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National Finances cont

National Finances cont

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National Finances cont

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  1. National Finances cont

  2. Federal Expenditures $13 trillion in federal deficits projected for the next 10 years

  3. The Debt Limit: History and Recent Increases (CRS) • Total debt of the federal government can increase in two ways. • Debt increases when the government sells debt to the public to finance budget deficits and acquire the financial resources needed to meet its obligations. This increases debt held by the public • Debt increases when the federal government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases debt held by government accounts. • The sum of debt held by the public and debt held by government accounts is the total federal debt. • Surpluses generally reduce debt held by the public while deficits raise it.

  4. Insurance and Financial Regulatory Reform inthe 111th Congress (CRS) • In the aftermath of the recent financial crisis, broad financial regulatory reform legislation has been advanced by the Obama Administration and by various Members of Congress. • Under the McCarran-Ferguson Act of 1945, insurance regulation is generally left to the individual states. • For several years prior to the financial crisis, some Members of Congress have introduced legislation to federalize insurance regulation along the lines of the regulation of the banking sector, although none of this legislation has reached the committee markup stage

  5. Subsidies – Welfare? • Earmarks (Office of Management and Budget) • Obama's Earmark Reform Promises Can Help Restore Federal Budget Discipline (Heritage Foundation) • Earmarks in the Federal Appropriations Process (Harvard Law School) • An agricultural subsidy is a governmental subsidy paid to farmers and agribusinesses to supplement their income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities. • Wheat, feed grains - such as maize, sorghum, barley, and oats - cotton, milk, rice, peanuts, sugar, tobacco, and oilseeds soybeans • The Concentration of U.S. Agricultural Subsidies (Iowa State University) • Hass Avocado Research and Promotion Plan (USDA Agricultural Marketing Service)

  6. Federal Trust Funds • Federal Debt and the Commitments of Federal Trust Funds (CBO) • Social Security (Wikipedia) • Misleading the Public: How the Social Security Trust Fund Really Works (American Heritage Foundation) • The Highway Trust Fund (Federal Highway Administration) • The Federal Excise Tax on Gasoline and the Highway Trust Fund: A Short History (CRS) • Wildlife and Sport Fish Restoration Programs (US Fish and Wildlife Service)

  7. FAA Budget FY 2003 • 76% from the Airport & Airway Trust Fund 24 %  from the General Fund • The Airport and Airway Trust Fund supported by the following taxes on aviation users • 7.5% passenger ticket tax - $4.2 b • $3.10 passenger flight segment fee (does not apply to passengers departing from a rural airport <100,000 passengers per year) - $1.8 b • 6.25% freight waybill tax - $422 m • $13.70 international departure and arrival taxes - $1.3 b • 7.5% frequent flyer award tax - $147 m • Aviation fuel taxes - $711 m • 4.3 cents on commercial aviation • 19.3 cents on general aviation gasoline • 21.8 cents on general aviation jet fuel

  8. Federal Income

  9. Income (Tax Policy Center) Internal Revenue Service • Forms and Publications Internal Revenue Code (26 USC) Internal Revenue Regulations (26 CFR) Individual Income Tax (Cornell University) Income Tax (Wikipedia) Payroll taxes, which finance the Social Security and Medicare programs, have become increasingly important (in 1998 accounted for one-third of all federal revenues; employers and workers each had to pay an amount equal to 7.65 percent of their wages up to $68,400 a year - FICA) Tax on corporate profits (InfoPlease) Miscellaneous taxes - excise taxes

  10. Income tax on individuals (2008 45% of total federal revenues) • levied on the worldwide income of U.S. citizens and resident aliens and on certain U.S. income of non-residents • first levied in 1862 to support the Civil War • established the Office of the Commissioner of Internal Revenue to collect taxes and enforce tax law by seizing the property and income of non-payers or through prosecution • declared unconstitutional by the Supreme Court in 1895 because it was not apportioned among the states as required by the Constitution • the 16th Amendment to the Constitution in 1913 allowed Congress to levy an income tax without apportionment • except during World War I income taxes remained a relatively minor source of federal revenue until the 1930s

