Oct
31
The Bank of Last Resort
October 31, 2011 | Leave a Comment
The Bank of Last Resort
Lance and I were talking the other day about the current plight of the real estate investor. It seemed as if every way we turned the “perfect storm” blocked our path. Even a seasoned investor has trouble purchasing property to resell. The bank’s decision-maker, who is hermetically sealed in an office tower somewhere far away, is lying in the corner; quivering in a fetal position and begins to squeal before the loan request question is even asked. And even if you managed to endure the invasive process that only a proctologist could relate to and squeak a loan through, there are no buyers. Why?
The other storm front. Even though loan rates are so cheap that mortgage payments would be cheaper than renting, and even though property values are so low that they cannot possibly pose a devastating risk for a bank that follows a reasonable lending practice, the road to qualifying a buyer winds down to a deeper and darker place than the aforementioned medical practitioners would ever dare to go.
The Third Storm Front:
Appraisals. Investors cannot sell anything because they are competing with the bank’s foreclosed valuations. Homeowners cannot sell anything for the same reason. I understand the rationale, at least on the surface, that when all the sales in the neighborhood are foreclosures, then those become your comparables. But a surface analysis is all the scrutiny that this logic can withstand. From the market standpoint, the banks are in a position that even Walmart would envy. They have enough cash to sell any foreclosed property for any amount they wish regardless of the size of the loss. The Smith household cannot do that. No matter how badly they need to sell, they simply cannot take a 40% loss. So even if they bother to put their house on the market, it just sits there while all foreclosures around it are selling. And, you guessed it, the valuation of their home drops every month.
But the virtual concept of a” home” implies a long-term hold. Even the banks base their formulas on a seven year or more statistic. Eventually someone will do the right thing and jobs will return to this country. If they don’t, then this argument, and all others regarding saving this country, will be moot. For the moment, let’s pretend sanity will prevail and continue the story.
Here goes. Foreclosures will drop back to the occasional sad story. Banks will no longer be the primary seller of neighborhoods (market maker). Property values will begin to increase to at least replacement value less depreciation. Increase by leaps and bounds? No, probably not. Besides, that’s an inflation related thing anyway. Conclusion: lenders should go back to the concept of a “home mortgage”. Stop using short-term data such as foreclosures as comps. If nature had been allowed to take its course, most of these things would be flushed out of the system by now anyway. I really should continue to beef up my justification for this point. And I can. But for the sake of time let’s move on to the true purpose of this article; the solution to this mess.
Lance said “the Fed should be the bank of last resort”. You remember Lance. Well here’s how it played out. Back when I wrote my piece against the bailout, I had suggested that a better alternative would be to let them fail and throw government-backed support to the more worthy banks. The idea was to encourage them to make every prudent loan possible (home, car, student, etc) on the pretext that Fannie, Freddie and family would promptly buy them to replenish their capital and keep the system in motion. Rinse and repeat. Yes, of course some of the loans would go bad. Big deal. Where is all that money they just poured on top of the banks responsible for this mess and expected it to trickle out the bottom. The Feds need to notify the Department of Plumbing because there is a serious clog in the pipes somewhere.
Well maybe it’s time for the “bank of last resort” to spring into action in a more sensible way. And before I even start, I do want to hear your whining about interfering with free commerce. We do it all the time. Every time we offer huge tax breaks and other bonuses to bring a particular company to town we’ve done it. You want to reward companies for adding jobs? Then don’t discriminate. Don’t put your eggs all in one basket. Provide the same per job incentive to every existing business in town. The banks had their chance. We are at war. Desperate situations require desperate actions.
Here’s the plan.
Uncle Sam rents some space in the dying strip malls across the country and sets up “the Direct Federal Lending Store” (DFLS) (the government can’t do anything without an acronym. Some things never change.). No, you don’t need a bank bunker style building because they don’t deal in cash anyway. Frugal, no giant columns, no marble stairways, no multimillion dollar salaries to be paid. Hey, they spend a great deal of time legislating how you can run a business so maybe it’s time they learn themselves. Anyway, here’s how it would go: The loans are at a rate of 4%. If you are current on your mortgage payment and would like to reduce your rate to have more expendable income or to simply stop circling the drain, you are eligible. If you are behind on your payments and can prove that a more affordable payment would stop your demise, you qualify. Rock bottom closing cost and payments in arrears would be added to the end of the mortgage. End of application.
