By Fax: 202-456-2461 202-456-0192 202-622-6415
May 14, 2009 Updated
President Barack Obama
Attn: Chief of Staff Rahm Emanuel
CC, Secretary of the Treasury and
Economic Advisor Summers
White House
1600 Pennsylvania Avenue
Washington DC 20500
RE: Solutions –THE CANDU MEMORANDUM for specific and alternative short term and long term solutions to our Nation’s current banking, financial, economic, energy, environmental and credit crisises.
Dear President “Barry” Obama,
Now it is still game-time Mr President and we need your “A” game as we are entering heavy into the first quarter, we need to break out our offense while maintaining our defense. The offense is the economic stimulation for investment and recovery, and the defense is the reduction in wasteful government spending by smart investment with proper cost controls. Your “A” game will have to emulate the intelligence and IQ capacity of the 1973 NY Nicks (Bill Bradley, Dave Debusshere, Jerry Lucas). You have it and we really need to see your “A” game.
The economic, financial and credit problems facing our nation and with the buck and stopping on your desk, with every national and international problem, is a monumental task that needs a change in how government will do business to reverse the current economic and financial melt-down. The key words here are :JOBS, HOUSES, MORTGAGES, CREDIT. CONSUMER SPENDING, GOVERNMENT SPENDING, TAXATION, GLOBAL ECONOMY AND SAVINGS.
First and briefly let us define these interrelated problems that you are attempting to solve. As Suzie Orman stated very simply in this past week on one her programs, we have a cause and effect on several areas that are totally inter-related. We are having an economy that is in a total state of fear and lack of confidence, and is therefore contracting.
1. We have a job crisis – accelerated unemployment (geometrically) that is quickly reaching unacceptable levels. When companies such as Microsoft start having sizable job cuts, we know we are in trouble, as this is a company that has had more money in the bank than some countries do. The close down, bankruptcy and downsizing of many businesses (both large and small) that are feeling and fearing the current and future loss of sales and revenues–is now accelerating at a disproportionate rate. These businesses fear that we will lose a lot more sooner than later. They cannot visualize an upturn, and if and when it will incur, even with the proposed stimuli packages now being discussed by the executive and legislative branches. However, there is also a strong domestic need for cross training people for new careers and not just in manufacturing.
2. We have a residential home-owner valuation crisis that is now becoming nationwide and vastly depressing market values of houses. Every foreclosure immediately depresses the housing values within close proximity to the foreclosed house to point that even good solid credit homeowners, who are paying their mortgages timely, are now facing upside down mortgages where their fear is becoming reality as their homes (which maybe their retirement asset) may be worth considerably less than their mortgage balances. New mortgage applications for buying of homes in the same vicinity as the foreclosed properties, are being declined because the foreclosed homes become “comps” (comparable sales) for use in valuing a property for a new mortgage on a sale or refinance. Many prospective home buyers fear that what they buy today will be worth less a year from now, and any equity they invest in their down payment could easily, they fear in their minds be possibly lost in the near future. The residential real estate market, which rose too sharply in the past, is now facing an abnormal downturn from the cancerous growth in the rate of foreclosures thus reducing home values at an accelerated rate.
3. We have a credit crisis, because banks are afraid of lending in fear of new loans going bad, as a result of the accelerated economic downturn and the overload of toxic assets held in the respective banks. It seems the bigger the bank, the more precarious their financial state. They are hoarding their capital, in fear of going under, if there is a liquidity run on the bank. Thus auto loans, student loans, small business loans and credit lines (for even credit-worthy borrowers) are being denied at an increasing rate.
- I firmly believe that many small local town banks are probably in much better financial shape than the big banking conglomerates. This is because if they portfolied the mortgages that they originated, they were far more conservative than their larger counterparts. Many of them did not heavily invest in or sell mortgages to “Securitized mortgage pools” or “Credit Swaps.” Many of these larger banks that have substantial toxic assets fear a possible nationalization of the larger banks.
4. We have a consumer spending crisis, because consumers, even those who are employed (besides the unemployed), are fearing possible job loss with the continuing melt down. The consumers are restricting their spending to bear essentials, as many fear a possible job loss, currently have lost a substantial portion of their equity in their assets due to market (stock market) loss in value of securities and/or loss in value of their primary asset - their home. Retirees are being drastically effected by this downturn in market values, as assets that they have worked for all their lives are being lost thru no fault of their own. They fear financial survival in an economy that has wiped out a substantial portion of the assets they retired on. With the vast expanse in the global economy, overseas producers of goods and services that our consumers and manufacturers have been purchasing due to their lower cost have been feeling the rapid decline of demand for their goods and services, and they fear a further loss.
