Tag Archives: taxpayer

High and Low Property Taxes

Posted on by

photo by JRPG

Newsmax quoted me in Lowest Property Tax Is Hawaii and the Highest Is New Jersey. It reads, in part,

The average American household spends $2,089 on real estate property taxes each year and residents of the 27 states with vehicle property taxes shell out another $423, according to the National Tax Lien Association.

However, some states cost more than others when it comes to the American Dream and its staples of a house and car.

“Different parts of the country have different levels of taxation and amenities paid for by the tax receipts,” said David Reiss, professor of law and research director with the Center for Urban Business Entrepreneurship at Brooklyn Law School.

The state with the lowest real estate property taxes is Hawaii where residents pay only $482 per household, which is the least average amount typically shelled out by a taxpayer, according to a 2016 WalletHub study, ranking states with the highest and lowest property taxes.

“High property taxes tend to be correlated with high income and high income tends to be correlated with Blue States, so it is not surprising that high property taxes are correlated with Blue States,” Reiss said.

*     *      *

“Local property taxes can help pay for all sorts of municipal services, including schools, road maintenance and emergency services,” Reiss said.

Alabama, Louisiana and Delaware, D.C. and South Carolina follow Hawaii among the states with the lowest property taxes.

High tax localities, such as Westchester County in New York, could have annual taxes that easily are in the tens of thousands of dollars a year range but such areas also have some of the best schools in the nation.

The WalletHub report further found that in Blue states, real estate property taxes are 39% higher at $2,250 a year than homeowners in Red states who pay $1,613.

The yearly burden weighs far more heavily on taxpayers in some states than in others based on region.

For example, communities in the Northeast typically have higher property taxes than many of those in the rest of the country.

“Monthly mortgage payments are usually much higher than monthly real property tax payments, measuring in the high hundreds in low-cost metros like Pittsburgh to the thousands in a high-cost metro like San Francisco so it is hard to put default rates squarely on the shoulders of real property taxes,” said Reiss.

GSE Reform, by Stealth?

Posted on by

Photo By Greg Willis

The Urban Institute’s Housing Finance Policy Center has issued its January 2016 Housing Finance at a Glance Chartbook. It opens by noting,

The FHFA recently released its 2016 Scorecard for Fannie Mae and Freddie Mac with updated guidance for credit risk transfer transactions. A year ago, under the 2015 scorecard, the FHFA had required Fannie Mae and Freddie Mac to transfer credit risk on a fixed dollar amount of UPB [unpaid principal balance] – $150 billion for Fannie Mae and $120 billion for Freddie Mac. Both exceeded those targets (Fannie $187 billion and Freddie 210 billion). Additionally, the 2015 scorecard did not indicate how much credit risk should be transferred (expected or unexpected, or a specific numeric threshold for example), instead leaving it to the GSEs’ discretion.
But that changes in 2016. FHFA’s 2016 scorecard is a notable departure from 2015 in that it requires the GSEs to transfer credit risk on “at least 90 percent” of the newly acquired UPB (with exceptions for HARP refinances, mortgages with maturities 20 years and below and with loan-to-value ratios 60 percent and below). Another departure from 2015 is the added requirement to transfer a substantial portion of credit risk covering “most of the credit losses projected to occur during stressful economic scenarios.” In other words, GSEs are required to transfer nearly all credit risk on new production, except for what is catastrophic. These two requirements are highly noteworthy because over time they will put the GSEs (and hence the taxpayers) in a remote, catastrophic risk position, letting private capital bear vast majority of credit losses the vast majority of the time – a key objective of most housing finance reform proposals. (3)
I have been arguing for a long time that the private sector should bear the credit risk in the mortgage market, so I think this is a good thing in principle. The FHFA needs to ensure, of course, that the agencies are pricing the transfer of credit risk properly, but overall this is a step in the right direction. Not being privy to any conversations in the Beltway, I always wonder if things like this happen with some kind of bipartisan acquiescence, but I guess we won’t know until someone tells us what happened behind closed doors.

