First of all, this bill is going to require everyone to buy  government approved health insurance or face a penalty from the IRS.  For individual tax payers, the penalty is   2.5% of gross pay.  For businesses, the tax penalty is 8% of a worker’s pay if the business does not pay for at least 72.5% of the worker’s health insurance premium.  There are also significant government subsidies for those who make under a certain income level to pay for premiums.

Additionally, there will be cuts to FSA and HSA plans and insurance companies will no longer be able to charge more premiums for preexisting conditions.  Also, the premium difference between the young and old will be lessened greatly.  The House bill says that the premium of an elderly person cannot be more than twice than that of a young person.  So essentially these changes will raise the price of health insurance for the young and healthy and punish those who try to save for their own medical expenses.

So what should the young and healthy do if this bill passes?  First of all, stay healthy.  Next,  if employed, ask the employer to give whatever they pay for your health insurance as a part of your pay instead if your employer is paying significantly more than 8% of your pay in health insurance premiums.  You will have to pay the 2.5% in tax penalty, and your employer will have to 8%, but you will have more cash in your pocket.  If you do get sick you will still be able to get insurance since the law basically says that everyone will be able to buy the same basic coverage regardless of preexisting conditions.

How do the numbers work out?  Here is a reference table from the Congressional Budget Office that shows how much the average health insurance premiums would be under the new plan for people in different income levels.  For a single person making around $38,000 a year, the estimated premium is $6100 a year, or 16% of income.  Suppose that this person is young and healthy and  simply pays for the tax penalty the cost is only $950 a year. Meanwhile, the person could save the difference.  Of course, right now this person pays no tax penalty, so the government is simply going to redistribute his or her money in subsidies for others.   If you look at the table, it seems that not a single income bracket pays less than 2.5% of their income for the premium, so even the poorest folks would do better to just skip health insurance while they are healthy, save the cash, and simply enroll when they do need to consume health care.  Of course, this will drive up health insurance premiums for everyone who is enrolled, and give more incentive for those who are enrolled to drop their coverage.

How does the math work out for employers?  Lets use the same employee making $38,000 as an example.  The employer is forced to pay 72.5% of the average premium of $6100, which is $4422.50  or  8% of 38,000 which is $3040.  Obviously, dropping the insurance is cheaper for the employer.  If the difference in cost were given to the employee directly then the employee still comes out ahead with more cash in his or her pocket.    When you go up in the income scale, the incentive is even higher to drop insurance.  For example, an employee making $102,000 a year with a family plan would cost   an employer around $15000 a year in insurance premiums or simply $8000 in tax penalties.  If the difference were given to that employee that employee would still come out ahead by several thousand dollars a year after the tax penalty.  That money could be used to pay for preventive care out of pocket.

Finally, lets examine why we have health insurance now.  It is to insure against future diseases  and healthcare consumption.  Your insurance doesn’t exactly buy you anything you can use right now.  For example, I was pregnant this year, and if I didn’t have health insurance to begin with  I would have had to pay quite a bit for the treatment I received.  Since pregnancy is a preexisting condition and I would not have been able to buy health insurance anywhere while pregnant.  Now if the new law passes, I could buy health insurance while pregnant since it would be illegal to refuse insurance to patients with preexisting conditions.  This completely changes the definition of insurance and makes it almost like a coupon program you can join at anytime.  Basically, your membership fee is your taxes, and then you can pay a middle layer of insurance companies when you need health care.  So, there is really no need to carry expensive health insurance that covers everything  when you are healthy because you can enroll anytime.

If all the young and healthy knew how to do basic math, they would be dropping their health insurance and opt for more cash  pay as soon as this bill is enacted.  Fortunately (or unfortunately) for Congress most American public schools aren’t so great so many people would become new insurance company customers because they cannot figure out that 2.5% is less of a penalty than the 15 or 16% they would be required to shell out.    I don’t know if this healthcare bill would actually raise the percentage of people who are insured because a lot of people out there do have common sense, and businesses will figure out that the 8% penalty is much less than what they would be required to pay otherwise.

