The “F” Word

It’s out. It’s not resetting interest rates that are the big factor behind the surge in home loan defaults YET. Most of the defaults happening today are for mortgages under a year old and so hadn’t even hit the two year reset mark. (Nationwide, more than half of the subprime delinquencies and foreclosures this year were loans that hadn’t reset.) Its not lending to people with poor credit scores. Nope, what we have here are loans made by lenders 1) without following prudent underwriting practices, like checking pay stubs for income verification, 2) by lenders creating ever more precarious mortgage products, and 3) some mixture of fraud. Fraud includes that by borrowers – who lied about their financial status - and lenders – who encouraged, aided and abetted the lies, while hiding the mortgage’s risky terms.

As Countrywide Financial Corp’s CEO was recently quoted, “Capitalism isn’t perfect.” Countrywide Credit is widely expected to file for bankruptcy.

Despite a lot of regulation in the banking industry, over 50% of mortgages are made by companies which are unregulated at the federal level. This reflects the fashionable bipartisan deregulation policies of the past 25 years.

If left to the market, resetting interest rates are going to push up defaults over the next eight months or so. This is true to a lesser extent in Vermont, where foreclosures through the first ten months of the year were 994, up 30% from a year ago, according to the Vermont Department of Banking, Insurance, Securities & Health Care Administration.

The state doesn’t have numbers on the number of mortgages which are due to reset in 2008-2009. One approach is to take the national average – about 35% of mortgages nationwide sold in 2005-2006 were adjustable rate mortgages – and apply that to the number of homes sold in 2005 and 2006. In 2005, 17,815 homes were sold, while last year 15,878 homes were sold, according to Vermont Realtors. That means that maybe there are maybe 11,800 or so adjustable rate mortgages in Vermont which will face increasing interest rates next year. Its not a huge number, but it could certainly spell trouble for the families and neighborhoods involved.

Foreclosure impacts everybody, the foreclosed family, renters and solvent homeowners, just in different ways. Foreclosed homes typically sell at a discount of 20-25% to other owner-occupied homes. This price drop drags down comparable prices in the neighborhood as the foreclosed home sales price is factored in. Renters can face eviction.

A few proposals being floated would limit the pain. The chair of the Federal Deposit Insurance Corp. is proposing that mortgage companies freeze interest rates on adjustable rate mortgages at the current rate to help borrowers avoid trouble. Essentially, this would convert the starter rate to a fixed rate. Banks will not be happy. Hey, if the “teaser” starter interest rate was good enough for the lending institution when it made the loan, it should be good enough for it for the life of the loan, no? A more tentative approach is being promoted by California Gov. Schwarzenegger who advocates freezing interest rates on certain adjustable rate mortgages for a period of time. Much more meaningful steps to protect homeowners and renters were taken during the New Deal, as in Canada today. What can and should Vermont policymakers do?

Wal-Mart Fights Paying Fair Share of Property Taxes

by James Parks
on AFL-CIO Blog:

A new report shows Wal-Mart—the world’s largest retailer, which made nearly $12 billion in profits last year—is squeezing money out of local communities by trying to reduce its property taxes, the main source of revenue for schools, roads, police and fire protection.

The giant retailer has sought to reduce the property taxes it pays on 35 percent of its stores and 40 percent of its distribution centers, according to a report by the nonprofit research group Good Jobs First. In fact, Rolling Back Property Tax Payments, estimates the company has filed more than 2,100 property tax challenges nationwide. Click here for the full text of the report. More...

VT Tax Study Info Debunks "Tax Burden" Myths

Vermont's Joint Fiscal Office published Vol. 2 of the Tax Study last week. It contains important information that helps debunk the mantra about VT having the highest "tax burden" in the country. By calculating tax liability for 24 different hypothetical filers in 12 states, they show clearly that VT's progressive income tax (and various sales tax exemptions) helps moderate the cost of taxes for most Vermonters. In the end, VT looks pretty good.

The media has done many stories about the so-called "tax burden" and routinely quotes those who refer to it as evidence of Vermont's anti-business attitude or to hype the Governor's "affordability agenda". Unlike the flawed per capita approach, the JFO study gets to the heart of the matter.

Doug Hoffer

Backdoor Electric Deregulation by “Political Suck-up Board”

Reprinting a comment by Traven at the Prog Blog:

CVPS wants what GMP has - “Alternative Regulation” - which may not use the deregulation word, but produces similar results. Effective earlier this year, GMP was granted permission to pass along the volatile wholesale cost of power to electric users. Under the alternative regulation scheme, GMP customers may see their electric bills change four to six times a year. No wonder CVPS wants deregulation, oops alternative regulation, too.

According to political appointee Riley Allen, director of planning for the Department of Public Service, whose mandate is to protect the interest of ratepayers, “The reality today is that wholesale (electric) markets are extremely volatile.” Certainly true, and reason enough as Californian’s found out years ago not to go there. In effect, under the new regulatory scheme, GMP will always know the wholesale prices it pays for electricity, but is protected from most of the price volatility. Electric users on the other hand will get a bill totally after the fact, when it is too late to reduce electric usage. It might not be so bad if electric users had real time price information and the ability to cut usage immediately. But we don’t. And so, those price spikes in natural gas prices and hot or cold weather will really hurt.

“Alternative Regulation” leaves GMP’s customers exposed to volatile prices. And its not just electricity use in Vermont that will drive the price GMP charges, but usage across all of New England. This is because electricity is priced and sold regionally. Think CT and Boston.

