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New rules will kill the housing market...

Outnumbered

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I just found this article on Drudge. If this flies homes will go back to more realistic values and the market will drop another 30% in most areas IMHO. The key to this article is the stipulation that the "stated" loans would become a thing of the past. This will absolutely destroy the market because people like myself who are self employed will only be able to qualify for about 1/2 the house we can now. With so many small businesses making up our economy we will take a large hit. Nothing like changing the rules half-way through the game:fsakes When homes start to tumble another 30% people will start to walk in droves. Why hang onto several hundred grand in negative equity? This is going to get crazy:smackhead

http://www.iht.com/articles/2007/12/18/business/subprime.php
 

Outnumbered

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U.S. Fed proposes rules to protect would-be homeowners
By Edmund L. Andrews and David Stout

Tuesday, December 18, 2007
WASHINGTON: The Federal Reserve moved Tuesday to impose tough new restrictions meant to curb unfair and deceptive home-lending practices and prevent a recurrence of the meltdown in subprime mortgages this year.

By a 5-to-0 vote, the Fed approved a plan that would tighten provisions meant to protect borrowers and apply them to a far larger share of home loans - whether from banks, mortgage companies or other lenders - than under current regulations.

The proposed rules underscore the more assertive role the Fed is now prepared to take in regulating lending, a big shift from the central bank's approach in the past. In general, the rules are meant to deter unscrupulous lenders from persuading people that they can afford loans that ought to be out of their reach. By extension, the rules are also intended to keep would-be buyers from deceiving themselves about the debt burdens they can shoulder.

"Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy," said the Fed chairman, Ben Bernanke.

"We want consumers to make decisions about home mortgage options confidently, with assurances that unscrupulous home mortgage practices will not be tolerated."

The plan includes provisions that would require more extensive disclosures, restrict advertising and make it harder to lend to borrowers with little or no documentation and a questionable ability to repay.

It would also allow borrowers, in some circumstances, to sue lenders who violated the rules.

The Fed acted under provisions of the Truth in Lending Act and the Home Ownership Equity Protection Act of 1994. In the past, it had been quite cautious about using its authority to clamp down, and the rules were last revised in 2001.

Details of the proposed rules, which could take effect next year after a period for public comment and possible revisions, can be read on the Fed's Web site, www.federalreserve.gov.

In "four key protections," the Fed listed these:

Creditors would be barred from lending without documenting a borrower's ability to repay the loan.

Creditors would have to verify a borrower's income and assets.

Prepayment penalties would be restricted.

Creditors would have to establish escrow accounts for taxes and insurance.

"Unfair and deceptive practices have harmed consumers and the integrity of the home mortgage market," said a Fed governor, Randall Kroszner. "We have listened closely and developed a response to abuses that we believe will facilitate responsible lending."

The action puts the Fed a step ahead of the Congress, which is considering its own steps to tighten restrictions on the home loan industry. A bill put forward by Representative Barney Frank, a Massachusetts Democrat and chairman of the Financial Services Committee of the House of Representatives, would expose mortgage brokers and lenders to legal liability if borrowers are unable to repay.

The Fed did not go as far as proposals by some consumer groups, which sought, for example, an outright ban on prepayment penalties.

What the Fed has been hearing in recent months is a complex blend of personal hardship and dire news for the country as a whole, as waves of foreclosures have swamped the housing market and threatened to mire the economy in a recession.

The housing boom of the first several years seems almost as distant as the boom in technology stocks, but economists have warned that the fallout from the housing slump could be much worse than that from the dot-com bubble.

Many homebuyers whose little slice of the American dream has turned into a nightmare were undone by "teaser rates" dangled in front of "balloon mortgages." When the tempting original rates were supplanted by much higher rates built into the loan, many homeowners could not make the monthly payments.

Those personal misfortunes - whether the result of individual misjudgment, excessive optimism, shady lending or all of those - have mushroomed into a national problem.

