Friday, December 30, 2011

Congress Messing With Mortgage Market...Again

Washington lawmakers, who began 2011 with sweeping plans to shrink the U.S. government’s role in mortgage finance, are heading into 2012 after enacting policies that expand it.
An 11th-hour payroll tax cut extension signed into law last week will for the first time divert funds directly from Fannie Mae (FNMA) and Freddie Mac, the two mortgage-finance companies under U.S. conservatorship, to pay for general government expenses.
That move came after two others that also could increase government involvement: Lawmakers allowed a tax break on private mortgage insurance to expire and raised loan limits for mortgages insured by theFederal Housing Administration. Advocates of private mortgage finance say they are concerned that using fees from Fannie Mae and Freddie Mac is setting a precedent that will keep the government in the mortgage business for a decade or more.
“The goal was, at the beginning of the year, how do we wind these down?” said Edward Pinto, a resident fellow at the American Enterprise Institute, a Washington-based research organization that favors limited government. “And at the end of the year we have further entrenched them and made it more difficult to wind them down, which is classic Washington.”
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac (FMCC), today directed the companies to increase fees on new mortgages by an average of 10 basis points, or .1 percentage point, effective April 1, to comply with the law.

Wednesday, December 21, 2011

Phew! It’s Done. Now What?

    As expected Congress finally passed the much debated bill that extended the tax breaks for another two years, extended unemployment benefits for another 13 months and added some additional tax breaks and considerations for business. The deal cut between President Obama and Senate Republicans some weeks ago was pretty much a done deal but there was an opportunity for the opponents to register their displeasure before the deal went down. Now that the politicians have finished with this the focus now shifts to what this really means for the growth of the economy in 2011 and beyond.
     An assessment of this law will preoccupy analysts and voters for the next few years as there will be two issues to consider. The first is whether the extension of breaks and benefits will really do much for the economy. Even if the answer to this question is positive, there will be a second set of concerns over whether the $1 trillion effort is worth it given what this will do to make the deficit that much worse. Those who fought the measure were pretty diverse in terms of their opposition  and most of the debate was less about really defeating the bill and more about staking out some future political positions. The economic critique was a little more pointed.

Analysis: There was no significant economic objection to the notion that this law would benefit the economy in the short term. How could it not? If the tax breaks had not been extended, the average tax payer would have been out between $1,500 and $3,000 dollars next year and that is not an inconsequential sum of money. A loss of unemployment benefits would have stripped some two million people of their assistance and that is cash no longer in private hands. Granted, the money would not have simply vanished and it would have been spent by the government in some way but when the economy is still faltering it is usually a better idea to get the private sector moving.
    The economists made their case on the basis of what is better in the long run and there were two schools of thought. To those who put deficit control at the top of the list, the whole notion of offering tax breaks and extending unemployment to a record number of months is folly and just puts off the inevitable day of reckoning. The assertion is that contending with the deficit is never going to be pleasant or popular and putting it off just ensures that it will be a bigger problem later.
     The other position is that dangling these tax cuts as political fuel every couple of years creates chaos in the business community. The executive and the strategist need to know what to expect in the years to come and it matters what the tax bill will be. The same is true for the individual. It serves little purpose to bring an issue this important back every couple of years. If the tax cut is a good idea it should be made permanent and it is isn’t, it should have been allowed to expire. - Courtesy Kentucky Society of CPA's.

Tuesday, December 20, 2011

IRS Issues Final Regs on EITC Due Diligence

The IRS on Monday issued final regulations with the due-diligence requirements for tax return preparers who prepare tax returns on which taxpayers claim the earned income tax credit (EITC). The new rules require tax return preparers to submit Form 8867, Paid Preparer’s Earned Income Credit Checklist, to the IRS.

Friday, December 16, 2011

Business Costs for 2012 Expected to Rise, WSJ Says

The Wall Street Journal is predicting that the cost of doing business will rise again in 2012 and businesses might have difficulty passing along those increases to customers. That might be good news for the Federal Reserve, but it isn't good news for business, the Journal says.

