The housing bill: First Time Home Buyers' Credit recapture

All about the housing bill: "Here's how the tax credit will work. You buy a
$200,000 house. The next year, when you file your income tax return, you have a
$7,500 credit. Not a deduction -- a credit. Essentially, you get to reduce your
income taxes by $7,500. That ought to make for some big refund checks.

But. Yeah, you know there's a 'but.' But you have to pay the money back
over 15 years. Say you buy the house this October. You get the $7,500 tax credit
for the 2008 tax year. That's the one with the filing deadline of April 15,
2009. Then you have to start repaying one-fifteenth of that amount, or $500,
every year for 15 years, starting with the 2010 tax year."

That's right - the first-time home buyer tax credit isn't a reduction in taxes, it's basically an interest-free loan. For the next 15 years (or until the home is sold/made into a rental), the taxpayer will pay a tax of 6 2/3% of the amount of the credit ($500/year on a $7500 tax credit). But, hey, an interest-free loan is an interest-free loan. If you haven't owned a home in the last 3 years, and your modified adjusted gross income is $70k or less (single), or $140k (married), it's a nice little bonus for buying a house. Provided you meet all the restrictions.

And, if first-time home buyers can't be expected to read a mortgage contract, it might amuse you to imagine them reading the text of the mortgage bailout law to discover that the "free" money has to be paid back:

`(f) Recapture of Credit-
`(1) IN GENERAL- Except as otherwise provided in this subsection, if a credit under subsection (a) is allowed to a taxpayer, the tax imposed by this chapter shall be increased by 6 2/3 percent of the amount of such credit for each taxable year in the recapture period.
`(2) ACCELERATION OF RECAPTURE- If a taxpayer disposes of the principal residence with respect to which a credit was allowed under subsection (a) (or such residence ceases to be the principal residence of the taxpayer (and, if married, the taxpayer's spouse)) before the end of the recapture period--
`(A) the tax imposed by this chapter for the taxable year of such disposition or cessation, shall be increased by the excess of the amount of the credit allowed over the amounts of tax imposed by paragraph (1) for preceding taxable years, and
`(B) paragraph (1) shall not apply with respect to such credit for such taxable year or any subsequent taxable year.
`(3) LIMITATION BASED ON GAIN- In the case of the sale of the principal residence to a person who is not related to the taxpayer, the increase in tax determined under paragraph (2) shall not exceed the amount of gain (if any) on such sale. Solely for purposes of the preceding sentence, the adjusted basis of such residence shall be reduced by the amount of the credit allowed under subsection (a) to the extent not previously recaptured under paragraph (1).
`(4) EXCEPTIONS-
`(A) DEATH OF TAXPAYER- Paragraphs (1) and (2) shall not apply to any taxable year ending after the date of the taxpayer's death.
`(B) INVOLUNTARY CONVERSION- Paragraph (2) shall not apply in the case of a residence which is compulsorily or involuntarily converted (within the meaning of section 1033(a)) if the taxpayer acquires a new principal residence during the 2-year period beginning on the date of the disposition or cessation referred to in paragraph (2). Paragraph (2) shall apply to such new principal residence during the recapture period in the same manner as if such new principal residence were the converted residence.
`(C) TRANSFERS BETWEEN SPOUSES OR INCIDENT TO DIVORCE- In the case of a transfer of a residence to which section 1041(a) applies--
`(i) paragraph (2) shall not apply to such transfer, and
`(ii) in the case of taxable years ending after such transfer, paragraphs (1) and (2) shall apply to the transferee in the same manner as if such transferee were the transferor (and shall not apply to the transferor).
`(5) JOINT RETURNS- In the case of a credit allowed under subsection (a) with respect to a joint return, half of such credit shall be treated as having been allowed to each individual filing such return for purposes of this subsection.
`(6) RECAPTURE PERIOD- For purposes of this subsection, the term `recapture period' means the 15 taxable years beginning with the second taxable year following the taxable year in which the purchase of the principal residence for which a credit is allowed under subsection (a) was made.