  11. during World War II, the modern system for managing federal income taxes was introduced, income tax rates were raised to high levels, and became the principal source of federal revenue • in 1943, employers were required  to collect income taxes from workers by withholding certain sums from their paychecks, a practice  that streamlined collection and significantly increased the number of taxpayers • <Federal government – income taxes • <State governments - sales and excise taxes> also federal funds • <Local governments - property taxes> also state funds

  12. Debates about income tax • Appropriate overall level of taxation • decided during budget negotiations • the government has run deficits, spending more than it collected in taxes, during the 1970s, 1980s, and the part of the 1990s • most Democrats are willing to tolerate a higher level of taxes to support a more active government • most Republicans generally favor lower taxes and smaller government

  13. Debates about income tax • How graduated, or "progressive" the tax should be • in general the income tax has been progressive - tax rates are higher for people with more income • most Democrats favor this - arguing that it is only fair to make people with more income pay more in taxes • most Republicans believe a progressive rate discourages people from working and investing, and therefore hurts the overall economy and therefore favor a more uniform rate structure,  some even suggest a uniform, or "flat," tax rate for everybody • some economists - both Democrats and Republicans - have suggested that income tax should be eliminated and replaced with a consumption tax, taxing people on what they spend rather than what they earn • flat tax (Wikipedia)

  14. Debates about income tax • How the tax should be used to promote social objectives • Congress has created various exemptions and deductions from the income tax to encourage specific kinds of economic activity – first time homebuyers (National Association of Home Builders) • Individuals are allowed to subtract from their taxable income any interest they must pay on loans used to buy homes – mortgage interest payments (IRS) • Lower - and middle-income taxpayers can shelter from taxation certain amounts of money that they save in special Individual Retirement Accounts (IRAs) to meet their retirement expenses and to pay for their children's college education • The Tax Reform Act of 1986, perhaps the most substantial reform of the U.S. tax system since the beginning of the income tax, reduced income tax rates while cutting back many popular income tax deductions (the home mortgage deduction and IRA deductions were preserved, however)

  15. Excise Taxes • Specific good - such as gasoline and cigarettes - often included in the price of the product • alcohol (Taxpayer Relief) • sales of luxury passenger vehicles (Michael Gray CPA) • air transportation tax (IRS) • Specific activities - gambling or on highway use by trucks • Tax Foundation

  16. Corporate Taxes (IRS) Corporate taxes in the United States (Wikipedia)

  17. Acquiring a Residence United States Housing Bubble (Wikipedia)

  18. Domestic Federal Policy Rethinking Federal Housing Policy (American Enterprise Institute) Federal Housing Policy and Preservation (Fannie Mae Foundation) The Housing Finance System and Federal Policy (Congressional Budget Office) A New Generation of Federal Housing Policy (Brookings Institute) Housing policy in the United States: an introduction (Book Advertisement) Congressional Oversight Panel Releases Oversight Report on Foreclosure Mitigation ( Who Regulates Whom? An Overview of U.S. Financial Supervision (CRS, February 24, 2009) US Housing Crash Continues ( National Association of Home Builders National Association of the Remodeling Industry

  19. Real Estate (Ilyce Glink) All about mortgages (Freddie Mac) Mortgage Glossary (HUD) Mortgage A loan secured by a legal interest in real property, commonly the fee title Most often made to enable individuals or corporations to acquire that interest The most common means of financing the purchase of real property The borrower conveys the interest acquired in that real property to the mortgagor as security for the loan, in effect creating an encumbrance, a mortgage lien Most made by financial institutions; mortgage companies, banks, or savings and loan associations Virtually anyone, including individuals, may make a mortgage loan – contract for deed

  20. Mortgage • Comprises two necessary contractual elements • A debt - a financial institution lends money to individuals who possess an interest in real property • A consideration for the debt • The debtor, conveys a “security” interest to the creditor  • This "security" interest simply backs up, or collateralizes, the financial obligation incurred by the landowner – the value of the structure • The legal document describing the mortgage is a mortgage deed – usually recorded in the county courthouse • Along with this document is a promissory note in which the details of how the mortgage will be repaid are spelled out – the monthly payment of the principal and interest – called an amortization schedule – not normally filed for public record

