Principles of Macroeconomics

1
Principles of Macroeconomics

• Economic Crisis

2
WHAT ARE WE DOING

• Fiscal Policy
• Monetary Policy
• Legislative Summaries
• Bush Tax Rebate 2008
• Obama Tax Credit
• TARP (Troubled Asset Relief Program)
• American Recovery and Reinvestment Act
• 410B Bill to Fund Federal Government
• Making Home Affordable Program
• Keynesian Multiplier Principle
• Bailouts

3
WHAT ARE WE DOING

• FISCAL POLICY
• Governments use of its spending and taxing
  powers
• Determined by the President
• and Congress for the national economy and by
  state legislatures

4
WHAT ARE WE DOING

• MONETARY POLICY
• Feds use of its tools to
• change interest rates and
• the money supply to
• influence credit conditions
• in the economy

5
WHAT ARE WE DOING

• MONETARY POLICY
• Given that interest rates are about as low as
  they can go, we will focus on the effects of
  fiscal policy to stabilize the economy

6
WHAT ARE WE DOING

• LEGISLATIVE SUMMARIES
• National Association of Tax Professionals
• www.natptax.com/tax_act_summaries.html

7
WHAT ARE WE DOING

• LEGISLATIVE SUMMARIES
• Summary of the American Recovery and Reinvestment
  Act of 2009 HR 1
• Summary of the Worker, Retiree, and Employer
  Recovery Act of 2008 HR 7327
• Summary of the Emergency Economic Stabilization
  Act of 2008, Energy Improvement and Extension Act
  of 2008 and Tax Extenders and Alternative Minimum
  Tax Relief Act of 2008 (HR 1424)
• Summary of the Housing Assistance Tax Act of 2008
  (H.R. 3221)
• Summary of the Heroes Earnings Assistance and
  Relief Tax Act of 2008 (H.R. 6081)

8
WHAT ARE WE DOING

• LEGISLATIVE SUMMARIES
• Summary of the Food, Conservation, and Energy Act
  of 2008 (AKA The Farm Bill)
• Summary of the Economic Stimulus Act of 2008
  (H.R. 5140)
• Treasury Department news release with examples of
  how the Economic Stimulus Act of 2008 will
  benefit Americans
• Summary of the Mortgage Forgiveness Relief Act of
  2007 (H.R. 3648)
• Summary of the Small Business Work Opportunity
  Act of 2007 (H.R. 2206)

9
WHAT ARE WE DOING

• Bush Tax Rebate 2008
• February 2008, Congress approved a 168B economic
  stimulus plan to help stave off economic
  recession
• Tax rebates for many citizens
• Citizens must have filed a 2007 tax return to be
  eligible for a rebate

10
WHAT ARE WE DOING

• Bush Tax Rebate 2008
• 600 for individuals with incomes of up to
  75,000
• Partial rebates for those earning 75,000 to
  87,000
• Couples 1,200 for those making up to 150,000
• Families additional 300 per child (up to age
  17)
• Partial rebates for couples making between
  150,000 and 174,000
• 300 for low income peopledisabled veterans,
  veterans' widows, senior citizens

11
WHAT ARE WE DOING

• Bush Tax Rebate 2008
• Impact of the 2008 Rebate August 15, 2008
  article by Christian Broda and Jonathan A.
  Parker, professors for University of Chicago and
  Northwestern University, respectively reported
• This spring, the US government handed out 100
  billion in tax rebates. Twentieth century
  economic thinking permanent income hypothesis,
  Ricardian equivalence, and the like suggests
  that most would have been saved, as Martin
  Feldstein recently argued. Not so. Recent
  research shows that the typical family increased
  spending by 3.5 when the rebate arrived,
  boosting overall nondurable consumption by 2.4
  in 2008Q2. The number should be 4.1 in 2008Q3.

12
WHAT ARE WE DOING

• Bush Tax Rebate 2008
• Early in 2008, in response to slowing economic
  growth, the US federal government enacted an
  economic stimulus package consisting mainly of a
  100 billion tax rebate program. By 1 July 2008,
  more than 70 million American households had
  received tax rebates of 950 on average. The hope
  of policymakers was that by putting money
  directly back into the hands of US households,
  they would increase spending levels and avoid (or
  at least mitigate) the severity of the slowdown.

