Because of Senate add-ons, the bill's initial price tag will be higher than the $700 billion that the Treasury would use to buy troubled assets. But over time, supporters say, taxpayers are likely to make back much if not all of the money the Treasury uses because it will be investing in assets with underlying value.Everybody in Washington, please stop telling us that we're going to see that $700 billion dollars again (maybe even turn a profit!) That cash is gone, it's vapor, it's black hole time. It sucked up the value of those stimulus checks here in Universe Alpha and all the parallel universes. It's a memory, an afterthought, ephemeral and ethereal. Gone, baby, gone.
Wednesday, October 01, 2008
Hooray? - Revised bailout bill passes in the Senate. Goin' to the House on Friday.
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There is, in my opinion, a major issue that was not addressed in the scheme that was passed. Specifically local property taxes do not seem to have been considered at all.
Many if not most of the “Troubled Assets” are mortgages that would have escrow funds attached to them. When a homeowner, (or in the case of a multifamily building, the owner) quits paying the mortgage, a mortgage lender with escrow funds advances the property taxes and insurance to protect the collateral. That advance then becomes an obligation of the homeowner.
Under the draft bill the "Troubled Assets" would be bought by the Federal Government. Uncle Sam would become the owner. If the homeowner does not pay the mortgage, there is nothing in the bill that provides money to pay the local property taxes. Even if the bill is modified to provide for funds from the government, it will be quite a while before the system is set up and functioning. In the mean time local government will simply not be paid.*
This has happened before during the bankruptcy of the Penn Central Railroad decades ago. In some cases it took a decade or more before the taxes were paid. Cities like Indianapolis that almost certainly have a lot of these kinds of mortgages are going to be in real pain.
However, here there is yet another problem. If the taxes are not paid for a couple of years, the county sells the property for taxes. The purchaser pays the taxes and then waits to see if the owner will redeem the property. The cost of redemption is about 10% over the money that the purchaser pays. (A very good rate of interest for less than a year, at least today)
Because the mortgage banker normally pays the taxes to avoid this, it doesn’t happen very often. When it does, the mortgage banker is notified and that usually causes him/her/it to correct his/he/its mistake and catch up the taxes. But if this is not done within a year of the tax sale the tax sale purchaser gets a clear deed to the property.
Given the typical lack of response by the federal government, if the current bill or anything like it passes, the first thing that will happen is that local government will not be able to collect local taxes for quite a while. When the property is sold for taxes, it seems likely that the federal government will not be quick enough to step in, resulting in huge losses for the federal government and some real windfalls for speculators who buy at the tax sales and a year later end up owning the property for a few percent of the value.
A much better solution would be guarantees to back up this paper rather than to take ownership of it. That leaves all of the existing structure in place to keep payments to local government in place.
Allan Yackey
*Even if the lender has set aside a reserve to deal with this it is certain to be inadequate. No one would have anticipated the scope of this in setting up reserves.
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