Dear Bank of America,
Please feel free to join in at any time. Uncle Sam would like to do the right thing for a change and get out of this business as soon as possible. After all, we’re only doing this because the country is on life support. We gave you the money to do it for us but you forgot to disburse it. We understand that mistakes happen but unfortunately we have no more time for you to correct it. So, we have decided to take our next trillion dollars and disburse it directly to the taxpayers where it belonged in the first place. We have no hard feelings and are anxious for you to buy us out of the marketplace.
Sincerely,
Uncle Sam
CC: The Taxpayer
Will some of these loans go bad? Yep. How many? Well, if the offices are run by government officials as opposed to hiring unemployed members of the financial services community, all of them. Will it be as bad as the decision to dump all that money on the undeserving banks? No chance. At least we are loaning the money directly back to the taxpayer with no middlemen to siphon it off. Should the government be in this business? Hell no. Add it to the list. Will we hear from the banks lobbyist? Oh yeah. Will the banks cut back on political donations? That would be nice. Here’s a refreshing thought. How about politicians getting elected because the people support them rather than business?
Robert Clifton,
VP, PTREIA
North Star Properties of NC, Inc
Notice: I am Robert Clifton. And with great sadness I approve this political message.
May
1
1099 Requirements Repealed
May 1, 2011 | Leave a Comment
Thank you to Coleman Alderson for bringing this to our attention. It’s good to have good news for a change!!!!
President Obama has signed a law that repeals two sets of rules that had business owners, company managers and landlords up in arms because of the paperwork nightmare they created. The rules that involved businesses issuing a blizzard of 1099 forms were created by two laws enacted in 2010. Rental property owners had to begin complying with one of the sets of rules this year. The second set for other types of businesses was not scheduled to go into effect until next year.
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The new rules ignited an immediate firestorm of criticism, but repealing them took longer than some expected.
Thankfully, all the attempted 1099 rule changes have finally been quashed by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act, which was signed into law on April 14, 2011.
Just so you understand where we stand now, here’s the 1099 story from beginning to end. We will start with the longstanding 1099 rules, which will now continue to apply without any changes.
Longstanding 1099 Rules Remain in Force
For many years, businesses have been required to report various types of payments to the IRS and to recipient taxpayers.
For instance, when a business pays $600 or more during a calendar year to an unincorporated independent contractor for services rendered, the business must file a Form 1099-MISC with the IRS to report the total amount paid in that year. The business must also send a copy of the Form 1099-MISC to the payee (a so-called payee statement). This reporting procedure helps the contractor remember to include the payments as income on his or her tax return, and it helps the IRS to make sure that happens.
Under the longstanding rules, other types of payments that businesses must report to the IRS on 1099s and to payees on payee statements include:
- Commissions, fees, and other forms of compensation paid to a single unincorporated payee when the total amount paid in a calendar year is $600 or more.
- Interest, rents, royalties, annuities, and other income items paid to a single unincorporated payee when the total amount paid in a calendar year is $600 or more.
When a 1099 is required, it must show the total amount of payments in the calendar year, the name and address of the payee, the tax ID number (TIN) of the payee, contact information for the payer, and the payer’s TIN. (For privacy reasons, it’s OK to show a truncated TIN on a 1099 that reports payments to an individual recipient.)
If your business doesn’t have a recipient’s TIN, you may be required to institute backup federal income tax withholding at a 28 percent rate on payments to that payee.
In most cases, the rules summarized above apply equally to payments made by non-profit organizations, because they are generally considered to be businesses for 1099 reporting purposes.
