Debt Free

Pearlstein Business Column

It’s sure to be only one of many plans floated in the next few weeks as government officials attempt to placate homeowners (voters) and minimize the economic impact of the credit market implosion. Pearlstein’s proposal brings the considerable influence of Fannie Mae and Freddie Mac to bear on the problem, something that may have to occur before investors consider returning to the market for mortgage debt secured products. It’s sad, because many homeowners have little chance of defaulting on their mortgages. If lending standards were sensibly (not with the strong knee-jerk reactions we’ve seen in recent weeks) revised to exclude the highest risk loans, and some of the very creative mortgage products were eliminated, the problems would fix itself fairly quickly.

All but the highest risk borrowers need to be able to refinance their balloon payments or high interest ARMs into a normal fixed interest and fixed term product. This would stabilize payments and allow homeowners to continue fitting their mortgage payments into the monthly budget, and spend for other consumer products at the same time. Other business owners would appreciate this continued ability for homeowners to contribute to the economy. The Pearlstein proposal addresses this and tries to minimize the distaste associated with a complete government bailout (funded by taxpayers, of course, as government bailouts are by necessity), as some others have proposed.

Even if his plan may be, in a way, distasteful, a collapse of the real estate market precipitated by an additional hundreds of thousands of foreclosed homes hitting the market, and the price erosion that would create, would probably be more distasteful. A cornerstone of his plan if for liens to be created that represent 90% of the difference between what the homeowner owes on the property and its’ market value (who determines this, exactly?). The lien would allow refinancing, whereas without it that would have been impossible due to negative equity in the property.

He ‘s proposing refinancing into a 40 year mortgage, coupled with the aforementioned lien, in lieu of foreclosure. The longer term mortgage would help lenders offset losing some of the value they would otherwise experience, because they could collect greater total interest. 40 year mortgages are not the hot ticket for homeowners in most cases, but an exception would be made here. The liens and mortgages would be kept by investors, or (more likely) sold and repackaged packaged into securities by Fannie Mae and Freddie Mac. These would then be released for consumption by investors.

Would it work? Possibly. It certainly seems better than some of the alternatives, especially considering the cost of failure. The market needs a correction, and this may provide it, without the total collapse many predict is in progress without it. It’s also possible that the credit industry downturn isn’t going to be as harsh pr prolonged as many are predicting, and that the naysayers (of which there are many) are over reacting. One thing is for sure, problems in the mortgage industry will have ripple effects that extend into every other area of the economy.

In the U.S., this is especially true due to the sheer volume of money pumped into consumer’s pockets as their home values skyrocketed in the last 5 – 7 years. Many pulled out newly created equity for all many of projects, from new SUVs (stupid use of home equity) vacations (ditto) to home improvements, remodels and new homes. That’s driven all areas of the economy to greater heights, and while a fun time for all, bound to correct sooner or later. It was, as the environmentalists say about our consumption of consumer goods, unsustainable.

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Posted by debtblog at 02:10 PM | Permalink | Comments (0) | TrackBacks (0)

These loans are like many other financial products; they may be the perfect solution for some people and a financial curse for others. It all comes down to your reasons for being in debt, your current income, the stability of that income, and your financial discipline. It’s that last one that’s the key to the puzzle. If you have relatively poor financial discipline, a debt consolidation loan is almost certainly a recipe for disaster. All you’ll accomplish is to erode the equity in your home and end up deeper in debt than when you started.

Oh, you may end up with a memorable vacation or new plasma TV too. How is that? Well, in the case of creditors with an inability to restrain themselves, the lower monthly payments provided by the debt consolidation loan give a euphoric feeling of financial well being. It’s kind of like financial crack. Since the borrower’s monthly cash flow is reduced, they feel like their financial position is so improved that they can afford to spend some money. That is almost always a huge mistake.

They (it’s “they” again) don’t let you in on this little secret, do they? Spending control is vital to any financial security program. Reigning in spending to a level where it lags income is the only way to get out o’ debt, mate. A debt consolidation loan will reduce monthly spending. If you stay there, it can really help. They can give the illusion of financial good fortune, however. Remember how you got in debt in the first place. Frequent trips to the mall, club or eBay have got to stop before you end up right back where you started, but with a new debt (the debt consolidation loan) to boot.

Lowering interest rates is always a good thing. Any time you can pay less for your money, you should do so, all else being equal. Just remember that other things go along with that lowering of the interest rates. If you get such a loan, make sure there are no prepayment penalties, just like a mortgage. In most cases there won’t be any, but if the lender thinks they really have you over a barrel, there may be one of those dreaded clauses in the contract. Make sure you really read the damned thing!

Debt Consolidation Loan Secret 1
Your total interest payments may, in fact, be higher than the credit cards you’re replacing. Then again, they may not be. It’s up to you to determine this. Look at the amount of the loan, the interest rate and the term. If the loan’s term is long enough, you could wind up paying more in total interest, even though the interest rate and monthly payment is lower.

Debt Consolidation Loan Secret 2
You don’t always get a realty low interest rate on one of these loans. It depends on your credit score. If you have too many credit cards and you’re struggling financially, there’s a good chance you’ve missed payments, had late payments, and your credit utilization score is too high. This will mean your credit score is probably pretty low. Now you’re at the mercy of the lender. They can charge you pretty much whatever they want to. Because a debt consolidation loan is a secured loan, the interest rate will probably lower than your credit card interest rate, but if that’s 18% - 29%, that’s not saying much, is it?