So could you save money with Obamacare?  You probably can if you have a preexisting condition and need to consume a lot of health care.  On the other hand, this will cost a lot more for those who are young, healthy, or make too much money.   In the end, it is just another program to expand government and does not do anything at all to improve the quality of healthcare in this country.

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In all honesty, I don’t think things have improved much in the past 12 months.  Sure, the stock market has regained ground, but it is mostly due to the fact that the US dollar has lost value.  That is not really a good thing for those who get paid in US dollars.   Unemployment and foreclosure are still going up so it is no time to celebrate the end of the recession yet.  The good news is that there are a lot of shopping, restaurant, and travel deals for the consumer this holiday season because everyone is trying to sell something to someone out there.  This is definitely a good time to save money on the things you need and enjoy.

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When CNN featured this gallery of people who went through foreclosure, my friend said to me, “Are we supposed to feel sorry for these people?  I want to punch them in the face, with the exception of the guy that became disabled”.  I thought the most egregious example of a deadbeat out of the four families is the third one here.  This is  a guy that obviously knew that he was walking away as a financial decision.  He actually said that he “landed on his feet in just about every way”.

Here is another guy that my friend would like to punch from the article titled “Mortgage-modification program questioned, protested. “

“The government cannot do anything to make Rafael Aponte’s home affordable.

Aponte has been unemployed for three years since being laid off after 17 years at National Display Co. That is how long he has owned his Northern Liberties rowhouse, now in foreclosure.

Protesting near the National Constitution Center, where a congressional panel yesterday tried to gauge the progress of homeowner-rescue programs, Aponte said his lender had agreed to modify his mortgage, then had withdrawn the offer.

“They said that without a job, how could I pay even that?” Aponte said. “They’re right, but it isn’t fair.” “

I thought that this article was hilarious since the guy admitted that the bank was right that he couldn’t pay, but still complained that it’s unfair.  The article actually went on to say that the mortgage bailout money should have been given directly to the borrowers.  Seriously? I say thank God now that there are banks that are smart enough to deny loans that they know wouldn’t be repaid.  Another precious quote from the above article is the following:

“Getting a homeowner’s DTI [debt-to-income] ratio to 31 percent won’t help the unemployed, since 31 percent of their income is zero,” said Paul Willen, a senior economist and policy adviser at the Federal Reserve Bank of Boston.

This made me laugh pretty hard, too.  When did you learn that 0 multipled by  anything is 0?

If my friend were to be face to face with these folks, I am sure he wouldn’t actually punch them in the face, even though someone needs to knock some sense into them.  What we are frustrated about is that many of these foreclosees are painted as victims in the media and coddled like innocent babes by the politicians.  Yes, the economy is in the pits right now, and many people are unemployed, but that is not an excuse to throw away personal responsibility.   If the government continues to bully banks into making loans to people who they know have no intention or ability to repay those loans, then this situation will not get better.  Unfortunately, that is still what I am seeing.  The banks are still portrayed as the ultimate villains that aren’t helping enough homeowners in trouble.  The truth of the matter is that a lot of these folks intend to walk away from a vastly depreciated asset anyway, and the modification efforts will just give them a few more months of free housing.

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The article suggested that the effect may be regional because most Asians in America live in California, which is one of the states hardest hit by declining prices and the recession.  This is definitely a solid theory.  Asians are not immune to job losses and for many families the loss of even one job means that the  next mortgage payment is no longer affordable.  As I wrote in this article about Chinese/Asian  immigrants and real estate, Asians often ignore the basic debt to income ratio guidelines to buy a home because they figure they will save money on everything else.  If two people were paying 58% of their income on a mortgage then one job loss definitely puts the nail on the coffin.  California currently has one of the highest unemployment rates in the country, and since the Asian community is concentrated here in California we are affected as a whole.

