AskDong

I will be digressing from my usual hopefully non-political blog to talk about AMT. There’s a been a bit of a discussion on CNN Money Generation Risk blog about the matter. The actual article/blog entry itself is not all that interesting. I’m more fascinated by comments. They run the gamut, and from I can tell I’m clearly left of the political spectrum for people who take interest in this matter.

Nobody likes taxes, but they are a necessary evil. What I glean from the comments is that most of the well to do don’t feel like they should be paying more in taxes. But why should the rich pay more in taxes? Other than a sense of egaltariasm why should the rich pay more? The rich should if they want to stay rich. I’ll try not to sound like a communist, but I will. Ultimately if the working class feels like they are being exploited it is in their power to rebel against the rich who are outnumbered. Ideally the rich should be happy to pay more because they feel like the taxes they pay serve to better the lives of other around them. However even if they don’t have that desire, I think it’s important to keep in mind it’s taxes that support the Government and the rule of a law that keeps them rich. A wealthy person may believe they have earned their money, and deserve to keep it, but the rule of law is what really allows them keep their money aside from a personal army. I do believe personal armies would be more expensive than whatever taxes the wealthy may pay. The example may be extreme, but I urge the wealthy to understand that they do not operate in a vacuum. If the nation were to destabilize either through internal forces or external ones, the lives of the poor would change, but not so much. It is the wealthy who would most likely suffer the greatest consequences. Therefore it’s justified that the wealthy pay the most to protect their way of life.

The argument for lower taxes in general is a more credible one. I don’t believe that the Government is the best entity for dishing out solutions. It’s inefficient and the exact opposite of innovative. However, if we’re making tax cuts we should start by benefiting the poorer end of the spectrum rather than the wealthy. Obviously any across the board tax cut will always benefit the rich as an absolute number they pay much more in taxes. There’s no reason that a tax cut should cut the percentage of total taxes that richest of all American’s Pay.  Taxes in 2001 could’ve easily been cut where all American’s benefited equally.  It wasn’t like the richest American’s were leaving the country to dodge the taxes.  So if we want to get rid of the AMT, maybe the rich need to start paying their fair share.  And we certainly don’t need to get rid of the estate tax. Like William Gate’s Sr, I’m a big fan of the estate tax.  I don’t see any reason why we shouldn’t shave a few ounces off the silver spoon.

I want to end with a defense of the rich. The “liberal populist left” is often willing to assign blame and derision to the rich. There is nothing wrong with being wealthy, and there is certainly nothing from wanting and achieving financial success. Most people want to be financially successful. One shouldn’t be ashamed or feel guilt for success. A little guilt for not giving back to society is on the other hand healthy. Success should always be encouraged. Too many confuse success with the display of success. I think ostentatious and frivolous displays of wealth should be critiqued. Waste is waste no matter how rich you are. However, earning money in itself is good thing and worth praise. Taxes should not be intended as punishment for money making success. Nor are taxes justified because they can afford it. Taxes are justified because they protect our way of life. In the next couple years, the Government will have to do something about taxes and spending (hopefully both), and getting rid of social security is not that solution (as much some would like that). Not everyone will be able to get what they want, but sometimes those who already have most of the toys that want already (i.e. high net worth individuals) will have to give something up.

I have great sympathy for borrowers and some sympathy for the ultimate lenders.  Who I don’t have sympathy for are the agents and underwriters who peddled these wares.   I don’t know exactly what the demographics of subprime borrowers are, but I don’t think I’d be going out on limb by speculating that sub-prime borrowers would tend to be lower income, and less educated (often underpriviliged minorities I imagine as well).   By definition subprime borrowers can document less income, and have poor credit history.    Sure there are too many “rich” people spending too much money as well, but at least they have the income on paper.  Mortgage applications question your debt obligations but not one’s spending habit.
I firmly believe that borrowers in the past couple years have been sweet talked by both real estate agents and mortgage lenders to buy more house than they can really afford.   It was only a matter of time they would be drowning in home equity.   Can’t afford that house on fixed rate – no problem take interest only ARM with a low teaser rate – just refinance later.    Many in the media have placed blamed on the mortgage options available.   While the exotic mortgages resetting higher rates contribute to the problem, it’s really the people selling the mortgages.  The mortgage agent who gives me my loan today doesn’t care if I can pay my mortgage in two years nor does the agent who sells me a house as long as I can get the mortgage to pay for it today.   Both of them make their money NOW.   I don’t believe mortgage agents are looking to screw people over, but if they themselves bear none of the risk… It’s near classic moral hazard/principal agent problem.   I don’t know exactly how the compensation is structured for mortgage agents and underwriters, but ideally their compensation should be tied to how well they vet their clients.   If their clients default, they should somehow have financial repercussions.  Obviously, there are economic situations that are outside the personal control of a mortgage underwriter, but a homeowner defaulting on 2 year ARM after the teaser rate expires because rates are higher is not one of those situations.   A short term ARM is ideally intended for someone who is planning on selling quickly, and does need the guarantee of a fixed rate.   A financially savvy flipper would be good candidate, not a single mother barely scraping by as is.
Full Disclosure:  I own AHM which is a Mortgage REIT that has taken a beating in the stock market with the sub-prime debacle.  They are primarily a prime lender, though they have a fair amount of option ARMs. 

