Simple Solution to Current US Real Estate led depression – tax policy and loan qualification solution

Posted on January 16, 2011


REAL SIMPLE SOLUTION to the Real Estate and Housing Valuation and Liquidity Crisis and Related Industry Job Losses

The housing bottom will pass, and recovery ensue, financial sector strengthen, and blue collar construction related jobs growth emerge quickly … if a few pages from prior play books are read, and a few new plays added. The following detailed steps are provided for clarity along with some supportive explanation of the role of each item in the formula:

  • These simple tax and loan program changes would quickly clean out the foreclosure pipeline, keep these homes from being flipped on the market competing with individual resale homes, quickly increase affordable housing for renters, increase value of average family homes, and create lots of jobs in the real estate and home improvement sectors:
  • Allow immediate deductibility of all repair and remodel expenses incurred the first year after buying a foreclosed property, up to 20% of its purchase price or $100,000 whichever is less … and tax any gain at capital gains only;
  • Eliminate the passive activity rules and any AMT as they apply to these foreclosure investments;
  • Eliminate all income (or capital gain) tax on a gain of such property held for 5 years or more (perhaps limit this to under $450,000 RESIDENTIAL FORECLOSED HOMES, or limited perhaps to $250,000 of gain).
  • Apply this exemption from US income taxes to foreign investors as well (and work to eliminate the income tax in the meantime on at least everyone making less than $100,000 annually- see Transaction Tax Replacement System article on this simple solution to many tax related fairness issues);
  • Institute a federal loan guarantee to ANYONE (not first time unqualified buyers) willing to put 20% down on a foreclosed property (residential or commercial or even raw land) – the credit score based lending system is preventing many qualified buyers from getting attractive interest rate loans to day for housing to cars you name it … lenders should be required to assess ability to pay, irrespective of credit score, in underwriting loans and setting loan rates. See below for info on why thousands of lending professionals who participating in the ponzi scheme of reckless underwriting from 2003 to 2007 with complete disregard to ability to pay should be prosecuted;
  • Streamline the underwriting process so it is a low doc no qualifying nonrecourse program where 20% or more is put down on a foreclosure purchase – assure lowest possible interest rate loans on these acquisitions due to gov’t guarantee;
  • Current underwriting standards for conventional loans is now too strict while in recent past it was reckless and caused this artificial economic cycle in the first place;
  • Consider exempting any subsequent foreclosure of this new loan product from the automatic stay of a borrowers subsequent bankruptcy … make recovery of the collateral cheap and fast for this special loan if the borrower defaults (any procedural remedy that minimizes litigation attorney involvement and expense in the future is a wonderful thing);
  • Do the above and watch the money flow in chasing properties coming through the foreclosure pipeline and how quickly banks will burn through that distressed inventory;
  • Some of the money that would flow into cleaning out the bank foreclosure pipelines will come from small blue collar trade companies who made a fortune on the excess building caused by funny money chasing real estate from 2003 to 2006 … especially since many of these contractors are pros ant burying income and hence could never qualify for a loan today (and if underwriting standards had always been required to be responsible we would not be in this pickle) despite having the 20% to put down on a home they likely have their eye on and can remodel nicely at wholesale and soon flip! If the suggestion below is followed their true wealth can come out too since an amnesty program connected to elimination of paper currency makes all too much sense.

While different from the play book underlying the 1981 ERTA tax act, these simple provisions would fuel investment in foreclosures (and give banks reason to clear out their pipelines verses being distracted by stupid government programs and fear of growing their REO portfolios further) without requiring any appropriations from the feds or states (other than revising income tax revenue projections).

The above concepts may sound crazy but they would greatly reduce government regulatory expenses, increase certainly of government revenue, increase worker productivity and quality of life immediately, increase attractiveness of US based investment by holders of all currency types, etc.  And, while elimination of paper currency raises hairs on all freedom loving backs, its time is way overdue as well with the convergent technologies deployed across all aspects of life today.

How Did We Get Here and Who Needs To Be Held Accountable?

