sources have nowthat the Obama Making Home Affordable Program is . This is really no surprise since so many people are unemployed and many others simply do not want to continue payments on a debt that is much larger than the underlying asset.   The actual amount of people that could stick with a modification is quite small.   In response to the poor conversion rate of HAMP, the clownshow is continuing in congress and it is highly likely that unemployed folks will soon get taxpayer’s money to directly pay for their mortgages.  Is this really the best idea?

The provision I am talking about is embedded in the ginormous that recently was passed by the House.  The plan is a authored by Congressman Chaka Fattah.  It is based on a Pennsylvania program Fattah created a couple decades ago called .   The way it works in Pennsylvania is that before a homeowner is foreclosed on, they get a notice from the lender that tells them they can apply for the HEMAP program.  Then if they qualify for the program they are given another loan that is worth up to 24 months of mortgage payments or $60,000, whichever is smaller.  The HEMAP program determines whether or not the borrower can repay the loan in 24 months, and they consider many things including job skills and medical situation.  Once the loan is secured from HEMAP, the borrower starts paying HEMAP at least $25 a month and at most 40% of the borrower’s net income, and HEMAP pays the entire mortgage amount to the lender.  The HEMAP agency establishes a repayment schedule for the assistance loan, but if the borrower has enough equity and credit to the entire mortgage then the loan must be repaid in part or in full.

It is unclear what the final bill will look like in Congress, but if it is exactly like the Pennsylvania program it still might not do much good.  The main reason is that most people have no equity in their homes, so why would they get another loan to put themselves in further debt?  This is basically a shell game that uses debt to pay debt, and I don’t see how homeowners will benefit unless they have significant equity in their homes and just need a little help to tide themselves through a period of unemployment.    There are definitely people in this category, but they might do better to just get the money from friends and family, and the truly responsible folks would have an emergency fund that they could use.  I also could not find much information on the default rate of the HEMAP loans in Pennsylvania, so it is unclear just how “successful” it is for the taxpayer, but I guess the government is just planning to spend TARP money, and that is not real money to the congress people anyway.  What do you think?  Does it make sense to directly pay for the mortgages of those facing foreclosure?

In the last couple days at the campuses of the University of California.  They are waving signs such as “Don’t take our education away”, and “affordable education for all”.  As an alumna of UC Berkeley, here is what I think about the issue.

First of all, I think that these students are just unlucky to be attending the UC system during the worst recession in several generations.  The California government operates on boom and bust cycles.  If you look at the historic tuition in the UC system, you will see that tuition has actually  gone down before in the late 90s because the economy was booming.  When I attended UC Berkeley in 2001, I was actually paying less than a student who attended in 1994 if you account for inflation.  In fact, I met an alumnus who graduated in the early 90s later on at an internship and he was really surprised that my tuition was just a little bit above his.  Basically, I was lucky and graduated before the major fee increases started.  The fact of the matter is that the state spends everything they have got when they are flush with money, and pretty much falls flat on its face when it is without money.  Right now, the state is just flat out broke.  The biggest problem here is that the tuition was not raised incrementally, and now the 32% increase is felt particularly hard by this group of students.  This is not the fault of the universities, but the state government in charge of the money.

Now, are the schools still affordable?  As of now, I think the UC tuition of approximately $10000 per year is still quite affordable if you compare how much an equivalent education at a private school costs.  UC Berkeley still has the top ranked engineering school in the country, and $10,000 a year is much less than $36,000 at MIT.  Similarly, the other UC campuses have some of the highest ranked programs in the country, and still cost 1/2 or  1/3rd of many private schools.  I actually think that the UCs were just too damn cheap for what they offer.  Even now, I think tuition at an UC would be less than what I will spend on childcare next year and I am not waving a sign that says “affordable childcare for all”.   Considering that UC graduates get paid comparable salaries as graduates of the ivies,  I still think that the UCs offer a great bang for the buck.

What really concerns me is that a lack of money could decrease the quality of the UC system.  If great professors, academics, and researchers no longer wanted to work at the UCs due to all the salary cuts and furloughs and the high cost of living in California then the education of many future young Californians will suffer.  I have no idea how much the schools will cost in 18 years when my baby goes to college, but if the quality of the schools go down then they might not be worth what they are charging. Perhaps in 18 years California will be in another boom cycle and the tuition will go down?

If you have not heard, the monstrous 2000 page healthcare bill has passed in the House.  It will be debated in the Senate soon, but chances are it will pass in some form.  I am not going to go on about all the things that are wrong about it because that will take too long.  Instead, I will write about who could save money if this bill passes.

