Sushi Money

     President Bush held a press conference discussing mortgage problems in the nation, and outlined a few initiatives he would like to see to help homeowners who are struggling to keep up with mortgage payments.  Realistically, few things will change right away, but the President’s focus does help bring attention to the problems and put it where it belongs- in the lap of Congress.  The legislative branch needs to get to work and overhaul various aspects of the lending laws, as well as modernizing the Federal Housing Administration.

“It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford,” Bush said in the Rose Garden. “Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders or a little help from their government.”

     Will lenders work with homeowners more now?  Maybe…  The President also cited the tax code as being a burden when a homeowner may receive “forgiveness” of a portion of their debt or mortgage balance.  The tax code does treat debt “forgiveness” as income, and it would be fully taxed in the same year.  Although I applaud possible changes to the tax code in certain situations, I have two concerns or doubts about this as being effective:

         1.  Why should an individual or family that is struggling to pay their mortgage receive any greater tax benefit than a similar individual or family that is paying their mortgage on time?  In other words, if two individuals or families (in a similar tax bracket) are paying for a similar mortgage amount, what happens when one family chooses to run up their debt and credit cards, buy new cars,  take out an adjustable rate mortgage on a house they can’t afford… and when they struggle to keep up with house payments their lender helps them out, forgives part of their loan, and Uncle Sam gives them a tax-free (or reduced tax) gift?  Now let’s say the other family made more prudent decisions, were careful with their debt and credit cards, managed their expenses carefully, didn’t take out an ARM (or if they did are paying it on time), and because of their wonderful financial management discipline… do they get a tax break?  Nope.   Does that seem fair?  Nope.  Nobody ever said the tax code was fair however.   But tell me, how is this an incentive to to foster financial discipline and positive money management for homeowners?  It’s not… it’s just a political hot-potato that will receive some level of attention.  

     But honestly- in good faith, I’m glad our government is focusing on ways to help people who really need help. Many times we don’t know the reasons an individual or family is struggling… it could be for some totally different reason like a death in the family, etc.   That is important, and we can do more.  Some homeowner or tax advocates might say it could be treated like capital losses or gains.  We’ll see…

      2.  More realistically perhaps, how many lenders are really going to “forgive” $20,000 of mortgage debt someone owes?!  I don’t really know how often this has happened… maybe they do.  More often I believe lenders will establish a “workout agreement” of some type where the homeowner’s payment is reduced or modified for certain time period, or the loan is re-negotiated or refinanced.  I really don’t think many lenders will be “forgiving” debt outright.  I could be wrong, but I suspect most will become creative in the way they can keep people on the hook for the debt they do owe.  And morally or ethically perhaps, if we owe a debt, then we should repay it.  If we cannot because of life-changing circumstances, then bankruptcy is another option to help someone start over. 

    All in all I’m glad that housing and mortgage woes are getting national attention.  In so many ways it speaks to the confidence and psychology that we all share for how the economy, and the country, are doing.  Our economy is chugging along pretty well considering housing and a few other areas, but if the mortgage woes continue… guess what?  Consumer spending will dive and so will the rest of the economy.  I don’t know… what do you think?  I’m guessing housing still has 2-3 years before it recovers.  If the banks and finanical institutions can get the lending and money-flow thing figured out, we should be fine. 

     Anna from Widow’s Quest has posted a terrific weekly round-up of articles on How to Solve Your Money Worries, and was kind enough to include Sushi Money’s discussion of Avoiding Foreclosure.  The Widow’s Quest site is dedicated to supporting those who are rebuilding their lives as widows, and how to reinvent yourself and move forward.  It’s a very interesting site and I appreciate the focus on solving money worries, as well as grieving the loss of a loved one.  From a personal perspective, my father passed away in 2005, and I know my mother has faced many challenges and questions along the way.  Losing a loved one at any stage of life is very difficult, but especially for seniors and those with long-established relationships.  The financial aspects of this change and separation can pose an additional burden at times of great stress.  For anyone going through this challenge there are many ways to find help.  Widow’s Quest talks about finding support as well.   For financial questions and concerns, I strongly recommend finding an objective fee-only certified financial planner in your local area.  You can use the Financial Planning Association’s search tool to help.

     In recent years, consumers are using money market funds in much the same way as a bank savings account.  Many money market funds even allow you to write a limited number of checks.  Yet the phrase “money market fund” is very broad.  Most banking institutions have what are called money market deposit accounts.  These are different from money market mutual funds, typically offered by financial institutions like brokerage or mutual fund companies. 

