US Fed and Major World Central Banks Coordinate Rate Cut

Major world central banks react to a broadening global economic crisis by taking extraordinary measures to coordinate monetary policy. In a move to reduce growing stress in the world credit markets central banks cut interest rates by a 0.5 percent.

This coordinated effort by the US Federal Reserve, Bank of England, European Central Bank, Canada, Switzerland, Sweden, and even the People’s Bank of China reflects the growing realization that globalization has deeply linked our independent economies.

Actions and reactions are increasingly directly and immediately impacting our respective markets. This realization has been no clearer than watching the market trading patterns following the clock from Asia, European, and into North America over the last few weeks. Watching these international trading exchanges, the closing marks are an eerie forecast of the impending fate of each new market opening.

The Federal Reserve, in a unanimous decision, lowered the Fed funds rate from 2.0 percent to 1.5 percent. Likewise, a similar reduction was made in the discount rate.

In a statement released with the rate decision the Fed said they reacted to increasingly weakening economic condition and were no longer immediately concerned with inflationary pressure. The weight of this decision was reflected in statements earlier in the week where Dallas Fed President Richard Fisher, a notorious inflationary hawk, said “market dysfunction trumps inflation.” Dallas Fed President Fisher has been a frequent dissenter in past Fed decisions to leave rates at current levels, advocating Fed rate increases.

In this same Federal Reserve statement, the Fed stated that it has been and will continue to be in close consultation with major world central banks to monitor ongoing economic conditions.

Early indications are that the markets are reacting positively and with increased confidence over the move as broad European market indexes bounced up at the news.

Article written by:

Bill Rice

http://www.mortgageloan.com/us-fed-and-major-world-central-banks-coordinate-rate-cut-2496

McCain: I’ll buy your mortgage

I

Interesting curveball from Sen. John McCain in the presidential debate: an economic proposal he’s either just come up with, or has been waiting to unveil. From the Los Angeles Times:

McCain offered one of his most significant proposals of the campaign, saying he would order the Treasury secretary to immediately “buy up the bad home loan mortgages in America and renegotiate … at the diminished value of those homes, and let people be able to make those … payments and stay in their homes.”

McCain’s $300-billion plan, a turnabout from an earlier position, would require a radical shift in the government’s approach. It raised several questions the McCain campaign could not immediately answer, including what its potential impact would be on efforts to remedy the global credit crisis.

From a separate Times’ article on the proposal:

McCain’s campaign issued a 1½-page fact sheet to explain his call for the massive federal intervention, which it called the American Homeownership Resurgence Plan. The campaign noted that the $700-billion financial rescue package approved by Congress last week gives the Treasury Department authority to directly buy mortgages, but added, “It may be necessary for Congress to raise the overall borrowing limit.”

The Obama campaign, evidently wanting a piece of the idea, said Sen. Barack Obama had already suggested the Treasury use its new powers to buy individual mortgages.

From the New York Times:

Mr. McCain sought to break through by highlighting a proposal under which the Treasury Department would buy up mortgages that had gone bad, and in effect refinance them at prices homeowners could afford.

Article written by:

Peter Viles  LA Times

Photo credit: Associated Press

http://latimesblogs.latimes.com/laland/2008/10/mccain-ill-buy.html

For Non-U.S. Citizens, Consider Buying U.S. Real Estate In 2008 Instead Of 2012

When foreign national buyers consider investing in U.S. real estate, they often focus on projects set to deliver 2-4 years out as opposed to projects that are ready to deliver today.

Considering the path of the world’s economy , this long-term investment strategy may be a bit short-sighted.  For non-U.S. citizens wanting to buying investment property in the United States, there are 3 excellent reasons to consider buying property now instead of at some vaguely-defined point in the future.

By themselves, each point holds it own merit.  Combined, however, the rationale is even more logical.

Reason #1: Home prices in the United States are relatively low

Actually, I should qualify that statement.

Versus their 2007 levels, home prices aren’t low everywhere, but for condos, condotels, and other units built specifically for real estate investors, there’s a combination of excess supply and eager sellers that may be too good to pass up.

And when I say “condos”, I’m not referring to new construction set to deliver in 2012 — like the Chicago Spire, for example.

Instead, I’m talking about finished condo projects in places like Florida, Las Vegas, Chicago, and Manhattan that are online now, lingering unsold and dragging on developer balance sheets.

Sure, you can get a good deal at Lincoln Park 2520, but you could get an amazing deal on a ready-to-deliver condo instead.  The year-end is looming and developers are itching to get finished inventory off the books.  And that may be the biggest understatement of the year.

Capitalizing on the down-trodden U.S. real estate market is a popular reason for international investors to buy condos in the United States.  Because the year is winding down and excess supply is clogging developer pipelines, this is a terrific time to make a deal.

Reason #2: The U.S. Dollar is running wild over the Euro, Pound, and others

For international buyers of U.S. real estate, there are two ways to make a profit.

The first is to profit from the property appreciation on the investment unit itself.  This is the form of profit that most investors talk about with respect to “buying in a down market”.

The lesser-known method is via currency appreciation.

Currency appreciation happens when the dollars applied to a downpayment on a home gain value from changes in foreign exchange markets and currency conversion rates.

As the U.S. Dollar has strengthened since July, for example, foreign national investors have profited handsomely.