5. We have a fear crisis, as everyone is being effected. Each aspect of items 1 to 4 are inter-related with global fears in the other global economies, particularly those that have heavily invested in US government securities, our large investment companies and banks, and specifically where the investment in many “Securitized pools of residential mortgages” and “credit swaps” that have become a major part of the “toxic assets” held by our banks and investment companies (including insurance giants such as AIG).
6. Our domestic primary manufacturing of autos and the related industries and supplier companies – steel etc. Are having substantial liquidity problems because of the sizable down turn in sales volume. Even foreign auto makers, who manufacture and assemble cars here in the states are feeling the pinch of reduced sales volume.
Now that I believe I have defined the basic fears that our nation and its political and economic leaders/advisers are experiencing, it is now the time to define some alternative solutions. This is where the Theory of Tax-Enomics can provide you with definitive alternative solutions that can quickly reverse the current melt-down.
As the buck stops with the President, he is going to have
to use his public and eloquent speaking ability to substantially reduce many of the fears our nation has as indicated in this memo random. However, if POTUS looks to history, he may see some of the alternative solutions more clearly.
Private industry, big and small businesses need a substantial consumptive demand for their goods and services to reverse the current economic contraction. They are the key and the engine to stimulate an expansion of our economy. Normally, the market rules of supply and demand in the past have been adequate stimulus to expand our economy.
The American taxpayer and consumer is laden with fears as previously indicated at present and justifiably so. If Taxpayer –consumer has no job, he loses his ability to get reasonable credit (what little there is) or fears losing his job he is not presently in, he is not likely to create any increase in demand of domestic goods and services, other than necessities of the highest priority. This is where the federal government needs to become a prime basic consumer of certain goods and services, particularly those that will have an immediate effect of stabilizing and expanding the economy.
The cost to the taxpayers’ will be substantially recouped from the rapid expansive effect of these targeted and definitive Tax-Enomic solutions.
TARGETED SOLUTION NO. 1
PARTIAL USE ($60 Billion) OF 2nd Half of TARP FUNDS FOR THE AUTO INDUSTRY –BUY – DO NOT LEND!! Fact:
- “U.S. sales for all automakers looks to be about 13.2 million in '08, off
18.5 percent from '07's 16.2 million sold, resulting in the lowest annual volume since 1992. - In December 2008 the Federal Government under the Bush Administration “loaned” or “invested” previously legislated Auto Energy funds to two of the big 3 Auto Industry Manufacturers. They set an outside date in the first quarter for the automakers to demonstrate their company’s financial viability. This kept them alive, but it was like putting a band-aid on gushing open wound.
Now is the time for the Federal Government to step in an unusual way to stabilize this industry and all its related supplier and sales distribution companies (auto parts suppliers and car dealers). This stabilization program will not only have a ripple effect on expansion of US jobs, it will target particularly areas of our country related to the auto manufacturing industry having substantial and excessive unemployment – states like Michigan, Ohio, Indiana, Pennsylvania and Illinois.
Instead of loaning or investing Federal Taxpayer dollars unsecured in the automakers, a new FVA (Federal Vehicle Authority) should be established under the Federal Reserve and TARP to purchase from the big 3 automakers and other automakers that have US assembly plants, 60 Billion dollars worth of “qualified” (“US Jobs Made”, or US assembled in the US) New Energy Efficient “Green” and hybrid autos.
At a $20,000 sale price per “qualified” vehicle this is equivalent to the 2008 decrease in volume in US sales over 2007 for all automakers of approximately 3 million vehicles as stated in the news article listed above.
The $60 billion dollars from TARP for the purchase of the “qualified” vehicles will be turned over to the FVA.
The “qualified” vehicles will receive a 50% exemption from the Federal excise tax on vehicles, where applied.
The automakers and auto assembly companies will receive a 5% non-refundable income tax credit (maximum of $1,000) per “qualified” vehicle sold under the program.
The FVA, under the Federal Reserve, will provide an FVA guarantee to lender-banks by insuring these new loans of the lenders, who will lend the automakers funding for the manufacturing and /or assembly of the “qualified” vehicles, which vehicles the FVA will maintain a secured lien as security for the financing. This will work in same manner that auto dealers get floor-planning financing. As a condition and incentive to the investing lenders, to keep the borrowing cost (financing rate) low and reasonable to obtain, the lenders would earn their finance income on a 50% tax free basis for automaker and assembly companies financing, on new auto consumer FVA guaranteed loans or floor-planning dealer-secured financing during the next three years providing that the financing interest rate does not exceed the three year treasury rate.
The vehicles to be “qualified” must have not less than 50% US made (US JOBS) parts – including any steel or tires. Any of the present plants that are producing “qualified” “green” or hybrid vehicles can be quickly expanded by increasing job shifts to accommodate the immediate increased need for auto workers to produce these “qualified” vehicles.
