Press Releases

04/25/2008

Ask AP: Mortgage insurance, taxing Social Security benefits

By The Associated Press

It sounds like a foolproof system for lending institutions: When someone's house is mortgaged to the hilt, the borrower has to get mortgage insurance, protecting the lender in the event of foreclosure.

So how did those lenders end up getting sucked into the mortgage mess?

That's one of the four questions being answered in this installment of "Ask AP," a weekly Q&A column where AP journalists respond to readers' questions about the news.

If you have your own news-related question that you'd like to see answered by an AP reporter or editor, send it to newsquestions(at)ap.org, with "Ask AP" in the subject line. And please include your full name and hometown so they can be published with your question.

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Have Social Security benefits always been subject to federal taxes?

Ralph B.

Omaha, Neb.

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When Social Security began in 1935, benefits were not taxed. Congress first passed a law in 1983 allowing Social Security benefits to be taxed and President Reagan signed it.

Whether you pay a tax on the benefits depends on your income from other sources, including wages, interest, other pension benefits and withdrawals from 401(k) and IRA accounts.

A single person claiming less than $25,000 and married taxpayers claiming less than $32,000 in income from other sources are not subject to the personal federal income tax on their Social Security benefits. Taxpayers with incomes above those thresholds will find that the personal income tax applies to some percentage of their benefits.

The original amount of benefits subject to federal income tax was 50 percent. Congress in 1993 raised the amount subject to tax to 85 percent. President Clinton signed that into law.

The Social Security Administration says about one-third of people who get Social Security have to pay income taxes on their benefits.

Jesse J. Holland

Associated Press Writer, Washington

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At least in my part of the country, when someone gets a mortgage loan to purchase a home, and the loan amount is more than 80 percent of the home's value, the borrower is required to pay for a private mortgage insurance policy. This ensures the lender that it will receive all that is due in the event of a default and foreclosure.

If that is also true across the country, it would seem that subprime loans should not be an issue, and investors holding securities backed by these loans shouldn't be in such financial trouble.

Can you explain why mortgage insurance hasn't prevented the mortgage meltdown?

Richard Gualano

Downers Grove, Ill.

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While lenders typically require home buyers to pay for mortgage insurance when they contribute less than 20 percent of a home's value to a purchase, that wasn't the case during the housing boom, when lending standards were lax. In addition to their first mortgage, many borrowers took on second mortgages, or so-called "piggyback" loans, that would cover the 20 percent down payment and allow them to avoid making mortgage insurance payments.

J.W. Elphinstone

AP Business Writer, New York

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Why the difference in spelling between "al-Qaida" (AP style) and "al-Qaeda" (the style in many other American publications)?

Harry Moskos

Knoxville, Tenn.

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Al-Qaida and al-Qaeda are transliterations of the Arabic word for "the base."

In Arabic, "Qaida" or "Qaeda" is a three-syllable word: KAH-i-da. Pronunciation is governed by a short second vowel that sounds somewhere between the "i'' or "e'' in "bit" or "bed." Arabic speakers sometimes elide the word into two syllables, rather like "KAH-da," according to Lee Keath, AP Cairo news editor.

"Al-Qaida" first appeared in AP stories in September 1998 in the aftermath of terrorist bombings of U.S. embassies in Africa. Other news accounts used "al-Qaeda." Following 9/11, AP settled on "al-Qaida," which has been listed in the AP Stylebook since 2003.

David Minthorn

AP Manager for News Administration

"Ask the Editor" columnist, APStylebook.com

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The buying of crude oil is based on the U.S. dollar. Would there be any advantages or disadvantages to the U.S. consumer if the buying and selling of oil were based on a different currency (for instance the euro)? And what would the advantage or disadvantage be for other countries if that was the case?

Thomas McAfee

Little Rock, Ark.

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The relationship between the price of oil and the value of the dollar is a complex one, but the bottom line is that a change in the currency used for oil trading wouldn't likely make much of a difference.

Right now, oil is traded in dollars, even on commodity markets based outside the United States. Whenever the dollar falls against the euro — as it has for much of the past year — oil becomes cheaper to Europeans. When Europeans take advantage by snapping up oil futures, the demand pushes up the price of oil for Americans.

What if oil were priced in euros? Again, if the dollar fell against the euro, oil would get more expensive to Americans — in this case, simply because it would take more dollars to buy the same barrel of oil.

So either way, when the dollar weakens, the price of oil usually goes up for Americans.

Some analysts explain it another way: It's the value of an investor's currency that matters, not what currency is used to price the item being invested in.

"The ultimate price to American consumers would be the same," said Tom Kloza, an analyst at the Oil Price Information Service, a company that tracks petroleum prices for oil producers, government agencies and other clients.

John Wilen

AP Energy and Transportation Writer, New York