As an example, here’s what a hypothetical 100,000 downpayment made on July 1, 2008 would be worth today in 4 popular currencies:

• Euros: €100,000 downpayment is now worth €114,201, a 14.2% gain
• Pounds: A £100,000 downpayment made now worth £112,343, a 12.3% gain
• Canadian Dollars: $100,000 downpayment is now worth $105,821, a 5.8% gain
• Australian Dollars: $100,000 downpayment is now worth $123,021, a 23.0% gain

These are monstrous amounts of currency appreciation over just a 90-day period and the U.S. dollar is expected to extend these gains through 2009 as the global economy and world currencies sputter.

Currency appreciation can be more profitable that equity appreciation and that’s the second reason why international investors may want to buy U.S. real estate before the end of the year.  For every amount that the U.S. dollar appreciates prior to a real estate closing, not only does the cost of a dollar-denominated downpayments increases but currency appreciation is held to a minimum, too.

Reason #3: Foreign national mortgages are still available, despite what you hear

When I talk with international real estate buyers, they’re often genuinely surprised that mortgage money is still available for foreign nationals.  And then, when we talk about new construction condos in Florida, the surprise turns to shock.  After all, everyone else is telling them financing a new construction condo in Miami is impossible — including their real estate developer.

And this bring us to an important point about the foreign national mortgage market.

For years, foreign national lending had been heavily concentrated with just a few lenders, most of whom were well-known banks.  To drive sales, they embarked on “road shows” across Europe, Asia, and South America, talking about their products and the virtues of buying real estate in the U.S.

Today, those lenders have all left the space, creating a giant information void that most people — mortgage brokers included — have wrongfully assumed to mean that foreign national mortgage lending is dead.

I’m happy to report that it’s not.

Sometimes, the hardest part about borrowing money as a foreign national is getting access to quality, timely information.  Presumably, that’s how you found this Web site to begin with (and why you’re still reading).

So, if you’re want some foreign national mortgage information on which you can rely, here are a few bullet points:

1. Foreign national mortgages are still available in the United States
2. Downpayment requirements are low — 10 or 20 percent, depending
3. Interest rates are reasonable and are not “monthly adjusting”
4. There’s no forbidden property types — condo, condotels, and multi-units are all okay

And it’s when I give these sort of details that my international clients wonder why every other stateside mortgage guy said foreign national mortgages couldn’t be done.

See, after JP Morgan Chase and Wachovia stopped lending to foreign nationals this summer, most people assumed that the market dried up entirely.  Chase and Wachovia were the last Big Banks standing in the foreign national space and a bevy of small- and medium-sized banks followed their lead.  Only, it didn’t dry up.

To take advantage of the growing foreign national demand, new mortgage lenders entered the fray and are now making common sense decisions on what most people generally believe are a strong set of borrowers.

However, there’s a caveat.  New funding sources are available today, but the lenders reserve the right to change their terms or policies at any time.  And historically, they do.  And, of course, they can always choose to discontinue the product at any time.

And, this is the third reason why foreign nationals should buy before the New Year.

Home prices may rise next year, or they may fall — we can’t predict that.  But, we can predict with near 100% certainty that mortgages will be less available tomorrow than they are today.  And that includes foreign national mortgages.

This is a variation on a common theme I cover with the press.

As a brief summary of the points above, international buyers may want to buy property sooner rather than later because:

1. Developers are willing to negotiate because of the current market climate
2. The U.S. Dollar is poised for gains, rendering down payments “more expensive”
3. The U.S. mortgage market will not exist in its current form in 2012

We know what the market looks like today and we don’t know what it will look like tomorrow.  Therefore, if buying U.S. real estate is part of your overall investment plan, consider moving up your timeframe to some point soon.

And remember, in the U.S., real estate agents are paid by the seller — not the buyer.  If you don’t have local representation, you’re welcome to call or email me for a referral to somebody I trust in any given market.  My contact information is all over this Web site.

(Images courtesy: The Chicago Spire, The Wall Street Journal Online)

Written by Dan Green (The Mortgage Reports)

http://www.themortgagereports.com/2008/10/for-non-us-citi.html

How to Save $150,000 (And Still Have a Life)

By Matthew Heimer and Beverly Goodman
October 11, 2004

WHERE DOES FRUGALITY cross the line between savvy and silly? For Lisa and Steve Carter, it might have been the six-minute showers.

With Steve jumping off the corporate treadmill and starting a new career as a blacksmith, the Portland, Ore., couple knew they’d need to build a bigger savings cushion. To get there, they sweated the small stuff. The Carters kept their house mostly dark, relying on a lightbulb or two at a time. They plotted shopping trips with the precision of NASA physicists, making sure they’d use the shortest possible route  and the bare minimum of gasoline. Gone were the thrice-weekly dinners out. Forget about 80-channel cable. Hello to a kitchen timer next to the shower stall  designed to cut back their hot-water bills.

And hello, as well, to a serious case of cheapskate’s malaise. “If you’re so vigilant about the day-to-day stuff, it really wears on you,” says Lisa, a staffer at a local university. “You start to feel deprived.” And for all their corner-cutting, the Carters weren’t saving enough to justify their sense of sacrifice  until they changed tactics and started thinking bigger.