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 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 pfizer viagra impotenceagainst 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 and does not do anything at all to improve the quality of healthcare in this country.

CNN recently ran to purchase a home.  I found the slideshow to be pretty interesting because it featured a good diversity of people, but quite a few of the examples were from California.  Here is a breakdown of the slideshow and my comments.

First,  there is a family of four from Adelanto, CA that is buying a home for $72,000.  Obviously for this family the tax credit is  a great deal.  They can only claim $7,200 because that is 10% of the price of the home, but hey, it is free money.  They are still waiting for approval on their purchase, and I hope they get it because it seems like an awesome deal for a 4 bedroom house.  However, the story indicates that they would have bought the house with the credit or not because they needed a new home and the price was right.

Next, there is a single woman from Michigan  who bought a $115,000 home for herself.  From the description she gave it seems that she has a good head on her shoulders and she has been saving for a downpayment.  This person also said that she would have bought the home anyway, and the $8,000 is really a bonus to her.  I think that is great for her, but this means that the stimulus did not really spur an additional sale here.

The next couple is actually from San Mateo County.  They bought a $750,000 home in San Carlos with an FHA loan.  This means that they put down 3.5% and their loan is somewhere around $723,000.  At 5.5% this is a mortgage of around $4100.  Throw in property taxes and that’s another $600 a month.  They will be paying pretty much all interest to begin with and  it definitely does not cost $5000 a month to rent a three bedroom in San Carlos.   This story makes me worry a bit because this couple is planning a wedding and they said that the $8000 tax credit is saving them.  If you do the math, $8000 is  1.06% of their purchase price.  Honestly $8000 would not even cover their closing costs on this purchase so it would seem that perhaps they are buying too much.  The story did indicate that they felt rushed into the decision because of the tax credit, and I don’t know if that is a good thing.

The next couple is from Baltimore and they purchased a $119,000 home that they fixed up with the tax credit and other grants for historic homes.  Again, I think in this case the $8000 is significant enough that it makes a lot of sense.

Another local couple from San Francisco is up next.  They got a $550,000, 2200 square foot home in San Francisco.  This is actually a pretty good deal if it is in a good area of San Francisco.  They used the $8,000 to partially pay for a $12,000 roof.  They indicated that they waited to buy their home because they heard that a refundable credit was coming out, but once again, $8000 is just a drop in the bucket for their purchase.  It’s great that they were pay for 2/3rd of their roof, though.

The next couple took advantage of the fact that     Essentially they got a 0% down loan from the government.  The home is $257,000 and they could not save up $9,000. It also seems that they got an adjustable loan?  In this case their only equity is the $8,000 tax credit,  so it was definitely crucial in their purchase decision.

The next guy also used the tax credit as a downpayment, but he bought a triplex and is renting out two units to pay for most of his mortgage.  So basically he became a little landlord on the dime of the US government.  That is a awesome deal for him and I hope he does well.

In conclusion, I would say that most of these folks would not have purchased a home this year if the tax credit weren’t there.  The two groups that used the tax credit as a downpayment could not have afforded what they bought.   In the two Bay Area  cases where the purchase prices were $550,000 and $750,000 the $8000 really was just a drop in the bucket so I feel like they shouldn’t have based their purchase decision solely on the credit.  Anyway,  it is nice to see that some people are able to take advantage of this in a smart manner even though I find it ironic that the government is giving out 0% down loans on one hand and wagging a finger at the “greedy bankers” with the other hand.  Honestly  I cannot wait for this credit to expire so that the housing market returns to normal.

Earlier this year , but now it seems that our income taxes will go up a little bit once again. This time it is due to deflation and it is not widely publicized.

This change will pretty much affect everyone who pays any income taxes because tax brackets are being pushed lower due to deflation.  you can see how the brackets are changing this year.    For us the increase will be around $150 on top of the extra 0.25% we are already going to pay.  It is not a huge deal, but it is interesting because this instance of lowering the tax bracket is very rare.

On the flip side, it is possible that next year.    This depends on the California Consumer Price Index numbers in October.  If this happens then Californians may see their property taxes go down a little bit, but it is also not significant considering that the deflation number is around 0.7% right now.  So on a $300,000 assessment with a 1.1% property tax rate, the 0.7% deflation will save a homeowner around $23 for the entire year.

I don’t think most Californians will feel the tax changes due to deflation, but it is possible that deflation could affect federal tax brackets next year, too.  Additionally, the IRS uses annual CPI to figure out limits for things such as IRA and 401k contributions, so those limits may not increase.  Although the deflation rate is quite small now, it is definitely something to keep an eye on.