These federal deficits were years in the making

Lately, it seems to be the criticism du jour to pin the entire (rising) federal deficit at the feet of Barack Obama, who has only been in office since January.

Meanwhile, I continue to get somewhat unhinged email blasts from some of my more conservative friends who, quite frankly, don't know what they're talking about when they drone on about Obama's policies being the end of civilization as we know it (as well as the apparent end of baseball and apple pie). Of course I want to reply, "Perhaps you should get that pesky bankruptcy off your credit report before throwing stones at Obama's fiscal house!" but I'm simply too polite to do so.

And, while I'm certainly no fan of the entire array of the policy prescriptions of the Obama Administration (and think his lack of a business background is beginning to show), the truth is that these deficits took years to build up, and they won't disappear simply because Sarah Palin is now pulling a new string on her back that quacks, "I told you so!" From a New York Times story:

There are two basic truths about the enormous deficits that the federal government will run in the coming years.

The first is that President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying. The second is that Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested.

The New York Times analyzed Congressional Budget Office reports going back almost a decade, with the aim of understanding how the federal government came to be far deeper in debt than it has been since the years just after World War II. This debt will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it...

The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years.

You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama.

The first category — the business cycle — accounts for 37 percent of the $2 trillion swing. It’s a reflection of the fact that both the 2001 recession and the current one reduced tax revenue, required more spending on safety-net programs and changed economists’ assumptions about how much in taxes the government would collect in future years.

About 33 percent of the swing stems from new legislation signed by Mr. Bush. That legislation, like his tax cuts and the Medicare prescription drug benefit, not only continue to cost the government but have also increased interest payments on the national debt.

Mr. Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing.

About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas...

The solution, though, is no mystery. It will involve some combination of tax increases and spending cuts. And it won’t be limited to pay-as-you-go rules, tax increases on somebody else, or a crackdown on waste, fraud and abuse. Your taxes will probably go up, and some government programs you favor will become less generous.

That is the legacy of our trillion-dollar deficits. Erasing them will be one of the great political issues of the coming decade.

And something that won't be addressed simply by "Drill, baby, drill!"

Interview with author Anthony Downs, "Real Estate and the Financial Crisis"

Yesterday I interviewed Dr. Anthony Downs, author of the new book out by the Urban Land Institute called "Real Estate and the Financial Crisis: How Turmoil in the Capital Markets is Restructuring Real Estate Finance."

Downs, who received his PhD in Economics from Stanford University, is a senior fellow at the Brookings Institution as well as a well-known writer and speaker, and has consulted with the nation's largest corporations, developers and government agencies.

This latest title marks Tony's 27th book, which I'll soon be reviewing for the Inman News service, but for now you can listen to the podcast on the widget below (due to a minor technical glitch, my bumper music started playing during the intro, which threw me a bit. But that's show biz!). Downs has also written "Niagara of Capital: How Global Capital Has Transformed Housing and Real Estate Markets," "Still Stuck in Traffic," and "Growth Management and Affordable Housing: Do They Conflict?" Earlier in his career, he also wrote "An Economic Theory of Democracy" and "Inside Bureaucracy."



If you want to buy this book from Amazon.com click on the link below.

No mortgage cram-downs for buyers in bankrtuptcy

Delinquent homeowners in bankruptcy who were also hoping to achieve principal reductions and other loan modifications from bankruptcy judges are sure to be disappointed in the Senate's decision to vote down the measure. Still, the law only prevents such cram-downs for principal homes, and allows judges to enact measures for vacation homes and investment properties. In other words, maybe move out, treat it as an income property and THEN file? From a CNNMoney.com story:

The Obama administration lost a bid to add a powerful weapon in its fight against foreclosure Thursday, after the Senate voted down a proposal to allow bankruptcy judges to modify mortgages.

The defeat left many housing advocates questioning the effectiveness of the president's loan modification plan. The so-called cramdown provision, which would allow judges to reduce mortgage principal, would have put pressure on servicers to modify loans before borrowers file for bankruptcy...

Bankruptcy reform was a key part of Obama's foreclosure prevention plan, which was introduced in mid-February. It aims to encourage servicers to be more aggressive in modifying loans through a mix of carrots, in the form of incentive payments, and the stick of cramdowns. Servicers have come under fire for not helping enough homeowners through voluntary initiatives...

Servicers covering 75% of the nation's mortgages are now participating in the modification program, which calls for banks to lower troubled borrowers' monthly payments to 31% of their pre-tax income. Many major servicers said they have beefed up their loan workout departments to handle more calls.

However, most just started accepting applications, so experts say they won't be able to judge the program until the fall at the earliest. By then, hundreds of thousands of borrowers could lose their homes...

Obama Administration extends housing aid to second mortgages

Since one of the major issues blocking loan modifications has been the fact that under-water homeowners have both first and second (or piggyback) loans on their properties, the Obama Administration is expanding its incentive program to second mortgages. From an L.A. Times story:

The Obama administration, stepping up efforts to stem foreclosures, will offer lenders and homeowners incentives to cut payments on second mortgages, write down balances on first mortgages that are underwater, and repay loans in a timely fashion.

The new measures announced Tuesday would especially help many distressed homeowners who have both first and second mortgages -- and can't afford either. The Treasury Department now wants lenders and their customer-service agents to agree to modify both loans as part of a comprehensive solution...