Debt Consolidation Loan Secret 3
If you have no collateral, such as real estate, you are probably not going to get a loan. On the radio ads, they may make it sound as if anyone can just “lower their monthly payments and eliminate debt”, but that’s because you are going to secure your debt with significant collateral. If you haven’t the means to do so, you’ll probably not find a lender willing to loan you any money.

Think about it from the lender’s perspective for a second. If you’ve gotten yourself overextended with numerous credit cards, you probably represent a substantial credit risk. Why would any investor want to loan you money at a favorable interest rate? You may find a loan, sure, but the interest rate may border upon usury.

Debt Consolidation Secret 4
You can easily lose your home if things turn ugly. This isn‘t really a big industry secret, but too few people really consider the full import of putting their home on the line when they get one of these loans. The next time you’re cruising down the 405, look at those prime accommodations in the shadow of any overpass and think about the whole thing again.

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Ed Hyman, the highly respected leader of International Strategy and Investment Group, has predicted the Fed will eventually drop the federal funds benchmark rate to as low as 2%. This move will be an attempt to keep the economy chugging along! I’d say that may do the trick. ISIG is a fund with management responsibility of around $1 billion in bond funds, and Hyman has carved out a name for himself by consistently floating accurate predictions of things economic and financial, so I tend to put some weight behind his words. He’s not right all the time (he screwed the pooch in ’96 by indicating record low bond yields and temporary economic strength, both of which turned out to be incorrect), but more than most.
 

2%! That’s pretty interesting. How would that affect your financial decision making process? If you do have an ARM that tracks the Prime, you’ll be in for some low payments ahead, as the Prime tends to float about 3 percentage points above the federal funds rate. Many other indices will be similarly low, should Hyman’s prediction be accurate. There’ll be dancing in the streets, sure, but will this bring back some of the mortgage company’s loose credit requirements? Probably not nearly to the extent we’ve seen in the last 5 years. You can expect most lenders to require some paperwork to back up your claims of grandiose income and avarian assets.

With any luck, cooler heads will prevail. This may keep every Tom, Dick and Harriett from becoming a real estate investor, and folks may buy properties with the intent of actually living in them again!

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The problem for many people is that in quite a few major metro areas, $417,000 does not a mansion buy. Far from it. That's basically the amount you'll spend for a decent 3 bedroom, 2 bath within 20 miles of downtown. Bostontonians, Serattleites, SoCalers, San Franciscans, and DCers know exactly what I'm talking about. If you've managed to amass some equity in your existing home, you could easily need the use of a jumbo to get a home in the $600,000 - $750,000 range. Again, a home in this price range, while a definite step up from an entry level, or “starter” house, isn't anything remotely mansion like in many areas of the country, even taking into account the recent market corrections. That range house would be just a step up from your first home.

Not wanting to be left out of the party, jumbo's have been in the news lately, just like, it seems, every other mortgage related product. Jumbo loans have always been more expensive than other mortgage products, but now they're getting harder to come by as well. It's gotten to the point where some banks, such as IndyMac, have indicated they'll not be selling them on the secondary market, but keeping them in their in-house loan portfolios. That should say something to all the investors out there. Namely, that there are still attractive debt secured investments out there.

Not everybody is a foreclosure risk and it seems that many have gone a bit overboard in their risk assessment. Why the industry ever decided that stated income and no doc loans were a good idea is a question for those with sharper minds than mine. If ongoing problems in the mortgage industry spread and cause people outside the financial and real estate industries to begin losing jobs, it may actually cause more to unload their homes, and the market to sink further. Now, however, we're just experiencing a well deserved correction in the market caused by stupid loans given by the very mortgage industry that's now coughing up blood. Just what were the industry insiders thinking when they decided to revise lending standards so that anyone with a pulse, or a presence in cyberspace, was a great candidate for a mortgage? Were they looking so short term that they were unaware that money to repay these loans would have to come from somewhere?

Sure, you could follow the train of thought that homes were becoming so expensive that creative loans were necessary to actually afford one. However, if lenders weren't giving out so many creative mortgages, the buyer pool would have been smaller, and home prices wouldn't have gone quite so far into the stratosphere. Or, you may have noticed that that free and easy credit, coupled with historically low interest rates encouraged the pool of buyers to swell to the point where sellers were grabbing every dollar they could get their hands on. The problem is that in economics, like at your local bar, any time there is a really big party, and many people are getting intoxicated, on either cheap booze or money, fights will break out and people will be hung over in the morning. People act like the party will go on forever and no one will notice what they're doing.

Too many people were invited to this party and they all showed up. Now there's going to be a great opportunity for those that can be janitors, or serve those in the future that didn't throw up on the table last night. Just because money's cheap doesn't mean you don't have to be a little bit smart about who you give it to.

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The first thing you need to be aware of is the ubiquitous ‘limited warranty’. That means just what it says, the coverage doesn’t extend bumper to bumper, top to bottom, or forever. It’s up to you, as a consumer, to determine exactly what the limitations are, something many consumers are loathe to do, given all the extremely fine print contained in most warranty descriptions. You, however, should not be among them, especially on major purchases, such as appliances, big screen TVs, vehicles, roofs, and even entire new homes. Seemingly minor differences in warranty coverage could dramatically affect how the manufacturer or builder stands behind their product, and more importantly, how much money you could have vacuumed (be sure to check the coverage on those too) from your bank account to pay for repairs. Remember limited means just that and something you may take for granted as being covered, may, in fact, not be.

One warranty clause you should be aware of on vehicle warranties, especially extended ones purchased for used vehicles, is the phrase “internally lubricated parts”. This is a common clause in such warranties. It means that parts lubricated by the internal oil supply of the transmission/differential/transaxle and/or engine are covered, but there are some other important parts and pieces that comprise the power train of the vehicle, and you could be stuck picking up the tab, should one of them break. These include (possibly expensive) parts such as wheel bearings, CV joints, drive shafts, and U-joints. Such things may be covered, but the chances are you’ll be paying for them if your extended warranty includes the ‘internally lubricated’ clause.