For 2011, if a payer fails to file a proper 1099 with the government, the IRS can assess a penalty of $100 or more per failure. For 2011, if a payer fails to send a proper payee statement, the IRS can assess an additional penalty of $100 or more for each failure. (Internal Revenue Code Sections 6721, 6722, and 6723)
Important: Penalties for failing to file 1099s and issue payee statements were increased by a 2010 law. The increased penalties remain in effect. To sum up, each time you fail to file a 1099 and issue the related payee statement, the IRS can still assess a penalty of $200 or more.
Most Payments to Corporations Need Not Be Reported
Most payments to corporations are exempt from any 1099 reporting requirements. There are a few exceptions. For instance, payments of $600 or more in a calendar year to a corporate law firm must be reported on a Form 1099-MISC for that year.
| Example 1: Your business makes monthly payments to rent office space from a corporate lessor. Under longstanding rules that will now remain in force, there is no 1099 reporting requirement for the payments, because they are made to a corporation. |
There is generally no requirement to issue 1099s to report payments for property (merchandise, raw materials, equipment, and just about anything else you can put your hands on).
| Example 2: Your business buys a delivery van, display shelving, and computer equipment. Under the longstanding rules that will now remain in force, there is no 1099 reporting requirement for these payments, because they are for property. |
Last year’s healthcare legislation and a separate small business law attempted to make big changes to the 1099 reporting rules. The repealed changes are briefly summarized below.
Payments to Corporations: Starting in 2012, if your business paid a corporation $600 or more in a calendar year, you generally would have been required to file a 1099 and issue a statement to the payee.
Also, your business would have been required to obtain a taxpayer ID number from each corporate payee to avoid the requirement for backup federal income tax withholding.
On the other side of the coin, if your business is incorporated, it would have had to supply customers with your company’s TIN to avoid backup withholding on payments to your business.
Payments for Property: Starting in 2012, if your business paid $600 or more in a calendar year to any payee as “amounts in consideration for property,” you would have been required to file a 1099 and issue a payee statement. Once again, the term “property” means equipment, merchandise, raw materials, and many other items.
Also, your business would have been required to obtain a TIN from each affected payee to avoid the requirement for backup withholding of federal income tax.
On the other side of the coin, if your business sells property, you would have had to supply customers with your TIN to avoid backup withholding on payments to your business.
Payments of Gross Proceeds: Starting in 2012, a third new rule would have required filing a 1099 and payee statement if your business paid $600 or more in “gross proceeds” to any payee in a calendar year. Apparently, this provision was intended to force the filing of millions of 1099s and payee statements to report business expenditures for things like meals at unincorporated restaurants, repairs of business vehicles at unincorporated auto shops, and seminars presented by unincorporated providers (the list could go on and on).
Payments by Rental Property Owners: Starting this year, owning rental property would have generally been considered a “business” for purposes of the 1099 reporting rules. Therefore, property owners would have generally been required to file 1099s and issue payee statements for any unincorporated service providers that were paid $600 or more during 2011 (for jobs including yard care, maintenance, and accounting). Starting in 2012, rental property owners would have been required to comply with the other burdensome 1099 changes explained earlier.
All of these now-repealed mandates would have undoubtedly required many millions of additional 1099s and payee statements each year.
Where We Stand Now
Thanks to the just-passed Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act, none of the attempted 1099 changes will take effect. So if your business is currently handling 1099s and payee statements without any problems, you can continue with the status quo. On the other hand, if you know you have compliance deficiencies, the harsher penalties that are now in effect dictate in favor of cleaning up your act (the harsher penalties will remain in force).
Finally, you might wonder how Congress compensated for the estimated $22 billion of revenue that was allegedly lost by repealing the attempted 1099 changes. The Feds will try to recoup the revenue (which we think was grossly overestimated in the first place) by collecting more “excess advance payments” of health insurance premium assistance credits collected by individuals. This change will take effect in 2014.
Consult with your tax adviser with any questions you may have about issuing 1099 forms in your situation.
