Payroll tax breaks aren’t enough, Mr. President: reset mortgage rates

Last night the president placated Republicans by throwing them a tax break they couldn’t resist, cut a few points off the payroll taxes.

The idea is to stimulate the economy by putting more cash in working people’s hands. But, this is just a temporary fix, and it doesn’t do much to change the real financial dystopian pressures on the poor and middle class: paying mortgages on homes that are still worth less than they were before the Wall Street Wizards decided to play monopoly with financial paper, without any apparent risk.

As a small business owner, I don’t get a paycheck every week that looks like what most employed people get. My cash flow isn’t consistent and from talking to accountants and financial planners, many small business people have similar financial profiles. Despite hiring people, and paying payroll taxes (where if you don’t file a form right- they fine you huge amounts- despite having all the other forms in place and paying everything you were supposed to) and contributing to the local economy- banks charged me 7.25% on my home- because of my “income” and probably because I’m in an urban area.

My home loan was originated when the rates were 6.25% or so. Now they hover around 4% and I can’t refinance. Foreclosures on other homes make my house worth less, new rules require more equity, appraisals come in low (a friend bought a double right next to two single family homes that went for over $200K within the last 3 years- he rents each side for $750 a month, and the appraisal comes in at $55K) and despite having a stellar payment record- I can’t take advantage of the 4.25% rates right now.

Neither can most people making under $100K a year.

The only people benefiting from cheap money thanks to the “new rules” are the wealthy. They are now flush with cash, able to buy foreclosures, rent them at unbelievable rates to those who can’t buy but need a place to live. The rich are getting richer.

Had the President really been interested in stimulating the economy, to increase consumption, resetting home loans down for working class Americans, could make a huge impact on the ability of more Americans to be able to buy the things that force companies to hire to grow. It would also begin to normalize the housing market and put value back in our pockets while slapping the bankers who got us in this mess. It would also start to put value back into our real estate that has taken a beating.

The caveat is, only do this on home loans at or under the median value, and better yet, only on homes older than 25 years old, because the last thing we need to do is encourage more sprawl.

The crazy thing is that my loan is still of value to someone, it’s now on the seventh servicer in the last 10 years. It’s been traded and factored so many times- all with someone making money on it, while I sit back and wonder if my house will ever appraise for what it was once worth.

Putting people back to work is the most important thing we can do, but in order to do that, it’s time to give the small guys a break.

Start with forcing a change on appraisals, eliminating foreclosure homes from “comps” – those are the bankers’ faults. Bring back the “10 cap” that a rental property’s value is partially tied to rental income: i.e., a rough estimate of value is that rent equals 10% of the value- making my friend’s house worth almost three times the appraisal, and then cap loans based on 60% of the value if it isn’t your primary residence. Totally eliminate secondary markets so that banks are vested in their portfolios and are more careful with their money. It wouldn’t be a bad idea to force residential mortgages back to local banks and put Main Street off limits to Wall Street.

A payroll tax break is nice- but what we really need is some systemic changes that put value back in the hands of small business people and the working class’s pocket. Then we’ll see jobs come back and maybe even the return of the middle class.

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9 Responses

  1. David Lauri September 9, 2011 / 8:33 am
    “[C]ut[ting] a few points off the payroll taxes” may well indeed be just “placat[ing] Republicans by throwing them a tax break they couldn’t resist,” and perhaps you’re right that what the President should instead have proposed is “resetting home loans down for working class Americans,” but the former is something he has some small chance of getting the current Congress to pass while the latter is probably not.
     
    So the question then becomes would you prefer that the President propose small steps that have some possibility of being enacted this year or would you prefer that he start his 2012 campaign now by proposing big steps that will not be enacted until 2013 and then only if he wins re-election and Democrats regain control of the House?

    Brilliant or Bozo? Thumb up 5 Thumb down 4

  2. John Ise September 9, 2011 / 8:59 am
    Speech was magnificent.  On policy, it could very well spark the economy (still wouldn’t be enough, granted).  But passing the jobs package with this Tea Party Congress…well not likely.  Today’s Republicans are not about helping the country economically, at this point 14 months from the election.  Rather, dare we say it, their insidiious motive is to have the eocnomy countinue to founder in hopes Obama’s defeated next year. 