13
WHAT ARE WE DOING

• OBAMA TAX CREDIT
• Refundable tax credit of up to 400 for working
  individuals and up to 800 for married taxpayers
  filing joint returns
• Phased out for taxpayers with modified adjusted
  gross income in excess of 75,000, or 150,000
  for married couples filing jointly

14
WHAT ARE WE DOING

• OBAMA TAX CREDIT
• Tax credit will appear April 2010 to offset the
  decreased tax withholding
• Cost estimate is 140 billion over the next two
  years
• Goal to increase consumer spending

15
WHAT ARE WE DOING

• OBAMA TAX CREDIT
• What is the difference between the Bush Tax
  Rebate and the Obama Tax Credit?
• Do you believe the effects will differ or will
  they be the same?

16
WHAT ARE WE DOING

• TARP (October 2008)
• Troubled Asset Relief Program
• Division A - Emergency Economic Stabilization Act
  of 2008 Division B - Energy Improvement and
  Extension Act of 2008 Division C - Tax
  Extensions and Alternative Minimum Tax Relief

17
WHAT ARE WE DOING

• Division A - Emergency Economic Stabilization
  Act of 2008
• 700B to US Treasury -- purchase or insure (ANY)
  troubled assets and to cover all administrative
  expenses of purchasing, insuring, holding, and
  selling those assets
• ANY troubled assets includes mortgages,auto
  loans, credit card loan portfolios, and school
  loan portfolios

18
WHAT ARE WE DOING

• Division A - Emergency Economic Stabilization
  Act of 2008
• US Treasury could bailout foreign commercial and
  central banks
• For example, Bank of Shanghai transfers its toxic
  assets to the Bank of Shanghai in Los Angeles
  which can then sell them to the US Treasury
• A provision to say if it wasn't owned by an
  American entity or even a subsidiary of an
  American entity, the Treasury could not buy it,
  provision was rejected

19
WHAT ARE WE DOING

• Division B - Energy Improvement and Extension
  Act of 2008 Provided tax incentives related to
  energy and fuel production and energy
  conservation
• CBO estimated that tax revenues would fall by
  6.8 billion, outlays would rise by about 0.2
  billion, and increase deficits by about 7
  billion

20
WHAT ARE WE DOING

• Division C - Tax Extensions and Alternative
  Minimum Tax Relief
• Extend AMT (alternative minimum tax) relief for
  2008
• AMT imposed 1969 to ensure the richest 155
  Americans paid some income tax of at least 26 or
  28 by getting rid of tax deductions that was
  lowered their tax rates

21
WHAT ARE WE DOING

22
WHAT ARE WE DOING

• Division C - Tax Extensions and Alternative
  Minimum Tax Relief
• Extend/modify other expiring tax provisions,
  provide tax relief for regions of the country
  affected by severe storms earlier in 2008, and
  provide payments to state and local governments
  for support to rural schools and other county
  programs
• Division C would reduce revenues by about
  105.2B, increase outlays by 7.1B, and increase
  projected deficits by about 112.3B

23
WHAT ARE WE DOING

• Division C - Tax Extensions and Alternative
  Minimum Tax Relief
• Division C, section 512 would impose a
  private-sector mandate on group health plans and
  issuers of group health insurance by prohibiting
  them from imposing treatment limitations or
  financial requirements for mental health benefits
  that differ from those placed on medical and
  surgical benefits

24
WHAT ARE WE DOING

• Does anyone notice that
• TARP (Troubled Asset Relief Program of October
  2008) contains many provisions that have nothing
  to do with troubled assets within the
  banking/mortgage industry ?

