Times They Are A Changing . . .


September 2009
Vol 32 No 12

          Depending upon whether or not your particular ox is being gored, it seems to me that the world according to Obama is getting sillier and sillier.   Here are some of the changes that have either been made, or are being considered:  

          HUD has decided that things aren’t bad enough for the Mobile Home industry. It has proposed tightening its standards for improved foundations to include either a floating slap upon which foundations will rest, or a foundation that will extend beyond the frost lines.  This will add several thousand dollars to the costs of installing a mobile home to qualify it for HUD financing while increasing the costs to consumers.  That’s the bad news.  The good news is that it will increase the value of all existing homes that might be “grand fathered” in under current HUD requirements.  It should spur buyers to sell/buy existing homes while they can under the current financing regulations.

          In the midst of a deepening recession, during which people are using the mail less and less, and free FAXes and email more and more, the Post Office is fighting back by raising the cost of stamps, rather then lowering prices, to attract business.  In like fashion, the government — confronted with falling tax revenues attributable to fall off in consumer spending and business failures — is planning to step up enforcement of taxes on corporations, Landlords, and contractors.  It is hiring an additional 2000 Revenue Agents to make sure that we pay unto Caesar what he thinks we should.  Under proposed regs, Landlords are to begin issuing Form 1099s to service providers and to withhold payments to firms that don’t provide valid I.D. numbers.  Form 1099s must be issued to corporations.  They don’t specify exactly how to remove the ensuing Mechanic’s liens for unpaid work without transferring funds.  

          Reagan proved that lowering taxes increased overall tax revenues, as indeed, virtually every tax reduction has.  But, in keeping with the general philosophy of killing the small business goose that lays the golden eggs, Congress and Civil Service employees with guaranteed government pensions ignore the facts of economic life that taxes increase prices and lower sales, thus reducing business taxes while increasing unemployment and the need for increased government spending.  
Apparently nobody has thought through the added costs of processing 1099s issued to businesses with fiscal rather than calendar years, or the costs of doing all this that will be passed on to the consumer in the form of higher prices or higher taxes.  

          It’s little wonder that the Secretary of the Treasury who “overlooked” paying almost $40,000 in income taxes might have skipped that day in Economics 101 where they taught that businesses don’t pay taxes, they collect them from consumers and pass them on to the government.  So taxes on those evil corporations, Landlords, and small businesses that are so roundly applauded by the “rob Peter to pay Paul” school of economics actually hurts those who can least afford them.  
          Under Obama’s new housing bill, financially stressed lenders and sellers, already teetering on the threshold of financial failure, who provide financing to foreclosed investors, are singled out for additional punishment when tenant occupied rentals are foreclosed.  The law allows tenants to remain in their foreclosed rentals through the end of their lease plus 90 days before being forced to vacate.

          That creates substantial costs for lenders and for buyers who might buy these homes either at foreclosure sale, or as REO property from lenders.  Their costs will keep rising while they pay for property and liability insurance, accruing unpaid HOA and utility liens, legally mandated repairs and maintenance, etc. The net result will be that tenant-occupied houses will be a pariah to foreclosure bidders and REO buyers who will only buy them at very high discounts to comparable foreclosure offerings.  It amounts to just one more nail in the coffin of lenders who are kept alive with bailouts paid for by tax-paying investors and owners.

          In 1949 the novel “1984” burst on the scene($9.99 at Amazon).  It portrayed a society (Oceana) in which government controlled virtually every aspect of citizens’ lives through impenetrable layers of bureaucracies.  Government understood that it could use politically correct language to gain and retain power  through control of education.  To achieve this end, it invented a new language that included “Big Brother”, “Newspeak”, “Double Speak”, “Group Think”.  This was coupled with “Reality Control” that was administered by the “Ministry of Truth” where history was continuously revised to make it match government promises.     

         Notice how almost every law is given a high-sounding name that bears little resemblance to its effect, but which makes government appear to be benevolent.  Today, Government, through its controlled media, is bombarding us with the 2009 version of “Newspeak” where bad news regarding its failed policies is downplayed (such as suppressing photos of war-dead, glossing over the failure of the TARP to boost the economy or to strengthen financial institutions, rising unemployment, falling house prices, foreclosures, credit card defaults, and bankruptcies, etc.).  

          Meanwhile, good news is amplified.  For example, when unreasonably priced foreclosed houses are taken back by lenders for lack of bidders, these are counted as “sales” and are widely heralded as “Housing Sales Rebound”.  The unrealistically high minimum bid prices that lenders placed on the houses they had to take back are new evidence that “Real Estate Prices Are Leveling Off”.  