Knowing that they’d soon move to a larger property to accommodate Steve’s ironwork, the Carters replaced their 30-year home loan with a hybrid adjustable-rate mortgage (ARM) that cut their interest rate from 6.875% to 4.625%. The mortgage move shaved $468 a month off the Carters’ home payment, saving more money than all their other penny-pinching put together.

Today the Carters still retain some of their money-saving habits: Steve loves to cook, for example, so restaurant visits remain rare. But the couple feels better knowing they’re working smarter, not harder, to save. “It’s much easier to focus on the big picture, knowing that little splurges won’t derail our plans,” says Lisa. “It’s exciting to see your results grow. . . . Opening your utility bill and realizing it’s $10 lower just isn’t the same.”

It’s certainly possible to save money using all of those dreary commonsense tactics that fill the Sunday-paper advice columns  choosing a brown-bag lunch over Au Bon Pain, buying clothes only on sale, clipping coupons and rolling loose change. But for most people in a consumer-centric culture, pinching pennies doesn’t come naturally. Faced with schoolmarmish lectures about giving up our creature comforts, our ids rebel: We don’t have the time to be frugal; we deserve a reward for our hard work; we want our HBO. If we do discipline ourselves, we may wind up like the Carters, waiting impatiently to see results. And like fad dieters, if we backslide by splurging on the things we’ve denied ourselves, we can wipe out our progress with one binge.

Fortunately, there’s a saner way to save, and it boils down to one tip: Hunt for bigger game. In any given year, you’ll spend tens or hundreds of times more on the big-ticket items in your budget  your house, your car, your medical bills  than on cappuccino and compact discs. It stands to reason that you’ll find the biggest savings in those same places. “The small stuff matters, but I’m telling people more and more often, see if you can do one huge thing to cut your costs,” says Mary Hunt, founder of the Cheapskate Monthly newsletter, which covers the small tips as well as the big ones. Dozens of financial planners we interviewed this spring sounded the same theme.

To put this approach to the test, we posed ourselves a challenge: How could a middle-to-upper-income household trim its expenses to set aside an extra $150,000 over 10 years  on top of what they’re already stashing in 401(k) plans, college-savings accounts and such? And could they do it without feeling like martyrs to miserliness?

To find out what those families were spending, we studied data on the expenditures of households with income of more than $75,000 per year. The data came from the federal Bureau of Labor Statistics’ annual consumer-expenditure survey and from a similar study by Mendelsohn Media Research. We found that by focusing on the expenditures that make up the four cornerstones of a typical household’s obligations  home, cars, investments and insurance  our family could come up with at least $137,500 in savings by making a few shrewd strategic moves. And that’s a conservative figure; in each section, our “baseline savings” rounds down from the maximum available savings to account for those already spending less than average. From there, we got our family over the top by coming up with 14 other smaller and equally painless tips, on everything from travel to credit cards to even your home computer. Pick and choose from those and you’ll easily save another $12,500.

It’s a potentially terrific haul  for not much work. Indeed, it’s striking to see how many relatively simple tactics go unheeded by most consumers. Too bad for them, because saving the big bucks turns out to be a matter of doing some smart legwork before you make your biggest expenditures. It takes effort  but not nearly as much effort as trying to nickel-and-dime your way to riches. And best of all, you won’t have to give up your “Sopranos,” your salon or your Starbucks.

House and Home
Baseline Savings: $30,000 over 10 years
Mortgage  it’s French for “death pledge.” When you become a homeowner, you make one of life’s biggest financial commitments. In 2002 and 2003, some 20 million homeowners made that pledge much less onerous, arranging refinancings that have already saved them $48 billion. With interest rates creeping higher, fewer homeowners have much to gain from a traditional refi. But a little creativity can still wring big savings out of your home payment  and there’s more than one way to shrink that beast.

When Greg Weyandt looked for alternatives to the 6.5%, 30-year fixed-rate mortgage on his home in Birmingham, Ala., significant savings seemed elusive  until he found out about LIBOR loans, an option that most mortgage brokers can arrange. While typical mortgages are tied to American banks’ prime rates, a LIBOR (London Interbank Offered Rate) loan is tied to banks in Europe  where a slower recovery has meant lower rates. That’s why getting a LIBOR slashed Weyandt’s interest rate to 3.875%. The drawback to a LIBOR: The rate is reset every month, and there’s a chance that a homeowner’s rates can spike. “But we’re saving so much, it was worth the risk,” says Weyandt. If rates go crazy, he plans to jump back to a fixed-rate mortgage, but if they don’t, he could save $30,000 over 10 years.

Like many refinancing strategies, the LIBOR works best for people in the earliest years of their mortgage: You benefit most from low rates in those years, when your payments predominantly go to interest rather than equity. But for people who plan to hold on to their home for 10 years or less  and 72% of homeowners flip their homes that quickly  the hybrid ARM can be the more attractive option. The payments on typical ARMs float with interest rates, but hybrids let you lock in a fixed rate for the first three to 10 years of the loan that is higher than that on a traditional ARM, but lower than that on a 30-year fixed-rate mortgage.

When they realized they were falling short of their retirement-savings goals, Paul and Jane Brandes took an ARM against their sea of troubles. By switching from a 30-year fixed mortgage to a hybrid ARM, fixed for seven years at 4.9%, they cut their house payments by $800 a month. “We’re not great savers,” insists Paul, but the Brandeses look great on paper: They’re taking their $9,600 a year in savings and plowing it into their daughters’ educations and their retirement plans.