25
WHAT ARE WE DOING

• Return to Division A Emergency Economic
  Stabilization Act of 2008
• Created program to allow the government to
  insure, instead of buying, some troubled assets
  held by banks
• Established an oversight board to monitor the
  Treasury's use of funds

26
WHAT ARE WE DOING

• Return to Division A Emergency Economic
  Stabilization Act of 2008
• Increased FDIC Insurance from
• 100,000 per account to 250,000
• account until Dec. 31, 2009

27
WHAT ARE WE DOING

• American Recovery and Reinvestment
• Act of 2009
• Economic stimulus package that was passed by
  Congress on Feb. 13, 2009 and signed into law by
  President Obama on Feb. 17
• CBO estimates the cost as 787B over the
  2009-2019 period

28
WHAT ARE WE DOING

• American Recovery and Reinvestment
• Act of 2009 Summary
• Tax Relief and Tax Cuts 288 billion
• State and Local Aid 142 billion
• Federal Spending Programs 357 billion
• Total 787 billion

29
WHAT ARE WE DOING

• American Recovery and Reinvestment
• Act of 2009 Various Provisions
• 116 billion New payroll tax credit of 400 per
  worker and 800 per couple in 2009 and 2010
• 70 billion One year increase in AMT
  (Alternative Minimum Tax) floor to 70,950 for
  joint filers for 2009

30
WHAT ARE WE DOING

• American Recovery and Reinvestment
• Act of 2009 Various Provisions
• 1.7 billion Deduction of sales tax from car
  purchases, not interest payments, phased out for
  incomes above 250,000.

31
WHAT ARE WE DOING

• American Recovery and Reinvestment
• Act of 2009 Various Provisions
• 15 billion Expansion of child tax credit -- A
  1,000 tax credit to more families (even those
  that do not pay income taxes)
• How could a family not pay any federal income
  taxes?

32
WHAT ARE WE DOING

• American Recovery and Reinvestment
• Act of 2009 Various Provisions
• What is the difference between a tax credit and
  a tax deduction?

33
WHAT ARE WE DOING

• American Recovery and Reinvestment
• Act of 2009 Various Provisions
• What percent of US households pay Federal Income
  Taxes?
• What percent of US households do not pay any
  Federal Income Taxes?

34
WHAT ARE WE DOING

• American Recovery and Reinvestment
• Act of 2009 Various Provisions
• 14 billion Expanded college credit to provide a
  2,500 expanded tax credit for college tuition
  and related expenses for 2009 and 2010--credit is
  phased out for couples making more than 160,000

35
WHAT ARE WE DOING

• American Recovery and Reinvestment
• Act of 2009 Various Provisions
• 4.7 billion Excluding from taxation the first
  2,400 a person receives in unemployment
  compensation benefits in 2009
• 4.7 billion Expanded earned income tax credit
  to increase the earned income tax credit which
  provides money to low income workers for
  families with at least three children.
• 4.3 billion Home energy credit to provide an
  expanded credit to homeowners who make their
  homes more energy-efficient in 2009 and 2010.
  Homeowners could recoup 30 percent of the cost up
  to 1,500 of numerous projects, such as
  installing energy-efficient windows, doors,
  furnaces and air conditioners.

36
WHAT ARE WE DOING

• American Recovery and Reinvestment
• Act of 2009 Various Provisions
• 6.6 billion Homebuyer credit of 8,000
  refundable credit for all homes bought between
  1/1/2009 and 12/1/2009 and repayment provision
  repealed for homes purchased in 2009 and held
  more than three years. This applies to first-time
  homebuyersthose who have not owned a home in the
  last 3 years.

37
WHAT ARE WE DOING

• American Recovery and Reinvestment Act of 2009
  Various Spending Provisions
• Healthcare 148 billion
• Education 91 billion
• Environment 7 billion
• Energy 61 billion

38
WHAT ARE WE DOING

• American Recovery and Reinvestment Act of 2009
  Various Spending Provisions
• Aid to low income workers, unemployed and
  retirees (including job training) 83 billion
• Infrastructure Investment 81 billion
• Investment into government facilities and vehicle
  fleets 30 billion

39
WHAT ARE WE DOING

• 410 Billion to Fund Federal Government
• Infamous earmarks bill signed March 11, 2009
• OMB defines earmarks as
• Funds provided by the Congress for projects
  or programs where the congressional direction (in
  bill or report language) circumvents Executive
  Branch merit-based or competitive allocation
  processes, or specifies the location or
  recipient, or otherwise curtails the ability of
  the Executive Branch to manage critical aspects
  of the funds allocation process