Another clause to be aware of is the term “normal wear and tear”. This could be construed as almost anything, depending on who is doing the evaluation, so be aware of this, but typically it refers to things such as clutches and brakes on vehicles and batteries on laptop computers for example. If you are unsure, ask the company for clarification.

If you are buying an extended warranty, make sure when the thing goes into effect. Some start covering the product from the date of product purchase, others kick in on the day you buy the warranty. Read the terms carefully to be sure. You could be purchasing the warranty weeks or months after you purchased the product, it’s up to you to decide if the dates are important to you or not. A similar clause applies to extended vehicle warranties when it comes to mileage. If the warranty states the coverage is for “5 years or 100,000 miles” for example, you need to make sure if that means 5 years or 100,000 miles from the date you purchase the warranty, or when the vehicle reaches 5 years old or 100,000 miles on the odometer. It’s often the latter. Needless to say, this could dramatically affect your coverage.

Another problem with extended warranties is the viability of the company you purchase them from. This includes store brand warranties, not just warranties from warranty companies. If you bought electronics from Silo or Pacific Stereo in the 1980’s you know what I mean. These companies seemed large and viable, then POOF! They were gone. No company, no warranty. Manufacturer’s warranties are less troublesome in this regard.

If you purchased an extended vehicle warranty from Warranty Gold, Pro Guard International, or Smart Choice, you know all too well that those extended vehicle warranties can become worthless overnight if the company that honors them goes bankrupt. It’s incumbent upon you, therefore, to carefully research the background of any extended warranty company before you purchase. Look into their financial viability and their history. You sure don’t want to spend $1,500 on an extended warranty, only to be unable to file a claim.

Sometimes warranties are simply not worth the cost, in many people’s opinion. This especially applies to some consumer electronics products. Why in the hell would anyone buy an extended warranty on a VCR or DVD player, for instance? Much to the chagrin of your local electronics repairman, you can buy a brand new one for well under $100, and many times it’s better than the one your spent $300 for 5 years ago. You need to do a cost benefit analysis before purchasing any extended coverage.

Buying a warranty is purchasing an insurance policy against failure. You are hedging your bets that your shiny, new product may, indeed fail at some point. What are the odds that it will? Do careful research on the reliability of what ever product it is that you’re purchasing. If the results bear out the need for a warranty, then consider its purchase, otherwise stick the $1,500 in a nice mutual fund that will generate you a healthy return. If the darn thing breaks, use the money for the repair or replacement. If not, you’ve got another little nest egg.

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Posted by debtblog at 01:49 PM | Permalink | Comments (0) | TrackBacks (0)

It seems that Home Depot Supply could use the latest building industry downturn as an opportunity to consolidate its builder business. In any industry downturn, firms are looking to economize and increase efficiency wherever possible so they can ride out the bumps ahead. With their massive capital and buying power, HDS is in a perfect position to help builders do just that. Now is the perfect time to consolidate their foothold on the building industry. With a solid distribution and supply network, they are a position to gain market share by forging new and expanding existing partnerships with the nation’s home builders. Time will tell if they do, in fact, take this opportunity to help home builders out in their hour of need, and, in so doing, give themselves a leg up as well.

The building industry suppliers that weather the storm will be in a great position to emerge from the current market problems with a greater market share and bolstered account list. For suppliers, now may be the time to focus even more intensely on remodeling oriented contractors, as the need for repairs and remodels grows as homeowners keep and improve their homes, rather than selling and moving up. Many will be dissuaded from selling due to poor residential real estate prices and lower demand because of a smaller pool of qualified creditors. If home owners still have substantial equity in their homes, a possibility if they’ve owned their homes for more than 5 – 7 years, remodeling may be a better choice than braving a stagnant sellers market.

Buyers, on the other hand, will be rewarded with a myriad of choices. Homes will be had for a relative song in many markets, as the list of foreclosures and deeply discounted properties grows. With cash from the savings they receive, they can jump in to making any improvements in their newly acquired properties. This may not be enough to offset the number of homeowners that don’t make pre-sale improvements before selling their homes, or the lack of new buyers that typically make improvements soon after acquiring their new homes. According to the remodeling industry study published by the Harvard University Joint Center for Housing Studies, there will be a slowdown in the remodeling industry, but it promises to much briefer than in the building industry as a whole.

A sector of the housing market that may still hold promise is the extreme upper end of the market. While not completely recession proof, the very rich will always have money to spend, and many spend it on homes and remodels. It’s not uncommon for wealthy homeowners to plunk down $3 – 5 million on a new home, only to immediately tear into the place for, as they see it, essential improvements. After all, if you can afford homes in this price range, you’re paying for location first and the structure second. The golf course or waterfront lot is the real prize in the deal, and that fabulous custom home is just so much clay to mold into the home of their dreams.

I’ve personally experienced wealthy heirs remodel exquisite, mid-century lakefront estates, and spend millions doing so, only to resell them because they couldn’t bear certain aspects of the place when they were finished. Life’s tough all over, I suppose, but that’s an insight into the minds of some in that socio-economic strata. When investing, the more insight, the better.

The Harvard study found that, while the number of new home builder has experienced a consolidation over the last 10 years or so, the number of remodeling contractors has actually swelled in the last 5 years by almost 25%. Remodel contractors in the Pacific Northwest and the East coast have experienced especially strong growth.