The situation is further complicated by the subsequent packaging and reselling of subprime mortgages in ways that are so arcane that even some bankers acknowledge they are befuddled by them.
 

69 1/2

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I just found this article on Drudge. If this flies homes will go back to more realistic values and the market will drop another 30% in most areas IMHO. The key to this article is the stipulation that the "stated" loans would become a thing of the past. This will absolutely destroy the market because people like myself who are self employed will only be able to qualify for about 1/2 the house we can now. With so many small businesses making up our economy we will take a large hit. Nothing like changing the rules half-way through the game:fsakes When homes start to tumble another 30% people will start to walk in droves. Why hang onto several hundred grand in negative equity? This is going to get crazy:smackhead

http://www.iht.com/articles/2007/12/18/business/subprime.php

If you don't make enough to make the payment, you don't get the loan. I don't get the problem unless someone is cheating on their taxes. If that is the case they don't deserve a home, just a cell.:hotdevil
 

Baja Big Dog

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It never ceases to amaze me, all the homeowners (or soon ton be EX-Homeowners) crying the blues about loosing their homes, blaming the lenders for the present state of the housing market, WTF people!!!

Did the lenders twist your arm? They are forced to disclose the payment issues now and later down the road, granted they can sugarcoat the issues with the the statements.."we cant tell you what the moaket will do in the next ten years", but come on, they all knew going into this what they were doing by mistating income.

And yes the ones that will be punished are the self employed, but thats a small number compaired to market!
 

Outnumbered

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If you don't make enough to make the payment, you don't get the loan. I don't get the problem unless someone is cheating on their taxes. If that is the case they don't deserve a home, just a cell.:hotdevil

You have a lot to learn about business. Obviously, you have never taken the time to learn about how the tax system works and how self-employed people earn a living. The government created the system to allow tax deductions to off-set income to encourage small business growth and investment in business capital. It is not cheating, it is the system as designed by Uncle Sam.

I play by the rules. However, I don't work for a company that pays me on a W-2 paycheck. Therefore, the money I make is not considered documentable personal income and not allowed to be used to qualify for a home. That is why the "stated" programs were invented to begin with.

The problem is that W-2 wage earners started to use the "stated" programs to qualify for more house than they should have. So these "cheaters" have basically fucked it up for us self-employed types who have lots of deductions on our tax returns. Self-employed types making $20k a year under Uncle Sam's rules could show $60k a year doing a similar job as an employee. Both bring home similar cash yet one can't buy a house under the new rules.
 

Outnumbered

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...
And yes the ones that will be punished are the self employed, but thats a small number compaired to market!

And how did you figure that? Don't forget that many self-empoyed types employ W-2 employees. If I knew I would never be able to buy a house working for myself I would fold my business and go get a stable W-2 job with a large corporation. Think about how that would unfold.

Here is some US census data for you to consider. And these stats are just the non-employer small businesses...

FOR IMMEDIATE RELEASE
FRIDAY, SEPTEMBER 30, 2005




CB05-140
Mike Bergman
Public Information Office
(301) 763-3030/457-3670 (fax)
(301) 457-1037 (TDD)
e-mail: <[email protected]>

Nevada, Arizona Lead Growth

Nation Adds 1 Million Self-Employed Businesses
to Reach 18.6 Million, Census Bureau Reports


The number of businesses with no paid employees grew from 17.6 million in 2002 to more than 18.6 million in 2003, a growth rate of 5.7 percent, according to a report issued today by the U.S. Census Bureau. This represents the biggest rate of increase in self-employment since the Census Bureau began releasing such statistics in 1997; the rate during the 2001 to 2002 period, 3.9 percent, was the previous high.