          Although the word “fair” doesn’t appear either in the Constitution or the Bible, Government has inserted it in just about every law or policy it imposes.  In typical “Double Speak”, it has come to justify additional loss of freedom by the “many” in order to reward the “few” that government favors. Typically, these are uninformed voters who don’t look very far beyond the immediate rewards government offers to them for returning office-holders to office.  It threatens to use anti-sedition laws to punish those who aren’t “politically correct”, or who actively resist government.  By creating a passive citizenry, government can continue to grow in size and power simply passing new laws that few understand or resist.

          The Obama Administration has steam-rollered the sanctity of contracts incorporated in the U.S. Constitution by forcing creditors of automobile companies to surrender senior debt in exchange for a minority interest in companies over which government has majority control.  Through increased powers given to the FED, government has total control over the credit markets.  Thus, it can decide WHO will gain access to credit, WHEN they’ll get it, the INTEREST they’ll pay, and the things they’ll be able to use credit for.  It doesn’t take a genius to figure out that those lenders “go along” with government policies will do better than those who don’t.  Hopefully, nobody will notice that the same Congressional “leaders” who forced lenders to make loans to marginal borrowers, and forced GNMA to buy them, were never blamed.  They’ll continue to be in full charge of the new programs.

          The next move is to further “regulate” the financial markets.  It’s no surprise that nobody in the government controlled media has brought up the point that Bernie Maddoff’s theft of $65 Billion was under the complete surveillance and control of the regulators; who did nothing to stop this slow-motion crime.  Based upon its stellar performance the last time around, the same government that is in the process of spending more money than it takes in and creating trillions of dollars in negative cash flow will now help those who have learned how to make money to avoid losing it.

          Government is primed to beef up healthcare with even more bureaucrats.  If they could simply collect payment in cash without the need to fill out government forms, most Doctors, Nurses, and Technicians could charge far less, spend more time with patients, and wind up earning more money.  I hope government realizes that, when it no longer pays, medical personnel can select another way to earn a living; such as buying and selling houses.  Many of them are already doing it.

          FHA Mortgagee Letter 2009-15 allows first time home buyers who use FHA financing to obtain short term loans from state housing agencies and qualifying non-profits for 10% of a home’s full price — up to a maximum of $8000 credit available under the American Recovery and Reinvestment Act of 2009 — and apply the loan proceeds toward their purchase costs.  

          Here’s how this would work:  So long as they can come up with 3.5% down payment themselves, they can then use their tax credit loan to make a larger down payment to reduce their mortgage and payments, and to pay closing costs.  The loan would be repayable when the borrower receives the tax credit from the IRS.   The fly in the ointment is that the tax credit program runs out on December 1, 2009.  

          A new provision of the law allows home sellers who sell to qualifying first time home buyers to also get the tax credit if they buy a replacement home within the time limits.  This is expected to bring 160,000 additional buyers into the housing market.

          Reviving the housing industry is a hot topic with the politicians who thus far have done nothing of note to help sellers and buyers.  Currently Colorado, New Jersey, Pennsylvania, and New Mexico have already instituted their own programs to use the tax credit as down payments.  Proposed H.R.2606 would extend this credit to all homebuyers until the end of 2010; and H.R. 2619 would add $3000 tax credit to refund closing costs for the costs of refinancing a mortgage so long as the loan amount didn’t exceed the original outstanding balance.  H.R. 2562 would extend the tax credit through 2010 for homebuyers who spent at least 3 months in the military during 2009.       

          Until tax revenues cover the additional costs created by Obama’s policies,  government must continue to borrow at higher and higher interest rates.  The problem is that most of our bonds have been bought by foreign investors.  Now, they are losing confidence in the value of the dollars they hold.  In recent Treasury auctions, the Chinese and Japanese who carry most of our debt have been reluctant to lend us any more money.  The Chinese have been swapping our Bonds for Oil futures.  They figure that’s a better investment than a falling dollar.  