A reader asks the following:

 My wife and I are in the process of looking at mortgages for a house that we
hope to close in the next 6 weeks.  Rates have come down a bit, which we’re
happy about, but we still have 2 questions:1. What do you think of an interest only loan with a slightly lower rate if we
commit(to ourselves)to making payments as if it were fully amortizing?  Is
there any drawback to this strategy aside from the possibility of not being
dilligent about payments?2. Have you heard of having your parents (or another relative/friend) granting
you a mortgage and you paying them instead of the bank?  This seems like a good
idea to me because it keeps the money in the family.  While it may not be the
best financial investment for them in the short-term it seems that they would
be interested because ultimately that money would come back to their kids
anyway.  Thoughts?

1.  Interest only mortgages in themselves like any other type of mortgage is not problematic.  As with any mortgage, they become problematic when they are used by borrowers to buy more house they can actually afford  or exposes the borrower to more risk than he or she might understand.   From what I can pick up from your letter this is not your case.   I’d say if you can get interest only mortgage with the exact same terms as conventional mortgage, go for it.  Why ever bypass a free option if you have discipline not use it?  Of course that’s the rub (or rather rubs).  Do you have the discipline and all the other terms equal?  I’ll take your word for the former.   The latter however is unlikely to be the case.    I like to think of all mortgages as a variation of 30 year amortized 1 year ARM.     Want the option of amortizing it over 40 years?  You have to pay for it.  Want to lock in rate for 3-Years or a longer long in period such as the full 30 years, you have to pay for it.   Want to only have to pay the interest on the loan?  You have to pay for it.  And how do you pay for it?  Either directly via the rate or by paying points.   So any lender offering an interest only option on loan should have the same  loan without the interest only option at better rate or lower points.  If this is not the case, by all means take the free option.

2.  Yes I have.  And each time I’ve heard of complications.  Some are administrative and financial.  Taking the mortgage deduction will not be an easy matter.    There are a bunch of legal hoops to jump through.  The loan must be securitized by the home.   Remember when you get a mortgage through a traditional lender, the title is strictly speaking in their name.  If you were to borrow from relatives, those same conventions must be followed, and your relatives would then be of course subject to the income taxes associated with the interest they earn.   Financially speaking assuming you do everything on the up and up, it’s not a bad move that may be beneficial to all parties.   However this is more of personal issue rather than a financial one.   It really depends on the type of relationship you have with the potential lender.  Power and control issues could easily arise.

 1. My designation is “1″ in my Tax deduction form (W4…I believe). 2. I was contributing at least 6% pretax to my 401K. 3. Earned a good consideration of Overtime (exact figure unknown momentarily). However, I understood that it got taxed at a higher percentage.  Nonetheless itwould be adjusted accordingly. 
4. Filed my Taxes through H&R Block tax program (my first year utilizingprogram; last year TaxCut was utilized). After all was said an done I received a refund of $99 Federal…which waspositive consequence of my Student Loan intrest and Telephone credit of $30;otherwise, I was in the red with the IRS.  Does $99 Federal Refund sound reasonable with excessive Overtime and Pretax 401Contribution? And, how many licks does it take to get to the center of aTootsie-Roll Pop?

Sincerely, LIB 

Without seeing the details of your tax return, it’s difficult for me to comment since I don’t know how much in taxes were deducted.   However, just on a sniff test, I’m surprised that you only got $99 refund.   I would expect a higher refund, but that’s mere opinion rather than anything based in solid fact.    It really depends how much was deducted which I don’t know.   I’d be willing to reveal the details of your tax return if you so desire.

A reader asks: 

How come there isn’t a Category for “Love” or “Dating”. Some people would like to get laid more than once per year (current rate)? Sure I want more Benjamins in my wallet, but I would also like the opportunity to potentially get my [edited for content]….

It true when I first established this blog almost a year ago, I intended to answer questions on relationships as well.  Given that there wasn’t much demand for either, I decided to focus on Finances since clearly that was the more intersting subject.   It’s not like anyone wants to talk about love and sex.   However,  I will still unofficially answer question regarding to relationships.

 Dear gentle reader:

I would make the argument that putting benjamins in your wallet in the long run will also serve to your other needs.   I don’t mean to say that you should be paying for services - that takes benjamins out of your wallet.   Nor do I think women are gold diggers.   Some are as are some men.  But I do believe that women will gravitate to men who have their #$% together, and even if you don’t - having more benjamins in your wallet will at least create the illusion of that.

 -Dong