In its order allowing the alternative path to deregulation, the Public Service Board, or as renamed in Jeff Danziger’s cartoon, the “Political Suck-up Board”, stated that GMP’s new way to charge its customers for electricity would not set a precedent. Anybody want to make a bet?

Anemic Job Growth - New Policies Needed

Doug Hoffer comments on Monthly Jobs Report:

In the latest Dept. of Labor press release, the Commissioner stated, “job growth continues on its modest growth path [but] we continue to be concerned about recent downward trends in labor force and employment."

It's good that the Commissioner has acknowledged a problem. But a longer term perspective would lead one to characterize job growth as anemic, rather than modest. And it's not a recent trend. As the graph below makes clear, private sector job growth has been significantly lower in the last three years than in the 1990s. [Note: I focus on private sector job growth because state economic development policy is not directed to and has little impact on public sector jobs.]

Since the last recession, we've gained 7,700 private sector jobs. But 4,300 simply replace those lost during the recession, so it's a net gain of only 3,400 jobs in six years (and it appears we may be heading for another recession.

And while the Department's press release makes no mention of it, many of the jobs being created are low wage. For example, of the 4,200 net new private sector jobs since August 2004, 2,600 are in "health care and social assistance". While there are many good jobs in this industry, almost 4 out of 10 are in "social assistance" and "nursing and residential care facilities". The average wages in these two sectors in 2006 were $16,888 and $25,019 respectively.

Unfortunately, Vermont is not alone as the U.S. economy is experiencing similar problems, although Vermont's performance is considerably worse (since August 2004, U.S. private sector jobs increased 5.4% while Vermont has grown only 1.7%.

The point is that Vermont's economic development policies are not working. Perhaps that's not surprising since Vermont is so small and the forces at work are so large. But if the "tools" we're using are not sufficient to overcome those forces, why don't we look for new tools? At some point we have to ask the question: What are we getting for the tens of millions we spend each year on economic development?

Isn't it time to look objectively at all of our policies and programs and determine which are providing a good return on investment and which are not? And for those that are not performing, we should consider a range of alternatives. Only then can policy makers determine how to allocate our limited resources wisely.

Inequality Growing Faster in New England

Rich & Poor

Rutland Herald editorial: "...It is not an accident of nature that our economy has worsened the economic plight of a majority and enriched the very richest. It is how our policymakers have designed the system. The question is how much longer the majority will allow those policies to widen the gap between rich and poor." Read More...

"Between 1989, when inequality in the region was low, and 2004, inequality rose faster in New England than anywhere else according to a report by two economists from New Hampshire in a publication of the Federal Reserve Bank of Boston."

Truth & Taxes

On yesterday's "Vermont This Week" (9-7-07), Mr. Roper (chair of the VT GOP) said that "the biggest expense that Vermonters are facing right now is the cost of their taxes".

That is inaccurate. A simple calculation shows that for a median income family with a median priced home, state & local taxes represent about 6% of their household budget, while transportation, housing, and food are all more than 13% each and health care is another 10% (even assuming an employer contribution). [Note: Sales taxes were not calculated separately but are typically 1% - 2% of gross income).

Using data from the VT Tax Department, the net school tax would be about 2.4% of gross income; state income tax 1.9%; and non-education municipal tax 1.6% (avg. statewide). Although not insignificant, do these look like "the biggest expense that Vermonters are facing right now"?

Elected officials, candidates, and their spokespersons should be held to a high standard for accuracy and truth. And reporters should not simply allow such falsehoods to be repeated. Mr. Roper's statement should be corrected.

I suggest that VPT, WPTZ, and other major media outlets seriously consider a regular feature (especially during campaigns) that examines such statements and report when they are found to be inaccurate or misleading.

We expect elected officials, candidates, and their spokespersons to engage in spirited debates about the issues. But voters deserve to know the truth. Some might argue that rival campaigns should respond in such cases. But how are voters to know the difference between opinion and fact unless the media holds them accountable? With respect, I always thought that was part of the job.

Doug Hoffer

To the editor, Reformer:

Re. your recent article on the proposed income tax for education ("Income tax plan weighed; panel seeks to fund education system", Reformer Aug. 21, 2007).

The article quoted the Governor's spokesman Jason Gibbs saying that shifting to an income-based system would discourage businesses from relocating to Vermont, thereby "undermining Vermont's economic security."

It would be helpful if Mr. Gibbs would provide evidence to support that assertion. Other than self-serving anecdotes from certain business advocacy groups, there is no data to back up their claims. Indeed, the academic literature has found consistently that state taxes are a very small part of business costs and that they have little impact on location decisions.

Furthermore, an income tax for education would not be an additional tax; it would simply replace the property tax.

For those interested in the subject, I suggest you read Vol. 1 of the Tax Study published by the Joint Fiscal Office. On page 58, it shows that 46% of the largest multi-state and multi-national firms operating in VT paid only $250 in corporate taxes in 2003. Does that sound like a burden to you?

As for the personal income tax, much is made of the fact that Vermont has a high top marginal tax rate. But only 1% of all filers pay at that rate, which only kicks in for earnings over $336,550. I wish I had such problems.

Opinion is one thing, but when people make statements that purport to be factual and have no basis, that's just dissembling and demagoguery.

Doug Hoffer