Senate version of the economic stimulus package

February 7th, 2009

Here is the answers to six of the common questions:

  1. I recently bought a home and qualified for the $7,500 new home buyer tax credit. Should this provision become law, would I qualify for it [as] well?
    The short answer is no, says Rob Dietz, an economist for the National Association of Home Builders. “The effective date of the … amendment is the date of enactment,” Dietz says. “So if you’ve already completed a purchase, you would not be qualified for the new program.”
  2. Isakson’s press release reads: “The amendment would sunset the current $7,500 housing tax credit on the date of enactment.” What does the term “sunset” mean there?
    In this context, the term “sunset” means that the $7,500 new home buyer tax credit would be supplanted by the proposed $15,000 credit, which applies to all home purchases — not just new homes. “If you are operating under the $7,500 [credit], that’s the one you [have],” says Joan Kirchner, Sen. Isakson’s Deputy Chief of Staff. “Then, from the date of enactment forward, the new one takes over and nobody else gets the old $7,500 [credit].”
  3. What are the odds of this provision becoming law?
    The $15,000 home-buying provision is a component of the massive — and increasingly controversial — economic stimulus package. The House of Representatives has already passed its version of the stimulus bill, and the White House is putting pressure on the Senate to do the same. However, the size of the package — which now totals more than $900 billion — has prompted some Republican senators to try and slash provisions to lower the tab. Still, Kirchner argues that the $15,000 tax credit enjoys strong support from the National Association of Realtors and the National Association of Home Builders and will remain in the stimulus bill that is signed into law. “Because of the way that it was adopted — unanimously, they didn’t call a roll call vote because both sides agreed to accept it — this provision is in,” Kirchner says. Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, also predicted that the amendment would make it into the final package. “It’s a targeted solution that will address housing as well as taxpayers — both of which need help,” he said.
  4. Does this tax credit need to be paid back?
    Nope. That’s a key distinction from the $7,500 first-time home buyer credit, which was “actually a 17-year repayment, which translates into a no-interest loan,” Dietz says.
  5. Is there an income limit or any other restrictions on participation?
    The tax credit would be limited to primary residences and does not come with an income restriction, Kirchner says. “You must occupy [the property] for at least two years as your primary residence,” she says. It applies to “any home, meaning a condo, a house, foreclosed, new, [or] previously owned.”
  6. Can I take the credit during tax year 2008?
    Yes, says Chris Cook, a legislative assistant to Sen. Isakson. Even if you buy a home in 2009, the provision would enable you “to file your taxes as if you purchased your home on Dec. 31 of 2008,” he says.

Author: Luke Mullins at the U.S. News & World Report Home Front blog

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How creditworthy is the United States of America?

February 7th, 2009

Right now, in the eyes of the official arbiters of credit grades - Standard & Poor’s and Moody’s Investors Service - Uncle Sam still deserves the highest rating of AAA.

But as the government’s costs to bail out the economy and the financial system mount, S&P and Moody’s in the last month have had to address the unthinkable: whether America might warrant a debt downgrade.

If the U.S. were to fall to, say, AA-plus on S&P’s scale, we’d be rated the same as Belgium. At A-plus, we’d be in the ranks with Italy.

And at just plain A, the U.S. would be on the same level as its largest state, California - whose debt rating S&P cut this week to the lowest of any state because of the continuing budget impasse.

So far, the raters don’t see a U.S. downgrade as imminent. But they’re raising the same questions that are on the minds of millions of Americans: Can we afford these bailouts? Are we choosing short-term fixes that will hurt us in the long run?

In a report this week, Moody’s said its AAA rating on U.S. Treasury debt was based on the “very high degree of economic and institutional strength” the U.S. has enjoyed historically.

Still, the firm noted that federal finances “have been substantially worsened by the credit crisis, recession and government spending to address these shocks.”

S&P, which affirmed its AAA rating on U.S. bonds last month, conceded that the risk to the nation’s fiscal health had “noticeably increased” but said America retained its core appeal as a “high income, highly diversified, exceptionally flexible economy.”

Of course, S&P and Moody’s are the same folks who failed to see the housing bust coming and affixed top-scale credit grades to mortgage securities that now trade for pennies on the dollar.

The derisive view of the debt raters is that they may be the last to know if America no longer is truly a AAA borrower.

Chances are, the marketplace would make that judgment before S&P and Moody’s would. It would be evident in surging interest rates on Treasury bonds, if investors judged that they should be paid significantly more to compensate for greater risks entailed in lending to the U.S.

At the end of last year, no one cared to question America’s AAA rating. Yields on Treasury securities were at generational or all-time lows - a function of the extraordinary level of fear in financial markets amid the global credit meltdown.

Many investors didn’t care what government bonds paid; they just wanted absolute safety of principal, and that’s what Treasury issues offered. So money poured in.

This year, the market’s mind-set has shifted notably. Yields on longer-term Treasury bonds have jumped. In part, that suggests a lessening of fear, which is good news. But it also reflects investors’ growing concern about the Treasury’s need to borrow as much as $2 trillion this year to finance the rescue of the economy and financial system.

The yield on the 10-year Treasury note, a benchmark for mortgages and other interest rates, reached 2.98% on Friday, up from a recent low of 2.06% on Dec. 30.

A 2.98% yield on a 10-year note still is a very low rate, historically. Even so, the simple message from investors to the Treasury has been, “If you want our money, you’ll have to pay more for it.”

But is that because the U.S. is perceived to be a riskier borrower - something less than AAA?

The risks involved in lending to a country are different from those in lending to businesses. A company can run out of money to pay creditors. Sovereign nations, on the other hand, always can print cash to cover debts.

The latter option, however, creates another risk: By borrowing excessively, then running the presses to pay those debts, a nation can fuel an inflationary spiral - the classic case of “too many dollars chasing too few goods and services.”

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