If there aren’t any moves in your future, you don’t have to reinvent the wheel to save money on your home. Closing costs on a refinancing can hover between 1.5 and 2%  as much as $5,400 on a $300,000 loan  but by renegotiating a lower rate with your current lender, instead of hunting elsewhere, you can considerably shrink them. And the investment of one extra payment a year can slash the total cost of your mortgage. On a $300,000, 30-year mortgage at interest of 6.875%, the strategy could retire your mortgage 10 years early, saving almost $59,000 in interest charges. The most painless way to do it: Boost every month’s payment by one-twelfth.

Hot Wheels
Baseline Savings: $40,000 over 10 years
Which costs more, your car or your house? Sounds like a no-brainer, unless you’re driving a Lamborghini. But it’s not so simple. According to the American Automobile Association, it costs 56 cents per mile to own and operate a new car. Assuming you spend about 60 years of your life behind the wheel, logging a modest 15,000 miles a year, you’ll amass 900,000 miles  and will pay $504,000 for the privilege. If you consider that the average family will own two cars at any given time, the lifetime tab will surpass the million-dollar mark  and there’s nothing like the word “million” to sharpen the mind when hunting for savings.

There’s one sure-fire way to trim that bill: Choose used. As Nancy Castleman, co-founder of GoodAdvicePress.com, points out, lower fuel efficiency of today’s bigger cars and faster depreciation can make new cars even more expensive to operate. But to many drivers, this advice is about as welcome as a broccoli-only diet. Barely half of the country’s upper-income households currently drive a preowned auto; many drivers would rather emulate Milton Stephanides, the patriarch of the Pulitzer-winning novel “Middlesex,” who celebrates his prosperity by buying a new Cadillac every year. It’s hard to resist the thrill of driving the newest machine on the block  or the Proustian joy of starting every day with that new-car smell.

But buying preowned doesn’t mean giving up luxury. The way Mary Lou Katz figures it, she’s driving at least $50,000 worth of car  and she bought it for under $10,000. The 45-year-old Pasadena attorney lovingly describes her Infiniti Q45 as “a beautiful sedan, with that gorgeous pearly white paint job you only see on high-end cars.” It just happens to be a 1994 model, not a 2004 (premium sticker price, $61,600). Katz found the seller on eBay and paid $6,500 cash for the car, then invested about $3,000 in maintenance work. The car has 107,000 miles on it, but Katz isn’t afraid of the wear and tear: “These days, you’ve got to figure any decent car will give you 200,000 miles.”

The popularity of leases in the late 1990s and the flood of sales incentives in the post-9/11 era have brought a glut of “gently used” cars into the secondary market, making used-car lots look like new-car dealerships. Internet rating services and manufacturer certification programs have helped consumers educate themselves and dodge shady deals. And generous warranty terms mean that many used cars still have some coverage.

Crunch the numbers on resale value and “the case for buying used cars gets even better,” explains Lakewood, Wash., financial planner Ben Jennings, “because most of the depreciation happens on somebody else’s dime, in the first four years of [the car's] life.” But that depreciation is greater than any decline in the car’s performance, so you get a lot of car for a lot less.

Say you’re eyeing Lexus’s high-end midsize sedan, the GS 300. New it would cost $43,000, but this spring you could snag a 2001 model from a dealer for around $27,500  a savings of more than $15,000. And the Lexus holds its value unusually well: When we checked the prices of 2004 and 2001 versions of five luxury sedans, the average difference was more than $20,000. You won’t clear the entire savings  when you trade in an older car, you’ll get less money than with a newer model. But if the cars you fancy range between $35,000 and $55,000, you can reasonably expect to save about $10,000 per car by making like a racetrack bettor and sticking with the three-year-olds. Consider that a middle- to upper-income family could buy four to six cars over the next 10 years, and you’re netting at least $40,000 in savings.

If you can’t bring yourself to become a used-car buyer, you can cut the costs of ownership significantly by becoming a used-car seller  and sidestepping the dealer. The same vehicle glut that makes the market attractive for used-car buyers has made it harder for consumers to get top dollar on trade-ins, says Philip Reed, author of Edmunds.com’s Strategies for Smart Car Buyers. But drivers can earn around $2,000 more per resale by selling their cars themselves, with the help of eBay and other online markets.

Investing  Paying Less to Play
Baseline Savings: $25,500 over 10 years
We typically think of saving and spending as two opposing habits, pitted in a tug-of-war over our money: To save more, you simply spend less. But where you save can be just as important as how much you put away-and focusing on mutual funds and brokerages that keep their fees and expenses low can add thousands to your nest egg.

Obvious advice? Sure. Standard practice for investors? Unfortunately, no. Index funds, among the cheapest vehicles for capturing the growth of the broader market, account for only 11% of domestic stock-fund assets, according to Morningstar. Load funds, whose sales commissions can devour big chunks of your principal, make up 57% of the fund market, an increase from 51% in 1994  even though they’ve underperformed no-load funds by nearly two percentage points a year over that stretch.

These loads and fees aren’t necessarily arbitrary: They represent what investors are willing to pay for professional advice. When Gerry Jackson began investing outside of his 401(k) plan a few years ago, the Aurora, Colo., engineer was looking for guidance, and he didn’t balk at the 1.5% of assets charged by his financial adviser. The adviser in turn put Jackson in an annuity, a variable universal life policy and various mutual funds  each with annual expenses approaching 2%.