40
WHAT ARE WE DOING

• 410 Billion to Fund Federal Government
• OBM reports that earmarks Include
• Add-ons, Carve-outs and funding provisions
  that do not name a recipient, but are so specific
  that only one recipient can qualify for funding

41
WHAT ARE WE DOING

• 410 Billion to Fund Federal Government
• Supposed to have been completed last fall, but
  Congress and President Bush could not agree
• 1,132-page spending bill that combines 9 spending
  bills to fund foreign aid and the annual
  operating budgets of every Cabinet department
  except for Defense, Homeland Security, and
  Veterans Affairs that were funded last year

42
WHAT ARE WE DOING

• 410 Billion to Fund Federal Government
• Independent watchdog group Taxpayers for Common
  Sense found 8,570 disclosed earmarks in the bill,
  worth 7.7 billion
• Only five senators did not add pet projects to
  the measure, including Republicans McCain, DeMint
  and Tom Coburn, and Democrats Feingold and
  McCaskill

43
WHAT ARE WE DOING

• 410 Billion to Fund Federal Government
• Numerous policy changes, including shutting down
  a program allowing Mexican trucking companies to
  operate beyond U.S.-Mexico border zones and
  easing rules on Cuban-Americans traveling to the
  island to visit relatives

44
WHAT ARE WE DOING

• 410 Billion Bill Provisions
• Increases many government agencies operating
  budgets 10 or more above fiscal 2008 levels
• One contentious item was the Washington DC school
  voucher program provides 1,700 low-income
  students with the equivalent of a 7,500 grant to
  attend a private school

45
WHAT ARE WE DOING

• 410 Billion Bill Provisions
• Increases for mass transit, public housing, the
  National Institutes of Health, Head Start and the
  Pell grant program
• The Food and Drug Administration would receive
  nearly 335 million more than it did in fiscal
  2008
• The supplemental nutrition program for women,
  infants and children, known as WIC, would grow by
  1.2 billion, a 21 percent jump from the 5.7
  billion appropriated last year

46
WHAT ARE WE DOING

• 410 Billion Bill Provisions
• 485,000 for a boarding school for at-risk native
  students in western Alaska
• 1.2 million for Helen Keller International so
  the nonprofit organization can provide eyeglasses
  to students with poor vision
• Dozens of state and local government money awards
  for police equipment and to combat methamphetamine

47
WHAT ARE WE DOING

• 410 Billion Bill Provisions
• 2.4 billion a 13 increase for the Agriculture
  Department
• 10 increase for the money-losing Amtrak
  passenger rail system

48
WHAT ARE WE DOING

• 410 Billion Bill Provisions
• Congress increased its own budget by 10,
  bringing it to 4.4 billion
• Provision denying lawmakers the automatic
  cost-of-living pay increase they are due January
  1, 2010

49
WHAT ARE WE DOING

• How did the recent decrease in household wealth,
  net exports, and business investment affect
  aggregate demand?
• What effects should expect from the Tarp Act, the
  American Recovery and Reinvestment Act, and the
  410B spending bill on aggregate demand?

50
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• Concept In the short run, for every dollarof
  increased government spending, real GDP/real
  Income will increase by a multiplied amount
• How would this occur?

51
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• Fiscal policy pursued by FDR to get us out of the
  Great Depression from John Maynard Keynes in the
  General Theory of Employment, Interest and Money
  written in 1936
• GDP contracted nearly 30
• Unemployment rose to about 25
• Did it work? Yes and No

52
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• By 1938, 6 million of the 14 million unemployed
  were back at work
• During the Great Depression, government spending,
  which at time represented about 10 of GDP,
  increased to establish many new programs for job
  creation and to put people back to work

53
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• What actually ended the Great Depression?

54
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• From 1939 to 1944, real GDP almost doubled and
  unemployment fell from 17 to 1

55
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• US government at all levels was about 10 of
  GDP prior to the Great Depression
• Percent rose after the Great Depression
• What is the size of US government in recent years?