7 bank failures so far this year

In 2007, the FDIC closed 3 failed banks. None in 2006 and 2005. 4 in 2004, 3 in 2003, 12 in 2002, 4 in 2001. So far this century, 2008 is on track to be the second worst year for bank failures.

FDIC: Failed Bank List
2007 Bank closures:
Bank Name, City, State, Closing Date
First Heritage Bank, NA, Newport Beach, CA July 25, 2008
First National Bank of Nevada, Reno, NV July 25, 2008
IndyMac Bank, Pasadena, CA July 11, 2008
First Integrity Bank, NA, Staples, MN May 30, 2008
ANB Financial, NA, Bentonville, AR May 9, 2008
Hume Bank, Hume, MO March 7, 2008
Douglass National Bank, Kansas City, MO January 25, 2008

http://www.fdic.gov/bank/individual/failed/ Includes links to Is My Account Fully Insured? and When a Bank Fails - Facts for Depositors, Creditors, and Borrowers.

A nifty little tool: The bank rater

TheStreet.com has a ratings lookup tool where users can look up thestreet.com's opinion of various entities. You can check their opinion of a stock, or get their idea of the financial stability of your life insurance provider. You can also look up your bank. I discovered this tool a year ago, when the bank failures began (just a trickle at first) - the bank that failed at that time was rated an E- before they failed.

To use the ratings screener, you go to the Banks tab on the Ratings Screener, type in your bank, and hit "Go." Pretty straightforward, except that some banks don't come up by exact name - if your bank doesn't come up, type in the first part of the bank's name and then sift manually through the results. Banks are rated from A to E-, just like academic grades. Personally, I'm wary about keeping my accounts below FDIC limits, but I'd be moving my checking account if I found my bank on the C- or worse list.

If you feel like whiling away a pleasant weekday afternoon, try this:

• Don't enter anything, and hit search (find out how many banks are in the database). I got 12,326.
• Set the rating option to "E" - the worst available rating. I got 332. Not bad - 332 "very weak" banks out of 12,326. Less than 3%.
• Set the rating option to "D" ("weak") and grab the drop-down box next to the rating drop-down - set that one to "or lower". That gets you all the D's and E's in one shot. I get 2,479 banks rated by the street.com as "weak" or worse. Yikes - That's 20% of all the banks they track.

You can play with the ratings screener, sorting by state or bank type, or see which states have the most banks named "Cowboy".

Call me paranoid, but, since I discovered the rater, I've made a point to check my bank's rating every couple of months. They're a B-rated bank, and, so far, they've maintained a solid B average.

And, please - PLEASE, pretty please with sugar on top, please keep your money FDIC insured. Consumers can keep more than $100k covered in a single bank, provided the accounts are titled in multiple names (for example, Mr. and Mrs. John Q. Public could be insured for $100k each, allowing a joint account to reach $200k before exceeding coverage limits). Payable on Death accounts can be covered for $100k per beneficiary - Mr. and Mrs. John Q. could get $400k FDIC coverage by setting up a POD account as "Payable on Death" to their 4 children.

Can the GAO get a mortgage bailout?

Why some conservatives are backing Obama: "Susan Eisenhower, granddaughter of Republican President Dwight Eisenhower: 'Deep in America's heart, I believe, is the nagging fear that our best years as a nation are over. We are disliked overseas and feel insecure at home. We watch as our federal budget hemorrhages red ink and our civil liberties are eroded. Crises in energy, health care and education threaten our way of life and our ability to compete internationally. ..."

I have not made up my mind about my Presidential vote, and linking to this article is not an endorsement of Obama - nor an indictment of him. But saving, investing, buying a house, pursuing an education, even having children - all these undertakings require a certain optimism, a trust that the future will bear them out, and a lot of Americans - especially investors, savers - you know, the kind of folk who sat out the housing bubble and are now prepared to swoop in and buy up houses - aren't feeling so optimistic. Politically, I believe that our government - under any candidate - needs to shore up those American "promises" - life, liberty, the pursuit of happiness, and freedom from the over-arching fear of Federal Government bankruptcy (or government spending hitting 50% of GDP, which the GAO projects will be necessary by 2070 - I don't know about you, but I do expect to be around in 2070, a mere 62 years from now; I hope to be a spry, active nonagenarian).