What is the key difference?  In most cases, money market deposit accounts at banking institutions are fully insured with the FDIC (Federal Deposit Insurance Corporation) for up to $100,000 protection for losses, just like a checking or savings account.  Check the FDIC link to review what is, or is not insured at your bank or financial institution.   But money market mutual funds are different animals, and may be invested in different products to achieve a higher rate of return for consumers.  And they are generally not FDIC insured. 

*** Update: 2008 ***  Due to the financial crisis in September/October 2008, the U.S. government has agreed to provide temporary FDIC insurance coverage for money market mutual funds of participating financial institutions.  Additionally, FDIC insurance has now been increased temporarily from basic amounts of $100,000 per customer deposit account to $250,000.  For more information, see the FDIC website.

     Rumors and concern by consumers for money market accounts have been flying around the internet in the past few months, with many people wondering how “safe” their money is with various banks and mutual fund accounts.  I know I was curious as well… are you?  Many of these fears may be unfounded, but there’s nothing wrong with making sure you are comfortable where you are putting your money.  So if you’re invested in a high-yield money market mutual fund, and don’t have FDIC insurance coverage, does this mean your money is at greater risk of loss?  Perhaps… remotely. If my financial institution was investing in high-yield commercial paper, with mortgage bonds or subprime CDO’s as the majority of assets… I would probably not feel comfortable, and would move my money elsewhere.  

But CNN/Money has written an excellent article today titled Debunking Money Market Fears while discussing how there has only been one money market fund that “lost” money for consumers over the past twenty years, paying .94 cents on the dollar after shutting down.  More typically, a financial insitution will make sure they “back up” their money market mutual funds to ensure their reputation and client confidence is maintained. 

    One of the best dicussions of the topic was addressed recently at Vanguard.  The Vanguard Prime Money Market fund is a low cost, high yield money market fund. Is this fund insured by the FDIC?  No.  But is it a safe money market fund?  In my opinion, very safe.  Responding to concern by clients and investors, the company addressed the issue recently in the article,  Vanguard money markets well-positioned for market volatility.  To quote how Vanguard invests with the Prime money market fund:

“What are the largest holdings of Vanguard Prime Money Market?”

“The largest category is bank certificates of deposit, slightly over half of the fund’s assets. U.S. government agency bonds and commercial paper are each about one-fifth of the portfolio. The commercial paper is short-term debt issued by blue-chip companies such as General Electric and Wal-Mart.”

     Looks like a very sound portfolio to me, and it was good information to know.  What about your money market mutual fund?  Do you know what they are investing in?  I also appreciate companies who provide full disclosure to investors.  Those who have been the most concerned about risk have moved a great deal of money into U.S. government treasury bonds, and funds that invest in treasuries, seeing that as the safest place.  After all, if the government’s treasury bonds are ever at risk, then we’re all in trouble!  Nothing wrong with that at all. 

We need to make decisions about what we believe is best… putting our money where we feel the most comfortable.  If that’s a bank savings account or CD, then that’s the place to go.  There are many excellent choices, and good, solid money market funds.  For a real bank savings account, there are terrific options like ING Direct, currently offering a 4.5% savings rate. You can open a savings account in under five minutes with no fees, no minimums and FDIC insurance.  ING Direct offers simple online transfers to and from any checking account you prefer.

  I personally believe our money is safe with most money market funds in the financial services industry whether FDIC insured or not, and will continue using Vanguard Prime as my money market fund of choice.  How about you?   Have you moved money around recently, or are you concerned about your own money market funds? I would love to hear your feedback!

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    Everyday it seems we read of increasing foreclosure rates, and how people all over the country are behind on mortgage payments with their lenders.  Foreclosure is nothing new across the nation; there has always been some percentage of the population affected by loss of income or another factor that leads to foreclosure and turning a home back to the lender.

In 2006 and 2007, some experts believed the media was over-hyping the foreclosure problem simply because of the real-estate and economic climate.  That may have been true, but it didn’t change the fact that Americans in record numbers are indeed facing foreclosure, and some are now calling for government action.  In concert with the U.S. economic problems, foreclosure is hot-button a political issue and 2008 has shown that foreclosure problems remain. 

**Update September 2008**   Before working with any company that tells you they can help solve your foreclosure problems, be sure to check them out thoroughly.  Find a financial counselor to review your situation, and be careful of scams.  Foreclosure scams and “equity skimming” are a huge problem across the nation today.  Work with qualified state or government counselors.  See below for more information.

There are a myriad of reasons for foreclosure… job loss, local economic changes, loss of a family member or divorce, a house that won’t sell, or an inability to make payments or refinance based on current income and the type of loan.  The latter is a real issue for some today… lender standards have tightened and some people have simply got in over their heads with an unsuitable loan.   So what can you do if you think you might be at risk of foreclosure? 

