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Proviso Probe

Monday, September 29, 2008

WARNING: bailout bill could deprive schools and local gov't of property tax revenue

This weekend Congress and the Bush administration announced agreement on a bill to bailout financial sector companies that invested in mortgage-backed securities. The program is called the Troubled Asset Recovery Program (TARP). The current legislation is called the Emergency Economic Stabilization Act of 2008. See Washington Post (Lori Montgomery and Paul Kane). The cost of the initial legislation is $700 billion.

Seven hundred billion dollars is approximately $2,300 for every person in the country, including newborn babies, Alzheimer's patients and undocumented workers. If you divide the current national debt by the number of citizens, each person in the United States is already carrying approximately$32,300. See U.S. National Debt Clock. So, if this legislation passes your share of the national debt will be approximately $34,600.

The United States financial institutions have been troubled. So far this year the federal government has bailed out Bear Stearns ($30 billion), Fannie Mae and Freddie Mac ($200 billion) and AIG ($85 billion). See ProPublica.

The Emergency Economic Stabilization Act of 2008 could be catastrophic for school districts and other local government that relies on property taxes.

Mortgage-backed securities were assumed to be secure investments because they were backed by property. This has proven to be false for at least a few reasons.

1.Properties decreased in value, so the mortgage was worth more than the property in some cases.
2.Financial institutions are simply unable to sell all the properties upon which they foreclosed.
3.Some of the loans were fraudulent. The government and financial sector created a system whereby it was profitable to mortgage properties for amounts much higher than the true value of the properties.

The supporters of the bailout argue that it's necessary because financial institutions don't have the money they need to lend each other to keep the economic system operating. The financial institutions have lost confidence in each other to repay loans because they are carrying large amounts of bad debt. Because the financial institution won't loan to each other this means that companies in other sectors of the economy can't get the cash they need for their day-to-day operations.

Opponents of the proposed bailout are concerned it's a scam to get taxpayers to buy a bunch of assets at inflated prices. TARP does get taxpayers to buy assets at prices above current market price, but is it a scam? Opponents of TARP think it's unnecessary, won't work and/or not a good enough deal for taxpayers. There are also other objections, like the fact it rewards companies that made negligent decisions. TARP will transfer a huge amount of wealth from the middle class to people who are very rich.

My understanding of how TARP will work is that the federal government will buy troubled mortgage-backed securities. I assume this means the federal government will buy a large number of foreclosed homes.

What's the problem with the federal government owning a bunch of boarded-up homes? The federal government does not pay property taxes. There are communities with foreclosure rates of 20-30%. If the federal government buys the foreclosed homes then the schools and municipal government go without the property tax revenue they would normally collect.

I have read the contents of the Emergency Economic Stabilization Act of 2008 and see no references to propery taxes.

I expect that the people who wrote the bill are optimists who expect that the government buying property will cause property values to rise. The idea is that after holding the properties the government will be able to sell them for approximately the same amount as it payed for the properties. The people who wrote this bill do not foresee the federal government holding large numbers of properties for years and years.

I think it would be prudent to write the bill in such a way that school districts and other local taxing bodies would not be injured by the legislation.

The simplest fix is to require the financial institution selling the properties to continue to pay the property taxes until the federal government liquidates the property. This would be fair because the financial institution would be obligated to pay the property taxes absent the federal bailout. It seems grossly unfair to penalize school districts for greedy financial institutions writing bad loans.

This requirement should be amended into the Emergency Economic Stabilization Act of 2008 before it is passed into law.

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  • The counter argument I've gotten from a couple sources is that the gov't won't be buying properties it will buy "mortgage-backed securities".

    If a homeowners stops paying their mortgages eventually some financial institution forecloses upon the property.

    So, financial institutions do own a bunch of properties they can't readily liquidate because the market is soft.

    When "Blank Check" Paulson comes around and offers to buy a financial institutions worst assets, why wouldn't the financial institution unload properties on the federal gov't?

    There are a bunch of costs, like property taxes, to holding properties.

    Is there anything in the Emergency Economic Stabilization Act of 2008 that prevents financial institutions from unloading foreclosed properties on the fed? Why wouldn't they use the program this way?

    Their sense of decency and fair play?

    By Blogger Carl Nyberg, at 11:23 AM, September 29, 2008  

  • Further, requiring financial institutions to pay property taxes on properties sold to the gov't has no effect if the federal gov't only buys mortgage-backed securities and doesn't acquire any properties.

    By Blogger Carl Nyberg, at 11:38 AM, September 29, 2008  

  • Good questions, but I don't think it'll get to that point. That is, if the government ends up with a large inventory of real estate because of this, in order to specifically keep the properties on the tax rolls, it will sell that inventory in one large block - probably to a foreign investor. I don't know. What do you think?

    By Anonymous Marie Carnes, at 1:32 PM, September 29, 2008  

  • Ms. Coffee says: Why don't we give each American over 18 about $100.000? That would work out to less than the 700 billion. It would also save the economy. People who were behind on their mortgages could pay up with the $100.000. People who need to pay for college, a car or whatever would have the money to do so. That would jump start the economy. Have you been to Target or Kmart lately? No one is there. Everyone is afraid to spend money. A $100,000 would be like winning the lottery!

    By Anonymous Anonymous, at 4:44 PM, September 30, 2008  

  • Down under says:
    Initially my reaction after reading your post was no way, since the federal government would be buying mortgage-backed securities. But upon reflection, I think you have a valid point. If the banks think they can easily increase their asset level (through the indirect support of the federal govenment), they are less likely to try and work things out with the borrowers or spend money to maintain a property, resulting in more foreclosures and decreased property values. Doesn't taking property off the rolls just increase taxes for the remaining property owners?

    By Anonymous Anonymous, at 5:07 PM, October 01, 2008  

  • Do you confident with $700b will be solve U.S economic?

    By Anonymous nick, at 10:01 AM, October 11, 2008  

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