During the primaries, I read a candidate's treatise on his intended policies, and I found some of the ideas quite promising, but the overall takeaway was "That adds up to a lot of new expenses. Gosh, doesn't he know how bad the government debt is?" Whether you're leaning towards Obama, McCain, Nader, or "None of The Above," here's a stark reminder:

The government only has two ways out of their economic mess - man up and start solving the problem.... (I'll wait while the laughter subsides)... or go ahead and let inflation run wild (no need to default when you own the currency printing presses). Will consumers allow inflation to run? There's an interesting test. But if inflation goes wild, home ownership is a decent bet - as long as inflation inflates your salary faster than your expenses. Rising taxes are virtually a given, under any president, because our government obligation has reached the point where it's an exploding option-ARM itself. Pay less now, pay lots more later; pay more now, pay less more later (yes, I said less more - it's gonna be more later no matter how we dice it). The housing market has given us a brilliant illustration of what happens when folks pay less than the interest on enormous long-term debts - lots of folks are overdue on their property taxes, lots of folks couldn't afford basic maintenance, and, now, lots of folks lost their homes. If America couldn't afford to have Bear Stearns implode, we certainly can't afford to have the Federal Government implode.

Data on the Government financial status:
Complete FY 2007 Financial Report (PDF, 186 pages)
The Nation by the Numbers (PDF, 10 pages)
Notes to the Financial Statements (PDF, 62 pages)

Vulture real estate investors swoop in - Jul. 2, 2008

Vulture real estate investors swoop in - Jul. 2, 2008: "Jack McCabe says he still sees 'a large disconnect between what buyers are willing to pay and what lenders are willing to sell for.'
That's even more true in California, according to David Michelson, a partner in California-based developer Three Arch Investors - despite the fact that home prices there are already down 35% in the last 12 months. The company is putting together a $250 million vulture investing fund in anticipation of even further declines, and will buy foreclosed homes in California, Nevada and Arizona.

'The transactions are not happening yet,' he said. 'There are plenty of people looking, but the lenders are carrying the cash value [of these distressed homes] at two or three times the actual value,' said Michelson.

Until banks reduce these prices - and take the write downs that will come with them - buyers like Michelson won't budge.

He figures that the banks will have to start liquidating these properties by the end of the year to get them off their books. And then, he says, the floodgates will open."

This is in contrast to the cases earlier in the article, where investers are scooping up property in other areas where banks and sellers are getting real. But in California, it's different. Could it be that - in a state where half a million dollars wouldn't buy much more than a condo or an inland starter home - the banks are too heavily burdened by California defaults to dare admit just how badly they've been burned?

Centex, Pulte dump land in Rancho - Sacramento Business Journal:

Centex, Pulte dump land in Rancho - Sacramento Business Journal:: "At the height of the local housing boom, $8 million would have fetched less than 20 acres of land approved for new homes as prices had escalated to $600,000 an acre in some areas. Builders and developers are still waiting for a new benchmark on what land is worth in today's economy. The buyers in this deal, Alvarado and Somers, paid $32,000 an acre."

The weird thing about this story is that - Centex, at least - had already begun building, had models up, even had some homes completed and, apparently, sold. And then - poof - Centex's web site doesn't show anything in Rancho Cordova anymore. So what happens to the fine folks who bought new homes in the midst of the graded fields of mud that Centex no longer plans to build upon?

And, yowza - Centex and Pulte, as partners together, paid $50 Million, plus they spent another $30 Million in improvements - and then sold the land for $8 Million. I'll be very curious to see who survives - the Centexes or the Lennars? Centex recognized the downturn and the falling prices ahead, and they cut prices before anyone else - so they sold out before anyone else. Lennar is still dreaming of 2005 prices. Is it smarter to cut the losses and run, or to squeeze the last no-money-down, gotta-have-granite, easy financing nickel out of what history will surely remember as a crazy, self-indulgent market.

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