Rigged Justice

Posted on by

photo by Toby Hudson

The Office of Senator Elizabeth Warren has released Rigged Justice: 2016 How Weak Enforcement Lets Corporate Offenders Off Easy. The Executive Summary states,

When government regulators and prosecutors fail to pursue big corporations or their executives who violate the law, or when the government lets them off with a slap on the wrist, corporate criminals have free rein to operate outside the law. They can game the system, cheat families, rip off taxpayers, and even take actions that result in the death of innocent victims—all with no serious consequences.

The failure to punish big corporations or their executives when they break the law undermines the foundations of this great country: If justice means a prison sentence for a teenager who steals a car, but it means nothing more than a sideways glance at a CEO who quietly engineers the theft of billions of dollars, then the promise of equal justice under the law has turned into a lie. The failure to prosecute big, visible crimes has a corrosive effect on the fabric of democracy and our shared belief that we are all equal in the eyes of the law.

Under the current approach to enforcement, corporate criminals routinely escape meaningful prosecution for their misconduct. This is so despite the fact that the law is unambiguous: if a corporation has violated the law, individuals within the corporation must also have violated the law. If the corporation is subject to charges of wrongdoing, so are those in the corporation who planned, authorized or took the actions. But even in cases of flagrant corporate law breaking, federal law enforcement agencies – and particularly the Department of Justice (DOJ) – rarely seek prosecution of individuals. In fact, federal agencies rarely pursue convictions of either large corporations or their executives in a court of law. Instead, they agree to criminal and civil settlements with corporations that rarely require any admission of wrongdoing and they let the executives go free without any individual accountability. (1)

I think the report’s central point is that the “contrast between the treatment of highly paid executives and everyone else couldn’t be sharper.” (1)

The report does not address some of the key issues that stand in the way of achieving substantive justice for financial wrongdoing. First, many of those accused of wrongdoing were well-represented by counsel who ensured that they did not violate any criminal laws, even if they engaged in rampant bad behavior. Second, contemporary jurisprudence of corporate criminal liability presents serious roadblocks to prosecutors who seek to pursue such wrongdoing. Third, many of these cases are incredibly resource heavy, even for federal prosecutors. This can incentivize them to go after other types of financial wrongdoing instead, such as insider trading.

It seems like it is too late to address much of the wrongdoing that arose from our most recent financial crisis. But if this report achieves one thing, I would hope that it gets Congress to focus on how corporations and their high-level executives could be held criminally accountable the next time around.

Fannie/Freddie 2016 Scorecard

Posted on by

Anne Madsen

The Federal Housing Finance Agency has posted the 2016 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions. The FHFA assesses the three entities using the following criteria, among others:

  • The extent to which each Enterprise conducts initiatives in a safe and sound manner consistent with FHFA’s expectations for all activities;
  • The extent to which the outcomes of their activities support a competitive and resilient secondary mortgage market to support homeowners and renters . . . (2)

The FHFA expects Fannie and Freddie to “Maintain, in a Safe and Sound Manner, Credit Availability and Foreclosure Prevention Activities for New and Refinanced Mortgages to Foster Liquid, Efficient, Competitive, and Resilient National Housing Finance Markets.” (3) The specifics are, unfortunately, not too specific when it comes to big picture issues like maintaining credit availability in a safe and sound manner, although the scorecard does discuss particular programs and policies like the Reps and Warranties Framework and the expiration of HAMP and HARP.

The FHFA also expects Fannie and Freddie to “Reduce Taxpayer Risk Through Increasing the Role of Private Capital in the Mortgage Market.” Here, the FHFA has more specifics, as it outlines particular risk transfer objects, such as requiring the Enterprises to transfer “credit risk on at least 90 percent of the unpaid principal balance of newly acquired single-family mortgages in” certain loan categories. (5)

The last goals relate to the building of the Common Securitization Platform and Single Security: Fannie and Freddie are to “Build a New Single-Family Infrastructure for Use by the Enterprises and Adaptable for Use by Other Participants in the Secondary Market in the Future.” (7) The FHFA us moving with all deliberate speed to reshape the secondary mortgage market in the face of indifference or gridlock in Congress.