  21. Terms of Mortgages • Vary greatly in terms of • the amount of money loaned - the principal • the rate of interest • the period of time for the repayment - amortization schedule

  22. Terms of Mortgage • Fixed rate mortgages - the interest rate on the mortgage loan is fixed for the life of the loan • Adjustable rate mortgages (ARM) - the interest rate is fixed for a specified period of time and then varies, usually within a minimum and a maximum figure • Home equity loans - second (junior) mortgageWells Fargo Home MortgageMortgage Bankers Association of America • Reverse mortgages - the owner sells a real property interest to a financial institution and receives a monthly sum of moneyNational Center for Home Equity Conversion Mortgage • Minnesota Association of Mortgage Brokers • Minnesota Mortgage Chart

  23. Types of Mortgage • A. Conventional Mortgage • B. Guaranteed Mortgage – one in which an entity, such as a federal agency, guarantees, or insures, repayment of the mortgage loan in the event the homeowner is unable to pay • Since 1934, the Federal Housing Administration (FHA) has helped build and maintain healthy, prosperous neighborhoods, and expand opportunities for affordable home ownership and rental housing through insuring loans  • Consolidated into the Department of Housing and Urban Development's (HUD) Office of Housing in 1965, the FHA continued its core mission • HRA is the largest mortgage insurer in the world • Insuring mortgages

  24. HUD's Mortgage Insurance Programs HUD doesn't make loans directly but rather insures the loans made through an approved commercial lender - a bank, mortgage company, or savings and loan association When someone with a HUD insured mortgage can't meet the payments, the lender forecloses on the home HUD pays the lender what is owed, takes ownership of the home, and sells it at market value as quickly as possible Section 203b Mortgage Section 255 Home Equity Conversion Mortgage - Reverse Mortgages Section 203k Rehabilitation Mortgage Energy-Efficient Mortgage Program Section 248 Indian Reservations and Other Restricted Lands Title I Home Improvements

  25. HUD's Special Homebuying Programs Officer Next Door Teacher Next Door Public Housing Home Ownership programs Homeownership Vouchers Financing Manufactured (Mobile) Homes Faith-Based and Community Initiatives Other Federal Mortgage Insurance Programs Veterans Affairs Home Loan program USDA Rural Development Housing programs helps rural communities and individuals by providing loans and grants for housing and community facilities

  26. Sub-Prime Mortgages • A sub-prime lender is one who lends to borrowers who do not qualify for loans from mainstream lenders • Some are independent, but increasingly they are affiliates of mainstream lenders operating under different names – Well Fargo • Sub-prime lenders seldom if ever identify themselves as such • Their prices are uniformly higher than those quoted by mainstream lenders • A sub-prime borrower is one who cannot qualify for prime financing terms because of low credit ratings, insufficient income, purpose of loan, or property type • Sub-prime lenders base their rates and fees on the same factors as prime lenders • Rates are higher the lower the credit score and the smaller the down-payment • But the entire structure of rates and fees is higher at sub-prime lenders to cover the greater risk and higher costs of sub-prime lending

  27. Sub-Prime Mortgages Sub-prime lending costs are also higher because more applications are rejected and marketing costs are higher A higher percentage of sub-prime than of prime loans go into default The development of the sub-prime market has made mortgages, and therefore home ownership, available to a segment of the population that otherwise would have been shut out of the market Some borrowers who are eligible for loans from mainstream lenders end up in the sub-prime market Some borrowers cannot bear the financial burden of a mortgage Sub-prime lending (HUD) The risk in sub-prime (CNN Money)

  28. Mortgage Foreclosures • If the borrower is unable to repay the loan, the creditor is entitled to force the sale of the property through appropriate judicial proceeding defined by state law • The proceeds from such a sale, termed foreclosure, go towards satisfying the debt • If the sale proceeds are less than the amount owed, the creditor is usually entitled to bring a personal action against the borrower to make up for any deficiency • The borrower receives the excess if the sale proceeds are greater than the amount owed • How to avoid foreclosure (HUD) • Mortgage foreclosure ( • Sub-prime in Hennepin and Dakota counties (CURA Reporter, Spring 2005) • Residential Foreclosures in Minneapolis (Minneapolis)