          When we can’t borrow, that leaves only one way for the Treasury to find money; get the FED to counterfeit it.  The recession is the only thing keeping inflation down.  With recovery, when the inflation factor is added to lenders’ risk factor, interest rates must rise.  Higher rates lowers the value of both stock and bond portfolios.  This is where the rubber really meets the road:

          By far, the biggest blocks of stocks and bonds are owned by IRAs, 401Ks, and pension funds upon which millions of people are counting to support themselves in retirement.  Almost everything that the Obama Administration and the Congress are doing today is going to reduce the value of these pension funds.  As things are going today, Americans who rely upon Social Security or Pension investments to fund their retirement, instead of retiring, should plan on continuing to work most of their lives.  If this sounds like a radical statement, show me just one socialist country in which oldsters are enjoying a comfortable retirement at any age.   

          As the “Law of Unintended Consequences” adjusts to all of the grand social schemes that the Obama Administration is imposing, the net effect will be a poorer America and a much slower recovery.  This is precisely what happened when Roosevelt laid out his array of alphabetical agencies to “manage” the economy.  This converted the Hoover recession into the Great Depression; which lasted for 8 years.  It seems that Obama is doing his best to follow Roosevelt’s economic recovery plan without considering the fact that Roosevelt damaged America much more than he helped it.
The solution for entrepreneurs is to implement the AAA Strategy: Alter your approach.  Adapt your practices to take advantage of every turn of events.  Avoid problems that government can create.  And finally, keep a low profile.

          Every time I look around the world changes a little bit.  Government seems to get a little bigger while independence and freedom shrink a little bit – for those who aren’t willing to look for new ways to do business that the bureaucrats haven’t considered.  It’s almost axiomatic that entrepreneurs who depend upon wits and innovation to maximize success should be able to out-think government staffers who are focused more upon minimizing input than maximizing output.  As a former government employee who got to see things at short range, I don’t think I’ve missed the mark too far.  You skeptics should take note of how few days each year that your legislature or the Congress is actually in session with everybody in attendance.   

          When a new law is proposed, the first thing to do is to look at all of the definitions.  That’s because laws don’t use the English that we use.  They define the meanings of their terms within the law, and they sometimes err.  For example, Rent Control laws often define “Landlords” as those who own property and “Tenants” as those who rent or lease it.  Whom do they overlook?  Those who lease houses from owners and sub-lease them to occupants.  All the provisions of the law that might impose obligations and restrictions on “Landlords” don’t apply to them, while all of the rights, powers, and privileges conferred upon “Tenants” inure to them.

          What really throws things out of whack is when a house is leased by an entrepreneur in the name of the Trustee of a Trust, after which, only the rights of possession and occupancy are “leased”, or sold on an installment contract.  Suddenly, a whole new set of laws called the Uniform Commercial Code apply, rather than real estate laws.  This creates a legal paradox in which one set of laws must be given precedent over another set of laws.  The entrepreneur is in legal limbo; a place where self-respecting contingent fee lawyers are loathe to tread.

          So, when a new law is proposed, try to see if it applies to “real estate”.  If so, the course is clear:  Do business only in entities that can convert real estate interests into personal property interests.  For example, a corporation could own a house, and sell its shares rather than the house.  The same goes for a Partnership, LLC, or Trust.  Ditto for selling an Option to buy a house on an installment sales contract.  Doing this would make it possible to “repossess” a house quickly without delay versus foreclosing it.  Moreover, none of these sales would be covered by a law such as House Bill 1787.  It seeks to limit the ability of an entrepreneur or homeowner to sell and to carry back financing on more than one residential real estate mortgage every 36 months.  But note: The sale, under an installment contract. of personal property in the form of a share of an entity share or Option is governed by the UCC.  This isn’t dealt with in the proposed HR 1787.

          Another approach is to fight fire with fire by writing letters to your Representative or Senator to protest, or to hire your own lobbyists to influence proposed legislation before it gets made into law.  This approach is being used to try to enable dealers with unsold inventory to be able to offer attractive financing terms without the need for cash or credit on the parts of the buyer.  Instead of being taxed on profit up-front as if they had received cash, dealers would only be taxed on profit as it was received.  This would be a boon to thousands of sellers and buyers alike, and act as a spur on the economy.  

          To circumvent the problem, a wheeler-dealer might simply sell his inventory at with just enough profit to provide operating cash flow, and retain an Option to buy it back at a slight profit from the person he sold to.  The buyer would get a real bargain, with a lower loan, lower insurance and taxes, and lower payments.  When the house was sold, or the Option was exercised, the occupant would get a small profit in addition to being able to live above his means.  The Option could be sold for an appropriate share of the profit, which would be taxed as long term capital gains.  Why?  Because, although he might have been a dealer in houses, he could also have been an investor in Options.  As such, he might even enter into a 1031 exchange and roll over his profit tax-free.

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