The FHFA may implement the reform of Fannie and Freddie all by its lonesome. Maybe that’s the best result, given where Congress is these days.

 

Obama Administration on Frannie

Posted on by

Michael Stegman

Michael Stegman, a White House Senior Policy Advisor, offered up the Obama Administration’s “perspective on critical housing issues” recently. (1) I found the remarks on the future of Fannie and Freddie to be of particular interest:

Before discussing what we would like to see happen in this Congress on GSE reform, you should be aware that last week the Administration made clear its opposition to taking any action in support of what has become known as “recap and release.” We believe that recapitalizing the GSEs with taxpayer funds and administratively- or legislatively-releasing them from conservatorship with a business model that conflicts with their public mission— in essence turning back the clock to the run up to the crisis~ would be both bad policy and poor stewardship of the taxpayers’ interest; willfully recreating the very system that helped do this nation so much harm.
ln remarks I presented two weeks ago at the Mortgage Bankers Association conference, I cautioned that no one should be misled by the increasingly noisy chorus of the advocates of recap and release, many of whom have placed big bets against reform so they can make a‘profit, and are doing everything they can to make sure that those bets pay off.
Nor, I said, should their promise that recap and release would generate a pot of money for affordable housing be taken seriously.
Despite claims to the contrary, recapitalizing the GSEs would not itself provide any resources for affordable housing. Nor can a related — or even unrelated — sale of Treasury’s investment in the GSEs provide any resources for affordable housing. The proceeds of the sale of any GSE obligations acquired by Treasury must by law be “dedicated for the sole purpose of deficit reduction.”
Rather than freeing recapitalized GSEs from conservatorship with their flawed charters intact, we should pursue more comprehensive approaches to reform such as those that members of Congress have introduced over the past two years including mutualizing Fannie and Freddie, or build upon bipartisan agreements on the features of a future secondary market system that were hammered out in the Senate Banking Committee last year:
Preservation of the TBA market; an explicit, paid for government guarantee of catastrophic losses for investors in qualifying MBS; maintaining a clear separation of the primary and secondary markets; ensuring the flow of mortgage credit in both good times and bad; separating the securitization plumbing from private credit risk taking; ensuring that community lenders have the same access to the secondary market as big banks; and making the benefits of government guaranteed MBS available to all households — both those who choose to rent and those with the ability and desire to own.
Members in Congress also reached bipartisan consensus on a transparent way to serve those the private market cannot serve without subsidy, through an annual 10 basis point assessment on the outstanding balance of government-guaranteed MES—which once fully implemented, would generate about 15 times more resources a year for affordable housing than FHFA is expected to raise through the GSEs’ current affordable housing levy–though we were pleased to see the Director begin collections on the affordability fee and look forward to effectively implementing the dollars through the Housing Trust Fund and the Capital Magnet Fund that should become available for the first time in the early months of 2016.
But there is much more work to be done on ensuring a level playing field in the new system, including a robust role for community banks and credit unions who know how best to serve their customers, and ensuring that all communities are served fairly, which can be most effectively achieved through a statutory duty to serve. Regrettably, the Committee could not agree upon such a provision during last year’s negotiations, and we will continue to fight for it. (3-4)
Much of these remarks are eminently reasonable but I have to say that the Obama Administration has not deployed much political capital on reforming the housing finance system. This has left the whole system in limbo and the longer it stays in limbo, the more likely it is that special interests will make inroads into the reform of the system, inroads that will not be in the public interest.
While the likelihood of reform coming out of the current Congress is incredibly small, the Administration should take all of the administrative steps it can to sketch out an outline of a housing finance system that can work for a broad range of borrowers through the credit cycle without putting excessive risk on taxpayers.
The Administration has taken some steps in the right direction, like off-loadling some risk from Fannie and Freddie to private investors. But there is a lot more work to be done if we are to have a system that provides the optimal amount of credit through the 21st century.

