Puerto Rico Creates Tax Shelters in Appeal to the Rich

Story originally appeared on the New York Times.

Known for its white-sand beaches and killer rums, Puerto Rico hopes to stake a new claim: tax haven for the wealthy.

Since the beginning of the year, the island has gone on a campaign to promote tax incentives that took effect last year, marketing its beautiful beaches, private schools and bargain costs in an effort to lure well-heeled hedge fund managers and business executives to its shores.

So far, Puerto Rico’s pitch has attracted a handful of under-the-radar millionaires. Several American executives of mostly smaller financial firms say they have already relocated to the island, and Puerto Rican officials say another 40 persons, mostly from the United States, have applied.

The tax savings could add up to “at least in the six figures” each year, said Barry Breeman, an American who said he was moving to Puerto Rico with his wife. Mr. Breeman is the co-founder of the New York-based Caribbean Property Group, a real estate investment firm that has substantial holdings on the island.

Millionaires are nice, but Puerto Rican officials hope to reel in billionaires like John A. Paulson, the hedge fund manager who Bloomberg News reported earlier this month was weighing a move.

The attention prompted an unusual statement from Mr. Paulson, which declared that he was not relocating. (Still, Mr. Paulson, a 57-year-old New Yorker, had briefly considered a move, say two people with knowledge of his plans.)

If not Mr. Paulson, government officials and real estate brokers in Puerto Rico hope to sell other wealthy mainland Americans on what they hope will become the next Singapore or Ireland as a favored low-tax destination. Puerto Rico is closer and, compared with Ireland, decidedly warmer. And unlike in Switzerland or other havens, in Puerto Rico, Americans do not give up their citizenship.

“There’s nothing wrong with spending 183 days a year on a sailboat or yacht and working from here,” said Alberto Bacó Bagué, the secretary of economic development and commerce for the island, in a telephone interview. “We’re catching up to Ireland and Singapore — you can shelter income legally, and legally in a good way.”

Puerto Rico is a commonwealth of the United States, but for tax purposes, it is treated differently. Most residents of Puerto Rico, with the exception of federal employees, already pay no federal income tax. A person needs to live 183 days a year on the island to become a legal resident.

The new tax breaks are a twist on the island’s tradition of using tax perks to bolster the economy. Puerto Rico’s per-capita income is around $15,200, half that of Mississippi, the poorest state in the nation. In 2006, a previous incentive exempting United States companies from paying taxes on profits from Puerto Rican manufacturing ended after Congress said that the incentive had bilked taxpayers.

The new tax breaks are a radical shift in that they focus on financial, legal and other services, not manufacturing. Puerto Rico slashed taxes on interest and dividends to zero from 33 percent, and it lowered taxes on capital gains, a major source of income for hedge fund managers, to zero to 10 percent.

The incentives work with existing United States breaks. While residents still have to file a federal tax return, they do not have to pay capital gains taxes of 15 percent on assets held before moving and sold after 10 years of island residency.

The new tax incentives “likely will be considered more broadly by some taxpayers as a new opportunity for income shifting and tax deferral,” said Michael Pfeifer, an international tax lawyer at the law firm Caplin Drysdale in Washington.

Mr. Bacó, the Puerto Rican economic development official, is planning a road show on the East Coast next month to woo financial and law firms as well as wealthy individuals to moving to Puerto Rico.

Because of its new aggressive tax breaks, Puerto Rico is a supercharged version of Florida, which does not tax individuals on ordinary income.

Recently, a business development group in Palm Beach, Fla., wined and dined 10 executives from the Northeast who had flown in for a two-day tour showcasing the state’s tax advantages, complete with golf outings, showings of oceanfront office space and a soiree aboard a yacht.

Florida has already landed one big fish: Edward S. Lampert of ESL Investments moved his headquarters from Greenwich, Conn., to near Miami last year.