56
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• Federal Government averages about 20 of GDP
• State and Local governments average about 15 of
  GDP

57
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• NOTA BENE (N.B.) Economists do not always
  agree
• Value of the multiplier is a source of
  disagreement and is particularly important given
  the magnitude of the current government fiscal
  policies

58
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• Robert J. Barro, Harvard economics professor and
  senior fellow at Stanfords Hoover Institution,
  on January 22, 2009 in Government Spending is No
  Free Lunch discussed the multiplier
• First assume that the multiplier was 1.0 an
  increase of one unit in government purchases
  would lead to an increase by one unit in real
  GDP. If the government buys another airplane or
  bridge, the economys total output expands by
  enough to create the airplane or bridge without
  requiring a cut in anyones consumption or
  investment.

59
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• If the multiplier is greater than 1.0 the
  process is even more wonderful real GDP rises
  by more than the increase in government
  purchases.
• Barro estimated a war-time multiplier of 0.8
  based on spending from 1943-1944

60
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• The war-based multiplier of 0.8 substantially
  overstates the multiplier that applies to
  peacetime government purchases when I attempted
  to estimate directly the multiplier associated
  with peacetime government purchases, I got a
  number insignificantly different from zero.

61
WHAT ARE WE DOING

• Keynesian Multiplier Principle
• Obamas economic advisers are assuming
  multiplier of 1.5
• Robert J. Barro and other economists believe that
  the multiplier is significantly less than one or
  about one and that we are invalidating
  everything we learned about macroeconomics since
  1936

62
WHAT ARE WE DOING

• BAILOUTS
• Freddie Mac and Fannie Mae Amount ?
• Conservatorship
• US Government controlled under the Federal
  Housing Finance Agency

63
WHAT ARE WE DOING

• BAILOUTS
• AIG 182B to date
• Partially owned by the US Government
• Paid out more than 160M in bonuses with 73
  employees getting 1 million or more

64
WHAT ARE WE DOING

• BAILOUTS
• 14 Banks sold stock to US Treasury 192 million
• Alpine Banks of Colorado 70 million
• Trinity Capital Corp (New Mexico) 35 million
• Spirit Bankcorp (Oklahoma) 30 million
• CBS Banc-Corp (Alabama) 24.3 million
• MS Financial Inc (Texas) 7.7 million
• Naples Bancorp (Florida) 4 million

65
WHAT ARE WE DOING

• BAILOUTS
• SBT Bancorp (Connecticut) 4 million
• Pathway Bancorp (Nebraska) 4 million
• Triad Bancorp (Montana) 4 million
• Clover Community (So. Carolina) 3 million
• CSRA Bancorp (Georgia) 2.5 million
• IBT Bankcorp (Texas) 2.3 million
• Maryland Financial (Maryland) 1.7 million
• Colonial American Bank (Pennsylvania) .6 million

66
WHAT ARE WE DOING

• BAILOUTS
• Is this all of the banks that have received aid
  from the US government?

67
WHAT ARE WE DOING

• BAILOUTS
• No, this is some of the small bailouts
• Union First Market Bank (Virginia) sold 59
  million in stock to the US Treasury

68
WHAT ARE WE DOING

• BAILOUTS
• And there are the credit unions ..
• US Central Corporate Federal Credit Union and
  Western Corporate Federal Credit Union are in
  conservatorship with 57B in assets

69
WHAT ARE WE DOING

• BAILOUTS
• Good News!
• Some large and small banks planning to repay or
  return bailout money

70
WHAT ARE WE DOING

• BAILOUTS
• Bad News!
• US Treasury March 23, 2009 announced it will buy
  up to 1 trillion in toxic assets through
  partnerships with private investors
• PUBLIC-PRIVATE INVESTMENT PROGRAM (PPIP)
• http//www.treas.gov/press/releases/reports/ppip_f
  act_sheet.pdf

71
WHAT ARE WE DOING

• BAILOUTS
• PPIP Provisions
• FDIC will create investment pools of toxic assets
• Auction the investment pools
• US Treasury will partner with the auction winners
  form public-private partnerships

72
WHAT ARE WE DOING

• BAILOUTS
• PPIP Provisions
• US Treasury example used a 6 to 1
• debt equity ratio
• Asset pool face value 100 sells for 84
• FDIC would provide a financing guaranty for 72
  of the debt
• Investor and US Treasury each pay 6 to create
  12 in equity for the 84 debt

73
WHAT ARE WE DOING

• BAILOUTS
• PPIP Provisions
• Private investor would service the loans using an
  asset manager with the responsibility of
  oversight who has been approved from the FDIC
• How much would the private investor have at risk?

