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Tuesday, August 25, 2009

Fairtax Could Have Prevented This Financial Mess

No real data to back me up because I don't get paid to write. This is all based on theory. Check out for yourself and figure out for yourself if this is a better system.

I think we all can agree that the unsustainable rise in real estate is what contributed to the recent economic collapse. Home prices in many areas rose at a rapid pace because new loan programs made it very simple to buy a home. The amount of home buyers drastically increased while inventory levels remained low. Many of us thought how can most people afford the average home price in Los Angeles County when it was reaching a median price around $530k? Under traditional underwriting standards you needed an annual income of more than $120k. So how did people making $50k annually qualify?

Stated income loans, 100% financing, interest only payments, and the worst one the negative amortization loan. These products is what made it affordable. People took on payments and many of them unfortunately were misled to believe that they can eventually refinance into a lower fixed payment because values were building instant equity. What if values went down or just flat-lined? This is the question failed to be asked or explained by the professionals.

How could the Fairtax have prevented this? Stated income loans were created for self-employed who have a tendency to write off a lot of their expenses to keep from paying income taxes. You mean cheat the IRS? It's a fine line that's walked but many will try to explain that every single lunch they had was business related. Sorry I let the cat out of the bag. Not only would the Fairtax create jobs and growth but it will switch the burden of paying taxes on income to paying a national retail sales tax. Those who spend more pay more. No more class warfare because the choice of paying taxes is yours and your spending habits.

Stated Income loans should have never been used for wage earners and it would have never been needed for self employed borrowers if we had a tax system like the Fairtax.

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