Friday, August 31, 2007
Ken Arnold Has Plan for Roiling Mortgage Market
THE SOLUTION:
Adopt the Comprehensive Mortgage Market and Tax Relief Act of 2009 (CMMTRA). For all mortgage loans to which the Federal government is a party to (FHA, GNMA, FNMA, etc.):
CONSUMER REFORM ELEMENTS
1) Mandate that on a cover page of all documents that there be standardized items to which are applied statutory category descriptions and other information relevant for a consumer to both understand and compare to other such mortgages. These would be within a prominent box to which the consumer would have to initial each box in order to complete the transaction. The comparator terms would be:
3) All final mortgage papers that have borrower’s current monthly servicing amounts which exceed a statutory maximum percentage of reported gross annual income (say, 40%) would prominently have stamped on the document’s face page the words “Higher Risk Mortgage Loan”.
LENDER REFORM ELEMENTS
1) In the secondary market for such mortgage paper (i.e. the bundling and sale of bonds), if any bundled group of mortgages contains more than five percent (5%) of its total value from “Higher Risk Mortgage Loans” (as defined in point three above), the bond itself would have to be labeled similarly.
2) When the labeling is required per point #1 above, the bond seller must prominently disclose what percentage of the portfolio’s total loan values are within this “Higher Risk Mortgage Loan” category. Example: If a $500 million mortgage bond contains $100 million from “Higher Risk Mortgage Loans” then the bond seller must list that 20% ($100 million of the $500 million in mortgages) is from such statutory category of mortgages.
TAX REFORM ELEMENTS
In addition to the above consumer reforms specific to the mortgages themselves, there are two, additional reforms required to aid individual citizens and taxpayers. These reforms deal with our Federal Tax code. The first has to do with the federal tax handlings in situations where a lending institution forgives part or all of the mortgage debt of the borrower. The second situation involves situations where there was a “loss on sale” of the property by a taxpayer.
A) Situations of a primary residences’ partial or full mortgage loan forgiveness: Under current tax law, such taxpayers would OWE federal taxes on all such amounts of loan forgiveness (they are considered “constructive income” to the taxpayer): This situation literally adds insult to injury. In addition to losing one’s home to foreclosure and incurring all the expenses and disruptions from a relocation, these citizens end up with a huge tax bill as well!
Example 1: If the bank, within a foreclosure, forgives $100,000 of the borrower’s debt owed, the taxpayer may end up with a $32,000 tax bill (i.e. $100,000 of “constructive income” times a federal tax rate of 32%).
Example 2: Faced with a large home and large mortgage balance outstanding which will cause the bank to incur substantial legal, real estate, maintenance, and other costs. In consideration for the lender continuing mortgage payments and ownership, a bank may contingently forgive, say, $50,000 of a $500,000 mortgage as long as thereafter the borrower continues to make payments recalculated and refinanced at this lower outstanding amount. This $50,000 would immediately be fully taxable income to the borrower.
The solution to these unfortunate circumstances is to at least cushion this tax hit that a citizen receives in tax bill. The tax code would specify that a taxpayer could apply a “home ownership hardship deduction” equal to fifty percent (50%) of the amount of loan forgiveness – thus halving the tax bill they currently would otherwise currently face. However: This deduction amount would be 100% applied to reducing any future, lifetime home capital gains tax exclusion (currently $500K for married filers and $250K for single taxpayers). Conceptually, they are borrowing against this future exclusion of gains to offset their currently incurring a loss on home ownership. This is a “fair balance” in that they are basically trading some of the tax benefits of the future for tax deductions today – when they truly have a financial hardship and may not otherwise even be able to even pay their tax bill.
In the event of a simple “loss on sale” of a primary residence: Well before the current mortgage crises, this situation represented one of MANY tax circumstances where the Federal taxpayer truly and justifiably feels that the tax code is a situation of: “Heads you win – tails I lose…” These type tax code provisions materially help foster the image of the IRS as an illogical, bullying, unfair entity within our country. And eliminating many of these types of unfair and inconsistent provisions would be a goal of Candidate Arnold while in Congress.