The sales pitches by Florida and Puerto Rico tap into a growing resentment among affluent people who feel that they have been vilified by politicians or believe they have unfairly become targets for disproportionately higher taxes. In one highly publicized example, the actor Gérard Depardieu, angry over a plan by the French government to raise taxes to 75 percent for the wealthy, accepted a Russian passport from President Vladimir V. Putin. Russia has a flat tax rate of 13 percent.

But a move to Puerto Rico may be easier said than done. Privately, some lawyers and accountants in the United States express concern that individuals who move to the American island for its lower taxes might appear “unpatriotic” in a widening crackdown by authorities on offshore tax dodging through Switzerland, Israel and Singapore.

And while the island’s tax breaks are legal, some investors say they do not want their hedge fund managers straying too far from their mainland office.

“Citi Private Bank expects hedge fund principals to be in a primary office with their critical employees close by,” David Bailin, the global head of managed investments for the firm, wrote in an e-mail.

Puerto Rico has been battered by several years of recession. Its unemployment rate is more than 13 percent, well above the national rate, and its economy remains mired. In December, Moody’s Investors Services downgraded the island’s debt to one notch above junk status; and in a recent research note, Breckenridge Capital Advisors said the island was “flirting with insolvency.” The island has the weakest pension fund in America and by some estimates could run out of money as soon as 2014.

An influx of wealthy financiers would provide a much-needed lift to the economy.

Margaret Pena Juvelier is a real estate broker with Sotheby’s International Realty who left the Upper East Side last fall to open an office in San Juan. “We’re getting an average of 10 to 15 calls or e-mails a day from people who want to look at homes,” she said.

Ms. Juvelier often sends a black S.U.V. with a driver in a suit and tie to meet clients, some of whom fly in on private jets and pepper her with questions like “is there a Whole Foods here?” and “if I get really sick, do I have to be medevaced?”

Nicholas Prouty of the investment fund Valivian Advisors, who is moving to San Juan from Greenwich, Conn., said he wanted “the excitement of having new experiences coupled with the worry of the unknown.”

While the real estate broker Ana González Brunet declines to name names, saying “discretion to billionaires is important,” she said multiple individuals had recently looked at the 8,379-square-foot penthouse in the Acquamarina in the chic Condado neighborhood of San Juan. The $5 million condo has underground parking and a panoramic view of the ocean through floor-to-ceiling windows, and is near luxury boutiques like Cartier, Salvatore Ferragamo and Louis Vuitton.

“It’s like being in the best part of Manhattan,” Ms. González Brunet said.

$3.6B Foreclosure Deal for Home Owners

Story first appeared on USA Today -

Consumer advocates say banks getting off too easy in reworked foreclosure settlement

A foreclosure settlement between the government and 13 banks will spread $3.6 billion in cash among millions of borrowers starting in April, regulators said Thursday.

But the $5.7 billion in mortgage relief that’s also part of the deal may favor borrowers with the biggest unpaid loan balances, consumer advocates say.

The settlement, first announced in January, is intended to compensate borrowers for foreclosure and mortgage servicing abuses.

The cash will be split among 4.2 million borrowers who were in foreclosure in 2009 or 2010 and had home loans serviced by one of 13 banks. They include Bank of America, Wells Fargo, and JPMorgan Chase.

Cash payouts will range from a few hundred dollars up to $125,000, says the Office of the Comptroller of the Currency (OCC). It’s overseeing the settlement with the Federal Reserve Board.

The companies are expected to meet their $5.7 billion mortgage relief obligation, in part, by modifying loans. They’ll earn certain levels of credit toward that $5.7 billion for certain actions.

Consumer advocates said they were shocked and dismayed when they learned Thursday how some of the credits will be tallied.

For instance, a bank forgiving $15,000 in principal owed on a $100,000 unpaid balance would get a $100,000 credit.

If the bank forgave $15,000 in principal on a $500,000 unpaid balance, they would get a $500,000 credit, says Bryan Hubbard, OCC spokesman.

The OCC says the terms are meant to drive modifications that best serve borrowers.
Consumer advocates, however, say the system will lead the banks to focus on high-balance loans instead of more smaller ones.

Plus, it’ll let them inflate the value of their modifications, says Alys Cohen, of the National Consumer Law Center. “It lets the banks off easy,” she says.