"Within their monthly surveys, the Fed banks of New York and Philadelphia added special questions about cost expectations for 2012. Although each bank asked slightly different questions, the results were similar. Businesses expect to pay more for labor and supplies, but energy inflation should ease.
Employee benefits, especially health care coverage, are expected to be the biggest cost headache next year.

"New York respondents expect overall benefits, on average, to rise 6.1% next year. Philadelphia respondents see their health care benefits alone rising 7.3%.

"Wages are anticipated to rise 2.8% in New York state, and 2.1% around the City of Brotherly Love.
Energy costs are seen rising about 2.9% in New York and 1.8% in Philly. That’s a relief–or maybe wishful thinking–from the 2011 experience. Nationally, yearly energy inflation is running more than 10%.

"The question for the inflation outlook is how much of the higher costs will businesses be able to pass along to their customers. The evidence is sparse but suggests, not much. Only the New York Fed asked about expected selling prices. Respondents on average hope to raise their prices by just 1.8%.

"Of course, the lack of pricing power reflects the fact that consumers are still quite bargain-conscious. That in turn is the result of the small pay raises businesses have given out and–as the surveys show–plan to dole out again next year.

"Without more cash in their pockets, consumers will resist higher prices except for staples, such as food and energy. Consequently, the Fed can rest easy; inflation will not be a problem next year. The central bank can continue to focus on promoting economic growth.

"Most businesses will not be so lucky. Companies have been able to offset some of this year’s cost-price squeeze through higher productivity. But that trend looks played out. As a result, expect more downward pressure on profit margins in 2012." from the Wall Street Journal

Friday, December 2, 2011

U.S. Sweeping Financial Reform Act Has Implications Around the Globe

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) passed in July is the single most sweeping financial regulatory reform in the United States since the securities acts of 1933 and 1934. Its scope is wide and broad but its implications are grey and murky. While American companies and industries sort through the 2,300 pages of the Dodd-Frank Act to find out what the new legislation means for them, the international implications have gone largely unexplored.
The Act significantly changes the U.S. federal regulatory framework as it relates to many types of financial services companies, especially banks and other deposit-taking institutions, both foreign and domestic. For example, it permits the Federal Reserve to terminate activities of U.S. branches, agencies or commercial lending subsidiaries of a non-U.S. entity if the Federal Reserve determines that the home country has not adopted appropriate systems to mitigate risk and if it may present a systemic risk to the U.S.
Added Responsibilities for SEC
The law also expands the scope of new responsibilities for the Securities and Exchange Commission (SEC). Congress has asked the SEC, among other things, to constantly monitor and oversee all domestic as well as international proposals and developments inclusive of the insurance industry and accounting profession. The SEC has to report back to Congress annually about all new proposals that affect the financial industry and how they affect the stability therein. These new requirements have increased some concern that coordinating everything on a global level may lead to a high margin of error.
Serious concerns were raised by the AICPA and others regarding government oversight of accounting standard-setting bodies in earlier stages of the legislation. Congress modified the original language to direct the Financial Stability Oversight Council to review and, as appropriate,  “submit comments” to the SEC and any standard-setting body with respect to an existing or proposed accounting principle, standard or procedure. In earlier versions, the Council was given increased power to directly influence standards. The AICPA successfully advocated for preserving an independent board to monitor these standards.  
PCAOB to Inspect Foreign Audit Firms
Additionally, Dodd-Frank amended the Sarbanes-Oxley Act (SOX), granting the authority for the Public Company Accounting Oversight Board (PCAOB) to now inspect foreign audit firms that practice in the U.S. or have U.S. clients. For example, any registered public accounting firm (domestic or foreign) that relies, in whole or in part, on the work of a foreign public accounting firm in issuing an audit report, performing audit work or conducting an interim review must:
  • Produce the foreign firm’s audit work papers and all related documents if the SEC or PCAOB requests them; and
  • Secure the foreign firm’s agreement to produce those documents as a condition of relying on the work of that firm.
The general international impact of Dodd-Frank is on external auditors and preparers who must comply with SOX, as amended by the Dodd-Frank Act, because they are employed or engaged by international/global public companies that list on U.S. exchanges. Read More