Next I think the speculative mania during the housing bubble was much more intense amongst the Asian community.  This is just my anecdotal experience, but my whole family and Indian coworkers talked about real estate pretty much 24/7.  These people mostly had significant amounts of savings for a downpayment, great credit, and all they were seeing is that the real estate market went up 20%  a year while stocks were not exactly catching up.   This prompted a lot of people to buy real estate that they did not even need.  Some of them intended to flip the properties quickly, and some became landlords with the intention to flip a bit later.   Another thing that spread the fire is that Asians talk about personal finance amongst family and friends very often so more and more people jumped on the bandwagon.  There are also folks who used their homes as ATMs to buy more property because they figured that they were  making a sound  investment.  For the most part, the Asians I have encountered that did all of these real estate deals knew exactly what they were getting into, and they were all sure that they were being smart about their money.  The phrase I heard the most often were that “real estate prices in the Bay Area will never go down” and “real estate is the best investment”.  I know that many non-Asian people did the same thing, but I feel that the Asian community got into real estate much more because owning real property is high on their priority lists.

Now after the crash, I actually do not personally know any Asian families that lost their homes.  I do know several that are fairly underwater, but they are still faithfully paying their debt because they are still employed.  Believe it or not real estate is still a really hot topic for my parents and their friends.  Now they are all talking about scooping up cheap properties as rental properties.  Now what I hear from my mom is similar to the following, “this property sold for $400,000 in 2005!  Now it’s 70% off! Positive cashflow!!!”.   I responded to her, “mom, remember when I told you a few years ago that real estate could come down by 40% and you didn’t believe me?”  She then said, “It’s more than 40% down!!”   I guess the obsession will never end.      Anyway, I wish them luck, and I hope some of the decline in homeownership was voluntary and not due to foreclosures.

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First of all, the FHA doesn’t make loans.  It simply insures lenders against losses on defaults.  This means that if a loan defaults completely, then the FHA is on the hook to make the lender whole.  The money it uses comes from mortgage insurance premiums that borrowers pay.  The current rate is 1.75% of the loan amount upfront, and some additional monthly insurance on 30 year loans.  The monthly mortgage insurance goes away when the borrower gains enough equity.  When you add it all together the premium is less than 3% of the loan.  The  borrowers will need a minimum downpayment of only 3.5%, and they can borrow up to $729k in high cost areas.  The problem with this whole scheme is that the lenders do not care if the FHA loses money because they will be compensated if things go wrong.  Since private insurers, Fannie, and Freddie tightened up their lending guidelines, the new subprime loans are practically all going to the FHA.  This has pushed the  mortgage loan  market share of FHA loans   from 2.7% in 2006 to 23% in the second quarter of 2009.

Basically, the FHA has taken on a vast expansion, and with that expansion it has taken on a lot more risk.  The 90+ late and foreclosure rate of FHA loans is now at 7.8% according to the Mortgage Bankers Association, and this is only expected to rise since those who take out FHA loans generally have very little downpayment, and their average credit scores are lower than the prime borrowers. Unemployment has not stopped rising and the economy isn’t totally recovered.    The FHA currently  insures about 5.2 million according to its website, and 7.8% means  that about 405,000 of these loans are practically lost.  Additionally, there are another 400 to 500k borrowers that have missed at least one payment.  Since the value of the FHA reserve funds are going to fall below 2% of the value of the insured loans, it is hard to imagine how the agency would cover all the losses when they come due unless all the loans that defaulted have balances much much lower than  the average loan.  It is pretty simple math when you think about it.

I really do not see how the FHA could build up its reserve fund in two to three years when the foreclosure rate of the loans it is insuring is not exactly decreasing.  The FHA is insuring many more loans than before, but those new loans are also defaulting and draining the reserve funds.  You have to remember that the insurance premium is very small, so in many instances the FHA is using the premiums from 20 to 30 homes to repay the lender for one default.  That is only sustainable if the default rate is very small, but a 30 day late rate of 17% is not exactly encouraging.

Anyway, the FHA does not expect to increase its insurance premium rates or downpayment limits, but it is requiring audits of the lenders that send loans to the FHA to prevent fraud.  I would have thought that those audits were already happening, but I guess not.  If the FHA really wants to decrease the amount of its defaults it would need to increase its downpayment limits so that people have more equity in their homes, but I don’t really see that happening.  Eventually this agency is going to need a bailout.  They may not call it a bailout, but I think it is pretty much inevitable unless the FHA changes course drastically.

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