Thursday, March 27, 2008

Quick Takes: Rising Taxes, Home Equity Crisis

Many people hold the misguided belief that their taxes will go down during a recession. If everyone is spending less then won’t the government need less? Unfortunately it never works out like this. During recessionary periods, government spending is normally in crisis as sales and income tax revenues drop, this leads to outsized tax increases to support rising spending as social program needs increase. The longer a recession lasts, the higher taxes tend to get.

MarketWatch outlines 9 reasons your taxes are going up. Facing a huge national debt load, it is unlikely that taxes will retreat. Irrespective of which party is in office, the entire situation will result in taxes being raised. There is no other possible real alternative to dig out from under the mountain of debt at the federal, state, and local levels of government – except for tax increases. (Nobody should be so naïve to believe that government spending will drop).

Taxes are not the only problem for consumers. The credit crisis is about to fold over to another sector, home equity loans are under pressure. Americans owe over $1.1 trillion on home equity loans. Many of these loans were unwritten during the bubble period with lax standards. Many home equity loans did not require income verification or were combined in “piggy-backing” deals for no cash down. All the questionable practices over the past few years in the mortgage market equally apply to the home equity loan sector.

A good portion of these home equity funds will not be repaid to the lending institutions. Especially in markets where housing prices have dropped significantly, second-lien holders are being left with nothing in short sale scenarios. The percentage of delinquent home equity loans was up to 5.7 percent in December, the figure is expected to be over 7% by the end of March.

Equity Loans as Next Round in Credit Crisis