According to the report, Nonemployer Statistics: 2003, Nevada led the nation in the growth of these small businesses, with a 11.4 percent increase between 2002 and 2003. Arizona climbed from ninth place in 2002 to second place in 2003, with a 9.4 percent increase. Georgia’s rate of business growth, the third largest, was 8.9 percent. Texas and Florida had business growth of 8.1 percent and 7.0 percent, respectively, to round out the top-five states in nonemployer business growth. (See Table 1. [Excel])

Nationally, these small businesses made up more than 70 percent of all businesses, with receipts nearing $830 billion.

Highlights:

Clark County had the highest number of nonemployer businesses of any county in Nevada: 95,923, with receipts totaling $5.3 billion. Businesses in real estate accounted for more than 25.2 percent of the total nonemployer receipts in Clark County.

Other counties with increases in nonemployer businesses included San Bernadino, Calif., 9.1 percent; Wayne, Mich., 6.2 percent; King, Wash., 5.5 percent; Montgomery, Md., 4.8 percent; Fairfax, Va., 4.7 percent; and Allegheny, Pa., 2.6 percent. (See Table 2. [Excel])

Among the nation’s most populous counties, Los Angeles, Calif., had 742,767 nonemployer businesses, with Cook, Ill., second at 340,548; followed by Harris, Texas, at 255,222.

Some examples of industries with impressive nonemployer business growth are real estate appraisers, 19.1 percent; nail salons, 15.9 percent; landscape architectural services, 14.6 percent; software publishers, 14.4 percent; clothing accessories stores, 12.9 percent; bed and breakfast inns, 8.5 percent; carpet and upholstery cleaning services, 7.5 percent; and confectionery and nut stores, 6.5 percent.

Four economic sectors accounted for almost 60 percent of nonemployer receipts — real estate and rental and leasing ($176.0 billion, or 21.2 percent); construction ($126.4 billion, or 15.2 percent); professional, scientific and technical services ($102.9 billion, or 12.4 percent) and retail trade ($80.5 billion, or 9.7 percent).
The report has data on 16.2 million individual proprietorships, more than 1.2 million corporations and l.2 million partnerships. Nonemployer firms may be run by one or more individuals, can range from home-based businesses to corner stores or construction contractors and often are part-time ventures with owners operating more than one business at a time.

The detailed Internet tables show the number of establishments and receipts in nearly 300 industries for the United States, states, counties and metropolitan areas. The data do not cover all self-employed individuals, since many self-employed business owners have paid employees.
 

69 1/2

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You have a lot to learn about business. Obviously, you have never taken the time to learn about how the tax system works and how self-employed people earn a living. The government created the system to allow tax deductions to off-set income to encourage small business growth and investment in business capital. It is not cheating, it is the system as designed by Uncle Sam.

I play by the rules. However, I don't work for a company that pays me on a W-2 paycheck. Therefore, the money I make is not considered documentable personal income and not allowed to be used to qualify for a home. That is why the "stated" programs were invented to begin with.

The problem is that W-2 wage earners started to use the "stated" programs to qualify for more house than they should have. So these "cheaters" have basically fucked it up for us self-employed types who have lots of deductions on our tax returns. Self-employed types making $20k a year under Uncle Sam's rules could show $60k a year doing a similar job as an employee. Both bring home similar cash yet one can't buy a house under the new rules.

I am a business owner too, any and all dollars you take out of the business have an income trail. If you don't have the income, you don't qualify for the payment. The only place this does not work is when looking at net worth. I bought my first home when I was 29 and borrowed 80% of the value. I had the money in investment accounts to pay cash but I have always financed, now on my fourth home. There is no real way to borrow for a home listing business assets to cover the mortgage.

The payments are monthly, you need enough cash arriving monthly to make them and other assumed obligations. That is where the ratios come from. I can't take cash out of the business without claiming it as income, can you? Dividends are looked at as income by mortgage lenders.
 