One emerging trend in home architecture is the resurgence of mid-century modern style homes. These homes are those built in the post WWII time frame until the early 1960’s. The trend began emerging a few years ago in remodels and new homes in Sun Belt states and has begun to spread to East Coast, and mid-west areas as well.These homes are characterized by architectural features such as “floating” elements, pocket doors, cantilevered roofs and decks, post and beam elements, and cathedral ceilings. If you’re targeting homes as remodel candidates with potential for strong appreciation, this is one style that could show strong demand in the future.

As always trends are cyclical, so the duration of this trend is unknown, but it appears to be gaining strength. There have begun to be magazines published that focus on this architectural style. New magazines are a good predictor of future demand and emerging trends (not just in this area, but of any trend). Watch for the increasing number and thickness of these publications, as the number of features and advertisers grows. =

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Here are 3 ways you can save money in everyday life. It's just a little bit here, and a few dollars there, but look out!  There'll be a few more ideas to follow.

1 - Saving Money on Prescription Drugs
It's a fact of modern life for most people that you or a family member will get stuck taking prescription drugs, either for a short term malady, or a long term condition. In the case of long term illness or condition, it can cost you many thousands of dollars in a few years. Here are some ways to reduce the pain, fiscally, not physically. Shop around to different pharmacies. They are free to set different rates for prescriptions, and many do. Remember that often generic drugs are available in lieu of brand name one, and there are definitely savings to be had going this route. Often there are multiple medications available for the same condition.

Check with your insurance company to see which available medication has the lowest out of pocket cost. In addition, you should get your doc to write you a prescription for as large a quantity of medication as possible. No, not so you can sell them on the black market to recoup your investment, but because the larger the quantity, the less often you'll have to fill it. Since every time you fill your prescription, you have to pay out of pocket, the fewer times you have to do this, the more money you'll save. Don't for get to check at the pharmacies that offer $4.00 or $5.00 generic prescription drugs to see if there's one available for you that will suit your needs.

2 – Save Money on Food
No matter how rich you are, and how well you've done for yourself financially, this basic need never goes away. In fact, it's a supreme source of pleasure for many, both rich and poor. Given that, you'll probably find yourself (or your personal assistant, for those of you in that income bracket), at the market fairly regularly. It's the regular things that offer the most potential for savings over time, so food is a great candidate for money savings.

Unless you like to pay more, you really don't need to shop in the cool, trendy, brand name supermarkets. Many cities are replete with very low cost warehouse food stores that have amazing selections, at a savings of as much as 50% on many items. This has the potential to save you more than almost anything else, depending upon the size of your family and their appetites. If it really blows your skirt up, you can visit the zoot markets once a quarter if you have to be seen by the beautiful people. If you like ethnic food, these warehouse food stores often cater to immigrant populations, so they sometimes have amazing selections of ethnic foods.

Buy using a shopping list, rather than your current appetite. You'll save money, especially if you have a good meal before you head to the store. This technique really works to keep all manner of different things from ending up in your shopping cart. As I mentioned in an earlier post about food's per unit pricing, don't forget to look at the cost per unit of things. Just because something's in the huge value pack, doesn't mean the specific price is actually lower.

3 - Save Money on Your Vehicle
No, not buying one, keeping the one you already own. Avoiding depreciation, you know. But in order to make that cost effective, you've got to maintain it. Priced a transmission lately? Better sit down first. That's why it pays to get your automatic transmission serviced regularly. The same holds true for such things as timing belt replacements. Many people are blissfully unaware that these even exist. On some engines, termed “interference engines”, a broken timing belt will cause the engines valves to collide with the pistons. This basically renders you expensive engine a pile scrap metal. No matter the price of scrap these days, it won't be enough to pay for a new engine. If your engine has one, replace the timing belt at the scheduled service interval. This typically between 75,000 and 125,000 miles, depending upon the model of engine in your vehicle.

Other basic, but oft neglected vehicle maintenance includes tire rotations. If you've taken a trip to your local tire store recently, you can see the price of oil has ramifications beyond those at the gas pump. Tires are made largely from synthetic compounds synthesized from, in part, crude oil. Hence, when the price of oil's knocking on $70/ barrel, the price of tires tends to be a bit steep. Rather than buying a new set of rubber wheel covers for your vehicle every 20,000 – 30,000 miles, rotate your tires every 7,500 miles, keep them properly inflated, and make sure your vehicle is properly aligned. Oh, one more thing; don't drive like you did when you were 17. A large percentage of tire wear can be directly attributed to driving style. Many tires today will last 60,000 – 80,000 if you let them. When you do replace them, don't get the cheapest set you can find, either. Little else contributes as much to the safety, braking, ride, comfort and handling of your vehicle as your tires.

That's not saying you should keep your ride forever. Eventually you'll reach the point where ongoing maintenance costs, or expected future ones will dictate the prudence of a newer vehicle. Beyond regular vehicle maintenance, do all you can to maximize the life of your car. Then of course, dump it unceremoniously at your nearest dealer and drive away in the used car of your choice (unless they're offering a 60 or 72 month, 0% financing deal on something new). You could sell it as private party, but that can be fraught with peril. You may get more for it, but you've got to spend much more time, pay to advertise it, meet who knows what kind of characters (and let them drive your car), and not realize any sales tax savings in states where that is applicable.

In states that have sales tax, you'll be able to save a substantial amount of money on sales tax by trading in your vehicle, rather than selling it and using the cash to buy a new vehicle. Often this savings is enough to largely offset the difference between the trade in value and the private party selling price. For example, if your area has a combined sales tax rate of 7% and you are trading in a car with a $10,000 value, you'll save $700 in sales taxes because you won't have to pay sales tax on $10,000 of the new car's sales price.