To reduce the production cost of these”qualified” vehicles, the FVA by legislation would grant for each vehicle produced and sold to FVA a $1,000 Federal payroll tax credit (offset to the FICA, MEDICARE, and FUTA Employer Payroll tax cost). Additionally for each new worker hired or rehired by the auto manufacturers, these new workers will have for 1 year a 50% reduction in their employer payroll tax cost. Each of these new “qualified” (hired or rehired) workers under this program will also have the same 1 year 50% reduction in their employee payroll tax cost, thus giving these workers more disposable income for consumer spending.
In addition each newly hired or rehired “qualified” employee, will be required to purchase a new green qualifying vehicle as part of their pay package. The $20,000 cost to each eligible employee will be paid out as part of their compensation package tax free over a 2 year period. This $20,000 vehicle compensation purchase will be free for both employer and employee of payroll taxes, and income tax free to the employee. The automakers unions will have to agree to this payroll concession. In exchange for receiving cumulative preferred company stock in the company employee pension funds as part of the employee pension benefits.
These FVA vehicles will first be distributed to replace on a one for one basis to Federal, State and local government agencies, which will substantially relieve these agencies of any appropriation requests for government vehicles. The agencies will turn over to the FVA for each vehicle received an existing used (gas guzzling non-qualified) vehicle presently owned by that agency or the proceeds of the sale of that vehicle. Alternatively the remainder but not less than 30% of the “qualified” vehicles will be placed with FVA for distribution to auto dealers for domestic consumer distribution throughout the country which will provide , if required, an FVA guarantee for floor planning of these vehicles with existing bank lenders. The FVA guarantee will be similar to an FHA or FDIC guarantee at a cost to the borrower of a small insurance premium FVIP (Federal Vehicle Insurance Premium). Also the auto dealers could provide for auto purchasers for an FVIP a FVA guarantee for new auto loans as set forth below. Each of the states and localities, as compensation for receiving these “qualified” vehicles will be requested to reduce the sales tax rate to a maximum of 2% on any consumer purchase of a “qualified” vehicle.
These vehicles to be considered as “qualified” will have the following minimum and maximum requirements.
1.The actual Sales Price of the “qualified” vehicle purchased by the FVA shall not exceed $20,000, except as stated below.
2.The “qualified” vehicles will be required at this price to have basic amenities and equipment (similar to vehicles sold presently) as follows:
- Automatic transmission, power steering, power brakes, power windows and other standard amenities.
- Minimum gas mileage of 30 MPG in local driving and or highway driving. For each additional increase of 5 MPG, the price of the vehicle can increase by $2,000.
- The vehicles will be required to have a minimum of 5 year and or 60,000 mile standard factory vehicle warranty.
- Tires, batteries, and other consumables shall carry a minimum of a 30,000 mile and/or 3 year factory warranty for normal use.
- These vehicles to be considered “qualified” will have to meet the minimum equipment and safety standards currently required by US, State and local government agencies.
The effect of this targeted Tax-Enomic solution is to rapidly expand customer domestic sales by US domestic auto manufacturing and assembly, and all its related supplier and dealer companies. Over a three year period, the actual taxpayer cost may be minimal on a Federal and State basis. This is because under the Theory of Tax-Enomics, by rapidly expanding the tax base and the amount of total taxable revenue generated by economic expansion, tax credits and cuts in tax rates will be materially offset by additional tax revenue generated from the economic expansion. In addition, the financing is secured by the vehicles.
The other real benefit of the above program is that we will be making a substantial correction in our domestic consumption of gasoline purchased, which will somewhat relieve our domestic consumption and reliance on gasoline purchased abroad.
TARGETED SOLUTION NO. 2
PARTIAL USE ($60 Billion) OF 2nd Half of TARP FUNDS FOR THE FLA (The Federal Lending Authority)” to solve the current credit crisis.
There is any easy solution to this Credit problem that was stated in the New York Times on January 19th:
The Next Threat To The Financial System: Corporate Defaults (NYT)(CHTR)(LVLT)(SIRI)
The next big threat to bank may be corporate defaults on debt, much if it originally supplied by the banks themselves. The irony is that the problem could be solved by the banks, if they won't open their vaults and provide more capital to companies who are in the process of refinancing. But, they won't. At least not without being forced to do so by the government. Banks don't want to put their earnings in greater trouble by offering more risky loans on top of the ones they already have issued. As the recession deepens, they have no reasonable way to evaluate whether they will be paid back.
For debt which is rated junk, the reluctance of the banks is understandable, but the issue reaches far beyond firms with highly risky., The New York Times reports that "This year alone, more than $700 billion in corporate loans will come due, according to Standard & Poor’s. "
A number of large American companies are left without access to capital by the trend. These include The New York Times (NYT) itself, which has $400 million in debt due at the middle of this year. Other corporations from Sirius (SIRI) to cable giant Charter (CHTR) to large telecom firm Level 3 (LVLT) may be forced into Chapter 11 or liquidation because they cannot tap that would have been readily available two years ago.