The most important first step is to make an honest appraisal of your situation.   In other words, make a realistic analysis of your budget… look at income and expenses in detail to see where you stand. If you know the house payment is simply too much, or you feel “frozen” without knowing what to do… then it’s time to explore options.   And a disclaimer: I won’t pretend to be a credit counseling expert and I encourage you to seek professional assistance. But I do have the experience and knowledge to offer some insight and direction, along with links to resources that may be helpful.   

If you’re reading this and concerned about your situation, you obviously are on the right track.  Whatever you do, don’t give in to destructive thoughts or actions  that will simply make things a lot worse for everyone.  In some cases, believe it or not, people are relieved by foreclosure and see it as a way to start fresh again.  With the burden of an overwhelming debt situation gone, one can start again and move forward.  Let’s assume you are facing the prospect of foreclosure, and want to approach the situation rationally, looking for solutions.  If we also first assume we want to stay in our home (not everyone does), then there are some prudent steps to take:

1.  Face up to the problem.  Makes sense… sometimes we simply try to ignore something we don’t want to deal with, or we procrastinate, thinking “it will all work out.”  Maybe, but don’t count on it.  It’s important to think positively, but it’s also important to take action.  There is no time like the present… so don’t ignore potential problems.  If you are falling behind on debt, then it will become that much harder to fix the problem later on.  Deal with it now.

2.  Consider Financial or Housing Counseling.   If you’re not sure you have a problem yet, but you’re having a difficult time keeping up with house payments and staying within the budget, there are some excellent (and awful) credit counseling agencies that can help you figure out how to maximize your income and manage money.  Find a legitimate organization such as the Consumer Credit Counseling Service.  Check with the National Foundation for Credit Counseling’s DebtAdvice.org Locator and find a competent local agency.  Do not run out and sign up with just any “fly-by-night” credit counseling outfit.  There are some very poor companies out there that make money by signing people up for “counseling” or “debt reduction” or ”credit repair” programs that will not help your situation. 

•      Take a look at this excellent factsheet from the Federal Trade Commission.  It talks about scams and considerations before signing up with some agency you know little about.   When it does become time to really find financial counseling assistance, find a legitimate agency.  
•      Check this page at the U.S. Trustee Program from the Department of Justice for a list of approved credit counseling agencies for each state.  Search your state or local area and try to find an agency you can visit in person. 
•      The U.S. Department of Housing and Urban Development also funds low-cost housing counseling.  It may or may not be available in your area, but that is another option.  In some cases, they can even speak to lenders.
•      If your income and credit situation allows, it may be best to refinance your mortgage.  A fixed rate loan will allow you to have a predictable mortgage payment for the life of your loan.  Understandably, your income and/or housing situation may not make refinancing feasible.  Often, other lenders or local banks may be your best bet for refinancing. 
•      Find ways to increase your income if possible.  Can family members help?  Consider selling items you don’t need, and lower your total monthly expenses.  Yet working at two jobs, or selling all your assets may not be the best thing to do over time. Also consider selling the home, and downsizing into a home, and mortgage payment, that is more affordable if possible. 
•      If you are behind on debt payments, the mortgage comes first!  In other words, if you’re going to be behind on payments of some kind, don’t pay your credit cards.  Why?  Because most credit card debt is “unsecured debt” and they cannot (depending on state law) take your home or property from you if you are late making payments.  Car loans are also “secured” debt and creditors can typically “repossess” your car.   But some creditors may call and threaten or harass you… if it’s for unsecured credit card debt however, that is the last debt you pay.  Take care of essentials first: Groceries, Utilities, Health needs and Mortgage payment.  But cut back where you can…

3.  You’re really concerned, or having trouble making house payments, no bones about it?   Then you must call your lender as soon as possible.  

250 Questions You Should Ask to Avoid Foreclosure 

     BUT!  Do your homework first.  Know your Mortgage Rights.  Prepare for the call and conversation. The bank or loan servicer does not want your home… they want you to keep making payments.  Many loan companies are making a renewed effort to work with consumers facing financial difficulty.   Be proactive, ask questions, and try and arrange a viable solution.  It may not always work however, and with some loans the lender is not able to modify the loan terms. 

