Monday, March 09, 2009
Last week, Obama officially released the final details of his $75 billion foreclosure relief plan. I have outlined a quick summary of the major points of the plan and how homeowners can find out if they are eligible to either modify or refinance their existing loan. There are two portions to the plan. One portion allows non-delinquent homeowners who have underwater mortgages to refinance at a lower rate and the second portion allows delinquent homeowners to get a loan modification. Here is a quick summary of the major points:
Part One: Refinance Guidelines:
You must be current on your mortgage payments, meaning you have not had late payments in the last 12 months.
The home being refinanced must be your primary residence.
The loan must be secured by Fannie Mae or Freddie Mac. You can find out if your loan is owned by these institutions by calling 1-800-7FANNIE, or 1-800-FREDDIE. You can also find out online at http://www.fanniemae.com/homeaffordable or http://www.fanniemae.com/homeaffordable
You are no more than 5% underwater or put another way - the amount you owe on your first mortgage cannot be more than 105% of the value of your home.
You have a stable income to qualify for a new mortgage.
All loans that are refinanced will be refinanced into 15 or 30 year fixed rate loans. The interest rate would be based on the market rate on the day of closing. The loans also would not have any prepayment penalties or be a balloon note. Borrower will be responsible for fees associated with the refinance.
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Wednesday, March 04, 2009
Just as we started the week with snow falling furiously, stocks also took another free fall and ended Monday at their worst level (DOW 6,760 & S&P 700) in 12 years – since 1997. Since Oct 2007, stocks have lost more than 50% of their value and close to 20% just this year. This translates into approximately $2 trillion of American’s retirement wealth that has been destroyed due to the precipitous fall in the stock market. Last week, a Financial Times article really resonated with me: “what started as a financial crisis became an economic crisis and is now an unemployment crisis.”
Consumer spending, which is the lifeblood of the economy and a catalyst in helping pull us out of other recessions, has virtually come to a halt. The savings rate, which was negative for so many years, is now 5% of disposable income, the highest it has been in 14 years. I believe it is a good thing that Americans are saving more but right now it’s just adding to the downward spiral in the economy. This is a major shift from the negative savings rate the US had for many years where households spent more than they earned through generous credit. Americans got used to easy credit and they developed an “insatiable” appetite for spending. After nearly 25 years of spending more than they earned through easy credit, consumer spending has come to a screeching halt. This new found frugality hurts the bottom line for business which isn’t good for the employment picture either.
Unemployment is now at 7.6% and there appears no end it site to this growing demographic. With rising unemployment, there can be no reversal in the housing market or in business forecasts or in consumer spending. This is a negative feedback cycle and I am not sure what or how we can stop it.
From all that I have read, it seems like the first thing we need to do is to fix the banking sector, get rid of the toxic assts and restart lending. But even if we “unclog” the banking sector, will the consumer have any demand for credit? I am not so sure as I really believe what I read in PIMCO’s most recent report - here. Consumers are not only repairing their own balance sheets but are fearful of losing their job, of losing the retirement account, of not being able to pay the mortgage if they do buy a house. Consumers, including myself are hunkered down.
Monday, March 02, 2009
Last week, President Obama delivered a $3.6 trillion budget proposal to Congress that he hopes will “break from a troubled past” with government having a much more expansive role, numerous tax increases on affluent families and businesses, and spending cuts targeted at those he says profited from ambitious policy prescriptions in decades” and focuses on the role that the federal government will have in providing national health care, education and shifting the US away from oil and gas. Obama believes that government can do some of what the private sector has done better. Understand there will be bigger government and that will only come at a cost – most likely in the form of higher taxes and not just on the rich – I guarantee… consumption taxes, personal property taxes and sales taxes.
To finance his proposals, the president has clearly chosen winners and losers—with the affluent heading the list of losers.” Obama’s speeches have sounded much more moral, his tone reflecting that of one governing far from the left. The anger Obama has shown recently was not on the campaign trail. Mr. Obama wrote, “Prudent investments in education, clean energy, health care, and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected. In the face of these trade-offs, Washington has ignored the squeeze on middle-class families that is making it harder for them to get ahead… There’s nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few.“
Obama’s budget seeks to raise approximately $634 billion from tax changes to the wealthy, outlined below, as well as cuts in government spending that would be used to extend health care coverage to 47 million people in America who are uninsured and subsidize premiums for those that can’t afford the health care they have.
The budget will seek to raise approximately $315 billion over the next ten years from increased income taxes on the affluent, as defined by those couples making $250,000 or singles making $200,000 per year or more will rise sharply – beginning in 2011. The proposal raises the top income tax rates to 36% and 39.6% from 33% and 35%.
The budget also seeks to raise $318 billion over the next 10 years by limiting the deductions on mortgage interest and charitable donations for the wealthy. If you and your family are in the 33% to 35% income tax bracket, you will see the deduction go to 28%. For example, if you had $1,000 in mortgage interest, you will only be able to deduct $280 versus $350. The same rule would apply to charitable deductions – if you were getting a 33% to 35% deduction, it will decrease to 28% by 2011.
Business will have to pay as well. The budget envisions raising approximately $210 billion over the next decade by limiting the ability of U.S.-based multinational companies to shield overseas profits from taxation. Additionally, $24 billion would come from hedge fund, real estate investment trusts and private equity managers, whose income would be taxed at income tax rates, not capital gains rates or 39.6% vs. 15%. Oil and gas companies would be hit particularly hard, with the repeal of multiple tax credits and deductions.
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