When companies are able to borrow, they are paying interest rates of 10% or higher. Servicing that debt requires a large part of which means that the money borrowed may solve short-term problems but it robs money from operations as time passes. High debt service costs become a boat anchor in and of themselves.
The SOLUTION TO THIS PROBLEM IS EASY IF YOU SEE IT:
Use the Theory of TAX-Enomics as follows:
FROM THE CANDUMEMOS to President OBAMA and the CONGRESS
The Theory of Tax-Enomics-Presidential Economic Solutions
Government thru the Federal Reserve must establish a Federal Lending Authority and Federal Vehicle Authority that will function like the FDIC and the FHA. By guaranteeing bank loans, with a small insurance premium, businesses and individuals will be able to get the necessary credit that is needed in our economy. By using TARP funds in this manner we get a 10 fold benefit as this is how you lubricate the nation’s credit vines. Any of the preferred stock or warrants issued to the US Government should be put into the (SSIF) Social Security Investment Fund as a bonus.
The stimulus must be geared to give the taxpayer worker more disposable spendable income and it should be tied to the creation of private sector jobs. One key for an employer and employee incentive - the revision and immediate reduction of the graduated downward HIDDEN ALTERNATIVE MINIMUM TAX – the Social Security Payroll tax, offset by removal of the cap on earnings it is subject to.
Example:
Reduce the Social Security rate to 2.50% on the first $200,000 and then to 3.25% on excess over $200,000 with no top cap on taxable earnings for the employer and the employee. Now we have room for a 1.45% Basic Health Care Tax with no cap for both employee and employer that will work like Medicare. It will provide limited basic health care insurance to insured workers, as Companies will only need then to offer and fund a medi-gap policy to their employees if they want to or can financially.
- This solves a lot of problems, INCLUDING BASIC HEALTH CARE COSTS, and will be self financing. It increases disposable personal income for the lower and middle-class wage earners. More disposable income for the taxpayer means more disposable income available for taxpayer savings, debt reduction, and domestic consumption of goods and services.
- More power for the congressional financial buck spent. For full details on this program see my blog.
TARGETED SOLUTION NO. 3
PARTIAL USE ($150 Billion) OF 2nd Half of TARP FUNDS FOR THE FLA (The Federal Lending Authority)” to solve the current RESIDENTIAL HOUSING DEPRESSED MARKET VALUE AND MORTGAGE FORECLOSURE CRISIS
This crisis is a third leg to our overall financial crisis – which at its current rate is approaching a real depression. As stated before
- We have a residential home-owner valuation crisis that is now becoming
nationwide and vastly depressing market values of houses. Every foreclosure
immediately depresses the housing values within close proximity to the
foreclosed house to point that even good solid credit homeowners who are paying their mortgages timely are now facing upside down mortgages, where their fear is becoming reality as their homes (which may be their retirement asset) may be worth considerably less than their current mortgage balances, and if we have no correction in the current direction of this crisis may cause further substantial drops in the market value of housing.
In Florida and California, we have instances where homes that were purchased in the past three years at prices like $500,000 and up may now have values in many cases as much as 40% less in sales price in a very ill-liquid market.
New mortgage applications for buying of homes in the same vicinity as the foreclosed properties, are being declined because the foreclosed homes become “comps” (comparable sales) for use in valuing a property for a new mortgage on a sale or refinance. Many prospective home buyers and residential home lenders fear that what these home buyers purchase today will be worth less a year from now, and any equity they invest in their down payment could easily, they fear in their minds be possibly lost in the near future. The residential real estate market, which rose too sharply in
the past, is now facing an abnormal downturn from the cancerous growth in the rate of foreclosures thus reducing home values at an accelerated rate. - This crisis is being further complicated because as prospective home buyers are being reduced by the current rapid evaporation of jobs.
It is important in seeking an economic and financial solution to this crisis that we define the “Toxic Assets”. The “Toxic Assets” basically include:
1. Potential “Toxic Mortgages” (potential defaulting mortgages –“Option Arms and Interest Only mortgages) which will have in the near future a substantial increased payment requirement and/or interest rate increase. These may cause a major loss to lenders and investors due to simultaneous potential decrease in home market values.
2. Existing “Toxic Mortgages” in default and/ or in foreclosure that are facing that same major loss due to simultaneous potential decrease in home market values.
3. “Toxic Assets” known as “REOs” - Real Estate owned foreclosed properties held by the banks-lenders that presently decreasing in value at an accelerated rate.
4. “Toxic Assets” known as “Mortgage Backed Securities” and “Credit Swaps and Derivatives”, which consist of“Securitized Pools” of various kinds of mortgages” that are currently difficult to evaluate on the “Mark to Market” rule. Complicating the evaluation of this type “Toxic Assets” is that they are held both nationally and globally, and they presently consist of mortgages not in default, as well as “Toxic Assets” described in Nos. 1 to 3 above.