It’s important to pursue all options:

•      Review your loan documents in detail so you understand them before you call.  Make sure you read the terms of your loan agreement, and prepare to ask questions if you need more information
•      Review the foreclosure laws in your state.  Each state has different timeframes and things lenders can and cannot do regarding foreclosure.  If you don’t know your foreclosure laws, you won’t understand the timeline or how much time you have to take certain actions. 
•      Make a list of your reasons for falling behind.  Income change or job loss?  Sickness or change in family situation?  How have you tried to manage the situation?  What other income or assets do you have available?  How long do you think this income situation will go on?  What do you ultimately want to happen?  Do you want to keep your home?  What kind of payments can you make each month?
•      You may be able to establish a “workout plan” with your lender.  This is basically a new plan for how you will pay your mortgage.  It may be temporary, or for a longer period, but does not change your committment to the loan debt.  It simply is an arrangement to help you pay your mortgage until your income improves.
•      Keep good records of any communication with your lender or loan servicer.  Ask for names, and write down times and dates.  If you ask for something, or they ask for something, then respond with a letter after the phone call to confirm and re-state the situation and expectations on both sides.  When you send the letter, use registered mail, with a return receipt.
•      If you want to keep and stay in your home, do not move out!  If you move out or try to rent the home, it will no longer qualify as a “principal residence” and your lender may not work with you any further on payment arrangements.  In fact, it will probably be classified as an “investment property” and be more difficult to arrange payment plans or to refinance.
•     Remember that your lender has a host of laws and legal requirements to comply with.  Don’t tolerate abusive phone calls with loan service personnel.  Ask for a supervisor if you are not getting anywhere on the phone.  If you have an attorney, have them send a letter to the loan servicer’s management and customer service divisions.

4.  If you do not want to keep your home, or if you’re ready to get out from under the debt of home ownership:

•    Consider selling your home.  Many are already doing so in today’s markets, but it’s difficult to find a buyer.  Do everything you can to make your home attractive to a buyer, including a low asking price.  This is no time to haggle over prices or pride, or to worry what your neighbors will think.  It’s your life… take charge, make your decisions and move on.
•    Consider a “short sale” or “fire sale” where you allow someone to buy the house at a much lower price.  That would be difficult to do, but depending on your situation, it’s something to consider.  Remember, if the sale doesn’t pay off the loan, you will still be responsible for the remainder of the debt with your lender or loan servicer.  It may be less, but you’ll still owe the money even though you are no longer in the home.
•    Deed in Lieu of Foreclosure: Basically, you just sign over your deed to the bank or lender, if they agree not to foreclose and/or as payment for the debt you owe.  It may only be for partial payment… but consider getting a real estate lawyer to help with this process and ensure your best interest.

5.  Be careful of scam artists who may approach you with fantastic solutions to your problem.  See # 2 above.  If you haven’t talked with a legitimate credit counseling firm, now may be the time to do so.  Make sure they are legitimate!  If you have been working with a credit counseling company, maybe it’s time to review your situation.  But stay alert for scams.  When you’re in a tough situation, many things sound good that you may not have considered before.  Don’t let your guard down, and make sure you know who or what company you are becoming involved with.

6. Use Your Assets? What about Bankruptcy? Many people recommend using any or all of your available assets to generate income and keep making payments on your home.  But let’s say you know you will go through foreclosure and are considering bankruptcy. It may or may not be possible depending on your income and asssets. 

The key about bankruptcy is that once officially filed, it immediately (but perhaps temporarily) stops the foreclosure process until the bankruptcy court and debt repayment agreements are established.  In other words, it gives you more time.  It may not keep your home from foreclosure.  We won’t go into the details regarding bankruptcy here, but there does come a time when paying money toward your mortgage may not benefit you in the long run.  Depending on your state’s laws and the type of bankruptcy, it may be in your best interest to save the money you have on hand for living expenses and other needs.  Only you can determine this, but if you are going through bankruptcy, giving your lender all of  your assets may leave you with fewer options. 

If you are considering bankruptcy, ensure you speak with a competent bankruptcy attorney, and work with a legitimate financial or credit counselor to explore this situation. There are many non-profit agencies that can help as well, such as the Housing Opportunities Collaborative in San Diego, California.  Their services may only be local, but there are probably similar organizations in your area.  But again, be careful of scam artists, even with bankruptcy!  This article talks about how foreclosure scams are on the rise, and CNN/Money talks about Rescue Scams to avoid.  Finally, read this Consumer Alert from the U.S. Trustee Program about Mortgage Foreclosure Scams.

7. Stay positive and take care of yourself and your family!  Life is full of challenges, both personal and professional.  Try to keep things in perspective and remember your long-term goals.  Life is nothing if not full of change, and we must change as well.  Take care of yourself and your family, and have faith that things will get better over time.  Talk with a counselor or member of the clergy if desired.  You are not alone!  Others are facing the same challenges.  And Clark Howard even talks about how foreclosure might be avoidable. There are countless others who are going through a similar situation.  You can get through it, and one day you will be moving forward in a new direction.  I wish you the best as you work with a challenging situation.