Lets step back for a second and assess our current financial crisis. It should by now be clearly evident to everyone that it resulted from:

  • Wide spread reckless irresponsible loan underwriting programs by banks and mortgage companies encouraged by, in fact created initially by, federal government legislated institutions like Freddie and Fannie;
  • Wide spread reckless, irresponsible and misleading securitization and distribution of packaged loan pool securities by investment banking firms in concert with credit enhancement structures knowing to be highly speculative as well;
  • Aggressive marketing by financial institutions of low to no money down real estate loan programs to a greed permeated culture;
  • Above coordinated behavior creating millions of unqualified buyers lining up for speculative real estate purchases they could not afford and had little to no money to put down or at risk and the lenders knew this.

This behavior was obviously recklessly and irresponsible (and surely qualifies as criminal under state and federal applicable laws). No different than if today these same institutions preyed on current fears of a worthless US dollar and marketing no qualifying low doc no money down (to even 105% LTV products) loans to buy gold. People with nothing to lose and many with lots to lose would line up as rapid gold price gains would surely occur at least for awhile. This is similar to the design engineering behind ponzi schemes.

Our financial industry regulators were worse than asleep at the wheel in this real estate speculation driven melt-down as well. They too have very unclean hands and this alone explains why there are not widespread criminal violation proceedings against players of at all levels of the reckless lending and underwriting and securitizing industries.

Our government under the guise of socially responsible and compassionate welfare class initiatives directly or indirectly created the playbook and game plan behind the abusive loan product “tools” of destruction in the first place – they created a ponzi scheme with everyone chasing free money and hoping to not be the last man standing. No ethical government would encourage home ownership with its attendant pressures and responsibilities on financially weak families.

Yet still today the U.S. federal government not only allows but encourages imprudent loan products and premature home ownership by individuals not ready or qualified for the responsibility and hidden pressures, costs and lost freedom associated with real estate ownership.

There is little doubt if the government had clean hands in this last financial bubble, tens of thousands of criminal prosecutions for reckless underwriting and related irresponsible loan practices preying on greedy consumers (verses being a check on imprudent consumer banking industry historically served) would be underway. With felony counts and real jail time required of those with experience in managerial positions on main and Wall Street. And likely restitution to tens of thousands of home buyers who put 20% or more down and lost it all during the time these institutions were artificially driving up prices (which now are artificially depressed) by writing widespread irresponsible loans whose repayment was clearly contingent on a continuation of rapid price gains the goal of all ponzi schemes.

This may not be the clearest example of how obviously immoral and reprehensible this behavior was by our “regulated” financial institutions, and why criminal prosecution of many should occur with no hesitation, but consider the consequences if a loan officer in a small tight town or community encouraged your 20 to 30 something child to borrow 100% to buy a rapidly appreciating home … all while knowing you child had little to no net worth and could never afford the debt service … and knowing repayment was clearly gambling purely on appreciation to flip the home.  You would take a paddle to that loan officer for not performing the other function of tempering your child’s desire to participate in a get rich quick scheme. And if you were a local Mafioso the banker would have instinctively resisted ever participating in a transaction remotely that irresponsible.

That exact reckless lending behavior preying on the public occurred institutionally across this country with government support for years. This does not excuse greedy public behavior but the cause clearly lays at the doorstep of the Feds and our private sector financial institutions who are trained to recognize and avoid excessive risk.

Rather than anyone being held accountable for the reckless underwriting that swept the country and global securities industry, the US government, the originator and still active participant in irresponsible underwriting based on immature and seemingly illiterate public policy objectives, bailed out the culpable institutions that surely should have been required to gain very personal expertise in our bankruptcy and liquidation systems.

As obvious as the reasons for our problems today are … just as they were clearly discernable from past cycles (the feds poor management underlies all bubbles … as it did with the incentive tax based system in 81 designed to speed recovery from failed 70s policies and yanked recklessly out from under us in 86 to cause the last financial collapse and widespread government bail-out), it appears NO ONE IN LEADERSHIP POSITIONS HAS A CLUE how to creatively address today’s very serious financial epidemic that, without creative courageous leadership, will depress the US for decades.

Our leaders know how to write bills that spend money for sure, layered with articulate colorful passionate rhetoric.  But they just as clearly lack the experienced intelligence to absorb all available facts and program in lesson of the past to design and implement creative effective efficient VISIONARY solutions.

Visit my blog on using technology to replace the income tax to make the US a global capital haven and fuel job growth and worker productivity without any federal appropriations bills