1 The Bank Bail-Out: Saving America's Banks

Much is known about the near-collapse of the housing market and the financial ruin that followed some of America’s largest banks. The more disturbing story is not how America’s largest financial institutions nearly caused the largest recession in US history, but how in the midst of the federal government’s efforts to stabilize the financial industry, the people, whose houses were being foreclosed and the small businesses on main street that suffered, were left in the dust. By examining the issues surrounding the collapse of the housing market and the federal government’s response, it is clear that the regular Americans were sacrificed in order to save wall-street.

In 2006 a problem arose across America. All economic indicators showed that prices for individual homes were starting to go down across the board. In order to try to force housing prices to increase, the Bush administrations authorized the Fed to lower interest rates and change the rules that pertained to borrowing. These new rules allowed an increase in the number of sub-prime mortgages, mortgages issued to lenders who might have problems with repayment. The result was that many people who previously could not afford to own their own home were allowed take out a home mortgage loan, which caused home prices to increase to record heights. With high prices and record profits, home developers began construction on new housing projects with the hopes of taking part in the housing bubble.

However, government deregulation, the saturation of the market with new houses, and sky-rocketing housing prices coupled with unnecessary financial risks taken by banks caused the housing bubble to finally pop. Homeowners woke up to discover that the value of their home was substantially lower than when they had originally taken out their mortgage for the same house. Many homeowners, who under normal circumstances would not quality for a home mortgage loan and were intending to sell their homes for more than what it was worth, found that their home was upside down and began to default on their mortgage payment. Foreclosures hit a record high and banks found themselves with a set of sub-prime loans that were now worthless, resulting in record losses for the vast majority of American lenders. On the precipice of the greatest financial collapse since 1929, investors and lenders alike solicited aid from the federal government.

What was proposed by Secretary of the Treasury, Henry Paulson, and the White House to Congress was the Emergency Economic Stabilization Act, which included the $700 billion Trouble Assets Relief Plan (TARP). The intention was to create liquidity for banks and lending institutions to prevent their financial collapse and, in exchange, the financial institutions would eventually pay back the money borrowed from the federal government with interest once the institution became profitable again. Under the Obama Administration, TARP was extended to General Motors and Chrysler, and a separate fund was created to reconstruct Fannie Mae and Freddie Mac.

Though the EESA created stipulations for the restructuring of the financial industry in the United States, this bill, and any bill after the EESA on the federal level failed to establish a plan to help homeowners struggling with their mortgage payments or homeowners facing foreclosure. The bill also did not establish a fund to bail out small businesses that were directly affected by the housing market collapse. Appliance and furniture retailers as well as home construction companies were faced with huge profit losses, and many of these companies were forced to file for bankruptcy or close their doors permanently. Though state and civic governments have attempted to address the issue within their jurisdiction, no federal actions have been taken to help homeowners or local small business. Many of those on main street America felt betrayed by a White House and Congress that was elected to protect their interest, and instead passed legislation to save the multi-billion wall-street banks.

The truth of the matter was just that, the blame should not be placed on the homeowners or the banks, but the federal government that first deregulated the housing market then failed to assist struggling homeowners and businesses. The government traded long-term growth for short-term price hikes, a fateful decision that the American people struggle with today.

0 Foreclosure Man

Since the very beginning of the real estate crisis, there has been a glut of bank-owned homes on the market in Michigan. Although that spells bad news for the people who lost them, it can be a veritable gold mine for people who have the means to buy them. Under normal circumstances, a real estate investor might pick and choose a handful of foreclosed properties, renovate them and flip them for a profit. The other popular option is to rent them out to tenants. One Michigan man has made a real splash: He bought a whopping 650 foreclosures at one time.

Just Call Him the Foreclosure Man

71-year-old Bill McMachen is far from an experienced real estate investor. Until 2001, he'd never purchased a foreclosed property in his life. On a whim, he decided to buy a bank-owned property for $12,000. Shortly thereafter, he sold it for a cool $18,000. Inspired by the quick and easy nature of the transaction, McMachen started thinking. The more foreclosed properties he bought, the more he stood to make. Unlike many would-be investors, McMachen had a decent amount of money at his disposal. He decided to find a way to put it to good use.