    You know I realized I missed an important point in my post about starting a small business… especially where the internet and blogging is concerned.  Instead of thinking about blogging as a business, which admittedly it may be for some, we can also think of blogging as an extension  of a business.  The Wall Street Journal Online has written a great article titled Blog It and They May Come where the author talks exactly about this point.  The examples highlight the fact that small businesses can leverage their customer base with blogging, and have increased revenues from the same.  Other small business bloggers are using their online presence to establish a deeper relationship with customers, and to solicit feedback.  Great article… and an excellent tie-in for small business.   And by the way, one of my favorite small business and start-up sites?  The Startup Journal… from the Wall Street Journal Center for Entreprenuers.  An excellent (and free!) site… looks like they’ll be moving to WSJ.com next week, so check there if the link has changed.

     I’m curious about the reasons many people have started or are thinking about starting a small business at home or with a franchise.  Entreprenuership continues to be a growing focus for many people, young and old.  The lure of finding a way to put one’s financial destiny in your own hands while “working for yourself” is very strong.  Even with full-time professional careers, many individuals and families are realizing the benefits of starting a home business.  Beginning a small business has never been easier in the U.S. and it seems the demand for services and products continue to increase.  Can blogging be considered a home business?  With a myriad of publishing tools and advertising compensation structures (adsense, yahoo publisher network, text-link-ads, etc), blogging can certainly provide an income stream for long-term leading publishers who offer insight, products and services that consumers want. But it takes time, creativity and a lot of desire!  Personally I don’t see this as a business-model per se, but I’m sure some would disagree.  My question about home businesses speaks more to those who create and sell a tangible product.  Crafts, auction listings, t-shirts, health products… something that a seller or business owner markets and ships to a buyer.  You can read stories everyday about someone who began a very small business and within a couple of years grew to an international clientele.  But what drives people in society to do that?  Is it simply a source of revenue?  Or is it something more… the passion and energy to create something that wasn’t there, and to “own and operate” your own business structure?  There are many tax reasons to start a business of course, and for operating a tax shelter.  But it’s got to be more than that… it must be something you really want to do. 

     Many people have used rental income from property as a tax shelter to offset income.  There are few better tax shelters over time if one can afford to operate (and maintain) a rental property.  I know of one case where an individual held a rental property for over 14 years, with negative cash flow during that time, but using the rental for a tremendous shelter to offset taxable income.  At the end of the period the individual sold the rental property for a healthy gain.   Of course without rolling into another investment, or using a “1031 exchange” they had to ultimately pay taxes on the gain and taxes on the depreciation deductions taken each year during ownership. But in the end, it was a very beneficial tool as an investment and taxation reduction mechanism.

     I see the trend for starting and operating a small business only continuing to grow in the years ahead.  The term “explode” may be more appropriate, especially when seeing how technology has revolutionized the ability for anyone to start an online business.  Payment and transaction tools are becoming simpler, and even PayPal has become an incredible tool for web-based business owners to simply moving money between buyers and sellers.

     And then there are the franchise opportunities.  A cursory look through many magazines or sites devoted to business opportunity reveals a ton of advertisements for franchising.  I have never started a franchise business, but many of these opportunities appear to serve the franchise business developer more than as a viable start-up for a new business opportunity.   Many of them are small operations with little promise of back-end support start-up knowledge, and prospective business owners must look carefully at the details for the type of franchise they are interested in.  But that’s not necessarily true for the larger franchise opportunities.  The barrier to entry for the larger franchises is of course money.  It is not cheap to start a larger, proven franchise.  In many ways, it’s a life-changing decision that will involve a lot of money and time to become successful.  Even if the time, money and passion are there to become successful with a franchise, an increasing problem in many areas of the nation will involve finding good employees to help the business grow and succeed. 

     It’s pretty amazing however, that anyone can start a business or create opportunities to make money over time.  As the U.S. and other nation’s populations become older… and we are indeed an aging society, there will be key trends over time for capitalizing on these demographics.  I hope to write more about the demographics and job trends of the future over time, because for anyone who desires to start a new business, those are key areas to capitalize on for success.

Here are a few references for to explore for starting or operating a small business.  There are countless more out there… why do you want to start a business?  I’d love to hear your experience, insight or simply reasons for doing it!

• U.S. Small Business Administration

• Inc.com magazine online

• Inc.com Guide to Starting a Business

• Entreprenuer magazine online

• Home Business Mag Online: Start-up Guide

• Fact Sheet and checklist from University of Maine: Starting a Home Business

    I’ve always been a big fan of PIMCO’s Bill Gross.   Primarily because of his insightful commentaries and a unique ability to provide macro context to the complexity of the financial markets.  Yet I disagree in part with his comments today in calling for the White House to rescue struggling homeowners across the nation.  Few question the need for some level of reform in the mortgage lending space, and help for homeowners who don’t know where to turn.