Have a great, debt free weekend.

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How the hell are you supposed to pull that off, minus some creative ballot box stuffing or other election shenanigans? It’s pretty easy, really. Just cast a vote in the oft-neglected primary elections. In many primaries the voter turnout is downright abysmal; on the order of 15 – 20%, sometimes even lower, especially in an off year contest. That means your vote will count for 3 times as much as when the voter turnout is 45 – 60%. The reasons for the low voter turnouts are, for the most part, fairly simple. The electorate tends to view the primary as less important than the general election, and the primary elections are far less publicized than the general election. You typically don’t see multi-million dollar campaign expenditures in a primary.

There are, however, many important issues decided during many primaries, not the least of which is who the hell you’ll get to decide between in the coming general election. Some of the smaller primaries may be even more important to you at the local level, as many tax issues are on the ballot during this time. Tired of your property taxes going up and up and up? Maybe you should have taken a trip to the polls to vote down the levy or other tax inducing legislation when they were on the primary ballot.

A bit of campaigning to friends, relatives, and associates could magnify your influence even more. Get a group of like minded voters headed to the polls, who otherwise might have stayed away, and your ARM may be the only thing going up, not your property taxes.

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Posted by debtblog at 01:07 PM | Permalink | Comments (0) | TrackBacks (0)

You can see by looking at the stock price charts of the heavily building industry related home improvement centers. Notice how they move almost in lock step of late, mostly trending down, however there is some movement that looks like short term recovery. Notice how the bank that is most heavily mortgage related, Wells Fargo, actually moves down the least of the three banks in the chart, but that all 3 banks and Home Depot actually move basically together, although the banks have showed a bit of a bounce back in the last couple of days.

In the next screen, notice that Fannie Mae (FNM) is actually posting a nice gain for the year and that the vertical scale must be expanded to accommodate the price drop experienced by embattled Countrywide Financial Corp (CFC). Adding in Capital One (COF), who yesterday announced they'd be taking an $860 million loss to rid themselves of the risk created by their recently acquired GreenPoint Mortgage division, shows the magnitude of the recent drop experienced by Countrywide, the nation's largest mortgage company.

When Countrywide (CFC) is superimposed against stocks from 3 of the country's largest home builders, Centex (CTX), DR Horton (DHI) and Pulte Homes Inc. (PHM) you can see that although the home builders have moved down almost in unison, Countrywide has fared much worse.

Does that mean there are no opportunities left in the sector? No, it doesn't. There are always opportunities. People still need places to live and the money to buy them. As noted before, there may be a mini remodeling boom as fewer people buy new homes. A $50,000 HELOC will allow a nice little addition and kitchen remodel. Don't look for a big jump among appliance manufacturer's though. As the housing market slows, the an increase in kitchen remodels will probably never make up for the number of new, high end appliances installed by the big home builders.

There are also millions of folks out there who represent great credit risks, despite what many of the banks and investors would have you believe. Lending to these people is still a very solid, profitable business. Much of the problems the market is experiencing today is of it's own making (mortgages that should have never been made) and some of it is driven by fear and hype, the record number of foreclosures notwithstanding.

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Posted by debtblog at 01:24 PM | Permalink | Comments (0) | TrackBacks (0)

Does this mean that all low / no money down, and other non-conforming mortgage products should have been eliminated? Not at all. Many creditors use these mortgages for a variety of reasons, and are excellent credit risks. In addition, many of those mortgage customers who received these products have done fine, made their payments every month, and never gotten into any trouble whatsoever. Many of the problems stem from those mortgage holders who were relying on a continually appreciating real estate market to allow them to refinance their ARMs and other mortgages into more favorable loans before their interest rates adjusted. Others got into trouble due to unrealistic expectations of future earnings growth.

The mortgage was all to eager to help many of these folks into loans they should have never qualified for. The 93% year over year increase in foreclosures for July illustrates the point, and drives home the stark reality that there were some very poor decisions made by lenders. Based on personal experience, and that of others, mortgage lenders will allow customers to qualify for loans that are much larger than their income has a realistic chance of supporting in the long term (and mortgages tend to be so, for the most part). One can suppose they may review their loan qualification procedures to help prevent such problems in the future.

One wonders now if many investors aren't, in effect, throwing the baby out with the bath water. Causing the mortgage lenders to restate their loan portfolios to reflect added risk (which the increasing foreclosure rate proves is definitely there), makes them have increased cash reserves in order to meet collateral requirements. Many mortgage companies simply cannot do so. Other backers are calling their credit lines entirely. Again, the mortgage companies haven't a prayer of paying off the line. By so doing, the creditors are driving out of business the very companies whose loans they have invested in. Who wins then?

In the latest mortgage company collapse, Mortgage company First Magnus, out of Tucson, AZ, fired all but 60 of its 6,000 employees, ceased operations and filed for bankruptcy yesterday. Although they show over $900 million in assets against only $813 million in liabilities, they had insufficient liquidity to continue operations.

Mortgage companies are using various strategies to deal with the problems. Coutrywide Financial got 11.5 Billion in additional credit from a group of 40 different lenders, Capital One closed their GreenPointMortgage division entirely, and Thornburg Mortgage has sold over $20 billion worth of mortgage backed securities in order to raise additional cash. Cap One's decision will cost them about $860 million, but they decided it was worth it, rather than facing additional risk exposure. Thornburg expects their asset sale to ding them for over $900 million.