    Country’s no longer first, just politics. 

    Smackdown!. What do you think? Thumb up 5 Thumb down 5

  3. Steve September 9, 2011 / 9:06 am
    Giving subprime borrowers prime loans secured against declining and upside down properties is what got us into the credit mess. Why would we want to do that again?  Banks screwed up, no question about that, but to screw up again is even worse. 

    I have bought both a foreclosure and a non-foreclosure and the only difference is the foreclosure was much faster to close, with no drama. Why would an appraiser not consider those when anyone looking to buy a house would? 

    By the way, I got a 4.0% refinance 18 months ago at 95% LTV with no problem. That was after a 10% drop in value from when I bought it.  It’s up to us as individuals to be responsible with our finances and make sure we don’t get in over our heads.

    Brilliant or Bozo? Thumb up 5 Thumb down 1

  4. Gary September 9, 2011 / 9:49 am
    David, Keep your 6.25% mortgage rate – for I found it wasn’t worth refinancing my home at 6.625% considering the closing costs and re-appraisal cost … especially since I only have about 10 more years to pay on it …
    There are government programs for those about to loose their homes, but be prepared for intensive paperwork …

    Brilliant or Bozo? Thumb up 2 Thumb down 3

  5. David Esrati September 9, 2011 / 10:35 am

    @Gary – can you read? My rate is 7.25% that’s 3.25% over the going rate.

    Poorly-rated. Bozo: Thumb up 2 Thumb down 6

  6. Bubba Jones September 9, 2011 / 11:22 am
    @David – There’s more that goes into deciding what your mortgage rate is than just “having a stellar payment record”.  What’s your credit score?  What’s your income?  What’s your total debt?  What’s your debt to income ratio?  What kind of equity do you have in the house?
     
    I don’t expect you to answer these questions here since, for purposes of this blog, these are all rhetorical questions but they are very real questions to the lending institution.
     
    You don’t have to be making $100k per year to take advantage of the current low rates.  I know someone that makes around $35k per year that just got a mortgage in excess of $150k at a 4.125% rate.  Of course this person has a credit score in excess of 800, no other debt and, due to frugality, a nice savings balance.  This person also put down 40% on the property.  This same person bought a new to them used vehicle 6 months later and got a 3% loan on that.
     
    I do understand what a pain it is to be self employed and try to get a mortgage.  When I got my mortgage 16+ years ago, I went straight to the bank that I dealt with instead of through a “mortgage company.”  In order to save a few bucks, I got a “5-1 ARM” (Gary – this means that I had a set interest rate for the first 5 years of the mortgage and then it “adjusts” every year after that), fully intending to refinance to a conventional fixed rate mortgage at some point.  Over the course of the 16 years, most years my rate was just a hair under a fixed rate mortgage so I just let it be.  There were a couple of years when rates went up and my rate was a little over the fixed rate but I wasn’t in a position at those times to refinance it so I let it ride.  My rate is based on prime so for the last few years, I’ve been sitting pretty and based on what the Fed said about interest rates a few weeks ago, I’ll be sitting pretty for some time to come.  Right now my mortgage is at 3%.

    Brilliant or Bozo? Thumb up 5 Thumb down 0

  7. Gary September 9, 2011 / 12:24 pm
    Okay, thanks guys; and to think I might go into real estate, better not … BTW, my mortgate rate is 6.625 fixed.
    Despite hiring people, and paying payroll taxes (where if you don’t file a form right- they fine you huge amounts- despite having all the other forms in place and paying everything you were supposed to) and contributing to the local economy- banks charged me 7.25% on my home- because of my “income” and probably because I’m in an urban area.

    My home loan was originated when the rates were 6.25% or so. Now they hover around 4% and I can’t refinance.

    Brilliant or Bozo? Thumb up 1 Thumb down 2

  8. bobby September 11, 2011 / 12:37 am
    President Obama, ” I’d rather be a really good  one term President than a mediocre two term President.”  1/25/09  So?
        
     

    Brilliant or Bozo? Thumb up 1 Thumb down 2

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