Congress is now weighing the concerns and potential for change appropriately, and many lenders and others are starting to work with homeowers who need help.  And yes, most certainly President Bush should support legislation and initiatives to help those facing foreclosure or skyrocketing house payments. This is only right.  But that’s not where, and by whom, these issues should be solved in my opinion.  Frankly, it’s pretty amazing that a leading bond market professional would toss it up to the government to figure this one out, but it certainly speaks to the degree of concern over the banking and credit problems they face.

     While acknowledging, sort of, that this is the responsibility of the Federal Reserve, Mr. Gross doesn’t believe the Fed can really do anything.  And Uncle Sam will bail everyone out?!   That’s where I strongly disagree:  In addition to the White House, the Fed, and even Congress…. why not look to the BANKS and other FINANCIAL INSTITUTIONS for their responsibility and continued inadequate response to this issue?   After all, it is the banks, hedge funds and other institutions and lenders that caused this mess, and have now panicked in response to it.   Even with the Fed’s injections of billions of dollars and a discount rate cut, apparently many financial institutions are still in hiding, unwilling to extend credit where it is needed… or least afraid to step back in the “pool”.  If anyone should be writing “fat checks” it’s the banks and other institutions extending a helping hand to struggling consumers. 

   So Mr. Gross… instead of just calling on the White House to “save” everyone, especially the financial institutions, why not call on your peers, and those among the leadership at the largest financial institutions to gather round a table and find out the best way to move forward.  

Unfortunately I believe there’s worse happening right now.  Many of these same banks and lenders are now charging exhorbitant extra fees and other charges now… how is that helping consumers?  And someone please tell me… when does government have the answer for society’s problems?  Rarely. Most often it is the private sector that figures out the issues, and then appeals and presents solutions that are eventually adopted in the form of legislation.  Leadership is needed… and yes, the governement can provide that leadership.  But financial institutions must also show leadership in time of crisis… not waiting in the wings.

     Mr. Gross… if you and many other leading bond and equity gurus get together, you just might calm the markets, and calm down the professionals within the countless institutions who are scared to death of providing liquidity to mortgage originators and banks conducting similar business.  What I’d really like to know is… who are they afraid for? Why is this fear really there for the insitutions?  Is it the bottom line and their investors…. fear based on greed and lower returns?  What relationship does this have to do with hedge funds, on the brink of collapse because inummerable wealthy and institutional investors want their money back right now?  

Many questions, few answers, but it’s interesting that most of the fear and panic of the last few months had little to do with “retail investors”… rather it continues to be the analysts, managers and institutional investors that are running scared and have ”turned off the taps” of liquidity.   Maybe it’s called being prudent.  Either way, the liquidity issues need to be solved by those who fostered this situation in the first place.  Gather ’round the table folks… you can do more to solve these problems than anyone.  Just my opinion.

* For some fascinating insight on the issue, check out this video of Countrywide CEO Angelo Mozilo speaking for nearly 15 minutes on CNBC.  He said some revealing things about the mortgage market, most importantly in my opinion that liquidity is not improving, and the commercial paper market is still falling.  What does this mean for him?  It challenges their ability to do business… to extend and conduct mortgage loans closings for homebuyers and those trying to refinance.  This is a real problem… especially when you have potential borrowers with solid credit and income… and they can’t find a loan because the banks and other financial institutions are afraid and unwilling to extend credit?  

[Update -July 2008:  Many see Countrywide Financial as complicit in the mortgage and lending crisis, and now Bank of America is left to clean up the Countrywide mess.  Former CEO Angelo Mozilo stepped down under a dark cloud last week, leaving behind a tarnished reputation and many questions after being hailed as a mortgage industry visionary over the years.  The controversy over Countrwide and Mr. Mozilo will probably continue, and some have even called for further investigations amid the "Friends of Angelo" revelations.]

    In a challenging housing and mortgage lending climate, it is obvious that both buyers and sellers are looking to improve their chances for completing the deal.  CNN/Money has written a great piece on how to Make the Rocky Real Estate Market work for you.   There is more worth considering…especially if you’re a seller. I’ve been there several times myself over the past fifteen years, and strongly believe there are specific things you must do to get your home sold.  So if you’re planning or trying to sell your home, take a look at Get Ready to Sell That House  posted in March.  When I look back, it was the little things that mattered most in selling several homes, and I would do those same things today.  Perhaps I might be even more accomodating to prospective buyers and really examine the bottom line selling price I would accept.