In the situation of a taxpayer who ends up selling a home at a substantial loss (whether by because of threat of foreclosure or otherwise), candidate Arnold would have losses be similarly recognized for the first time like capital gains are now. They would not be ignored for tax deduction purposes. Any capital loss from a home sale over similar lifetime limits of $500K (joint filings) and $250K (single filers) would be fully tax deductible. Additionally, any loss on sale below these thresholds could, like the first proposal concerning loan forgiveness, be declared a “home ownership hardship deduction” and be similarly handled. Specifically, a taxpayer would be allowed to deduct 50% of the loss on sale but such amount deducted would offset any future exclusion amount the taxpayer would otherwise have for any future home sale capital gains tax.
Example: The single taxpayer/borrower purchased a $700,000 home in 2006. In 2008 he had to relieve himself of this debt burden and, in the bad real estate market and under threat of foreclosure, he had to sell the same home for net proceeds of only $400,000. A net loss of $300,000 therefore occurred on this sale.
Under the current tax code, this taxpayer would have NONE of this loss ever recognized for tax purposes (the “heads wins – tails loses” situation…). Under CMMSTRA, however, this taxpayer would have a full deduction of the loss amount above the lifetime exclusion amount (now fairly balanced for capital gains AND losses) of $50,000 ($300,000 loss less $250,000 lifetime exclusion for a single taxpayer). Additionally, fifty percent (50%) of the remaining $250,000 loss on sale can be declared by the taxpayer as a “home ownership hardship deduction) for an additional tax deduction of $125,000. Thus: Whereas before CMMSRA there would have been $ 0.00 deductions available in this true, financial hardship situation, the taxpayer now has available a total available deduction of $ 175,000 on the actual, $ 300,000 loss on sale of their primary residence.
ADVANTAGES TO ENACTING CMMSTRA
1) Greatly increases both the ease of obtaining relevant consumer and investor information to make sound decisions in both the borrowing as well as investing end of the mortgage markets in the United States.
2) Restores the tax code to a better sense of balance where gains are taxed and losses are deducted rather than unfairly ignoring losses for taxation purposes.
3) Adds much needed stability to the current markets by not only adding further disclosures but greatly lessening the negative financial impacts upon those citizens caught in the current binds of mortgages they are unable to make full payments on, homes that they’re unable to sell without heavy losses, and tax bills that would otherwise come in the mail that would truly add “insult to injury”.
4) Helps to ensure the current stability of our financial markets as well as our economy generally. There would be lesser bankruptcies, less turmoil in the credit markets, and a more even and continuing availability of credit for all so as to avoid a deep recession and, in the long run, aid in long term growth from strong and stable banking and mortgage markets.
5) Currently aids citizen taxpayers now caught in unfortunate circumstances by tapping into a deduction that they are quite possibly doing to use someday anyway. The Federal government may lose some tax revenues now for all of the benefits specified, but they will regain much of those revenues later when these lowered, lifetime maximum capital gains exclusions are then employed by taxpayers who, by then, are much better able to handle any tax bills from such real estate transactions.
CONCLUSION
The above initiative well addresses some of the immediate, negative impact to our current mortgage and real estate market woes. It does not wrongly involve government bailouts nor does it insulate the market from actions of greed which were of their own doing. Going forward, moreover, CMMSTRA will ensure much greater mortgage information. And this will greatly benefit both the consumers of mortgage products (i.e. the borrowers) AND the makers of such mortgage products (i.e. the mortgage firms and ultimate investors in such mortgage products).
Time currently is of the essence to ensure a minimum of pain in the marketplace as well as reasonable and timely stability in the financial markets. It is therefore greatly urged that Congress well consider these creative initiatives of candidate Ken Arnold much sooner than when he, hopefully, enters that body in January, 2009.