Jan
9
New 1099 rules for Landlords
January 9, 2011 | 1 Comment
NEW RULES AFFECT RENTAL PROPERTY OWNERS FILING OF FORM 1099
By: Gregory D. DuBrock, CPA
Two Acts recently passed through Congress present significant burdensome compliance reporting requirements on businesses and Rental Property Owners.
The following are summary excerpts from the Journal of Accountancy, dated November 11, 2010, and response to the members of Congress regarding the two new Acts as prepared by the American Institute of Certified Public Accountants (AICPA) on November 16, 2010.
The Small Business Jobs Act of 2010 (SBJA) contains the provision whereby owners of property who receive rental income will be required to issue Forms 1099 to service providers for payments of $600 or more during the year. The Internal Revenue Code currently requires only “persons engaged in a trade or business” to satisfy reporting requirements. The SBJA subjects recipients of rental income from real estate to the same information-reporting requirements as taxpayers engaged in a “trade or business”. This would be the first time that individual taxpayers owning rental property who are not “engaged in a trade or business”, would be required to provide Forms 1099-MISC. For example, many individuals who own a vacation property that is rented part of the year to help defray their cost would be subject to the provisions of the SBJA. The AICPA in response to Congress questioned the need for sending information forms to certain providers of services, such as to utility companies. While rental property owners will not actually issue the required 1099’s until early 2012 (for year 2011), they need to start maintaining adequate records of payments starting January 1, 2011, so they will be prepared to issue correct 1099s. They will also need to obtain the name, address and taxpayer identification number of the service provider, using Form W-9 or similar form. This includes, but is not limited to, plumbers, painters, handymen, etc. of any nationality.
The Patient Protection and Affordable Care Act (PPACA) made significant changes to the compliance reporting law that will take effect in 2012. These changes were addressed by the AICPA in response to Congress. “First, the PPACA overturns a long standing tax regulation providing that corporations were generally exempt recipients for reporting purposes, i.e. compliance Forms 1099 were not issued to Corporations. Second, the provisions of the PPACA expands information reporting requirements to business payments for Property (which is in addition to business payments for only services as required by current law). Thus, beginning in 2012 (compliance Forms 1009 reports due in 2013 for 2012 payments), if a business (including, now, individuals who receive rental income) generally purchases $600 or more in Property or Services from another entity (including a corporation), it must provide the vendor and the IRS with a Form 1099-MISC.” It will be interesting to see how many compliance Forms 1099-MISC Lowe’s Home Improvement, Inc. receives!
There are to be ‘exceptions’ issued by the IRS. However, such ‘exceptions’ have not been issued yet, thus there is no current additional guidance.
Taxpayers should be aware that penalties for non compliance not only exist, but have been increased significantly, i.e. 100% +, for failure to file a correct information return. The increased penalties apply to information returns required to be filed on or after January 1, 2011.
Mar
8
Take Our Country Back: A Two Step Process
March 8, 2010 | 2 Comments
TAKING OUR COUNTRY BACK: A TWO-STEP PROCESS
Still think we can work within the system? Still think business as usual in DC can be changed by a little antigovernment sentiment? Well, I don’t. Nothing short of bringing them all home and starting over with a new crop could correct such firmly entrenched arrogance and abuse of power. Case in point: the latest escapades unearthed on Representative Charles Rangel. Rangel is no ordinary garden-variety congressman. This guy has served 20 terms! He is arguably the most powerful man in Congress. As chairman of the House Ways and Means Committee, he and his committee hold the purse strings to America. Basically, any legislation that requires funds to be effective is at his mercy. If he and his committee do not approve the funds then the legislation is moot. He is also in charge of writing the tax code. More on that little piece of irony later.