There is a financial fact that has never really been discussed about the “toxic assets” now held by lenders and investors of the lenders. The Toxic assets in almost all cases do have both a current and future value, which has always been the case with real estate. The major problem in evaluating the “Toxic Assets” current and future value is the volatility in our current market values of residential housing.
Not withstanding, the future value, rather than the immediate future value of these assets does have a realistic probability for a normal to substantial increase providing
A. The current residential housing market values can be stabilized, and with reasonable reduction in the supply of housing vs demand.
B. The current illiquid mortgage markets-lack of available credit and lenders can be become fluid with increased availability.
Here is a fact that should be recognized:
If a mortgage is in default or even in the foreclosure process, while the owner is still in possession. This “Toxic Asset” does have a minimum value, which may be:
1. The amount of value equal to a mortgage amount that the owner can afford and is willing to continue pay to stay in the home, based upon his current income and financial needs, irrespective of the so-called "current market value”.
2. The amount of value equal to a mortgage amount that the owner can afford and is willing to pay to stay in the home based upon his current income and financial needs and where the “current market value is not “upside down” (the mortgage amount is less than its current market value in a quick or “short sale”).
3. The amount of value equal to a mortgage amount that the owner can afford and is willing to pay to stay in the home based upon his current income and financial needs and where the “current market value is “upside down” (the mortgage amount is less than its current market value in a quick or “short sale”). This last value becomes a real economic decision for the home-owner mortgage borrower, as it may better financially to terminate his home ownership of the property (due to the substantial difference in the present mortgage amount vs the lower current market value of the home).
Example – Home purchased for $750,000 with a mortgage of $500,000 and is now currently worth and saleable at $300,000.
One part of a solution that could have a material effect on the market value of new or resale homes purchased is that the initial equity in a new or resale home purchased could be insured thru the FLA (Federal Lending Authority) by paying with your mortgage an FHVIP (Federal Home Value Insurance Premium) - an insurance premium (Similar to FHA MIP)– paid monthly with your mortgage that insures the equity purchased). You pay the premium, but you are required to properly maintain the home, for you to be insured for your equity purchased.
A second part of a solution would be the use of a “REX” type loan agreement from the FLA. This is a loan to the homeowner, not requiring any monthly payments, in exchange for a 50% increase in the future equity of the property over the current market value. There are more details to this program, which was be run by private lenders, until AIG the investor got into trouble with other “credit” investments.
THE CANDU MEMO - A New Ideas to improve the housing and residential mortgage market
SPECIFIC CHANGE PROGRAMS FOR TO STABILIZE AND IMPROVE THE HOUSING MARKET VALUE CRISIS AND THE RESIDENTIAL MORTGAGE FINANCING CRISIS.
In today's residential mortgage financing market, it has become very difficult for many prospective home buyers to qualify their incomes and assets under today's mortgage underwriting rules. Additionally, the transaction has become (except using FHA financing), substantially economically unfeasible in today's harried home market valuation crisis, which is due to great extent to consumer lack of confidence.
In order to gain more liquidity in the residential mortgage market and to provide the proper tax and financial incentives to stimulate home purchases and help stabilize the residential market values, I propose certain changes using the Theory of Tax-Enomics that will be beneficial to the both the borrower, the lender or assignees.
1. Qualifying Income for Residential Mortgage Financing
In establishing the underwriting rules a sufficient qualifying income for their respective debt to income ratio, certain non-taxable income should be considered to help borrowers qualify. The qualifying income ratios in it self is a complicated process for the lay person to understand.
What the question basically means to the residential mortgage lender underwriter (the person responsible for qualifying the mortgage applicant) is "does the homeowner borrower have sufficient income to qualify and carry the proposed mortgage?"
There is a non-taxable income that many borrowers have that should be used in this qualifying ratio that presently to my knowledge is never considered.
- To wit - the non-taxable income earned on retirement tax deferred accounts, because this income is not reported on the borrower's tax returns.
Most taxpayers, who have retirement accounts, are aware of the tax rule that if they withdraw (not borrow that is allowed in limited amounts from non-IRA retirement accounts) monies from their retirement accounts - they, if below 59 1/2 age, are subject to a 10% tax penalty, in addition to the money being taxable as NON-Earned income.
Example if a taxpayer withdraws $10,000 from his IRA or 401 K plan, if he is younger than 59 1/2 he is subject to $1000 penalty and $10,000 is subject to income tax (but not the 7.45%) payroll tax.
If the borrower - prospective homeowner has a 401 K or an IRA that has an annualized income within the account of $12,000 he should be allowed to use this NON-Taxable Income in the underwriting process of income qualification. This income should be reduced by 2.55% (the 10% tax penalty for early withdrawal less the 7.45% payroll taxes that it is not subject to).