Ken Arnold – Republican Candidate
U.S. Congress – 8th District of Illinois
Ken@Arnoldforyou.com
www.ArnoldforCongress.com
August 28, 2007
ARNOLD FOR CONGRESS
“ Strong, Creative Leadership . . . for the 21 st Century ! “
Adopt the Comprehensive Mortgage Market and Tax Relief Act of 2009 (CMMTRA). For all mortgage loans to which the Federal government is a party to (FHA, GNMA, FNMA, etc.):
CONSUMER REFORM ELEMENTS
1) Mandate that on a cover page of all documents that there be standardized items to which are applied statutory category descriptions and other information relevant for a consumer to both understand and compare to other such mortgages. These would be within a prominent box to which the consumer would have to initial each box in order to complete the transaction. The comparator terms would be:
a) Interest Rate (APR)2) All such mortgages would have a statutory limit of APR applied to them. Such limit would merely dictate that the APR can never be more than two times that of the initial APR of the loan. [NOTE: Identified “Balloon Loans” are exempted from this limitation since the borrower well knows of the Balloon payment(s).]
b) Term of Initial Interest Rate
c) Type of Mortgage
d) Maximum Potential APR during the life of the mortgage
e) Maximum Total Closing Costs (as a Percentage of Loan)
f) Other relevant items
3) All final mortgage papers that have borrower’s current monthly servicing amounts which exceed a statutory maximum percentage of reported gross annual income (say, 40%) would prominently have stamped on the document’s face page the words “Higher Risk Mortgage Loan”.
LENDER REFORM ELEMENTS
1) In the secondary market for such mortgage paper (i.e. the bundling and sale of bonds), if any bundled group of mortgages contains more than five percent (5%) of its total value from “Higher Risk Mortgage Loans” (as defined in point three above), the bond itself would have to be labeled similarly.
2) When the labeling is required per point #1 above, the bond seller must prominently disclose what percentage of the portfolio’s total loan values are within this “Higher Risk Mortgage Loan” category. Example: If a $500 million mortgage bond contains $100 million from “Higher Risk Mortgage Loans” then the bond seller must list that 20% ($100 million of the $500 million in mortgages) is from such statutory category of mortgages.
TAX REFORM ELEMENTS
In addition to the above consumer reforms specific to the mortgages themselves, there are two, additional reforms required to aid individual citizens and taxpayers. These reforms deal with our Federal Tax code. The first has to do with the federal tax handlings in situations where a lending institution forgives part or all of the mortgage debt of the borrower. The second situation involves situations where there was a “loss on sale” of the property by a taxpayer.
A) Situations of a primary residences’ partial or full mortgage loan forgiveness: Under current tax law, such taxpayers would OWE federal taxes on all such amounts of loan forgiveness (they are considered “constructive income” to the taxpayer): This situation literally adds insult to injury. In addition to losing one’s home to foreclosure and incurring all the expenses and disruptions from a relocation, these citizens end up with a huge tax bill as well!
Example 1: If the bank, within a foreclosure, forgives $100,000 of the borrower’s debt owed, the taxpayer may end up with a $32,000 tax bill (i.e. $100,000 of “constructive income” times a federal tax rate of 32%).
Example 2: Faced with a large home and large mortgage balance outstanding which will cause the bank to incur substantial legal, real estate, maintenance, and other costs. In consideration for the lender continuing mortgage payments and ownership, a bank may contingently forgive, say, $50,000 of a $500,000 mortgage as long as thereafter the borrower continues to make payments recalculated and refinanced at this lower outstanding amount. This $50,000 would immediately be fully taxable income to the borrower.
The solution to these unfortunate circumstances is to at least cushion this tax hit that a citizen receives in tax bill. The tax code would specify that a taxpayer could apply a “home ownership hardship deduction” equal to fifty percent (50%) of the amount of loan forgiveness – thus halving the tax bill they currently would otherwise currently face. However: This deduction amount would be 100% applied to reducing any future, lifetime home capital gains tax exclusion (currently $500K for married filers and $250K for single taxpayers). Conceptually, they are borrowing against this future exclusion of gains to offset their currently incurring a loss on home ownership. This is a “fair balance” in that they are basically trading some of the tax benefits of the future for tax deductions today – when they truly have a financial hardship and may not otherwise even be able to even pay their tax bill.
In the event of a simple “loss on sale” of a primary residence: Well before the current mortgage crises, this situation represented one of MANY tax circumstances where the Federal taxpayer truly and justifiably feels that the tax code is a situation of: “Heads you win – tails I lose…” These type tax code provisions materially help foster the image of the IRS as an illogical, bullying, unfair entity within our country. And eliminating many of these types of unfair and inconsistent provisions would be a goal of Candidate Arnold while in Congress.