     For buyers, the real estate market offers incredible opportunities right now… and maybe for the next 12-18 months.  We never really know, but it’s a good bet that a housing recovery is a year or two away, so it’s a buyer’s market for now. Yet there’s always something to deal with… and getting a mortgage loan isn’t quite so simple anymore.  That doesn’t mean you can’t get a loan, because you can.  But lenders are obviously very concerned about mortgage risk right now, and will grill you from top to bottom to ensure income verification and credit score analysis meets their criteria.  Here’s a few things to consider as a buyer BEFORE you begin the mortgage application process:

• Get a copy of your credit history and look carefully at every item.  I recommend getting a copy of your credit history from all three major credit agencies.  You can do this through MyFico.com or a similar company.
• If there’s something you think shouldn’t be on your credit report, then send a dispute letter to the credit bureau.  They are required by law to investigate and return their findings to you.  If they can’t, they must drop that item after 30 days.
• Unless your credit situation is severely challenged, I would not recommend going through a “credit repair” agency or business.  You can do the same thing yourself intead of paying them monthly fees and retainers.
• Take a close look at your individual or family debt situation.  If you’re married, and will be applying jointly for the mortgage loan, then both spouse’s debt and credit history will be closely examined.  Avoid applying for any loans, of any kind, within 6 months of applying for a mortgage. 
• Work hard to pay down your debt to improve your debt-to-income ratio.  Mortgage lenders have slightly different criteria, but the bottom line is that you must be able to make the monthly mortgage payment.  Check out this article from Bankrate.com describing the basics of mortgage lending criteria.  There’s a calculator at the end of the article to conduct your own analysis.
• Be realistic about the size of the mortgage you can afford.  When your credit history, debt and income situation are in control, then it’s time to think about that down payment. 
• Mortgage lenders are probably going to require a 10% to 20% down payment for the home you choose to purchase.  If you put less than 20% down, you’ll also be paying for Private Mortgage Insurance which can be 5% to 10% of your monthly payment.  Maybe even more with the mortgage fallout this year.
• Consider the costs of insurance on your prospective home, which may add up to 10% to 15% of your monthly payment.
• Taxes… a biggie.  Take a look at your county collector or assessors property tax requirements.  You can probably see what homeowners are paying for taxes in the area you might choose to live. Property taxes vary widely throughout the nation, but in some areas monthly property taxes can make up 20% to 40% of your monthly mortgage payment! 
• Most lenders will require an “escrow account” to hold funds for property taxes, insurance and private mortgage insurance.  That escrow account accumulates funds throughout the year, and is why it’s added to your monthly mortage payment.  The lender wants to make sure those fees are paid, so most insist on escrow accounts.
• Is it time to look for a home?  This should be something you spend several months on… take your time and have a good idea of the size and cost of the house you can afford.  When you are serious about looking at homes, with the potential to make an offer to buy… you’ll want to have a mortgage loan “pre-approval” letter in hand.  This is more than a “pre-qualification” that simply says you are qualified to apply for a loan.  The “pre-approval” is an initial commitment from a lender for a given mortgage product, and given mortgage amount.  You should not have to “apply” for a mortgage loan to gain a pre-approval letter.  Talk to your preferred lender(s) and ask what is required to get a pre-approval letter. 
• Ready to apply for a mortgage?  Do so very carefully… Bankrate.com also offers a great look at national and local mortgage rates from many different lenders.  Just do your homework and shop around.   When you are ready, it might be in your interest to apply with two or three lenders.  It may mean paying several hundred dollars extra for more than one home appraisal, etc. but that’s an option you can choose.  During a home purchase in 2006, I applied with two lenders, one of which refunded the home appraisal if we did not close on a loan with them.  Just make sure you are not committed to the loan for any excessive costs when applying with more than one lender.  The lender does want your business, but if they cannot offer as good or better rates than another lender, they will usually tell you.
• When applying for a mortgage, do not space out loan applications over several weeks or more.  Your credit history will normally show multiple “hits” for loan application if spaced out over time and it may lower your credit score.  But two weeks is usually the magic timeframe.  If you apply for a loan with several lenders within a two-week period, the credit bureas normally don’t consider that negatively for your credit score, understanding that consumers may be shopping or applying for a loan.
• Type of loan?  I’m a firm believer in a 30-year fixed rate mortgage.  You can pay points at closing to lower the rate, or take a higher rate for little to no points.  All points are is a prepaid form of interest tacked on to your costs at closing.  In exchange for a lower rate, you are prepaying the lender up front.  Sometimes you can wrap those points up in the mortgage itself.  Rates are still very good right now by historical standards.  I paid for several years on a loan at 8.9% and 7.9 percent.  I even paid off a truck loan at over 12% in the mid-1980’s!  Sounds absurd right now, but that was life back then.   You can talk to many people who had mortgage loans ranging from 10% to 14% in the early 1980’s after rampant inflation during the Carter years.  Why do you think Ronald Reagan was elected?  So if we can get a mortgage loan today from 6.5% to 7.5% we’re doing pretty darn good!
• Finally, be patient yet firm with your lender, and ensure you understand the process and forms you’ll be dealing with!  There will be appraisals, inspections, etc, etc.  Your buyers agent (you have one, right?) should be knowledgeable about the process and help shepard the closing.  The lender can (and should) give you a package of estimated closing costs, including most of the forms you will see at closing.  Read and understand the terms of your loan… and go over the expected closing costs in advance so there are no surprises on closing day.  If you do get a surprise at closing, perhaps a change in interest rates or some excessive costs that were not previously disclosed… be prepared to walk away.  Most people never do, they just want the process finished and are happy to get into the home of their dreams.  But it’s your money, and your mortgage.  It should be something you understand and are prepared for.  After all, it’s probably the biggest expense of your life!