The program would slash second-mortgage interest rates to as low as 1% for five years for some borrowers. It also seeks to revive a Federal Housing Administration effort to persuade lenders to cut loan balances enough so that borrowers again have equity in their homes.

Money for the plan would come from a previously authorized $50-billion allocation from the $700-billion Treasury Department bailout fund that Congress established last year. The $50 billion already has been used to create incentives for modifying first mortgages...

The issue of mortgage fraud vs. AIG bonuses

Back in the mid 1990s, I worked for a short time at SunAmerica, which was absorbed by AIG in 1999, and remember working for a rather detailed executive who is now an EVP at AIG. He had this rather peculiar habit of insisting that each piece of paper, whether it was a fax, snail mail, email, report or any other variety of correspondence be placed in a colored plastic folder. Should an errant piece of paper find its way into the wrong folder, there'd be hell to pay! So of course I've been wondering through this AIG meltdown, "Why didn't he or someone else apply this obsession with minutiae to, you know, the products they sold such as credit default swaps?"

And yet in the DC Examiner, the editorial page opines that mortgage fraud is such a growing cancer on the national stage that going after AIG bonuses is really nothing more than a political sideshow. From the editorial:

Many cancers become untreatable once they metastasize - spread throughout the human body. Something not unlike that appears to be happening in the mortgage industry even as President Barack Obama is off chasing AIG executive bonuses he deems as excessive.

To see what is wrong with this picture, one need look no further than the latest data from the Mortgage Bankers Association on mortgage delinquencies, covering the fourth quarter of 2008. Nationally, a little more than 92 percent of all mortgage loans were current, while 6.30 percent were seriously delinquent (i.e. more than 90 days past due). For sub-prime mortgages, which make up 11 percent of all mortgages, however, the overall delinquency percentage is 23.11 percent, and 33 percent for those with adjustable rates (ARMs). California’s ARM delinquency percentage is 39 percent and Florida’s a staggering 47 percent.

In other words, one of every four sub-primes is seriously delinquent nationwide, as is one of every three ARMs. It’s much worse in the two states thought to be havens for speculators. National delinquency rates like that simply cannot happen without extensive speculation and mortgage fraud, especially loan officers and applicants using false income, debt and other data.

Considering the pivotal role played by toxic bank assets made up in part by securitized packages of sub-prime mortgages in freezing up the financial sector, one might expect Obama to make a high national priority of identifying mortgage fraud perpetrators and prosecuting them to the fullest extent of the law.

Otherwise, it will be impossible to prevent such fraud from continuing and even expanding – metastasizing – throughout the mortgage finance industry. But when The Examiner asked the White House press office if the president plans a national anti-fraud program, we were referred to the Justice Department. There, a spokesman said he was unaware of such a program, though individual U.S. prosecutors might be launching their own efforts. The FBI has an anti-mortgage fraud effort, but the G-men clearly could use some help....

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Prepare for higher taxes! Obama unveils budget blueprint.

President Obama unveiled his budget blueprint, which reverses Bush's tax cuts earlier in the decade, increases the wages subject to Social Security withholding and increases the long-term capital gains tax from 15% to 20%. Think he'll get it through Congress? From a Wall Street Journal story:

President Barack Obama delivered a $3.6 trillion budget blueprint to Congress Thursday that aims to "break from a troubled past," with expanded government activism, tax increases on affluent families and businesses, and spending cuts targeted at those he says profited from "an era of profound irresponsibility." The budget blueprint for fiscal year 2010 is one of the most ambitious policy prescriptions in decades, a reordering of the federal government to provide national health care, shift the energy economy away from oil and gas, and boost the federal commitment to education.

One war would end, as troops leave Iraq, while another would ramp up in Afghanistan. To fund it all, families earning over $250,000 and a variety of businesses will pay a steep price, but Mr. Obama implored Americans to own up to the mistakes of the past while accepting profound sacrifices...

The budget's introduction is likely to herald one of the fiercest political fights Washington has seen in years, waged on multiple fronts. Within minutes, Republicans were lambasting a document they called class warfare, designed to mire the nation in recession for years to come. Business lobbyists were girding for battle even before the budget's unveiling. Even Democrats are likely to blanch at cuts to agriculture and other programs that have been tried before – and have failed repeatedly...

As expected, taxes will rise for singles earning $200,000 and couples earning $250,000, beginning in 2011 -- for a total windfall of $656 billion over 10 years. Income tax hikes would raise $339 billion alone. Limits on personal exemptions and itemized deductions would bring in another $180 billion. Higher capital gains rates would bring in $118 billion. The estate tax, scheduled to be repealed next year, would instead be preserved, with the value of estates over $3.5 million -- $7 million for couples -- taxed at 45%...

Businesses would be hit, too. The budget envisions reaping $210 billion over the next decade by limiting the ability of U.S.-based multinational companies to shield overseas profits from taxation. Another $24 billion would come from hedge fund and private equity managers, whose income would be taxed at income tax rates, not capital gains rates. Oil and gas companies would be hit particularly hard, with the repeal of multiple tax credits and deductions.

The federal government would take over most student lending. Managed care companies would lose their subsidies for offering Medicare plans. Farmers with operating incomes over $500,000 would see their farm subsidies phased out. And cotton storage would no longer be financed by the federal government.

What? No more cotton storage? Now that's just over the line.

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