Floods of money: Recovery or inflation?
The Federal Reserve was widely expected to hold the short-term bank lending rate at between zero and 0.25 percent, so it came as no surprise when it did. The decision to dump money into the economy to try to buy us out of the recession was only slightly more surprising, but the amount — $1.2 trillion — took everyone by surprise. Hoping to lower mortgages rates and consumer debt, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
Market reaction
The immediate market reaction was good: the Dow bounced 90 points, the S&P soared, and all market indicators were generally positive. Government bond prices leaped too, since mortgage rates will be going down even further than before. If, and it’s a great big if, this can help stabilize credit markets and get us all spending, the economy may start to climb out of recession this year. But is there a catch? You bet.
Inflation
Some economists — the ones with more than 10 minutes training in economics 101 — say the $3.9 Trillion slated for the budget can’t help but create galloping inflation the minute the economy starts to recover. In fact, inflation may not even wait for the recovery; the dollar took an immediate tumble against other major currencies with the Fed announcement. The Wall Street Journal’s Judy Shelton doesn’t mince words: “How can capitalism find its footing when the monetary foundation is shifting with each new government bailout — each new infusion of deficit-financed government expenditure? American families deserve better than to be punished by wasteful public spending and ruinous inflation.”
More free eco-cash
So you didn’t qualify for freebies from the mortgage bailout? Cheer up — Washington is on a spending spree, and you can get up to $19,000 in upgrades to your house. Expanded tax incentives in 2009 and 2010 for energy-efficient and renewable-energy home improvements include $1,500 in tax credits for qualifying windows, doors, insulation, roofs, heating and cooling equipment, water heaters, and even wood and pellet stoves. You’ll get a tax credit of 30% with no upper limit through 2016 for installing qualifying solar technology, small wind-energy systems, or geothermal-well systems.
AIG again
The House will vote today on a bill to levy a 90 percent tax on bonuses paid to employees with family incomes above $250,000, who work at companies that have received at least $5 billion in government bailout money. Edward Liddy, brought in last year by the government to run AIG, told a House subcommittee Wednesday that the company was contractually obligated to pay the bonuses but added that many of them had already returned part of all of the bonuses. The saga continues.
Now on to our real estate investing education section …
Fast Facts About the Stimulus Bail-Out
Short sale investors are likely to encounter clients that want to hold out for a big fat government paycheck rather than walk away from a home. After all, the media is filled with reports about big checks, bail-outs and “free money.” Of course, scams and other fraudulent schemes abound making it tough to educate consumers about the facts versus fiction of the stimulus plan. Here to help is a quick primer about the proposed bail-out:
Fact: In order to refinance homeowners must be up to date on their current mortgage yet still demonstrate that they are “at risk” of facing foreclosure. The government anticipates up to 4 million households will fall into this delicate balancing act in order to qualify for funds…and it’s not limited to just owner occupied homes.
Fact: Mortgage modification clauses are much more difficult to obtain. Homeowners will have to satisfy the following stipulations in order to qualify:
Second lien holders must agree to waive or write-off obligations.
The home must be worth 80 to 105 percent of the current mortgage.
The primary lien holder must agree to modify principle, extend the duration of the loan and/or reduce interest rates to as little as 2 percent…or a combination of all of the above.
The homeowner must agree to credit counseling if they have extensive household debt in addition to high mortgage obligations.
Homes must be the primary residence and currently occupied. Homes cannot be vacant, in need of extensive repairs or otherwise hindered.
Up to $1,000 annual incentive payments will be made for up to five years – but only if the homeowner isn’t late on payments.
A new inspection may be required as well as the following documents:
Recent tax return and 2 to 4 recent pay stubs. Self-employed borrowers will need copies of quarterly estimated tax returns and prior year return.
Copies of all bank statements.
Proof of income from Social Security, alimony, child support or other income that you intend to use for the purpose of qualifying.
Current mortgage and liens including second mortgages.
Completed copies of Form 4506-T…a Request for Transcript of a Tax Return.
Completed copies of Form 1126 – a Borrower Financial Information form.
Proof or documentation of hardship, job loss, or other factors that may have influenced your current financial situation.