But as the market slide of 2001 and 2002 sent his investments avalanching, Jackson says, “I saw how much fees of 3%-plus were hurting my performance. I realized I couldn’t afford to hang on.” Jackson moved his money to a self-directed account at Charles Schwab, where he invests in stock and bond index funds whose fees average about 0.3%. He expects to put about $20,000 a year in those funds  and at that rate, the difference in fees and expenses between those investments and his adviser’s plan will save him at least $6,000 over 10 years.

It’s entirely possible to construct a portfolio made up exclusively of index and actively managed no-load funds. But if you’re tempted by some of the very attractive load funds, keep in mind that a typical front-end load of 4.75% would strip $2,375 out of a $50,000 initial investment. “You’re in a hole from the very beginning,” notes Jim Holtzman of Pittsburgh’s Legend Financial Advisors. “You spend your first few months as an investor just trying to break even.” Worse still, if you want to put more money in the fund, you’ll typically pay the load on each new contribution. Just remember: Loads represent the money paid to a salesperson to pitch and sell a fund to you; if you’re doing your own research and selecting your own funds, there’s no reason to pay one.

How much can you save dodging these nickel-and-dime fees? Let’s assume that, like Jackson, you’re putting aside $20,000 a year in mutual funds. Invest 40%, or $8,000 a year, in index funds instead of diversified stock funds and you’re saving about $1,080 over 10 years in management fees  the difference between the average index-fund fee, around 0.25%, and the 1.6% expense ratio at the average actively managed fund. Steer the whole portfolio away from front-load funds and you’re saving roughly 5% in commissions  as much as $10,000 over 10 years. Assuming that you invest the savings and earn 8% a year after fees, you’ll increase your nest egg by about $17,000 over 10 years  far from chump change.

When it comes to picking stocks, your full-service broker may be a great source of advice. But you’ll be better off bypassing him when trading shares. Making 15 trades a year, you’d pay, on average, $1,100 in commissions at a full-service broker, compared with only $255 at the average discount brokerage  so taking the discount route could save you $8,450 over 10 years. That’s enough to pick up a couple of those Berkshire Hathaway shares you’ve been coveting  B shares, that is.

The Insurance Safety Net
Baseline Savings: $42,000 over 10 years
In a sense, your insurance and your savings strategy go hand in hand  your life, health and property coverage are designed to keep you from having to drain your savings to cope with accidents, sickness and death. But with the average upper-income household paying around $4,900 a year in premiums, the coverage itself is a serious financial commitment  and an arena for finding serious savings.

That goes double for life insurance, where many policyholders overpay. The majority of life policies in force today double as savings plans: “Permanent life” products combine insurance with a small investment account. But while these policies have some tax advantages, they’re an expensive way to actually insure your family against your death. According to a recent survey of insurance industry sales, permanent products cost anywhere from six to nine times more per $1,000 of coverage than ordinary term life (which doesn’t include a savings element). For a healthy male in his mid-40s, the difference in annual premiums between a 30-year term policy and a midrange permanent life policy is about $2,600, or $26,000 over 10 years.

That’s one reason Don Claussen of Hendersonville, Tenn., took a hard look at his insurance bill two years ago, when he began considering a career change. The former software programmer and his wife, Jill, were paying $5,800 a year in premiums on permanent-life insurance; by switching to term, they cut their annual bill by $2,800. “It means we have to have more discipline about saving elsewhere,” says Don, now 53, “but [switching coverage] also gives us the cash flow to have more options.” Just remember: Switching policies midstream doesn’t always pay off. The Claussens had held their permanent policies long enough to avoid surrender charges, fees that can take a big bite out of any savings you build up; if you’re already committed to such a policy, it’s worth holding until the fees expire.

Your health-insurance premiums are less likely to be under your control, especially if you belong to an employer-sponsored plan. But one insurance loophole offers serious savings  savings that most of your peers are passing up. Flexible spending accounts (FSAs) let employees put aside pretax dollars to cover uninsured health care expenses  including the cost of meeting your health plan’s deductible. In 2003, 80% of large employers offered health care spending accounts, but only 17% of eligible employees took part in them.

Most folks are scared away by the “use it or lose it” rules that require FSA users to use all their stored money by the end of the calendar year. “People just don’t want to leave money on the table,” says financial planner Jim Holtzman. But given that the average upper-income household runs up $1,700 a year in out-of-pocket medical expenses, an FSA-using family would probably find plenty of use for the set-aside money. Assuming you pay around 30% of your income in state and federal taxes, channeling $1,700 through an FSA would shave your tax bill by $510 a year; contributing and using $3,000 would save you $900. Think of it: You can profit from your nearsightedness and tooth decay. The savings scenario should get rosier next year, when more companies will offer a similar plan, the health savings account (HSA), that will let users carry over their savings from year to year and job to job.

Protecting your property is just as expensive as insuring your life and limbs, but it doesn’t have to cost an arm and a leg. Maintaining a higher-than-average deductible on your house and car  say, $1,000 instead of the usual $250 or $500  is one of the most reliable ways to reduce your premium. Upper-income consumers pay around $2,400 a year for home and auto insurance, but higher deductibles can cut those premiums by 15 to 25% annually. Consolidating both policies with the same insurer can shave another 10% off the bill. The total savings: as much as $8,400 over 10 years.