In many cases this may be inconsequential if the borrower has limited assets in retirement accounts. However, in many cases this additional qualifying income may then allow the borrower to qualify.
The reason it should be used to qualify is that if the borrower does have insufficient income to pay his mortgage at any point this additional income subject to the 10% withdrawal penalty (if under 59 1/2), is available to the borrower to subsidize his income.
2. FREE THE RETIREMENT ACCOUNTS - KEOS, IRAs and Corporate Pension Plans.
These tax deferred accounts presently tax plan withdrawals (with a 10% withdrawal penalty if under 59 1/2). Under certain 401 K plan and Corporate Retirement Plans, a participant is allowed to borrow funds from these accounts, subject to strict limitations, without a tax impact. However this is a loan that requires repayment and the interest at present is not deductible.
In order to make it easier for prospective borrowers-homeowners to use funds in their retirement accounts for the purchase of a residential home (owner-occupied), I propose using the Theory of Tax-Enomics for changes in the tax laws as follows:
A taxpayer (prospective borrower-owner occupied home owner) may withdraw funds from his retirement account for direct use in the purchase of a primary residence without any tax penalty, will not be subject as taxable income in the year of withdrawal, and said withdrawal will only have deferred tax implications.
The deferred tax implication will be that the amount of withdrawal will reduce any taxable gain exclusion on sale of primary residence home, under the present tax laws to the extent of the amount of the withdrawal.
Example:
- In 2008 the taxpayer - prospective borrower withdraws (not borrows) from his retirement accounts $75,000 to use in the purchase of his purchase of a primary residence (owner-occupied).
Under present tax law, if the borrower is under 59 1/2 he will pay a $7,500 tax penalty and the $75,000 will become taxable as ordinary income in the year of withdrawal. This makes the withdrawal in most cases as economically unfeasible.
If the tax law were changed to allow the $75,000 to be withdrawn without current tax impact (no 10%tax withdrawal penalty and withdrawn income not subject to current tax impact), the withdrawal becomes an economically feasible and advantageous transaction for the prospective borrower-homeowner. It also allows the borrower to have more equity in his new owner-occupied home - which may represent a significant asset at retirement age. This equates to reduction in retirement asset account from which the funds were taken.
The only tax impact would be if the owner occupied home, when sold in the future would have a reduced taxable gain exclusion
($500,000 - Joint Exclusion reduced by $75,000 to $425,000;
$250,000 for a Single Taxpayer Exclusion reduced by $75,000 withdrawal to $175,000).
Another change in the law would allow immediate family relatives to have the same currently tax free retirement account withdrawal for use in the purchase of the prospective borrower-homeowner residence. The deferred tax impact would not fall on the transferor (the relative withdrawing the funds), but on the future taxable gain of the homeowner (The beneficiary transferee) as set forth above.
If the taxpayer uses the proceeds within a set-time frame to purchase another primary owner-occupied residence, the reduction in taxable gain exclusion, at the option of the taxpayer can be transferred to the new residence - in whole or in part.
If a borrower borrows an allowed loan from a 401 K or Corporate retirement account for the purpose of a primary owner occupied residential home purchase, the interest on said loan should be deductible as qualifying mortgage loan interest, providing it is repaid like a mortgage over a term not to exceed the 65 years less the borrower's age. IRAs should be included in accounts eligible for these permissible "mortgage loans." The institutions who administer these loans shall be entitled to an administrative fee not to exceed 1/2% of the interest charged on the loan which interest income when repaid will go directly back into the participant's retirement account.
3. Increase in tax incentives to stimulate home purchases:
Many years ago, there was a $2,000 tax credit granted for a new home purchase. At that time with housing significantly lower than today's prices (even in this depressed value prices market for residential homes). This tax credit has not existed for many years. This tax credit was very successful at that time. The Senate and Congress are currently considering two different proposals for a $15,000 (not a borrowed credit requiring repayment) to a $7500 credit repaid over 5 years.
Using the Theory of Tax-Enomics, I propose the following different change in the tax law. A $20,000 Residential Home Purchase Investment tax credit for the purchase of a new residential primary home that is owner-occupied that would be spread over a 10 year period. It is also self-financing to the government.
- NOTE:Multi family homes up to 4 family would be eligible for this program and the others listed below, on a percentage basis of the owner-occupied portion to the rental portion of the residence.
- $11,000 in the year of purchase, $1,000 in 2nd thru 10Th year ($9,000). Homeowners have more financial needs in the early years after the purchase. However, the incentives have been made to encourage the homeowner to stay in their homes for at least 10 years.
- The credit would be non-refundable,except in the case of a short sale to avoid foreclosure during the ten year period, but unused credits could be carried forward thru the 10Th year.