There are many library books and other sources of information on buying and selling homes… do yourself a favor and continue to learn as much as possible before hand.  I’m sure I missed something… let me know!

     Most of my investment portfolio is well diversified in low-cost mutual funds, but I do invest in individual stocks.  One of my recent purchases is Pfizer (PFE), the “world’s largest research-based pharmaceutical company.”  It’s one of the most widely owned stocks in the market, yet has been a laggard for several years in terms of stock price appreciation.  Well, depreciation is more like it… but although the stock price has not rewarded investors over time, the dividend yield certainly has.  Pfizer’s dividend is now almost 5% if you can believe it… coupled of course with a stock price decline of several dollars in as many months.  Seeking Alpha published FP Trading Desk’s view of the stock with commentary from a Goldman Sach’s analyst that makes a compelling, albeit brief, argument for buying the stock.   Most of the negative views of the stock involve the expiration of patent protection on several key drugs including Lipitor.  With increased generic competition and an unknown future, the negatives involve concern over Pfizer’s gross sales and market growth, reasoning the company will be hit hard over the next five years, especially between 2010 and 2011. 

     But Pfizer itself believes their drug pipeline is strong with a recent statement from John LaMattina, their President of Global R&D (via AP) that ”I think so far we’re on track to deliver on the goal of tripling the number of compounds in the Phase III pipeline by 2009.” He also indicates that “Pfizer has 11 programs in final testing stages, up from eight, and 47 programs in its mid-stage pipeline compared with 32 last year,”  and called the Phase II portfolio the “largest in the company’s history.”  Pretty strong statements from within the company, even though they’ve shut down up to 13 drug research programs as well this year.  Pfizer also recently received approval from the U.S. Food and Drug Administration for a new HIV/AIDS drug named Selzentry.

   I have no idea where the stock will tread over the short-term, but as an investment it fits my personal strategy for a dividend-based value opportunity for a long-term buy… probably a very long-term buy however.  The stock has been trading within a dollar of its 52-week low for several weeks now, and although it may go lower, offers an incredible dividend with low trailing P/E of around 10.  Of course the forward P/E is also around 10 based on estimates, with an earnings growth (PEG) ratio around 2.6.  It’s not an exciting story by any means, and the company’s quarterly revenue growth is down more than 5%.  I like the dividend however and believe the company’s 22 Billion dollars in cash will keep it safe, and in fact allow it to increase over the coming years.  If the stock remains a laggard or only grows incrementally for a few years, I’ll take the dividend reinvestments.  For me this is a long-term value pick, and I’ll work to hold on to it for 10 years or more.  As always, do your own research!

Full Disclosure: Own Pfizer stock at time of writing.

It’s that time of year again!  Like many other families, ours is focused once again on the school year.  Everyone’s going to school somewhere, from the first-grader to Mom the teacher and Dad the grad student.  The family pace picks up quickly it seems, and the summer routine is reshuffled once again.   Where saving and investing is concerned, it seems many of us are going “back to school” as well…  many questions loom as to where the stock market and interest rates are headed and where to put one’s money.  I don’t know about you, but when I find too many questions and not enough answers, I go back to the basics.  From the action on treasuries lately, I imagine many banks and fund managers are focusing on basics as well lately.  For our personal strategy, paying off debt is a great way for earning a sure rate of return!  I’ve got a couple loans around 6% that I’m working off right now.  Of course, being disciplined about monthly savings and investment allocations is also a positive strategy over the long-term.  So it’s time to return to the basics and leave the larger questions for the pundits and economic experts.  I’m also trying to increase savings for the 2008 Roth IRA contribution beginning in January.  I don’t know where the market is headed but we may see some excellent buying opportunties ahead.  For those with a disciplined monthly investing strategy, dollar cost averaging will work in your favor.  For now it’s time to hit the books again…