There’s another advantage to the insure-it-yourself strategy. “Insurance companies are getting pretty picky about who they cover,” says newsletter editor Mary Hunt. If you constantly bill your insurers for relatively small repairs, she explains, “pretty soon they’ll jack your premiums through the roof.” The message: If you can resign yourself to opening your own wallet to pay for that scratched rear-view mirror, you’ll save thousands in the long run. And after visiting the auto shop, you’ll be able to relax, guiltlessly, with cable-on-demand and a mocha Frappuccino.

Real Story On Financial Crisis (Real Blame!)

Last post, titled What You Should Know About Today’s Economy, I shared an email conversation with my daughter, Andrea (this was originally written in March 2008).  In it I referred to some of the problems in today’s economy, and posed the question if we are in 1977 all over again.  Every one of you for whom we have prepared a written Retirement, Tax, and Estate Plan during the past four years have read a section discussing our current “socio-economic environment.”  Within that section we made some generic observations about interest rates, the deficit, the falling dollar, international trade, each of the investment markets including real estate, and many other topics. But, throughout those four years we have included in every engagement the following observation:

“Corporate and Personal borrowing is at an all-time high. This is the major chink in the armor of the economy. Rising interest rates may force defaults, causing a domino effect on defaults – on corporate debt and home mortgages….The severity of massive debt keeps the economy in a more precarious condition that it otherwise would be; more critically, it keeps families with debt more precarious, while families with minimal debt will be cushioned against economic volatility…” Do you remember reading this in your plan? It’s been there for four years.

We may not be able to change the economic problems of our nation, but we can do things to insulate ourselves against them.  I will say it again: the last time we saw these economic indicators was 1977-1979.  Do you remember 1979-1981?  Let me remind you: falling dollar (this is the one to watch), 13% inflation rate, 13% unemployment rate, 21% Prime, 18% money market funds, 17% mortgages, $850 gold, $50 silver (remember the Hunt brothers trying to corner the silver market?), skyrocketing deficits, skyrocketing oil and food prices, money supply growing far faster than the economy, plummeting stock market, plummeting real estate, zero building, “stagflation,” and on and on.

We ask ourselves why?  The discussion of indicators is too exhaustive to make meaningful mention here, except to say that the world has changed since then.  Some of the similar signs are the falling dollar, which has fallen almost 50% against the Euro during the past few years. That suggests a terrible 10-15% inflation rate; after all, inflation is ultimately defined as “the value of the dollar.”

Some might ask, “Why has America been able to spend and spend and run such large deficits without inflation?  Without a day of reckoning?”  I’ll just mention two reasons we’ve been spared: (1) Free trade has allowed us to buy goods and services while keeping our costs down and enjoy a higher standard of living (incidentally, free-trade is also the #1 foreign policy to prevent war—people don’t go to war with people with whom they trade), and (2) Foreigners have been willing to finance our government deficit, allowing us to spend and spend without a day of reckoning.  More on this in a moment.

Who can veto Congress?  Who can veto the President?  The Fed?  No. Who can veto the Fed?  Hint: Many are not even U.S. citizens. Those that are buying U.S. Government Bonds—China, Saudi Arabia, and Japan, in that order, because they are the one’s financing our budget deficit.  They are why we have not had a day of reckoning. People can hate them all they want, but they pay for our Medicare, entitlement programs, and wars.

Now, what’s the problem with all this?  The problem is that, with the falling dollar, U.S. interest rate must, I repeat must, rise!  Those nations will not continue to finance our deficits if they can’t get their money returned to them, adjusted for the currency exchange rate!  They’d rather go finance the deficits of Western Europe!  Are our friends in Western Europe financing our deficits? No! They’ve got their own deficits.  And will the U.S. Government pay the higher rates, even if it breaks the economy as it did in 1981? Or worse?  Of course, because who would finance America’s deficit if it defaulted on its debt?

The Fed can lower short-term rates, but it has no control over long-term rates. That’s determined by the free market.  Inflation is, and interest rates will, rise dramatically!  What does this do to a debt-ridden nation?  See 1979-1981. BUT, perhaps worse this time.  Far worse.

A very wise and astute businessman made some quiet but urgent observations about our economy.  Members of the predominate faith here in Utah refer to him as “the Prophet.” Whether you are of the faith or not, he was a mature adult at the time of the Great Depression, and he has managed the business of a large multinational organization. He passed away a couple months ago.  He commented, “the economy is a fragile thing…there is a portent of stormy weather ahead.” (Gordon B. Hinckley, CR, 10/1998)  Later he again stressed the importance of getting out of debt and the shocks our economy could see (CR, 10/2001). And again recently (CR, 4/2007). Why don’t we listen to those that have been down the path before?

Why far worse?  In 1991 then Governor Bangerter appointed me along with two others to serve as three members of the Utah Thrift Panel to arbitrate claims brought by depositors against five failed thrift institutions.  Do you remember the S&L debacle of the late 1980s? And how it broke the FSLIC, needing a congressional bail-out? And caused a real estate collapse of 50% in CA, AZ, and elsewhere?  Now the banks are into mortgages, and the FDIC is no stronger, and the problem is many, many times larger. Unlike then, today the consuming public have been cannibalizing their net worth under the stupidity of home equity loans, living high, going to Tahiti, on equity that sometimes took generations to grow. The growth of the 1990’s was phony growth, spurred by spending that we did not have, and which is exhausted now.