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Posted by debtblog at 12:56 PM | Permalink | Comments (0) | TrackBacks (0)

That's the kind of market to be in, a niche market about to be transformed to a mainstream market. Just look at the past markets to make the same leap; automobiles (not a great example at this point in time, but look at the broader historical context), plastics, aircraft, premium coffee, and electronics. There is a very nce period from just before the niche becomes mainstream to when the market matures and becomes saturated (driving down profit margins) where investors can make out handily. The key is to avoid those companies that will become lost in the inevitable shakeout. NOTE: I foolishly don't own any of this stock, yet.

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Posted by debtblog at 02:26 PM | Permalink | Comments (0) | TrackBacks (0)

The problem is that the whole “free health care for everyone” thing is an egalitarian fantasy. One only needs ask any of the thousands of Canadians who flock to U.S. doctors and hospitals every year seeking to circumvent the long wait times encountered in the Canadian national health care system. It's not that Canadians don't spend money on health care, either. On the contrary. They actually spend an astounding 9.3% of their GDP on it every year. BC and Newfoundland are projected to spend a full 50% of their provincial budgets on health care this year and Alberta will reach that dubious milestone in the next 4 years. The Canadian Taxpayer's Federation, admittedly an organization with an agenda, reports that in some provinces, the percentage of a Canadian's tax burden derived from health care is as high as 40%.

More troubling is the average wait time experienced by those under such systems as found in Canada and England for basic life saving procedures, such as an EKG. If you have a heart condition, this is basic diagnostic tool that should be available to your physician immediately. According to a recent study published in the New England Journal of Medicine, the average wait time experienced by Canadians seems rather long to those raised with the the U.S. health care system. For example the average wait time in Canada to see various specialists, after seeing one's GP are as follows:

• Internal Medicine - 4.5 weeks

• Medical Oncology – 3 weeks

• Urology - 7.5 weeks

• Neurosurgery – 11 weeks

• Opthalmology – 14.3 weeks

• Orthopedic Surgery – 14.7 weeks
  

That seems like a fairly long wait, but should the specialist determine that additional treatment is indeed required, be prepared to wait even longer. For example some of the average wait times reported in the NJM include:

• Internal Medicine - 6.3 weeks

• Medical Oncology - 2.6 weeks

• Urology – 5.3 weeks

• Neurosurgery – 7.8 weeks

• Opthalmology – 13.1 weeks

• Orthopedic Surgery – 25.3 weeks

Imagine upon being told by your physician that you indeed have a brain tumor (after waiting 11 weeks to see the neurologist in the first place), that they'd be happy to fit you in at the earliest opportunity; 2 months from now! Or that that, after already waiting over 3 months to get a specialist to look at your failing vision, they would be able to start corrective surgery for the problem in only 3 more short months!

It's not that Canadians spend an erroneous amount of money on their health care compared to those in the U.S., either. Actually, Canadians spend about $3,300 per capita on health care, whereas Americans spend over $5,600 (2003 figures, according to the Organization for Economic Co-operation and Development's 2005 study). It's that they aren't getting a good value for their dollar. It matters not that they spend comparatively little compared to the U.S., it's that their health care dollars are not buying them ready access to services.

Despite what some would have you believe, American's do spend a large portion of their money on publicly funded health care. Over 44% of American health care in 2003 was financed with public money. In Canada, the figure was just shy of 70%. The biggest problem in the U.S. is that many people simply do not have health insurance, about 46.6 million (15.9% of the U.S. population – both figures according to the 2005 U.S. census report) at last count. Some of the uninsured were so by choice. Many workers, especially those young, single, and feeling invincible decline to accept employer sponsored health insurance, preferring to take their chances. In fact, a 2005 study by George Washington University's National Health Policy Forum found that 35% of workers at small companies (3 to 199 employees) declined health benefits, although employee monthly costs averaged only between $43 (single coverage) and $282 (family coverage). At all size firms firms the average cost rose to $308 and $829 respectively.

The cost of health insurance is steadily rising, prompting employers to look at new and unique solutions to the problem. On of these is to join with other small businesses to form insurance buying co-ops. This allows the businesses to be eligible to participate in a larger group plan than they'd otherwise be eligible for.

One thing is for sure, we need to look at new and unique solutions for the health care problem. One thing that many Americans seem to not want to do is to view the whole thing as a personal responsibility issue, preferring instead to view it as a government problem. It's been ingrained into the minds of many that access to health care is an inalienable right, like free speech, the right to bear arms, or the freedom to assemble. While that would be fantastic, the fact is that health care costs money, and plenty of it. Everybody needs to make the determination of how much money they feel it should cost, and where those funds should come from. Remember, medical schools is expensive, time consuming and ill suited to many. Remember too, that all those shiny, computerized medical miracles strewn about modern hospitals are extremely expensive to develop and procure.

Paying for health care, weather at the governmental level or individually won't get any cheaper. If the government pays for it, you are still paying for it. Those who pay no taxes relish in this idea. Those of us who do, may want to look into the whole issue a bit deeper. If we get $829 worth of health insurance every month, but our taxes increase by $1,100, is that a good value, or just the price we'll have to pay?

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Posted by debtblog at 01:59 PM | Permalink | Comments (0) | TrackBacks (0)

In the news this morning was the fact that one of the largest U.S. mortgage lenders, Countrywide Financial, has completely drawn down one of their available credit lines due to the unavailability of cash for mortgages. The scary thing is that the credit line wasn’t small potatoes either, it had a limit of $11.5 BILLION! The news of the complete exhaustion of the credit line helped Countrywide stock to an 11% single day drop. Looks like another shorting opportunity in the mortgage industry. The larger question however, is what happens if one of the engines that’s been fueling our economy, mortgage money, evaporates like so many raindrops in the Sonoran?