Here’s the short version of the story. But to keep this in perspective, (that’s writing lingo for why Robert is so mad) please keep in mind that this guy is at the top of the heap for setting the example. Rangel accepted what he of all people, or anyone else should have known were corporate sponsored Caribbean trips. Not once, but multiple times. And that’s just the ones that have recently come to light from 2007 and 2008. How should he have known you ask? Well he knew he wasn’t paying for them. And at least on planet Earth, Caribbean trips don’t just fall out of the sky. Granted he is in DC, where the laws of physics are different. You see, that’s part of the problem. I believe in DC it does customarily rain Caribbean vacations. Then there are those two pesky e-mails from his staff warning him that it was not Caribbean Vacation Falling From The Sky Day. Then, apparently because they know how stubborn he is about passing up any freebie, they also sent him a letter. His response to the warnings? Well, it was basically gibberish. But I think what he was trying to do was pin it on his staff, which is beneath contempt. And if that didn’t work, he would employ the argument “you can’t prove I read them”. Then, if that didn’t work, he went into some ramblings about the definition of corporate sponsor. Now that brought me back to the day when my head completely spun around as Bill Clinton said his answer “depended upon what the definition of is is”.
Now before we move on… let’s make this crystal clear: this leader of leaders knew he was accepting free trips to St. Maarten and Antigua from big business. End of story. It wasn’t the first time, but maybe it will be the last for him. But the point is; it’s not just him. This is the climate in Washington, and until we throw them all out on their well tanned butts nothing will change. For the time being Rangel is cooling his heels in the shadows waiting for all this to blow over. Now that’s up to us, isn’t it?
Moving on. It gets better. Remember he heads up the tax writing committee. Guess who forgot to report rental income on his villa in the Dominican Republic? Guess who forgot to list several hundred thousand dollars of additional wealth? Is this the guy you want writing the laws that we have to abide by? One of our members recently took a job with the IRS. He was worried sick that he had not distributed 1099s to everyone falling in the gray area that worked on his rental properties. Oh but wait, that’s not apples to apples. If you work for the IRS, you must be squeaky clean. If you run the IRS (Geithner), or write the tax laws (Rangel) it’s no big deal.
Step One
Of course we throw Rangel out. Because thankfully, in spite of warnings from his staff, his arrogance got him caught. That’s a no-brainer. Step one begins with throwing out all 435 members of Congress and 100 senators. The business climate in DC has corrupted the thought process of so many of them that it would be too much trouble to sort them out. I’m willing to accept a little collateral damage to send a stronger message. End of step one.
Step Two
The real issue is the perverted climate in Washington. Until this climate is eradicated we can never expect to see any noble legislation. Even if you brought in an entirely new group of lawmakers nothing would change because the lobbyists are there waiting to help them get “settled in”. Unless it benefits big business in some way, it just won’t happen. Three quick examples.
1. The bailout of course is probably the best example in history; pouring money into the very institutions that nearly brought upon us the collapse of our monetary system and economy.
2. Look at the changes being proposed to stop owner financing of any kind in real estate. I can only imagine that notion came from the banking industry somehow in order to tighten their grip on the market.
3. And here’s a classic. For over 50 years the government has struggled to put the tobacco industry under FDA supervision. What a waste of time. Why? Because Congress wrote into the legislation that they could not ban nicotine from tobacco products. That’s the addictive part; the part that deprives you of free will to quit. You would have to be as dumb as a bag of hammers to write legislation like that. Or could it be that you have been bought by the tobacco lobby?
So how do we stop all the backroom dealings with special interest groups? The simplest way would be to take some guidance from the court system. I am referring to the “ex parte” rule. That means that generally a judge cannot hear evidence in a case without both sides present. In this case, the American people are one side and special interest groups are the other. We both need to be present. A simple way to do that would be to forbid anyone from approaching a Congressman to influence legislation outside the halls of Congress. Make it a criminal offense for both parties. Simply set up meeting rooms within the halls of Congress and times for legislators to be present to hear input from anyone wishing to influence legislation. C-SPAN must be running. Any printed materials would have to be scanned and made available on the Internet. Now you have true transparency.
The exception of course would be publicly held meetings. “Public invited” is the key term here. So if someone from the mortgage industry wants to talk to an elected official about legislation in his Miami condo, I claim dibs on the bedroom overlooking Biscayne Bay.