  29. Government Involvement • Governments regulate many aspects of mortgage lending - foreclosure • Directly • licensing individuals - state • imposing legal requirements on participants in the transactions • lending by the government, by state-regulated banks or sponsorship of various entities – Minnesota Housing Finance Agency – MN affordable housing bank • underwriting – guaranteeing loans made by commercial banks – federal • Indirectly – regulating the participants in the financial transactions or the financial markets, such as the banking industry – federal and state

  30. Federal Government Involvement Fair lending statutes Equal  Credit Opportunity Act - prohibits discrimination in lending practices Fair Housing - prohibits discrimination in housing Truth in Lending - requires credit institutions to inform borrowers of the true cost of borrowing money (Wikipedia) including the interest rate and cost of all finance charges (origination fees, finder's fees, service charges, and "points") and three-day right of rescission Real Estate Settlement Procedures Act - buyers and sellers have full knowledge of all "settlement" costs - settlement, when the necessary deeds and the financial transactions are completed Community Reinvestment Act Itemized Deductions (IRS) Monetary Policy - the value of money and the Federal Reserve Board Federal Deposit Insurance Company

  31. Primary Mortgage Market • Loan origination by credit institutions • Commercial Bank • Mutual Savings Bank • Savings & Loans Association (Thrifts) - S & L Crisis (Wikipedia) Chronology (FDIC) • Credit Union • State Housing Agency • Mortgage Companies, often through a mortgage broker

  32. Once a mortgage is originated, lenders have a choice • to hold the mortgage in their own portfolios • to sell the mortgages to secondary market investors • When lenders sell their mortgages, they replenish their funds so they can turn around and lend more money to home buyers • September 2001, the total real-estate equity market in the United States was $372.7 billion • Pension funds held $144 billion

  33. Secondary mortgage market • This allows the banks to quickly recoup their mortgage money and originate other mortgages • The investors gain low-risk income at a higher interest rate (essentially the mortgage rate, minus the origination fees and other service fees) than they could gain from other sources • Mortgaged backed securities have grown rapidly in the last 10 years as a result of the wider dissemination of technology in the mortgage lending world • For borrowers this securitization process keeps mortgage rates almost artificially low, since the pools of funds used to create new loans can be refreshed quickly allowing rapid flow of capital from investors to borrowers

  34. Secondary Mortgage Market • The market in which existing mortgages and mortgage-backed securities are traded • Institutions that purchase mortgages from originators and sell them to investors • Ensure mortgage funds are available to primary lenders • A mortgage backed security is a security based on a pool of underlying mortgages • Usually based on mortgages that are guaranteed by a government agency for payment of principal and a guarantee of timely payment • History of Secondary Mortgage Market

  35. Secondary mortgage market Mortgage lending is a major category of the business of finance Mortgages are commercial paper and can be conveyed and assigned freely to other holders In the U.S., the federal government has created several programs, actually government sponsored entities, to foster mortgage lending and housing construction and thus encourage home ownership • the Federal National Mortgage Association (Fannie Mae) • the Federal Home Loan Mortgage Corporation (Freddie Mac) These programs work by buying a large number of mortgages from banks and issuing (at a slightly lower interest rate) "mortgage-backed bonds" to investors, which are known as Mortgage Backed Securities – IOUs secured by a pool of mortgages Wide range of investors – money managers, insurance companies, thrift institutions, commercial banks, trust departments, pension funds, securities dealers and private investors

  36. Secondary mortgage market • Mortgage assigned to another legal entity - who thus invests in the underlying value of the property and the financial ability of the borrower • Insurance Companies • Pension funds – retirement funds • Mutual Funds – retirement funds • Real Estate Investment Trusts (Securities and Exchange Commission) • When homeowners are unable to pay the mortgage ………