- Any unused credits after the 10Th year would expire.
- If the owner occupied residence is sold during the 10 year period, the remaining unused credits will be permanently extinguished. The incentive is that home owners should stay in their homes during the 10 year period that they are receiving the incentives.
- The used tax credits will carry a deferred tax impact in the reduction of up to $40,000 of the taxable gain exclusion, on a 2 for 1 basis. Each $1.00 of credit received and used will reduce the taxable gain exclusion by $2.00. This reduction in the taxable gain exclusion could be deferred again by an investment in a new owner occupied residence, if the investment equals at least 50% of the original residence purchase price, including improvements. Sometimes, home owners need to downsize and therefore should not be penalized for doing so.
4. Provide Tax and Financial Incentives to Lenders to reduce existing mortgages on owner-occupied homes in foreclosure or in mortgage default.
Purpose is to provide certain tax and financial incentives to allow lenders the economic ability to restructure these loans. Additionally, the modification agreement would have the proper incentives to make it economically feasible and desirable for the borrowers to enter into the modification agreement and remain in their homes.
Multi family homes up to 4 family would be eligible for this program and the others listed above and below, on a percentage basis of the owner-occupied portion to the rental portion of the residence.
Using the Theory of Tax-Enomics, Lenders or Assignees holding existing mortgages on owner-occupied homes in foreclosure or in mortgage default of 2 or more payments would be eligible to receive certain tax incentives in consideration of a mortgage modification and restructure agreement as indicated below.
If the current appraised value of the owner-occupied residential home has been reduced below the principal balance of the mortgages on the property, the lenders must agree to modify and reduce the principal mortgage balances to an amount not to exceed 80% of the current appraised value. This lender or assignees will be granted permission for maximum modification administrative fee of $1,000 to be rolled into the new mortgage principal as long as this fee does not increase the new mortgage principal balance above the 80% of the current appraised value.
The mortgage terms must be converted to a minimum 30 year fixed rate mortgage not to exceed the lower of the ten year bond rate or 1% above the current prime rate or at the time of the agreement.
The mortgage would have at least one full month of being interest free to the borrowers and not require any payment until the first of the month, following the first full month following the signed agreement. The lenders will not receive short-term interest under this agreement. This would now be powerful economic incentives to the homeowner to remain in the home under the agreement.
The tax and financial incentives to enter into such agreement for the lenders, or any assignees in a Securitized pool of mortgage backed securities, would be several part. There is no free lunch here.
The entire remaining principal balance (maximum of 80%of the current appraised value) held by the lender or any assignees in a Securitized pool of mortgage backed securities, would be converted to a tax free bond for its remaining term. This means the income on these mortgage bonds would be tax free to the recipient.
For each dollar of principal balance of the mortgage loan in foreclosure or in mortgage default reduced by the lender or the assignees of the securities pool of mortgage back securities, said lender or assignees will be allowed to convert to tax free income on the principal balance of other mortgage bonds held equal to triple the amount of principal reduction.
For Example:
- If the lender or assignees enters into a qualifying mortgage modification
agreement whereby the lender or assignees reduces a mortgage principal balance of a mortgage on an owner occupied residential home in foreclosure or mortgage default by $25,000 on a $225,000 principal balance of said mortgage, the interest income earned on the remaining $200,000 will be deemed tax free for the remaining mortgage term, or until the mortgage is paid off. - In addition the lender and or assignees will be allowed to convert $75,000 (3 X the reduced principal balance) of principal of other mortgages held to a tax free bond (income would be non-taxable).
Using the Theory of Tax-Enomics the Owner-Occupied Residential home owner mortgage borrower would receive tax and economic incentives to enter into the mortgage modification agreement, subject to certain limitations.
The Owner-Occupied Residential home owner mortgage borrower would receive the economic incentives listed above.
Additionally, the lender will be required to delete all derogatory credit info from the borrower's file and notify all three credit reporting agencies to delete the credit derogatory with respect to the borrower's mortgage accounts.
The qualifying borrower(s) who enter into the modification agreement will receive a $20,000 non-refundable tax credit spread over a ten year period of the agreement.
1. $4,500 in the first year of the agreement, $2,000 in
2nd thru 5Th years ($8,000), and $1,500 for 6Th thru 10Th years ($7,500). Homeowners have more financial needs in the early years after defaulting on their mortgage.
2. The credit would be non-refundable, but unused credits could be carried forward thru the 10Th year.
3. Any unused credits after the 10Th year would expire.
4. If the owner occupied residence is sold during the 10 year period, the remaining unused credits will be permanently extinguished.
5. The used tax credits will carry a deferred tax impact in the reduction of up to $40,000 of the taxable gain exclusion, on a 2 for 1 basis. Each $1.00 of credit received and used will reduce the taxable gain exclusion by $2.00. This reduction in the taxable gain exclusion could be deferred by an investment in a new owner occupied residence, if the investment equals at least 50% of the original residence purchase price, including improvements.