We may be about to find out. Fannie Mae and Freddie Mac, the largest mortgage loan buyers are bound by statutory limitation to $1.4 trillion in total mortgage debt. They are awfully close to that now, and if they reach it will be unable to purchase any additional loans. This will further deepen the problems faced by Countrywide and others who must sell their loans as part of their normal business operations.

If no one is available to purchase the loans, the lenders will be stymied. So will you, the potential homebuyer. Yesterday Senator Charles “Chucky” Schumer out of NY said he’d introduce a bill for at least a temporary abolition of the $1.4 trillion debt limit faced by Mae and Mac. Where, or if there would be a new, higher limit imposed is unknown.

While fewer buyers in the existing home market would be a problem, in the new home market it could spell economic disaster. Already homes are sitting on the market as builders struggle to rid themselves of unsold inventory. This is a great opportunity for potential homeowners who can get a mortgage, but not so good for the hundreds of thousands of workers who rely on the homebuilding industry for their paychecks.

After steadily rising since 1992, the number of new housing starts has dropped precipitously in the last year, down from a high of just over 2 million in 2005 to 1.8 million last year. In the first 6 months of 2007. Figures released by the Census Bureau yesterday for July residential unit starts indicate that it’s not over yet. Far from it. July figures are on pace for an adjusted annual figure of only 1.381 million units. Obviously that’s a hefty drop from over 2 million, but even more telling is that it’s 20.9% down from the revised June estimate of 1.47 million annual units. To further illustrate the decline, the value of private, residential construction dropped from $694 million and $678 million in March and April of 2006 to $555 and $551 million in the same 2 months of 2007. This says nothing of the decline in existing home sales and remodeling projects, all sure to adversely affect the economy, and your wallet.

That will spill over into the economy in many different ways. If you work in the real estate, mortgage, construction, building supply, or appraisal industries, you’ve probably noticed a drop. However, construction jobs for both home builders and specialty trades have yet t experience the magnitude of decline that the drop in new housing starts would suggest. In fact, the number of those employed in residential construction

(I have no idea how they correlate this figure with the huge number of illegal aliens employed as sheet rockers, landscapers, carpenters, laborers, insulators, and roofers in this country. To what percent these official government figures reflect those workers, I have no idea. I have no doubt that the argument “They only take jobs Americans don’t want” will be a much tougher sell, as the number of unemployed American skilled and unskilled construction trades people grows.

Lest you think I’m exaggerating, just take a walk around the job site in any large scale housing development in this country [the few that are left]. Get there about 11:00am and see who shows up at the mobile burrito van for lunch. Count the number of those who speak any semblance of Englais. You could just as well be at a job site in Mexico City. I’m not discounting their work ethic or ability. They work very hard, and for the most part, do a good job, in record time. They’re just not legal and bring with them all the problems that represents, and more.)

sits at over 3 million, down only slightly from its peak in the summer of 2006. This fails to count employees and business owners in related industries that may, in fact, be feeling the pinch already. So far there has been about a 10 to 1 disparity in the housing starts to lost construction jobs number. Starts are down about 20%, while jobs have fallen only about 2%. It won’t stay that way forever. Builders won’t keep employees if they aren’t building homes. Buckle down.

Oh, and have a great weekend!

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Posted by debtblog at 02:04 PM | Permalink | Comments (0) | TrackBacks (0)

As many of you reading this will readily agree, that’s completely insane! Your little diversions now can cost you plenty. Even if you manage to avoid getting in trouble with the law, getting a girl pregnant / getting pregnant yourself, or wrecking your car, you’ll be losing out on the power of compounded savings and tax benefits of an employer sponsored savings plans with matching. If you had your fun and emerged relatively unscathed, nice work! Now, however you’ll need to look at some strategies to help you play retirement catch up.

Due to the aforementioned benefits of compounding and tax savings, the length of time you participate in an IRA, 401(k), SEP or other retirement savings vehicle will really boost the value of your retirement near the end of its term. What can you do if that term has been a bit abbreviated due to starting late? Here are some ideas to chew on.

Retirement Plan Boosting Strategy #1
Stay late. It’s probably not exactly what you want to hear, but it’s very powerful. With 50 being the new 30, and many Americans beginning their retirement plan contributions as if that were the case, you can work for just a few more years and reap dramatic increases in your retirement plan totals. For example if you move your retirement age back from 65 to 68, you can benefit big time.

If you’d managed to amass $500,000 in your accounts, that additional 3 years of contributions and compounded interest will provide the difference between just getting by and living a pretty comfortable life. Not only will you have 3 fewer years to withdraw money from your plan(s), there will be a much larger dollar amount in them. For example, if you use my standard 8% return calculation, that $500k will grow to about $800 in those 3 years.

That obviously brings up the thought “That’s huge! Why not just stay until 70?” You’d benefit there too by having almost $1,000,000 to retire on. If you’re in your 50’s now, there’s a great possibility the feds will have moved back your social security retirement age until 70 anyway, in an effort to salvage the whole Social Security idea.

Retirement Plan Boosting Strategy #2
Have an expert look at your retirement plan. Some things are extremely complex. For example, don’t let your tax free 401(k) contributions reduce your taxable income to a point where it could take you down a tax bracket, causing the value of other tax exempt vehicles and deductions, such as your mortgage interest, to lose some value. Some experts argue that you’d be better served in that case to invest in a Roth IRA and blue chip stocks, then pay the capital gains on these vehicles when you sell them. That’s contradicted by others, who feel that is a recipe for disaster, and you should max out your 401(k) or 403(b) at all times. In fact, there is no one best retirement strategy. It depends on your individual situation.

