DAVID ARTHUR WALTERS
Miami Beach, Florida 33139
March 7, 2009
Senator Mel Martinez
Banking, Housing and Urban Affairs Committee
UNITED STATES SENATE
Washington, D.C. 20510-0906
Re: Suspend PAL Rules, Accelerate Depreciation
Your Honor:
Your staff sent me a form letter dated January 8 over your facsimile signature in response to my recommendation, which was apparently unread since not specifically responded to, to suspend passive activity loss rules for rental properties and to accelerate depreciation on same, which would, in effect, reinstitute the tax advantage that contributed to the boom in rental housing once wanted for urban development. A member of your staff informed me it was highly unlikely that you would hear of my recommendation unless it was brought to your attention by a very important person. I tried to contact George Soros to that end, but apparently he is also too busy to personally attend to the notions of a man on the street even though this man thinks Mr. Soros would be a savvier Secretary Treasurer than the esteemed man we now have in office.
The elimination of the so-called tax shelter for rental properties advanced certain vested interests whose advantage it was to promote the “ownership society” under such “home sweet home” pitches as “real estate is the basis of all wealth,” “your home is your best investment”, “it is cheaper to own than to rent.” Of course it is cheaper to own than to rent when real estate prices are being artificially inflated by credit expansion and contrived scarcity; that is, if you store your gains in a sound substance before inflated prices and/or the political-economic system collapses in a final reckoning – since a particular plot of Mongolian grazing land does not provide enduring subsistence, Mongolia nomads wander about as occasions demand, and it is difficult to persuade them to herd their livestock to Western-style slaughterhouses because their wealth is gauged by the size of their herds. Quite a few investors and speculators made fortunes on the turnover. But many of them, including titans such as Miami’s Jorge Perez as well as numerous small investors, were caught with their pants down when the lights came on.
Now that 20% of home loans are delinquent in your home state of Florida, making it ground zero for the nation’s foreclosure crisis, the dream of home ownership is turning into a nightmare for a multitude, including many thousands of proud homeowners who did not expect to profit monetarily on homeownership but simply wanted to enjoy the happiness and suffer the headaches associated with being their own landlords. Now it is estimated that homeowners owe more than $500 billion than their properties are worth, and that they will probably find themselves even deeper underwater unless something finally is done, such as authorizing bankruptcy judges to “cram down” the principal amount of the mortgage loans, with the banks and taxpayers-at-large sharing the burden of the discount.
A somewhat similar cram-down strategy was Mexico’s 1998 El Punto Final program, the government’s last shot at remedying the banking and housing collapse resulting from Mexico’s 1995 currency crisis. As you must know very well, since you are on the Banking and Housing Committee, Mexico’s initial mortgage bailout program, Acuerdo de Apoyo a los Deudores de la Banca, funded by the Fund for the Protection of Bank Savings, attempted to relieve the mounting burden by reducing mortgage payments, but it was discovered that payment discounts were an inadequate response to the rising default rate, and that borrowers’ decisions to cooperate in restructuring loans depended more on home equity considerations or the reduction of the balance owed than on the payment reductions offered. That is, the increasing default rate was rooted in negative equity. Wherefore El Punto Final was offered to share the cost of balance reduction of old loans with the banks, provided that they make new loans – old loan balances would be subsidized to the extent of one-third of the value of the new loans.
It is difficult to ascertain how effective El Punto Final was because of the complex changing circumstances and the dearth of data available for macroeconomic analysis due to Mexico’s informational opacity. But whatever the cause might have been, it is known that past due loans decreased from 17.6 percent of total loans in 1997 to 8.5 percent in 2000. However, the program did not restart bank lending as much as desired: bank credit contracted from about 19 percent of GDP at the end of 1998 to around 10 percent by the end of 2000. Finally, it is offered that the Mexican bailout programs created a widespread expectation that there would always be another bailout hence fostered a culture of irresponsibility. For further information on the pros and cons of El Punto Final and world banking crises in general, your committee may want to interview Professor Charles W. Calomiris of Columbia University.
If the El Punto Final model were employed north of the Rio Grande, it would have to be applied broadly, perhaps to subsidize over half the face value of the mortgage balances, hence the cost of the final residential bailout would be massive. It is with the masses in mind that I remind your good office of my suggestion to suspend PAL rules and accelerate depreciation on rental properties, so that investors who either have or expect profits in other sectors of the economy may shield those profits from taxes in return to their contributions to the cause of providing affordable shelter to American families.
Of course the falling home prices are a boon to people who could not afford the prices inflated by imprudent credit and monetary policies. We see a woman in Miami in tears because she bought a house in foreclosure for $65,000 – it is in a “bad” neighborhood, but it is her neighborhood and her new home is much better than the drug- and gun-infested housing project she lived in. A couple in Ft. Lauderdale, a janitor and a maid, were delightfully shocked when they picked up a foreclosed home for $55,000. A lady in Detroit bought a house for $1,200, which amounted to two months rent at her previous residence – she thinks Detroit will come back some day, and in any event it is her city. And so on and so forth. But we know there is ample grief on the other side of that extraordinary joy. Many of the aggrieved losers might have preferred to stay in their homes on a rental basis, perhaps with an option to buy.
The historian Arnold Toynbee stressed the notion that man needs a challenge to progress, to claw his way and get a leg up and over the current ledge of civilization – we certainly have such a challenge today, in the form of an economic “cyclone” that is so devastating that it seems to be more of an angry act of YHWH or of wild Nature than of man, so terrible already that some borrowers are actually invoking force majeure clauses in a rude attempt to back out of their legal responsibilities. As a pacific instead of militant Republican, you may believe that recovery from the Great Depression was due more to productive human innovation in the face of challenges than to the hackneyed explanations - monetary expansion and World War II. The principal innovations were in chemical engineering, electrical machinery and equipment, electric power generation and distribution, aeronautics, and civil-structural engineering, not to mention the advance of education during the Great Depression.
I notice that KB Homes in Los Angeles is responding to the housing crisis with “tiny homes for tough times”, 880 square foot new homes priced at $64,000, which allows KB to compete with foreclosed used homes. But more to my point, I notice that a few small investors have been buying homes at distressed prices and renting them out at a profit. Here in Miami, entrepreneurs are approaching financially distressed homeowners with offers to stall foreclosures and eventually restructure loans provided that reduced monthly payments are made to the entrepreneurs – no doubt some of those homeowners will discover that they have been conned out of their titles.
Why not provide legitimate, qualified investors with an incentive to buy properties in default and rent them out, the first option to rent going to the present occupant? Thus would the transition be less painful. And of course the “tax shelter” incentive I speak of would spawn new construction of rental units. At the very least, I believe it would behoove your committee to at least consider the suspension of PAL rules and acceleration of depreciation on rental properties.
Sincerely,
David Arthur Walters
empiricalpragmatics@yahoo.com
copy of previous letter:
http://davidarthurwalters.bravehost.com/foreclosure.html