A New Way to Make Money

McMachen earned his fortune by selling yachts. Not surprisingly, the yacht industry hasn't fared very well since the economy took a nosedive. Instead of accepting the situation, McMachen had found a new way to make money. Clearly, a higher volume was going to be needed to make the venture as profitable as possible. When he saw an advertisement for a bank-owned property auction by Macomb County, he couldn't resist. The auction was to include 650 tax-foreclosed properties. McMachen was in, but he just had one question: Could he just buy all of them?

An Auction to Remember

Although county officials had never seen it happen, they told McMachen that there was no reason that he couldn't just buy the entire lot of foreclosed homes. The asking price, $4.8 million, was the total of the amount of back taxes that were owed on all of the properties in question. At an average price of just over $7,300 per property, McMachen would be getting them for an absolute steal. Instead of drag the process out, he went ahead and bought the entire lot in one fell swoop.

What's Next?

The properties that McMachen snapped up at the Macomb County auction included 403 single-family homes, 120 residential lots, 14 condominiums, nine commercial buildings and some undeveloped land. Not surprisingly, people were immediate curious about how McMachen was going to handle all of those properties. From the very start, his plan was to sell them to investors for a profit. However, he wanted to give back to the community too, so he plans to donate some of the homes to needy families. Unlike when buying foreclosed homes at an auction, however, he's going to give investors the opportunity to inspect them and see the property for themselves to find the perfect house that suits them before buying them.

Properties are Flying off the Shelves

As overwhelming as suddenly coming into 650 properties may sound, McMachen has handled it gracefully. In fact, he unloaded 181 in one week and another 150 in another week. According to him, all of the properties should be off his hands shortly. As it happens, people are hungry for investment properties. Of course, people who want to buy and live in them can do so as well. With the right mortgage loan, it's possible to become a homeowner for very little money. There's no word on whether McMachen will buy another batch of properties, but it's clear he's discovered a new career.

0 Fiscal Cliff and Housing

It seems that for now we have avoided the fiscal cliff which was supposed to take effect in 2013. It is considered as an economically damaging set of tax increases and spending reductions which is good news for the housing industry, but for how long? The enactment of H.R. 8 or the American Taxpayer Relief Act of 2012 has the following provisions; it has increased income tax, increase in capital gain and dividend rates, exemption and deduction phase-out for all individuals with high-income.It has made permanent the alternative minimum tax relief and has increased the federal estate, gift and generation-skipping tax.

There will also be an extension of certain tax breaks but for a limited time which is generally two years for various business credits, exemptions including new markets tax credit, work opportunity tax credit, and the exclusion of gain on the disposition of certain small business stock. Well, this extension from the Tax breaks are good for home buyers since it will help lessen the number of foreclosure and will help borrowers whose mortgage is upside down to stay in their homes. You may recall, that a law was signed in 2007 stating that debt relief modifications, foreclosures and homes in short sale were no longer taxable and it was supposed to end in 2012. Now, if these tax breaks were not extended, homeowners would not agree in putting their homes in short sale because they would then be facing the tax bill and they would also not agree to the principal reduction loan modification which is way more successful than any other modifications because it leaves the principal as is. This latest development in legislation would do “mostly” good for the people. It somehow prevented the massive tax hikes and deep government spending cuts which could trigger the country to go into recession again. About ninety percent of the new tax revenue which will be collected for the year will come from families who are earning more than 1 million dollar annually. Meaning, only 1 percent of the population will be affected.

However, the negative part of the deal would be; the act did not extend the 2% reduction in Social Security portion of the FICA tax collected from wages, so as a result, a worker who earns a total of $113,000 per Social Security ceiling for 2013 will see an increase in taxes from his earnings of $2,274 this year. If an individual’s income is above $250,000 then expect the tax rate on stock dividends to exceed the current 15% level. Explained as; each extra dollar earned as investment income which includes dividends and long-term capital gains are now subject to the 15% rate plus a 3.8% surcharge under the Affordable Care Act or the “Obama Care” making now a total levy of 18.8% on your income.

In two weeks time the Congress will meet again to raise the debt ceiling. Well, whatever the outcome would be, ordinary citizens are being called to act and let their voices be heard by calling their representatives and let them hear your thoughts on this before it takes effect on March 1, 2013.

About the Author:

Georges Kfoury is the founder and Chief Executive Officer of Leaderscorp Financial Inc. headquartered in Rancho Cucamonga, CA, a leading provider of mortgage financing dedicated towards providing affordable home loans. He founded the company way back 2003 from a ground level, without having the mortgage background. In spite of this, he was able to immediately take the company a level of generating annual income ranging from 8 to 10 million dollars.