In the situation of a taxpayer who ends up selling a home at a substantial loss (whether by because of threat of foreclosure or otherwise), candidate Arnold would have losses be similarly recognized for the first time like capital gains are now. They would not be ignored for tax deduction purposes. Any capital loss from a home sale over similar lifetime limits of $500K (joint filings) and $250K (single filers) would be fully tax deductible. Additionally, any loss on sale below these thresholds could, like the first proposal concerning loan forgiveness, be declared a “home ownership hardship deduction” and be similarly handled. Specifically, a taxpayer would be allowed to deduct 50% of the loss on sale but such amount deducted would offset any future exclusion amount the taxpayer would otherwise have for any future home sale capital gains tax.
Example: The single taxpayer/borrower purchased a $700,000 home in 2006. In 2008 he had to relieve himself of this debt burden and, in the bad real estate market and under threat of foreclosure, he had to sell the same home for net proceeds of only $400,000. A net loss of $300,000 therefore occurred on this sale.
Under the current tax code, this taxpayer would have NONE of this loss ever recognized for tax purposes (the “heads wins – tails loses” situation…). Under CMMSTRA, however, this taxpayer would have a full deduction of the loss amount above the lifetime exclusion amount (now fairly balanced for capital gains AND losses) of $50,000 ($300,000 loss less $250,000 lifetime exclusion for a single taxpayer). Additionally, fifty percent (50%) of the remaining $250,000 loss on sale can be declared by the taxpayer as a “home ownership hardship deduction) for an additional tax deduction of $125,000. Thus: Whereas before CMMSRA there would have been $ 0.00 deductions available in this true, financial hardship situation, the taxpayer now has available a total available deduction of $ 175,000 on the actual, $ 300,000 loss on sale of their primary residence.
ADVANTAGES TO ENACTING CMMSTRA
1) Greatly increases both the ease of obtaining relevant consumer and investor information to make sound decisions in both the borrowing as well as investing end of the mortgage markets in the United States.
2) Restores the tax code to a better sense of balance where gains are taxed and losses are deducted rather than unfairly ignoring losses for taxation purposes.
3) Adds much needed stability to the current markets by not only adding further disclosures but greatly lessening the negative financial impacts upon those citizens caught in the current binds of mortgages they are unable to make full payments on, homes that they’re unable to sell without heavy losses, and tax bills that would otherwise come in the mail that would truly add “insult to injury”.
4) Helps to ensure the current stability of our financial markets as well as our economy generally. There would be lesser bankruptcies, less turmoil in the credit markets, and a more even and continuing availability of credit for all so as to avoid a deep recession and, in the long run, aid in long term growth from strong and stable banking and mortgage markets.
5) Currently aids citizen taxpayers now caught in unfortunate circumstances by tapping into a deduction that they are quite possibly doing to use someday anyway. The Federal government may lose some tax revenues now for all of the benefits specified, but they will regain much of those revenues later when these lowered, lifetime maximum capital gains exclusions are then employed by taxpayers who, by then, are much better able to handle any tax bills from such real estate transactions.
CONCLUSION
The above initiative well addresses some of the immediate, negative impact to our current mortgage and real estate market woes. It does not wrongly involve government bailouts nor does it insulate the market from actions of greed which were of their own doing. Going forward, moreover, CMMSTRA will ensure much greater mortgage information. And this will greatly benefit both the consumers of mortgage products (i.e. the borrowers) AND the makers of such mortgage products (i.e. the mortgage firms and ultimate investors in such mortgage products).
Time currently is of the essence to ensure a minimum of pain in the marketplace as well as reasonable and timely stability in the financial markets. It is therefore greatly urged that Congress well consider these creative initiatives of candidate Ken Arnold much sooner than when he, hopefully, enters that body in January, 2009.
Ken Arnold – Republican Candidate
U.S. Congress – 8th District of Illinois
Ken@Arnoldforyou.com
www.ArnoldforCongress.com
August 28, 2007
ARNOLD FOR CONGRESS
“ Strong, Creative Leadership . . . for the 21 st Century ! “
Labels: 8th Congressional District, Ken Arnold, Mortgage
# posted by Cal Skinner : 11:19 AM