Note: Under the Theory of Tax-Enomics, the key to the above programs is that in long run they are self-financing. Tax Incentives - Tax Credits or exemption from tax are only granted in exchange for services being provided that will stabilize and enhance the economy. They are only granted where the participants are doing services for the economy or assisting the economy by stimulating and restoring consumer confidence in the housing market values and residential mortgage financing. In each case either the Lender or Assignees and the Primary Owner-Occupied Residential.
As a last resort and stop-gap measure to keep homeowners in their homes, defaulting or in foreclosure proceeds home-owners would be offered a LEASE-REPURCHASE AGREEMENT from the lender and TARP as follows:
1. A monthly rental payment by the tenant equal to 60% of the existing mortgage payment (exclusive of taxes and insurance) on a net lease basis would be afforded to the home owner. This lease would contain a 10 year repurchase option to the homeowner-now lessee, where for each month that he makes the agreed monthly rental payment, he will receive a repurchase option credit equal to 80% of the monthly rental payment, which can be applied to an exercise of the lease purchase option. The 10 year option repurchase price shall be an amount equal to 80% of the present mortgage principal balance (with all late fees or other lender charges removed) with an accrual each year on a simple interest basis of 1% of principal balance to be added to the repurchase price. The repurchase credit is extinguished after a 10 year period. The tenant is responsible for payment of the taxes (the tax deduction will be allowed by the tenant), insurance, utilities, and maintenance payments under this new lease-purchase rental agreement. If he leaves the property (terminates the lease or defaults on the lease), the cumulative lease-repurchase option credit is extinguished.
2. In consideration of the home-owner entering into this LEASE-REPURCHASE AGREEMENT, the home-owner (now tenant) will get the same tax credits as in the modification of mortgage set forth previously. In addition all credit derogatories against the tenant with regard to this mortgage shall be deleted from his credit profile by the lender from all three reporting agencies.
3. In consideration of the lender agreeing to this Lease Purchase Agreement, TARP will guarantee the 80% of the remaining principal mortgage balance for the 10 year period (or until exercise of the repurchase option by the “homeowner” Tenant). Any income earned by the lender from the repurchase option shall be 80% tax free. TARP will then purchase 20% of the “PRINICIPAL” (free of Lender Fees etc) balance from the lender. This will allow a value to assigned to this “TOXIC ASSET”.
- Homeowner/Borrower must participate financially to get the incentives. The stimulation in the housing market for purchase of new homes. and the above Foreclosure Avoidance programs should substantially stabilize the residential housing market values and financial credit crisis.
- The stabilization and increase in liquidity of the residential mortgage financing market by the above alternative Foreclosure Avoidance programs, and reducing and solving a substantial part of the foreclosure problem will have a very positive and stabilizing effect on the housing market valuations.
4. Government jobs programs that include retraining individuals in private industry so they can cross train to new jobs, while receiving a living wage during retraining.
Examples from my blog:
A Solar and Wind Energy WPA program (the SWEPA –The Solar-Wind Energy Work Program Authority) – A government agency that will actively:
- A. Install Wind Turbines on interstate highways by use of private contractors who will be given contracts to place Wind Turbines on interstate highways middle island dividers.
- B. Provide Government Trained Employees to these private contractors. The SWEPA will set up training centers for new prospective employees who will be paid a salary over and above their unemployment insurance benefits if they take and complete the training program.
The Auto Consumer investment Tax Credit Program for energy efficient vehicles – See Blog for complete details
Provide Government sponsored Retraining Centers in different cities to offer people who are unemployed and are willing to be retrained or cross trained in a new field of employment.
- These centers will hire private contractors to retrain people in new skills at the contractor’s facility. The contractor will receive a training fee with a bonus upon completion by hire of the trainee in either the contractor’s facility or by another employer using the trainee’s new skill.
- The trainees retain their unemployment insurance benefits, and receive a small supplemental trainee fee. Upon completion and hire by a new employer they receive a small bonus tax credit.
This concept and solution will need more details to iron out any prospective problems. The thought for it just came to mind.
Some other food for thought
When my mother passed away at the age of 86, my uncle her brother made the following comment at her funeral, which is very appra pro for the present candidates.
"She had the cleanest mind, because she changed it so often."
When a President, a legislator, a political candidate changes his position on an issue or a policy, he is not "flip-flopping"; he is just cleaning his mind.
Accordingly, based upon new information I update my blogs.
JFK said “Ask not what your country can do for you, but what you can do for your country.”
Well Mr. President I am trying – but will you do a Mitzvah and ever listen.
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MRCANDU10 (Cousin of MR.GET-IT DONE)
Lloyd Michael Abrahams CPA