When the deal was announced, consumer advocates said it included too little money. The new credit formula is “monumentally bad,” says Ira Rheingold, executive director of the National Association of Consumer Advocates. “I’m absolutely stunned that they would do this.”

The OCC disagrees with the consumer advocates. It also says regulators could take further action if the banks fail to meet the deal’s requirements for well-structured assistance.

The $9.3 billion settlement largely replaces a 2011 agreement reached between the regulators and the companies. That one required case-by-case foreclosure reviews and was too slow and costly, regulators say.

Florida man swallowed by sinkhole presumed dead

Story first appeared on The Detroit News -

Hazard common in state due to porous limestone caverns

In a matter of seconds, the earth opened under Jeff Bush's bedroom and swallowed him up like something out of a horror movie. About the only thing left was the TV cable running down into the hole.

Bush, 37, was presumed dead Friday, the victim of a sinkhole — a hazard so common in Florida that state law requires home insurers to provide coverage against the danger.

The sinkhole, estimated at 20 feet across and 20 feet deep, caused the home's concrete floor to cave in around 11 p.m. Thursday as everyone in the Tampa-area house was turning in for the night. It gave way with a loud crash that sounded like a car hitting the house and brought Bush's brother running.

Jeremy Bush said he jumped into the hole but couldn't see his brother and had to be rescued himself by a sheriff's deputy who reached out and pulled him to safety as the ground crumbled around him.

"The floor was still giving in and the dirt was still going down, but I didn't care. I wanted to save my brother," Jeremy Bush said through tears Friday. "But I just couldn't do nothing."

Officials lowered equipment into the sinkhole and saw no signs of life, said Hillsborough County Fire Rescue spokeswoman Jessica Damico.

A dresser and the TV set had vanished down the hole, along with most of Bush's bed.

"All I could see was the cable wire running from the TV going down into the hole. I saw a corner of the bed and a corner of the box spring and the frame of the bed," Jeremy Bush said.

At a news conference Friday night, county administrator Mike Merrill described the home as "seriously unstable." He said no one can go in the home because officials were afraid of another collapse and losing more lives. The soil around the home was very soft and the sinkhole was expected to grow.

Engineers said they may have to demolish the small house, though from the outside there appeared to be nothing wrong with the four-bedroom, concrete-wall structure, built in 1974.

"I cannot tell you why it has not collapsed yet," said Bill Bracken, the owner of an engineering company called in to assess the sinkhole and home.

Florida is prone to sinkholes because there are caverns below ground of limestone, a porous rock that easily dissolves in water. A sinkhole near Orlando grew to 400 feet across in 1981 and devoured five sports cars, most of two businesses, a three-bedroom house and the deep end of an Olympic-size swimming pool.

More than 500 sinkholes have been reported in Hillsborough County alone since the government started keeping track in 1954, according to the state's environmental agency.

Jeremy Bush said someone came out to the home a couple of months ago to check for sinkholes and other things, apparently for insurance purposes. "He said there was nothing wrong with the house. Nothing. And a couple of months later, my brother dies. In a sinkhole."

Six people were at the home at the time, including Jeremy Bush's wife and his 2-year-old daughter.

States with faster foreclosure rates seeing sharper home price increases

Story first appeared on USA Today -

Many states with faster foreclosure processes are seeing sharper increases in home prices than states where foreclosures take longer to get done.

There are exceptions, and other factors — such as job growth — are likely stronger drivers of home price trends, economists say.

But home price data generally show stronger price increases in states where courts don't have to approve foreclosures than in states where they do. Foreclosures are completed faster where court approval isn't necessary.

Last year, home values tracked by Zillow, a web-based real estate tracker, rose an average 5.4% in the 24 states where foreclosures don't go through the courts, according to Zillow. Where they do, the average increase was 3.2%.

Asking prices, a leading indicator of price trends, show a similar pattern.

In January, asking prices in non-judicial states were up an average of 7.3% year-over-year vs. 3.1% for judicial foreclosure states, show data from real estate website Trulia.