Why far worse?  Maybe this is the clincher: Derivatives. Ever heard of them? Originally Fed Chairman Greenspan was against regulating them because they were a means to “reduce risk.” Derivatives are basically “bets” that some risk will or will not happen. Derivatives do not “reduce risk,” they “transfer risk,” in a zero-sum manner. What’s the problem?  Greedy bankers figured they could get rich off trading derivatives.  And they could do this without regulation, without reporting it to their shareholders on their financial statements, and by being highly leveraged, based on the bank’s credit rating.  Maybe they only had to put-up $1 for every $20 dollar bet, thus leveraging themselves 20 to 1, and as much as 100 to 1.

Get this.  Every major financial collapse in the past 20 years has been the result of derivatives, starting with Black Monday in 1987. Then the S&Ls. Remember the 223-year-old British Barings Bank brought down by a reckless hotshot 27-year-old trader?  Remember Orange County going bankrupt due to $1.5B loss in derivatives? Remember the collapse of the Asian markets in 1997?  Remember Enron getting caught in the squeeze, too leveraged to hide any longer? The collapse of Argentina? Remember the LTCM hedge fund collapse when the Fed organized a $3.5B bailout? And now the collapse of Bear-Stearns.  Why?  Derivatives on their mortgage portfolio multiplying the impact of the basic problem (sub-prime loans) many-fold.  It isn’t the sub-prime loans—it’s the derivatives.

How does all this happen?  And how does it affect you?  This happens when the bet is made, and a financially strong institution only has to put up, say, 2¢ on the dollar as collateral. But, if their financial rating gets downgraded, as happened to Ford & GM a while back, those holding the contract have to increase their collateral to double or triple. What assets do they sell to cover their bet?  Their bad assets? The derivatives?  No. They have to sell their good assets, their stocks. This puts selling pressure on the market, things worsen, and downward spiral begins. So, this isn’t just about derivatives.  It is about the banking industry, the stock market, and real estate. (Bonds would likely increase in value, which is the major asset backing the insurance industry.)

Two weeks ago, for the first time in history, the Fed pumped money into the ailing securities markets to save the investment bankers and brokerage houses from collapse, to the tune of $200 billion.  Now the Fed says they want to regulate not only banking, but also the securities industry, and virtually replace the SEC.  Will it happen?  Of course it will. “Them that’s got the money make the rules.”  The Fed’s got to “protect their investment.” And the Fed can buy/dictate anything because it’s got the printing press (at the cost of our inflation).

How big is this phantom economy where no real goods or services are produced?  The U.S. economy is almost $14 Trillion in total output.  The world economy is about $50 Trillion in total output. Current derivative “bets” out there total $516 Trillion dollars—that’s 10 times the size of the entire global economy!  And 37 times the size of the entire U.S. economy!  And one-third of it is held by three banks: JP Morgan Chase, Bank of America, and Citigroup ($158T as of 3Q07, John Pugsley, Sovereign Individual, 3/08).  “J.P. Morgan Chase’s dabbling in derivatives makes it too big for even the Federal Reserve to bail out.” (John Crudele, New York Post.)

“Derivatives the new ‘ticking bomb’ … Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen.” (Market Watch, 3/10/08)  As Warren Buffett said at his last Berkshire Hathaway annual meeting: “A world where huge amounts of leverage have been brought into the system is a dangerous world.”

Banks and securities/brokerage firms are into derivatives, hence the $100 billion and $200 billion bail-outs, respectively, two weeks ago. This isn’t pocket change. We will all pay for it in a higher inflation-tax.  Same with the mortgage industry.  The only financial industry that has stayed away from derivatives is the insurance industry, which primarily holds 90%+ in bonds to back its obligations.

I am not a doomsayer.  I simply say that we live in a precarious economy with unknown risks. I suggest we go conservative by staying/getting out of debt, and putting our dollars into safe vehicles that will weather most any financial storm.  I suggest that if we prepare right, we have nothing to fear. I believe the prices of wheat and other commodities will continue to rise, so get your year-supply of food.  And there is a whole list of other actions someone can take to protect their families against days of increasing commotion and volatility ahead.  I am not saying anyone needs to panic and run out and live off nature, or sell everything and buy gold.  I am suggesting that we be forewarned, forearmed, prepared, and informed about what’s going on in the world about us.

If you are already a client, we invite you to call for a periodic review. If you are not already a client, we invite you to talk with us. You can start by attending one of our public workshops.  If not us, then talk with somebody that understands more than just a few annuity products, but also a little bit about tax strategies, and the world economy.   My sincerest best wishes to you.

Hank Brock is president of Brock and Associates, LLC, a financial planning firm specializing in retirement, estate, and tax planning.  Hank Brock can be reached at 435-673-9599.

http://www.brockfc.com/lets-understand-this-economy.html

Motivated first-time homebuyer: the city of Los Angeles

In the rush to a bailout deal, this piece of news fell through the cracks last week, but is worth revisiting:

California and many of its communities hardest hit by the foreclosure crisis stand to receive more than $500 million in federal aid over the next 18 months to buy and fix up distressed homes, the Department of Housing and Urban Development announced Friday.