0 Repost: How the Mortgage Industry Can Help the US Economy

This is an article I recently wrote for Economic Intersect. Do visit the original article at http://econintersect.com/b2evolution/blog2.php/2012/10/09/how-the-mortgage-industry-can-help-the-us-economy

With the world still recovering from the 2008 global financial meltdown, the Federal Reserve is using every means necessary to stave off any potential threats to the U.S. economy. On September 13 Chairman Ben Bernanke announced another round of quantitative easing to further stimulate the economy which is suffering from sustained unemployment above 8% and little growth in GDP. As seen on CNNMoney the next morning (the 14^th), world markets were reacting with positively, pushing U.S. stock indices to their highest levels in five years. QE3, this round involving purchase of mortgage-backed securities by the Fed, continues the aggressive stimulus program it began after the financial crisis.

Follow up:

How Will The Fed Make a Positive Approach to the Market?
The Fed announced it will purchase $40 billion of debt every month for an indefinite period of time in an effort to inject long-term, stable growth in the labor market by bringing down the cost of borrowing. Quite simply, a reduction in mortgage rates provides economic stimulus by creating demand for housing and more refinancing, giving people more to spend. The Fed seems to believe that relieving banks of some of their MBS inventory will create more mortgage issuance.
It is no secret companies are hoarding deep pockets of cash, afraid to take on more cost and add workers due to fears of another economic recession and the reticence of consumers to increase their spending. QE3 is an attempt to alleviate concern by letting corporate leaders know the Fed will continue to get involved in an effort to inject life into the economy. 

Improvements Brings a Light to the Darkened Economy
Coincidentally, one economic bright spot this year is the very same asset class that helped incite the 2008 crash and subsequent recession – residential real estate. The housing market has bottomed out (at least many seem to believe so) and is now beginning what could be a long-term trend upward.

An improvement in housing prices led to a second quarter decrease in home mortgages being underwater, down to 10.8 million from the high of 11.4 million in the first quarter. In Southern California, housing prices are once again rising, spurred by increased August sales, which were up 9.0% in just one month and 14.2% higher than the same month a year ago. 

Foreclosures and Their Impacts
The government’s 2011 shift in policy to address housing supply and not housing demand has been the stimulus for a significant decrease in foreclosures. Three million homeowners have lost their homes to foreclosure since 2009, but that number has fallen since the 2010 September peak. Congress is considering a plan that would help responsible borrowers significantly reduce their mortgage payments several hundred dollars per month, yielding mortgage holders a $3,000 per year increase in savings. 

With homeowners stuck in mortgages at 6 or 7% interest and housing values beneath their pre-recession levels, there has been little mortgage relief available until now. This is an expansion of The Home Affordable Refinance Program (HARP) that has helped homeowners to stay in their residences. According to makinghomeaffordable.gov, with HARP homeowners whose mortgages are owned or guaranteed by Freddie Mac or Fannie Mae can refinance their homes if they meet a certain set of conditions. A recent analysis by Morgan Stanley concluded that refinancing half the mortgages held by these institutions would translate to a $46 billion dollar a year increase in capital for consumers to spend. 

Unemployment and Its Negative Effects
A housing recovery has always been essential to signalling a turnaround in the economy and the infusion of jobs into the workplace. The construction industry was one of the hardest hit segments in the recession, losing 2.2 million jobs, approximately one quarter of all jobs lost in the financial crisis.

The massive pre-recession run-up of housing prices led to millions of new jobs related to housing, but the slow recovery in real estate has equated to a tepid recovery in that sector’s job growth. Unemployment among construction workers has been sustained above 12%, far above the nation’s recent unemployment figure of 7.8% in September. With GDP hovering below 2% so far this year, a growth spurt in housing could dramatically help this figure. Real estate construction has traditionally contributed 5% to GDP, more than double the current 2.3%. 

HAMP Study Says Banks Unable to Deal with Volumes of Mortgage Mods
The government's mortgage modification plan has seen its downfalls as well as successes. While attempting to modify about 3-4 million mortgages, HAMP has completed only 1.2 million. A study has been released authored by economists from the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency and four high ranked universities which explained this shortfall. In the study, it was shown that the largest banks were not staffed or organized sufficiently to deal with high volumes of mortgage modifications, and would have come up short even without the added load from HAMP. The study also found that about 800,000 homeowners were not processed because of confusion in processing and clerical mistakes.