What’s “Debt Bomb” mean in Investor Words? #Investorwords

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Yes, this one is used actively. Sign of the times.

Defaults on debts or other obligations taken on by large financial institutions that affect not only the economy of the financial institution’s home country, but also the global financial community as well. FDIC look out.

Debt Bomb

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She will stick to her guns even if it’s not the popular view…

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Sheila Bair
By Patricia Sellers

During the worst economic crisis since the 1930s, Sheila Bair has been the little guy’s protector in chief. Guaranteeing the savings of bank customers is the main job of the chair of the Federal Deposit Insurance Corporation. Bair did that while the FDIC handled 25 bank failures in 2008. To boost trust, she also upped the guarantee from $100,000 to $250,000. “No customer has ever lost a penny of insured deposits,” she says.

Bair’s unusual clout, though, derives from the breadth of her command and her guts in staking new ground. An early Cassandra about the dangers of subprime loans, she incensed Treasury officials last fall by pushing aggressively for a massive mortgage-refinancing program. “She will stick to her guns even if it’s not the popular view,” says personal-finance expert (and fellow TIME 100 honoree) Suze Orman.

Bair, 55, is the rare Republican who has not only survived in the Obama Administration but gained power. The government has enacted many of the mortgage-modification proposals she championed. And the FDIC now has oversight of public-private funds that are being created to buy troubled bank assets to crank up lending again. A lawyer who hails from tiny Independence, Kans., Bair believes that fiscal responsibility begins at home. She’s written two children’s books on the subject. In Rock, Brock and the Savings Shock, about twin boys who get money from their grandpa, the lesson is clear: “You just have to stop spending all your money and save.”

Sellers is an editor-at-large at Fortune

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States to turn $8,000 home-purchase tax credit into cash!

Instead of making buyers wait until they receive their tax refunds, some states have created bridge-loan programs that advance purchasers the money they need for their closings.

Reporting from Washington — For the housing market, it’s the equivalent of financial alchemy, and it’s hot: Turning the $8,000 federal home-purchase tax credit, which normally isn’t spendable until after you’ve gotten your refund, into immediate, hard cash, available for your down payment and closing costs.

Congress’ stimulus-bill tax credit for 2009 is generating efforts nationwide to find ways to “monetize” it — providing money upfront to buyers who need dollars for down payments right now, not next year after they file their federal returns and get refunds. The credit is available only to qualified taxpayers who have not owned a house during the previous three years, and who close by Nov. 30, among other requirements. Buyers can amend their 2008 returns to claim the credit or claim it on returns for 2009.

In recent weeks, at least 10 states say they’ve come up with ways to work this monetary magic. They have created innovative bridge-loan programs that advance credit-eligible buyers the cash they need for their closings. Generally the advances take the form of second mortgages — with or without interest charges — that become due and payable whenever buyers receive their credits in the form of refunds from the Internal Revenue Service.

In Missouri, which was the first state to create such a program, buyers can get a no-cost “tax credit advance” of up to 6% of the home price. The advance is actually an interest-free second lien that is repayable no later than June 2010, once the buyers have received their $8,000 tax credit.

If buyers can’t meet that repayment deadline, the advance morphs into a traditional second mortgage with a 10-year payback term and a fixed interest rate one-half a percentage point higher than their first mortgage rate. The underlying first loans are all fixed-rate 30-year mortgages issued by private lenders participating with the tax-exempt bond programs of the Missouri Housing Development Commission.

Colorado kicked off a similar program, known as JumpStart, on April 14. Delaware, New Jersey, Tennessee, Idaho, Washington state, Ohio, Pennsylvania and New Mexico have come out with their own versions, some with modest interest charges on the second mortgage from the beginning.

In Washington, where the state Housing Finance Commission already runs a tax credit bridge-loan program for buyers using its mortgages, state Treasurer James McIntire wants to make it much bigger. He has been pushing for creation of a “public-private” down-payment program that could reach far larger numbers of consumers than is possible under the housing commission’s current funding constraints.

McIntire has proposed depositing $25 million of state funds into interest-earning accounts at an FDIC-insured bank. The bank would then provide revolving lines of credit to the state housing commission to greatly expand its down payment bridge-loan efforts. In a novel arrangement, the Washington Assn. of Realtors has pledged $400,000 as a backstop for McIntire’s plan to cover any unexpected losses on the credit monetization transactions. The state Legislature has authorized the program in its new budget.

McIntire is also trying to persuade the Obama administration to allow the state to tap into bridge loan-assisted home buyers’ amended 2008 tax returns and be directly assigned all or a portion of the tax credit refunds. Under current IRS rules, McIntire said, tax refund checks are sent only to the taxpayer’s address. To ensure prompt repayment of bridge loans, the state would like to have refunds mailed to the housing finance commission in cases in which repayment of a bridge loan is due.

Bottom line: Since other state housing agencies reportedly are considering rolling out credit-monetization programs on their own, stay tuned in here to keep your eye on what’s happening in CA. A no-cost advance tied to the $8,000 credit just might get you the down payment and closing cash you need. And be prepared by looking in on and working on your credit.

By Kenneth R. Harney
Los Angeles Times

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