More, from the Los Angeles Times:

The city of Los Angeles is to receive about $33 million directly from the federal government. In the next few months, the city could also get money from the state, which has a pool of $145 million to allocate to communities. With more than 13,000 foreclosed homes in the city, Los Angeles Councilman Ed Reyes warned that the federal funds would go quickly. Los Angeles County is to receive $17 million, and other cities in the county, such as Long Beach and Lancaster, also would get awards.

In Los Angeles, it’s not clear whether this gift from the federal government — from taxpayers, really — will be worth the trouble. Foreclosed houses are already selling to private buyers, and they are selling quickly — roughly 100 foreclosed houses are sold every business day in Los Angeles County. Foreclosures account for 1 of every 3 homes sold in L.A. County.

At prevailing prices — roughly $200,000 to $300,000 for foreclosed homes — the $33 million in federal funds would buy roughly 130 houses — the same number of homes that private buyers snap up in a day or two across the county. But the city will have to go to some lengths to buy the homes, or at least it should. It will need to establish a procedure that safeguards against favoritism in picking which houses to buy, and guarantees the city pays no more — or less — than market price. The city will also have to come up with a plan to seek bids, hire contractors and renovate and those homes, then maintain them while it lists them for sale and sells them. It will be selling into a market dominated by falling prices, which means the city could well lose money on homes the private sector would have happily bought.

What’s the point, then, of the city buying the foreclosed houses? Great question.

– Peter Viles

House defeats $700B financial industry bailout

By JULIE HIRSCHFELD DAVIS, Associated Press Writer 3 minutes ago

WASHINGTON – The House on Monday defeated a $700 billion emergency rescue for the nation’s financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive into recession without it. Stocks plummeted on Wall Street even before the 228-205 vote to reject the bill was announced on the House floor.

Bush and a host of leading congressional figures had implored the lawmakers to pass the legislation despite howls of protest from their constituents back home. Despite pressure from supporters, not enough members were willing to take the political risk just five weeks before an election.

Ample no votes came from both the Democratic and Republican sides of the aisle. More than two-thirds of Republicans and 40 percent of Democrats opposed the bill.

The overriding question for congressional leaders was what to do next. Congress has been trying to adjourn so that its members can go out and campaign. And with only five weeks left until Election Day, there was no clear indication of whether the leadership would keep them in Washington. Leaders were huddling after the vote to figure out their next steps.

A White House spokesman said that President Bush was “very disappointed.”

“There’s no question that the country is facing a difficult crisis that needs to be addressed,” Tony Fratto told reporters. He said the president will be meeting with members of his team later in the day “to determine next steps.”

“Obviously we are very disappointed in this outcome,” Fratto said. “There’s no question that the country is facing a difficult crisis that needs to be addressed. The president will be meeting with his team this afternoon to determine the next steps and will also be in touch with congressional leaders.”

Monday’s mind-numbing vote had been preceded by unusually aggressive White House lobbying, and Fratto said that Bush had used a “call list” of people he wanted to persuade to vote yes as late as a short time before the vote.

Lawmakers shouted news of the plummeting Dow Jones average as lawmakers crowded on the House floor during the drawn-out and tense call of the roll, which dragged on for roughly 40 minutes as leaders on both sides scrambled to corral enough of their rank-and-file members to support the deeply unpopular measure.

They found only two.

Bush and his economic advisers, as well as congressional leaders in both parties had argued the plan was vital to insulating ordinary Americans from the effects of Wall Street’s bad bets. The version that was up for vote Monday was the product of marathon closed-door negotiations on Capitol Hill over the weekend.

“We’re all worried about losing our jobs,” Rep. Paul Ryan, R-Wis., declared in an impassioned speech in support of the bill before the vote. “Most of us say, ‘I want this thing to pass, but I want you to vote for it — not me.’ “

With their dire warnings of impending economic doom and their sweeping request for unprecedented sums of money and authority to bail out cash-starved financial firms, Bush and his economic chiefs have focused the attention of world markets on Congress, Ryan added.

“We’re in this moment, and if we fail to do the right thing, Heaven help us,” he said.

The legislation the administration promoted would have allowed the government to buy bad mortgages and other rotten assets held by troubled banks and financial institutions. Getting those debts off their books should bolster those companies’ balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan worked, the thinking went, it would help lift a major weight off the national economy that is already sputtering.

The fear in the financial markets send the Dow Jones industrials cascading down by over 700 points at one juncture. As the vote was shown on TV, stocks plunged and investors fled to the safety of the credit markets, worrying that the financial system would keep sinking under the weight of failed mortgage debt.

“As I said on the floor, this is a bipartisan responsibility and we think (Democrats) met our responsibility,” said House Majority Leader Steny Hoyer, D-Md.

Asked whether majority Democrats would try to reverse the stunning defeat, Hoyer said, “We’re certainly not going to abandon our responsibility. We’ll continue to focus on this and see what actions we can take.”

Several Republican aides said House Speaker Nancy Pelosi, D-Calif., had torpedoed any spirit of bipartisanship that surrounded the bill with her scathing speech near the close of the debate that blamed Bush’s policies for the economic turmoil.

Without mentioning her by name, Rep. Adam Putnam, R-Fla., No. 3 Republican, said: “The partisan tone at the end of the debate today I think did impact the votes on our side.”

Putnam said lawmakers were working “to garner the necessary votes to avoid a financial collapse.”

But the defeat was already causing a brutal round of finger-pointing.