Bad Governance
The House finally passed the lousy two-month extension of payroll tax breaks. The CBO scored the Bill that is now law. The costs for 59 days (and annualized if extended for all of 2012):
Social Security....................$19.8B........Annualized $119.B
Extended Unemployment.....$8.4B........Annualized $50.4B
Medicare...............................$3.4B........Annualized $20.4B
Totals........(two months).....$31.2B........Annualized $181.8B
The total cost of $31B is paid for with an increase in mortgage fees to be charged by Fannie and Freddie. Given that these two are providing 90% of new mortgages, most folks who buy a home or refi an old mortgage will get hit with these fees. CBO estimates when these fees will come into the Treasury.
1) The bill sucks money out those who have a mortgage. But if this method of financing the stimulus were used to cover the other ten-months of 2012 it would but a monster bite in those homeowners. It is dumb economic policy to stick it to those who borrow money for the next ten years to pay for a two-month stimulus. It is insane to think that this could be expanded to cover a full years worth of stimulus.
My point is that there is a funding hole for expanding the stimulus beyond February. We can look forward to another
2) Note that the revenue from the tax on mortgages is $1.3B in fiscal 2012. Fiscal 12 ends on 9/30, therefore the tax kicks in prior to 9/30. The 1.3b is at least three months worth of revenue (as compared to full year 2013 @4.6B). Based on this information I conclude that the start date for the mortgage tax is June 1, 2012.
We have seen in the past what happens when a subsidy for housing ends. The housing market reacts pre and post the ending of the stimulus in a predictable fashion. Buyers do what they can to get a deal done before the subsidy goes away. Demand is “borrowed” from the future.
The tax on mortgages will work in a similar manner. Post 5/30, a buyer who takes out a $600,000 mortgage will pay an extra $50 a month ($6,000 over ten years). Will this influence demand on a short-term basis? I would expect so. The RE hucksters will be pushing this all spring:
“Buy Now! Close Quick! Avoid the Tax!
After 6/1 there will be a drop off in demand for housing. This seems particularly dumb to me as this will happen right in front of the election. Possibly the Republicans (the tax on mortgages was their idea) think that a weak housing market coming into November plays to their hand. I think they will end up with egg on their faces.
3) The Republican leaders hate Fannie and Freddie. The reason they insisted that the 2012 stimulus be paid for on the backs of mortgagors is that they want to force F/F out of business. I hate F/F too. But 2012 is not the time to make mortgages more expensive
The Republican Party has been digging their heels in fighting against every form of tax increase. But what do they do to achieve their objectives? They raise taxes, just like the Democrats do.
I would give the Democrats a C- grade on how this worked out. The Republicans deserve a D-. America is suffering from bad governance.
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Bad Weather
Today there are reports of 1000+ deaths from flooding in the Philippines. Last week another 750 were killed from massive floods in southern Thailand. A month ago the Thai capitol, Bangkok was inundated for a month. Deaths by drowning and water borne illnesses are in the thousands. These hundred-year floods are the result of the same weather pattern that brought the floods to Australia a year ago. La Nina conditions have persisted in the Pacific Ocean.
The following chart looks at the long-term ENSO cycles. Below zero is La Nina, above brings El Nino conditions. The data shows that neutrality in ocean temperatures was achieved in September. But today we are rapidly turning back to strong La Nina conditions. The chart shows several occasions in the past where the ENSO cycle was negative then neutral and finally negative again. It’s more normal to see a cycle shift from a La Nina to a El Nino.
Both El and La conditions bring the potential for severe weather. When the cycle persists the damage that it brings is concentrated in the same parts of the globe. This slide looks at Asia today. There are severe storms all over the region. The rest of the globe has relatively tranquil conditions.
For the US, the return of a strong La Nina means that West Texas will stay dry, above average rain in the central part of the country is probable and the NE looks like it is going to get a miserable winter; Cold and snow.
The farmers say, "A drought will scare you to death, but too much rain will kill you." As usual, the farmers are right.