74
WHAT ARE WE DOING

• BAILOUTS
• PPIP Provisions
• For MBS (mortgage backed securities) US Treasury
  will hire 5 asset managers who will seek private
  investors
• US Treasury will match equity for every dollar
  raised from investors

75
WHAT ARE WE DOING

• BAILOUTS
• PPIP Provisions
• Asset managers can get additional debt financing
  up to 50 of the equity in the asset pool
• US Treasury said in some cases, it might provide
  financing of up to 100 of the equity

76
WHAT ARE WE DOING

• BAILOUTS
• PPIP Provisions
• Asset managers would have complete discretion
  over the asset pools
• How much would an investor have at risk if they
  are able to finance 100 of their equity
  purchase?

77
WHAT ARE WE DOING

• BAILOUTS
• RETURN TO TARP -- Mortgage Goals
• Keep people in their homes
• Lower the default/foreclosure rates
• Allow banks and mortgage lenders to stay in
  business

78
WHAT ARE WE DOING

• BAILOUTS
• TARP Mortgage Provisions
• Cheaper fixed rates loans if lenders agree to
  take losses on their loans
• Mortgage could only represent 90 of the property
  value
• Avoid foreclosure, eliminate negative equity

79
WHAT ARE WE DOING

• BAILOUTS
• TARP Mortgage Provisions
• Mortgages up to 625,500
• Borrowers penalized if they re-fi or sell during
  the next 5 years
• 7,500 tax credit if single earning lt75,000 or
  married lt150,000 a yearto be repaid interest
  free over 15 years

80
WHAT ARE WE DOING

• BAILOUTS
• TARP Mortgage Goals
• Must live in the home
• Mortgage signed before January 1, 2008
• Mortgage payments must exceed your Gross Annual
  Income by 31

81
WHAT ARE WE DOING

• BAILOUTS
• 75B MAKING HOME AFFORDABLE
• Two separate programs
• Home Loan Refinance
• Home Loan Modification

82
WHAT ARE WE DOING

• BAILOUTS
• LOAN REFINANCE PROGRAM
• Available to 4 to 5 million homeowners with good
  payment history on an existing mortgage owned by
  Fannie Mae or Freddie Mac
• Normally, these borrowers would be unable to
  refinance because their homes have lost value,
  pushing their current loan-to-value ratios above
  80 percent

83
WHAT ARE WE DOING

• BAILOUTS
• LOAN REFINANCE PROGRAM
• Eligibility requirements
• Owner and occupant of a one- to four-unit home
• Your property loan is owned/secured by Fannie
  Mae or Freddie Mac
• At the time you apply, you must be current on
  your mortgage payments (meaning you have
  not been more than 30 days late in the last 12
  months)

84
WHAT ARE WE DOING

• BAILOUTS
• LOAN REFINANCE PROGRAM
• Must have sufficient income to support the new
  mortgage payments
• Owners can refinance up to 105 percent of the new
  value of the home
• This program will end in June 2010

85
WHAT ARE WE DOING

• BAILOUTS
• LOAN REFINANCE PROGRAM EFFECTS
• Reduce mortgage payments
• Borrowers paying interest-only payments or those
  who have a low introductory rate that will
  increase in the future may not see their current
  payment go down, but they could save a great deal
  over the life of the loan by avoiding future
  mortgage payment increases
• Refinancing will not reduce the amount that
  borrowers will owe on the loan, but helps
  borrowers get into more affordable loans

86
WHAT ARE WE DOING

• BAILOUTSLOAN MODIFICATION PROGRAM
• Help 3 to 4 million at-risk homeowners
• Reduce monthly mortgage payments to no more than
  31 percent of the borrower's gross monthly income