Non-judicial foreclosure states have tended to clear out distressed home inventory quicker, which is helping prices, says John Burns, CEO of John Burns Real Estate Consulting. Its home price analysis shows that the 10 major metropolitan areas that have seen the most rapid appreciation in the past year are in non-judicial foreclosure states.

Job growth and how far prices dropped during the housing bust are probably stronger drivers of home price trends, says Trulia economist Jed Kolko. But foreclosure speeds are a contributing factor, he and others say.

In Florida, New York and New Jersey — all judicial foreclosure states — the average loan in foreclosure was past due for more than 31 months before the process was completed, according to December data from Lender Processing Services.

In California, Arizona and Nevada — all non-judicial foreclosure states — that average was fewer than 22 months, LPS data show.

Those three states were among the top seven in terms of home value gains last year, Zillow's data show.

Homes lingering in foreclosure "creates real uncertainty," which hurts prices, and inhibits investor buyers, says Stan Humphries, Zillow's chief economist.

Investors have played a big role in driving prices higher in Arizona, Nevada and California, he adds.

As of December, 10% of Florida's home loans were still in some stage of foreclosure, the highest percentage in the nation. Behind it were New Jersey, at 7%, and New York, at 5%, according to CoreLogic.

The overhang of distressed homes in the market "is absolutely contributing" to smaller price gains in judicial foreclosure states, says Mike Fratantoni, economist with the Mortgage Bankers Association.

Florida home values, up 6.4% last year, bested the national rise of 5.9%, Zillow's data show. But values rose less than 1% last year in New York and New Jersey, Zillow says.

Florida values would probably have risen more last year if more of its foreclosures were behind it, says Kolko.

That's because Florida, like Arizona, California and Nevada, saw home prices fall more than 40% from its peak before the housing bust. It's also a market that attracts investor and second-home buyers.

Exceptions to the trends in price gains between judicial and non-judicial foreclosure states underscore that many factors influence home values, Kolko says.

For instance, Zillow's data show strong price gains last year in Indiana, a judicial state. On the other hand, Rhode Island had the greatest price depreciation last year, the data show, and it's a non-judicial state.

Burns' data show that five of the top 20 housing markets for price gains were cities with full or partial court oversight of foreclosures, including Washington, D.C., New York and Miami.

Mortgage Rates Holding Steady

Story first appeared on USA Today -

The average U.S. rate on the 30-year fixed mortgage was unchanged this week near historic lows, while the average rate on the 15-year loan fell. Low mortgage rates could help strengthen the housing recovery.

Mortgage buyer Freddie Mac said Thursday that the rate on the 30-year loan stayed at 3.53%. That's still near the 3.31% rate reached in November, the lowest in records dating to 1971.

The rate on the 15-year fixed mortgage dropped to 2.77% from 2.81% last week. The record low is 2.63%.

Cheap mortgages are encouraging more people to buy homes and refinance, trends that could help boost the economy this year.

Increased sales are helping push home prices up steadily, which makes consumers feel wealthier and more likely to spend. In addition, a limited supply of houses for sale has created demand for new construction, which has made builders more confident.

And when people refinance, that typically leads to lower monthly mortgage payments and even more spending. Consumer spending drives nearly 70% of economic activity.

Still, the housing market has a long way to a full recovery. And many people are unable to take advantage of the low rates, either because they can't qualify for stricter lending rules or they lack the money to meet larger down payment requirements.

To calculate average mortgage rates, Freddie Mac surveys lenders across the country on Monday through Wednesday of each week. The average doesn't include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1% of the loan amount.

The average fee for 30-year loans ticked up to 0.8 point from 0.7 point last week. The fee for 15-year loans was unchanged at 0.7 point.

The average rate on a one-year adjustable-rate mortgage fell to 2.53% from 2.59%. The fee for one-year adjustable-rate loans declined to 0.4 from 0.5 point.

The average rate on a five-year adjustable-rate mortgage fell to 2.63% from 2.7% last week. The fee remained at 0.6 point.