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Posts
I think we can conclude that the mortg tax is all for pol purposes. The dems think they've snookered the rep by getting a boost to housing.
ReplyDeleteThe rep think they have snookered the dems by getting a falloff in housing in the last few months before the election.
Of course the dems win on this. You've heard of the line "if a tree falls in the forest and nobody is there, does it make a sound?" When housing spikes, it will be on the news endlessly. When housing collapses, is there really a collapse in the months right before the election if the media absolutely positively refuses to report it?
So .....obvious.
Bad Thailand weather is also a result of man made redirection of natural waterways causing undue buildups.
ReplyDeleteThere is never a bad time to make the U.S. government smaller.
ReplyDeleteFannie and Freddie need to be shut down ASAP. The quicker the American people recognize that Social Security is a redistributive Ponzi scheme and not a pension program the better.
Sounds like a win-win
It seems mortgages are the favored instrument to tax the public. Probably because a higher mortgage rate is not recognized as a tax(if this were to cover default risk then a different case but it's not).
ReplyDeleteWe already have a tax on mortgages, but it's not paid into the treasury, but to the four big banks who effectively control the process by which a mortage gets insured by the GSE's. Chris Whalen at IRA points out that four big banks enjoy an oligopoly on mortgage creation by virtue of no one else having the ability to deliver a mortgage directly into a TBA pool.
Seems every which way on looks everyone is trying to earn a few basis points on the mortgages we take out, while leaving us as tax payers liable for the credit risk on the back end.
Hmm Well I just don't think it will lead improvements in the housing market with this law passed. It's just quite hard to believe.
ReplyDeletenew york real estate ce
Bruce,
ReplyDeleteWhy did you use a $600K mortgage? The median home price is less than $175K.
Is this tax going to be passed along to all mortgages regardless of origin date? Even at $600 income per year per mortgage, if you divide that into $4B they are projecting in 2014, that implies 6.6M mortgages.
Also, wasn't F&F suppose to raise their guarantee fee on their own accord to encourage competition from the private market? The projected income stream doesn't look like F&F will be getting smaller within the next 10 years.
Bruce,
ReplyDeleteOne more thing if I may. They may call this a G Fee but it's really a tax. We know they need $35+ B over a 10 year period. What happens if mortgage refis dry up when interest rates go up? Could this G Fee potential go up, like our tax rates?
Per FHA mag, the fee is estimated to be 12.5 basis points initially.
ReplyDeletehttp://www.fhfa.gov/webfiles/22982/GFEESTMT122911F.pdf
It starts April 1. So six months = $1.3B and the next 12 months (2013) = $4.6B.
So either the CBO is projecting a lot more mortgages being originated (not likely) or the 12.5 basis points will increase, just like a tax rate.
I suspect this could cause an inhibitory loop. No one refi and treasuries can't get any lower. As less people refi, the higher those tax rates...errr...G Fees will have to become.
This vote was determined by men who yielded to their own hatreds of Fannie and Freddie. As you say, they could just as likely to have hated the Boy Scouts and tax them instead. Such is the state of the legislature, that they are blinded by their passions and have no accountability for the Fannie and Freddie’s bloated condition which they had created. It is like a marriage that falls apart is at the point the hatred takes over and not the reasonable perspective. And thus, these legislatures have time and again proven that their love and hate of freedom is not love at all, but hatred, as they call Ron Paul the “doctor of no” whenever he tries to stand up for the US Constitution. And this issue is about standing up for mortgage holders, and who has stood up for them? These lawmakers do not represent either the people or the Constitution!
ReplyDeleteMother Nature has to shake off the horrible conditions in which mankind lives. These are the times that try men’s souls, as Thomas Paine said. And so, it is up to people to do some soul searching in how they can right fascism in America and terrorism in the Middle East, and fanaticism in the world. Man pours his darkness into nature and nature must shake it off.
ReplyDeleteThe Wills India Fashion Week in New Delhi has successfully ended in a more sizzling style for spring summer. It has all that glamour and glitz, demanded by London, Paris and New York fashion Weeks.
ReplyDelete