87
WHAT ARE WE DOING

• BAILOUTSLOAN MODIFICATION PROGRAM
• Working with the banking and credit union
  regulators, the FHA, the VA, the USDA and the
  Federal Housing Finance Agency, to pursue
  affordable and sustainable mortgage modifications

88
WHAT ARE WE DOING

• BAILOUTSLOAN MODIFICATION PROGRAM
• Banks and other mortgage providers can begin
  immediately to modify eligible mortgages under
  the modification program so that at-risk
  borrowers can better afford their payments

89
WHAT ARE WE DOING

• BAILOUTS
• LOAN MODIFICATION PLAN
• Eligibility requirements are as follows
• Mortgage loan must have originated before
  January 1, 2009
• Must be first-lien loans on owner-occupied
  properties with unpaid principal balance up to
  729,750

90
WHAT ARE WE DOING

• BAILOUTS
• LOAN MODIFICATION PLAN
• Loan limits above 729,750 are allowed for
  owner-occupied properties with two to four units
• Mortgage payment (including taxes, insurance, and
  homeowners association dues) must be more than 31
  percent of your gross monthly income

91
WHAT ARE WE DOING

• BAILOUTS
• LOAN MODIFICATION PLAN
• All borrowers must fully document income,
  including a signed IRS 4506-T, two most-recent
  pay stubs, most recent tax return, and must sign
  an affidavit of financial hardship

92
WHAT ARE WE DOING

• BAILOUTS
• LOAN MODIFICATION PLAN
• Property owner occupancy status will be verified
  through borrower credit report and other
  documentation
• Modifications can start from now until Dec, 21,
  2012 with loans only modified once under the
  program

93
WHAT ARE WE DOING

• BAILOUTS
• LOAN MODIFICATION PLAN
• New FHA Streamline Refinance Program
• Homeowners who have been on time since they took
  out their FHA mortgage qualify in a simple
  process takes about a week
• It allows people to skip up to two months of
  mortgage payments and can drastically reduce
  their monthly payment

94
WHAT ARE WE DOING

• BAILOUTS
• LOAN MODIFICATION PLAN
• New FHA Streamline Refinance Program
• Borrowers with an FHA loan may simply modify
  their interest rate and monthly payment with no
  credit check and no income verification
• Those who currently do not have an FHA loan can
  still take advantage of the extremely low
  interest rates and convert their loan to an FHA
  loan

95
WHAT ARE WE DOING

• MONETARY POLICY
• Fed maintaining low interest rate target, close
  to zero, for the Federal Funds rate of interest
  bank to bank loan interest rate
• Fed buying long term US Treasury Bonds and
  billions in MBS (mortgage backed securities)
• Treasury Bonds - IOUs of the US Government

96
WHAT ARE WE DOING

• MONETARY POLICY
• Buying Treasury Bonds increases the demand for
  bonds, raises their price and lowers their yield
• March 2009 Fed buying caused bond yields to fall
  to about 2.5 and 30 year fixed mortgage rates
  fell to about 4.7 interest

97
WHAT ARE WE DOING

• MONETARY POLICY
• Fed may increase the money supply up to 1.15T
• Buying 300B in US Treasury Bonds
• Raise the amount of MBS of Fannie Mae and
  Freddie Mac that may be purchased from
  500B to 1.25T
• Potential additional purchases of US
  Treasury Bonds of 100B

98
WHAT ARE WE DOING

• MONETARY POLICY
• Fed has been successful providing downward
  pressure to keep interest long term interest
  rates low

99
WHAT ARE WE DOING

• Fiscal Policy v
• Monetary Policy v
• Legislative Summaries v
• Bush Tax Rebate 2008 v
• Obama Tax Credit v
• TARP (Troubled Asset Relief Program) v
• American Recovery and Reinvestment Act v
• 410B Bill to Fund Federal Government v
• Making Home Affordable Program v
• Keynesian Multiplier Principle v
• Bailouts v

100
WHAT ARE WE DOING

• WHAT IS GOING ON v
• HOW DID WE GET HERE v
• WHAT ARE WE DOING v
• COST/BENEFIT ANALYSIS OF CHOICES