Many factors come into play here; your age, the value of your retirement plan(s) now, the age you’d like to retire, your income, your tax bracket, the value of your home and your plans for it upon retirement, etc. For example, you may have $500,000 equity in your home. That’s a pretty realistic assumption in many areas of the country. In fact, many of you may have a significantly higher amount that that, if you’re in California, Seattle, Las Vegas, or the North East and have owned your home for a while. In that case you can take up to $500,000 if you’re married without paying any capital gains tax at all. Since 1997, you’re eligible to pocket the entire amount you profit on the sale of your primary residence without owing Uncle Sam a dime, up to the $250,000 for singles and $500,000 for married couples. If that describes you, and you are planning on selling, buying a Prevost, and touring the country in your golden years, that obviously changes your retirement planning some.

The point is that you’re looking at a whole array of retirement options, each with their own set of tax and income consequences. The unique combination of factors combines to render no one option the best for everyone. Look carefully to make sure you’re maximizing your tax and income benefits now, before it has a chance to cost you more later.

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Posted by debtblog at 02:20 PM | Permalink | Comments (0) | TrackBacks (0)

The next time you're sitting in your mortgage broker's office, there are a couple of things you should know about the mortgage you're about to commit to. One important fact that you should know right up front is that your broker is getting paid. Nothing wrong with that, fish gotta swim, birds gotta eat, after all. It's how they're getting paid that you should be fully aware of. You should know that your mortgage broker is not only getting paid by you, in the form of fees tacked on to your loan (you can, and should, negotiate these down in most cases), but by the bank as well. If you weren't aware of this, consider yourself enlightened.

The money the broker makes from the bank or lending institution is actually, in most cases, far greater than the pittance (If you did a good job of negotiating) they'll receive from your fee. The bank's payment to the broker is referred to as the 'Yield Spread Premium'. What you may also not be clued in to is that this fee actually rises with the interest rate of your mortgage! That's right, the worse the loan for you, the better it is for your broker. A conflict of interest? Possibly so, but it drives home the point about the importance of finding a trustworthy mortgage broker. Don't worry, there are plenty of them out there, but it's up to you to find one. Just make sure you ask them about the yield spread premium, and how much they stand to make from your mortgage. You should be able to find it on your good faith estimate under the heading 'YSP', or possibly 'POC'.

The other little fact that most brokers don't clue you in on is that, like the F&I guy (or gal) you have to sit with when you buy a car, they usually get paid on all the extras and contract clauses that are advantageous for the bank or lender, but less so for you. Typically many of these clauses can be eliminated for many classes of mortgage. On big one is the prepayment penalty. Banks love this penalty, because it helps protect their investment. They count on receiving a certain amount of interest from you before you either pay off your loan during the term, or eventually refinance it. To ensure you actually pay them what they want, and help ensure they can count on a certain amount of interest income, they insert a penalty clause in your contract. That means they get a monetary penalty from you should you get out of the loan early. It sucks for you and can keep you from refinancing into a better mortgage product should the need or opportunity arise.

So, you need to:
1 – Trust your broker, but verify

2 - Know what fees will be rolled into your loan and negotiate them down, preferably to 1% or less. Then, make sure they don't back out on the negotiated fees prior to closing. I have saved thousands of dollars negotiating lower fees like this, and you should too. This doesn't include the application fee, which you should NEVER pay.

3 – Ask about the broker's pay structure, the yield spread premium, and how they're incentivized for the various contract items along the way.

Look at the possibility of asking the broker to agree to a set fee up front, in lieu of the hidden fees they typically receive. Some do this now, but not many.

There are fewer lenders out there by the day, due to the problems in the mortgage industry. As the competition thins out a bit, you may think you'll be unable to find a good mortgage. Most likely you'll do just fine, but you've got to be your own advocate. Don't be a wimp. Many people are simply too chicken to actually ask the tough questions. They feel bad or find it distasteful. Well it may be, but so is getting stuck with a crappy mortgage, and that pain could last for 30 years.

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Posted by debtblog at 01:32 PM | Permalink | Comments (0) | TrackBacks (0)

Here's another Debt Free thought of the day:

Methinks one should always should examine closely the concept of risk vs. cost. Maybe a look at the balance between not only the risk vs. cost, but what's risked. The risk may be very slight, and the cost great, but if that which is risked is infinitely precious, then almost any cost is worth paying. (Except freedom, see Ben Franklin) 

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Posted by debtblog at 06:57 AM | Permalink | Comments (0) | TrackBacks (0)

Here's a way to help raise one of the components of your credit score; your credit utilization score. Credit utilization is nothing but the percentage of your aggregate outstanding balances on revolving credit accounts compared to total of their limits. With that in mind, there are two ways to improve your credit utilization, and thus your overall credit score.

You can either pay down your outstanding balance or increase your total credit limit. In most cases it's far more expeditious to get your credit card companies to increase your limits. Why? Well, unless your outstanding balances are relatively low, or you have a sudden influx of cash, you stand a fairly small chance of paying them down in the short term to the extent they'd positively impact your credit utilization score.

They danger here is readily apparent to most of you. Once your credit limits begin to grow, it's a standing invitation to charge, charge, charge. If you're trying to get debt free and find financial prosperity, restraint here is vital. This technique is not for those with little financial discipline. If you're unable to restrain yourself from using your credit card, don't get the limit increased. If you are able to take advantage of this score raising technique, there are two basic ways to get a limit increase.

One way is to simply ask your credit card issuer. In many cases, if you have a solid, on-time payment history, they'll be all too happy to comply. After all, they make their money charging you interest on your purchases. The more you spend, the more they make. Another way is to engage in behavio