Outnumbered

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I am a business owner too, any and all dollars you take out of the business have an income trail. If you don't have the income, you don't qualify for the payment. The only place this does not work is when looking at net worth. I bought my first home when I was 29 and borrowed 80% of the value. I had the money in investment accounts to pay cash but I have always financed, now on my fourth home. There is no real way to borrow for a home listing business assets to cover the mortgage.

The payments are monthly, you need enough cash arriving monthly to make them and other assumed obligations. That is where the ratios come from. I can't take cash out of the business without claiming it as income, can you? Dividends are looked at as income by mortgage lenders.

It depends on how you set up your business. If you are claiming all of your income without taking full advantage of the tax laws then you are giving too much to Uncle Sam and I assume probably not using a seasoned CPA. I have had a quality CPA since I started my business 18 years ago and I can tell you that he has saved me mucho $$--far beyond his steep price tag for services.

I bought my first house full-doc in 1993 when houses were reasonable. But, now with the prices where they are and the tax shelters I have built with my CPA, there is no way I could even qualify for the loan I got in 1993 without a stated program. Without going into too much detail, I am confident that if I did my own taxes and did not have a CPA to set-up some nice strategy I could qualify full-doc. However, I would be paying more taxes.
 

Roaddogg 4040

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Outnumbered, it still looks like there is an opening for self employed and business owners to use bank statements for alternate documents. I haven't done a stated loan in a long time. The last one I tried, we stated the income at $150K and it was shot down. Then, we went to bank statements and the lender then said the client made $390,000 as that was the total deposits. The ratios are a little different.

I had only used stated income for business owners and self employed.


69 1/2, if you are self employed, then you have never made that much money or you have a crappy accountant that doesn't understand the tax code. The benefits of being a business owner and self employed are that many things get written off FIRST and you are taxed on what is left over. Granted, you have to pay yourself a reasonable salary to be taxed on. But even your business structure is dependant on the size of your business. S corps are great for smaller businesses so there is no double taxation, but the write offs are more limited and there is potential for phantom income (profit on paper, but doesn't show up in cash flow). C corps have great write offs, but have the potential for double taxation. They did make some changes to the tax treatment of dividends so it is possible to deduct income you pass to yourself from the corporation. As Outnumbered said, he could possibly qualify for less, even though he actually has the money but didn't officially recognize it as income.

There is a difference between cheating on your taxes and legally avoiding taxes. Think of taxes like a Toll Road. If you drive the toll road and don't pay...you have cheated. But, if you take a different road that has no toll and gets you to the same end point, you have legally avoided paying the toll. And, when you take the other road, you find out there are some additional benefits like less traffic, better scenery, and even a short cut that might be bumpy, but still legal. The tax code is not black and white...if you think it is...just call the IRS 10 different times and ask them about the treatment of dividends on a C-corp and you will get 10 different answers. Some people like to call things a "loop hole" when in reality, it is their laws. And...by the way...the government creates their own "loop holes" like in California with the creation of the Mello Roos "tax" that is not really a tax, because if it was, it would violated Proposition 13 and be illegal. So, they created an "assessed fee" that happens to show up comingled with your property tax bill....how is that for a "loop hole."

Also...I am a certified Tax Preparer. I don't do taxes, but in my line of business I do creative strategies and I need to understand the tax consequences of the different strategies and how to minimize tax liabilities without spending more money in the process like most people do.

The IRS tax code is 44,000 pages and growing (say it outloud...Forty four THOUSAND pages) and to think it is black and white is at a minimum naive to flat out ignorant. The more they add, the more options people have.

Hey, I'd love for them to go to a flax tax rate or a consumption tax basis like Steve Forbes and several others have proposed.

The reason I am doing my diatribe is that I am tired of ignorant people claiming people like Outnumbered (and myself) are "Cheating." All I can think is....why don't you voice your opinion when you generate a half million dollars or more per year and see how the government penalizes you for being successful.

Very well said. We own our own business and agree 100%. Not sure how these rules are going to affect us when we buld our new home, next year but I'm sure it won't help...

Steve
 
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