple who was foreclosed upon and thus could verify this information
firsthand. When everyone else was stark raving mad with visions of
real estate riches I begged and pleaded with my folks to wait it out
since there was no way to rationalize half million dollar homes in the
Central Valley-California’s Appalachia. I am glad there were others
out to support and substantiate my view.
Sincerely,
Efrain Rojas
From a reader:
Patrick,
Knowing that the RE market is declining, a friend of mine recently placed a bid on a condo in San Francisco that was much lower than the asking price.Then my friend was inadvertently copied on an email that her realtor’s parter sent to her realtor. I don’t have a copy of the email, but to paraphrase, the email essentially said this:
“Tell the seller’s agent that we think our client’s offer is too low, so the seller should counter-offer. We think the buyer will get emotionally involved (with the home) and will accept the counter so we can close the deal.”
Is this unbelievable or what?! Who exactly is her agent working for anyway?
Patrick’s answer: The buyer’s own agent works for the seller and works against the buyer because no sale means no commission.
Shit hitting the fan
Splattering Fannie, Freddie
Run for cover now
What will happen? Possibilities:
I think number one is the best option.
Patrick
The relationships between inflation, interest rates, foreclosures, the Fed, banks, and the general economy can be explained better in terms of hours of human labor than it can in terms of dollars.
A mortgage is a promise to work much more than it is a promise to pay money. A mortgage is technically written in terms of money, but the reality is that money represents work. The goal is for the lender to extract real work from the borrower, though perhaps in a roundabout means. The only real consideration in lending is that the borrower not be allowed to escape the promised servitude.
The housing bubble, however, consisted of promises to pay more hours of human work than could possibly exist. There are simply not enough people and not enough hours in the day to pay back such massive mortgage debt. The strawberry picker at $7/hour would have to work for about 71 years to pay back the principal on the apocryphal million dollar mortgage, and that ignores the interest, taxes, etc. It’s just not going to happen. They money is not going to be paid back.
Beyond the breaking point, when a borrower has nothing to look forward to but a life of servitude, there is no longer any motivation to pay back at all, because it cannot possibly make the situation any better. And there is a motivation to borrow yet more, because it cannot hurt. Two death sentences are no worse than one.
The Fed’s goal, when it forcibly transfers money from savers to borrowers by lowering interest rates, is to bring borrowers back to the brink of bankruptcy from well beyond that brink. When people are afraid of becoming bankrupt, they can be forced to work. When they’re already lost, there is nothing to be afraid of.
From the image above, it looks like the bundling of mortgages into mortgage-backed bonds has pretty much disappeared, and that jumbo lending has suffered about as much as other kinds of lending.
So why the long delay between this implosion in lending and price falls in more expensive neighborhoods? Is it that richer people have been able to hold out longer? Prices are down only 10% to 15% in the better parts of Menlo Park, CA, but I would expect a bigger drop based on the dearth of willing lenders. Maybe it’s just a matter of time.
Patrick
On Jun 23, 2008, at 11:49 AM, A Guy wrote:
Long time reader…and, luckily, a renter here. I would like to bounce an idea off of you. I hear that foreclosed properties don’t pay prop taxes. Is that true? If yes, then is there any way you can use your contacts/site to support the idea that municipalities impose regular prop taxes on empty houses. This would:
- increase holding costs, forcing trustee to sell more quickly, driving home values to normalized pricing levels more quickly
- help neighborhoods by ‘re-populating’ them more quickly
- reduce the unfair concept that only owner-occupied houses bear the tax burden
- ultimately deter speculation
- reduce likelihood of municipalities facing bankruptcy
Your thoughts would be appreciated.
Phil
Thanks Phil,
I’ve heard that as well, but it’s hard to believe, since it would be so unfair that banks pay no taxes while everyone else has to.
The idea of using property tax to keep things fair (and eliminating income tax and sales tax entirely) is an old one, but not yet tried anywhere. Henry George proposed it more than 100 years ago:
http://en.wikipedia.org/wiki/Georgism
I’ll make a post out of this.
Patrick
Hi Patrick,
I’ve been following your website with some interest. I am just curious about something. Will credit scoring finally be scrutinized as one of the primary causes of this problem with a host of loans now going bad? Everything from Fannie Mae to Freddie Mac to Subprime to Alt A and even Home Equity etc., was all primarily facilitated with the use of the “statistically significant” credit score, whereas such common sense practices as actually cash flowing the borrower to see if they could actually service this debt was abandoned or ignored altogether. Is anyone looking at this to bring this to light? I think people like Fair Isaac have a lot to answer for for getting all this in motion in the first place.
To me this is no different than Moody’s taking significant fees to assign AAA ratings to Subprime mortgage-backed pools of securities that were on their way to being worthless because again, cash flow underlying the ability to service those mortgages was not even considered. Clearly this was a conflict of interest at the time by Moody’s but the fox was already in the henhouse and nobody seemed to care. Now the common taxpayer (who still doesn’t understand this) will have to ultimately bail out entities like Bear Sterns, Countrywide and ultimately the Fed plus who knows how many more because proper cash flow analysis was ignored that if done properly would have never allowed these loans to get on the books in the first place.
Is anybody even looking at this as a core cause (ie, the fact that credit scoring is very much also to blame for this) or are they just looking at other stuff? It seems like someone should bring this point to the forefront and get the Fed looking at it, or Congress, or somebody for gosh sakes.
Just a thought.
Best regards and keep up the good work!
Dave Smith