Credit Risk Transfer Deals

Posted on by

A Syn

The Federal Housing Finance Agency released an Overview of Fannie Mae and Freddie Mac Credit Risk Transfer Transactions. It opens,

In 2012, the Federal Housing Finance Agency (FHFA) initiated a strategic plan to develop a program of credit risk transfer intended to reduce Fannie Mae’s and Freddie Mac’s (the Enterprises’) overall risk and, therefore, the risk they pose to taxpayers. In just three years, the Enterprises have made significant progress in developing a market for credit risk transfer securities, evidenced by the fact that they have already transferred significant credit risk on loans with over $667 billion of unpaid principal balance (UPB).

Credit risk transfer is now a regular part of the Enterprises’ business. The Enterprises are currently transferring a significant amount of the credit risk on almost 90% of the loans that account for the vast majority of their underlying credit risk. These loans constitute about half of all Enterprise loan acquisitions. Going forward, FHFA will continue to encourage the Enterprises to engage in large volumes of meaningful credit risk transfer through specific goals in the annual conservatorship scorecard and by working closely with Enterprise staff to develop and evaluate credit risk transfer structures. (2)

This is indeed good news for taxpayers and should reduce their exposure to future losses at Fannie and Freddie. There is still a lot of work to do, though, to get that risk level as low as possible. The report notes that these transactions have not yet been done for adjustable-rate mortgages or 15 year mortgages. Most importantly, the report cautions that

Because the programs have not been implemented through an entire housing price cycle, it is too soon to say whether the credit risk transfer transactions currently ongoing will make economic sense in all stages of the cycle. Specifically, we cannot know the extent to which investors will continue to participate through a housing downturn. Additionally, the investor base and pricing for these transactions could be affected by a higher interest rate environment in which other fixed-income securities may be more attractive alternatives. (22)

Taxpayers are exposed to many heightened risks during Fannie and Freddie’s conservatorship, such as operational risk. These risk transfer transactions are thus particularly important while the two companies linger on in that state.

Strange Love for Homeowner Tax Rates

Posted on by

                                  Peter Sellers as Dr. Strangelove

With a nod to Dr. Strangelove, David Hasen has posted a scary little thought experiment, How I Learned to Stop Worrying and Love our Homeowner Tax Rules on SSRN. The essay “estimates the magnitude of life-cycle tax benefits available from home ownership for representative taxpayers.” (1)

Hasan starts with a not-that-far-fetched example of a couple who purchases a California home in the 1960s. The home passes to their daughter and son-in-law in 2013. he documents a federal and state tax savings of about $15,000 per year for every year the home is owned by the family.

Hasan concludes,

A large literature has examined the distributional and allocative effects of the homeowner tax rules described above. Summarizing, the literature notes that the rules favor homeowners over renters, owners of larger homes over owners of smaller ones, and residents of states with a large owner-occupied housing sector over residents of other states. The literature also notes the efficiency costs associated with the rules, as taxpayers respond by adjusting their economic positions in ways that reduce total social wealth. The responses may include holding property rather than selling it, occupying it rather than renting it, and swapping it rather than selling it for cash, all as described above. Each of these choices, when tax-motivated, creates real economic costs.

The contribution of the present discussion is modest. One largely hidden aspect of the rules has been just how large the dollar tax savings can be relative to affected taxpayers’ overall tax liabilities, especially when considered in life-cycle terms. The discussion above gives a sense of the numbers for a relatively typical, albeit profitable, course of investment over two generations for an upper-income, but by no means wealthy couple. The bottom line is that for such a couple, taxes are reduced by 40 to 50 percent.

Benefits that are heavily skewed to higher income taxpayers and, consequently, that undermine the general distributional structure headlined in the law promote neither civic pride nor a sense of common purpose; benefits that have massive allocative effects create a large drag on the economy. If I hadn’t learned to stop worrying and love our homeowner tax rules, I might even be upset myself. (10, footnotes omitted)

Academics, myself included, rail against the way that federal housing policy overwhelmingly favors owners (wealthier, on average) over renters (poorer, on average), primarily through the tax code. It does not seem like the political will is there to change that dynamic at present. Nonetheless, it is important to keep reminding everyone of the facts:  federal housing policy heavily favors the wealthy over the poor, a sure sign of a poorly designed social policy.