Remember that phrase on one of those hugely historic documents? “A government of the people, by the people, for the people”? Well, they are still governing us. But by the people? They’re not paying any attention to us. Money speaks louder than words. They already have all of our money. The only one left “speaking” is big business and special interests. For the people? What a joke.
Robert Clifton, VP PTREIA
North Star Properties of NC, Inc CEO
Jan
19
The Second Wave of Mortgage Defaults
January 19, 2010 | 1 Comment
By Jim Nelson
Baltimore, Maryland
<< Compliments of Coleman Alderson >>
Our economy is about to relapse into the disease that sent us into the Great Depression: Part Deux. Subprime loans caused the initial illness. Option-ARMs will cause the relapse.
In the first half of the past decade, subprime loans were king. They were cheap and easy to get approved. Along with the subprime boom came subprime adjustable-rate mortgages (ARMs), which were equally easy to afford…for a while.
Of course, the “A” and the “R” in ARM meant that the interest rate borrowers pay changes, or resets. The majority of these resets occurred between the summer of 2007 and the summer of 2008.
This period saw a massive amount of mortgage interest rate hikes, which caused millions of foreclosures. Things spiraled down from there, eventually freezing nearly all credit and causing the panic of 2008.
Of course, that’s the 50-cent version of recent history. There were plenty of other financial calamities that went along with this, including the bundling of mortgage-backed securities and risky derivative products.
If you believe the Obama White House and the glass-half-full press corps, you’d think this mess is now behind us. We are, after all, in a recovery…right?
Unfortunately, no one is talking about the second wave of ARM resets and foreclosures…
You see, this second wave will come crashing even harder than the first. It’s made up of a type of mortgage called “Option ARMs.” These give borrowers the option of how much they want to pay during the first five or 10 years of repayment:
1) The full amortized rate, including interest and principal.
2) Interest only, or…
3) A token payment, well below the amount needed to cover the interest on the loan.
This third option causes the mortgage balance to INCREASE instead of decrease. And usually, the borrower can continue to make minimum payments until the mortgage balance increases to 125% of the original amount. That’s when the trouble begins…especially if the interest rate increases at the same time.
This is the exact situation in which many homeowners now find themselves.
Obviously, these option ARMs were supposed to be reserved for customers with better credit than those who took out subprime mortgages. But apparently, they were handed out to almost anyone who wanted them.
According to Whitney Tilson and Glenn Tongue of T2 Partners, who are experts on this subject, about 80% of option ARMs are negatively amortizing. Meaning these so-called top-tier borrowers are heading further into the hole. Once their rates reset, they could be in serious trouble.
And that could be happening very soon:
The chart above shows the two peaks in the mortgage-reset wave. The first peak is comprised of subprime ARM resets. And the second is mostly constructed of option ARM resets. We appear to be in the eye of the storm.
That fact alone shook our nerves when we first discovered it. But it was a different chart in Tilson and Tongue’s most recent presentation that really got us startled… It’s also the reason I’m predicting the dollar spike in 2010.
Instead of resetting as expected after the first five years, many option ARMs are so negatively amortized that they are hitting their automatic reset cap.
That means they are resetting early…like right now.
As you can see from the second chart, the expected reset peak was to occur in 2011. But the real peak is happening now. You can also see that the amount of mortgages resetting is spread over a longer period of time than originally thought, but is peaking much earlier. Unfortunately, it’s not the peaks that matter.
You see, those are just resets. But with unemployment reaching quarter- century highs every month, and the massive number of homeowners about to receive mortgage bills for two to three times what they are used to paying, we find ourselves in an even scarier environment than this time last year.
It takes anywhere between 3-12 months for most homeowners to actually go into foreclosure. Therefore, the wave of Option-ARMs that are now resetting could cause a major wave of foreclosures over the next 6 to 18 months.
It’s tough to say exactly when the storm will come. But my guess is the second half of 2010.
This second wave of foreclosures will not be good news for the economy or the stock market…At least that’s my guess.
Regards,
Jim Nelson,
for The Daily Reckoning
