Last week’s long-awaited foreclosure relief effort from the Obama administration touched a nerve among homeowners who didn’t get in over their heads in the borrowing frenzy. Or who are also struggling to make their payments but don’t want or expect government help.
Why, they ask, should my taxes be used to help pay my neighbor’s mortgage?
It turns out there is a pretty good answer.
How will the homeowner bailout affect responsible borrowers such as myself? I purchased my condo two years ago, borrowed what I knew I could afford considering my budget, and am not at risk of foreclosure. It seems unfortunate that we are bailing out those who did not borrow responsibly or did not truly understand their mortgages before signing them. So on top of me not seeing any advantage from the housing bailout, my taxes will most likely increase as well.
— Lars M., Evanston, Ill.
You’re not alone in wondering why your taxes should be used to help your neighbor make their mortgage payment.
The Obama administration’s plan to use $75 billion of tax dollars help some homeowners pay their mortgages touched off a huge backlash. Apart from a flood of mail to the Answer Desk inbox, the outrage was galvanized by CNBC’s Rick Santelli, who covers the commodity markets in Chicago. On Thursday, Santelli gave voice to that outrage in an on-air rant that — among other things — called for a “tea party” this summer to protest the administration’s plan to “subsidize losers’ mortgages.”
It was apparently a rant heard ’round the world — or at least ’round YouTube. On Friday, White House press secretary Robert Gibbs felt the need to respond directly to Santelli’s attack on the Obama's foreclosure relief plan by noting that many homeowners facing foreclosure won’t be eligible for help, including investors and people who “long ago knew they were in a house they couldn’t afford. Instead, he said, the plan is targeted toward helping people “who aren’t yet in trouble keep from getting in trouble.”
Gibbs also pointed out that millions more Americans will benefit from the government’s comprehensive effort to drive down mortgages rates, allowing homeowners who aren’t in trouble refinance to a better rate and save money.
Preventing foreclosures also pays benefits to anyone who owns a home by slowing — and possibly stopping — the ongoing slide in home prices. Each new foreclosed property — sold at fire sale prices — drives down the value of every other home on the street.
“If you live in a home that’s near one that’s been foreclosed, your home value likely has dropped by about 9 percent, which for the average home is about $20,000,” Gibbs told reporters Friday.
According to the U.S. census, there were about 75 million owner-occupied homes at the end of 2008. By our math, that means that the $75 billion being spent to prevent foreclosures works out to about $1,000 per owner-occupied home. Which means you’re spending $1,000 in taxes to head of the loss of $20,000 on the value of your house. These days, that doesn’t seem like such a bad investment.
Gibbs invited Santelli to the White House to go over the plan and explain why it helps all homeowners.
“I’d be happy to buy him a cup of coffee,” said Gibbs. “Decaf.”
If my home is already in the foreclosure process, can the homeowner bailout help? Or is it too late?
— Alicia O.
It’s not necessarily too late if you meet the criteria and your lender is willing to modify your loan. Many lenders have agreed to stop foreclosures already in progress until they have a chance to review them to see if the home can be saved with the help of the new plan.
Unfortunately, not everyone is going to be eligible for help. If you can’t show that you have enough income to cover even a modified loan, the plan can’t help.
The main provision of the plan is a series of financial incentives (payments) to lenders who agree to cut your monthly payment. The two most common ways to do this are to lower your interest rate to the current market rate or to stretch out your payments for 40 years. (You’ll still pay as much, you just get longer to do so.)
So if you live in the home backed by the mortgage you want to change, and if your current interest rate is much higher than the market rate (about 5.25 percent at this writing), you may be a good candidate for a new, more affordable loan. Even if you’re already in foreclosure.
The goal is to come up with a monthly payment that amounts to no more than 31 percent of your monthly income. If, after cutting your rate and stretching out your payments, you still don’t have enough income to meet that 31 percent threshold, the plan probably won’t work for you.
Aside from the burden of unaffordable monthly payments, many homeowners are carrying a mortgage that’s bigger than their home is worth. In some cases, lenders may be willing to reduce the principal down to the level of your home’s current value. After all, if they foreclose, they’re going to lose that money anyway.
But that’s up the lender or the company “servicing” your mortgage for the investors who own it. The program is entirely voluntary.
For more on who is eligible for help, check out our Frequently Asked Questions.
Could you tell us if the Sixteenth Amendment was ever ratified by the States?
— Thomas M., East Sandwich, Mass.
We seem to get this one a lot every year as the deadline for income tax filing approaches.
The Sixteenth Amendment gives Congress “the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
The amendment was proposed by the 61st Congress on July 12, 1909, when it passed the House, having already passed the Senate on July 5. Ratification was completed Feb. 3, 1913, when the legislature of the 36th state approved the amendment. (Since there were 48 states, 36 were required to ratify the amendment. (Delaware, Wyoming, and New Mexico each passed it Feb. 3, hoping to cast the winning vote.)
On Feb. 25, 1913, Secretary of State Philander Knox certified that this it had become part of the Constitution. Here’s when each state ratified it.
Now get back to filing your taxes.
Alabama, Aug. 10, 1909
Kentucky, Feb. 8, 1910
South Carolina, Feb. 19, 1910
Illinois, March 1, 1910
Mississippi, March 7, 1910
Oklahoma, March 10, 1910
Maryland, April 8,1910
Georgia, Aug. 3, 1910
Texas, Aug. 16, 1910
Ohio, Jan. 19,1911
Idaho, Jan. 20, 1911
Oregon, Jan. 23, 1911
Washington,Jan. 26, 1911
Montana, Jan. 27, 1911
Indiana, Jan. 30, 1911
California, Jan. 31, 1911
Nevada, Jan. 31, 1911
South Dakota, Feb. 1, 1911
Nebraska, Feb. 9, 1911
North Carolina, Feb. 11, 1911
Colorado, Feb. 15, 1911
North Dakota, Feb. 17, 1911
Michigan, Feb. 23, 1911
Iowa, Feb. 24, 1911
Kansas, March 2, 1911
Missouri, March 16, 1911
Maine, March 31, 1911
Tennessee, April 7, 1911
Arkansas, April 22, 1911
Wisconsin, May 16, 1911
New York, July 12, 1911
Arizona, April 3, 1912
Minnesota, June 11, 1912
Louisiana, June 28, 1912
West Virginia, Jan. 31, 1913
Delaware, Feb. 3, 1913
Wyoming, Feb. 3, 1913
New Mexico, Feb. 3, 1913
New Jersey, Feb. 4, 1913
Vermont, Feb. 19, 1913
Massachusetts, March 4, 1913
New Hampshire, March 7, 1913
The amendment was rejected (and not subsequently ratified) by Connecticut, Rhode Island and Utah.