Florida Mortgage Report

Robbing Peter to Pay Paul?

There are many things in life that catch my eye and this one scares me.  In a MSNBC article, it discusses the fact that more and more Americans are taking loans out against their 401(k)s and even stopping contributions.  The reasons for doing this are varied, but some are doing it just to keep up with their lifestyle instead of making necessary changes.  That is just scary.

Why would you want to sacrifice your future to live in the present?  Do you plan on dying early?  This is backwards thinking as any sacrifices should be done now, even if it means moving in a down market.

As home prices fall and banks tighten lending standards, more people are doing the same thing: raiding their retirement savings just to get by and spending their nest eggs to gas up SUVs, pay mortgages or put food on the table.

I purposefully underlined the gassing up SUVs comment as SUVs are a luxury and there are many cars out there that are just as well suited for your needs and have better gas mileage, but lack "status".  Chasing "status" will destroy your finances and I see that everyday in South Florida, where BMWs and Hummers account for a large portion of the automobiles.

Charlton and his wife used the retirement money and $7,000 from savings to pay down their credit card debt. They also cut monthly expenses by pawning a diamond ring and selling camera equipment he owed money on. And he's looking for someone to take over his $550 monthly payment on a gray BMW 335i he leased last April.

Need I say more?  Well, yes I do as he makes a very common thought process...

"I made the best decision I could," he said. "I keep hearing about bankrupting your future retirement. But I feel like it's far enough away that I'll be able to save up enough."

The time value of money went from working side by side with him to against him, though he does not realize it.  That is a common problem with Americans all across the country.  Focusing on paying down debts, especially mortgages, can be detrimental to your financial health overall.  Not setting up emergency funds and doing other financial planning is what leads to these problems to begin with. (check out my "Flight Planning Your Retirement Series")

There is also an important tax issue for those deciding to get a loan against their retirement account...

Consumers who tap their retirement accounts can take a loan from their 401(k) accounts worth up to $50,000, or 50 percent of the amount invested, whichever is less. There are no tax consequences for a loan in good standing. But if a borrower defaults, the loan is considered a withdrawal and subject to the same tax penalties.

Taking out a loan against your retirement account can have dire consequences.  Besides the tax issues above if you default, if you fail to contribute to your account for five years, you can expect nearly 20% less money available for retirement if you are 40 years old already.  That could easily spell financial disaster for you in the long run.

Did You Have Your ARM Fixed By a Real Mortgage Professional?

If you are like the multitudes that rushed to convert your ARM (Adjustable Rate Mortgage) to a fixed rate mortgage, following the media's advice and not listening to true mortgage professionals, I'll bet you are wishing you hadn't wasted your money.  Fixed rate mortgages are still hovering in the mid-5s if you don't pay points and those ARMs, even when fully indexed are dropping below the mid-5s at this point and probably will fall further.

Now, if you are sought out the help of a true mortgage professional, they would have advised you not to fix your ARM if it wasn't broke.  Now, thousands, if not millions, of Americans have gone and wasted money seeking a general mortgage practitioner instead of seeking a specialist.  The end result is wasting money fixing something that wasn't broken in the first place.

Take a look at this chart to see what I am talking about, and what I have been for a while...

As you can see, there are clear advantages of keeping your ARM, especially if it is tied to LIBOR.  The chart above shows the 30-year rates and the fully indexed 6-month LIBOR rates (including the standard 2.25% margin).  I even threw in the Fed Funds Rate to show the correlation to the Fed's decisions and your LIBOR ARM.  (Keep in mind that pricing on new ARMs are not effected directly by the Fed's actions, but rather on market forces like normal mortgage rates).

As you can see, if you kept your ARM the entire time, there were times when your rate would have been significantly below those of the 30-year fixed, while the times when your rate would have exceeded the 30-year, it was not very significant and short lived as well.  ARMs are not really as bad as people think, that is the bottom line.  And rushing to get your ARM fixed right now may prove more costly over time than you could possibly think.

Now, there are reasons why you would want to convert your ARM to a fixed rate mortgage, but you need to seek a true mortgage professional that will put your best interests above his/her own and that is very hard to find these days.

Is Home Equity Safe? (Originally Published in 2006)

(This is another article written back in 2006 when interest rates were higher, originally posted on my AR blog)

Would it be better to have $400,000 in Home Equity or $400,000 in a safe, conservative investment account? Many Florida and Gulf Coast homeowners no longer need to pause and think about it, they can easily answer that question now.

One of the least publicized lessons from hurricanes Katrina, Rita, and Wilma taught us concerns personal finance and the best way to own your home. Most Americans strive to pay down or pay off their mortgages. However, those that followed this advice were worst hit when the hurricanes arrived, including Senator Trent Lott.

Senator Lott was living the “American Dream” by owning his home outright. Like many Americans do, he considered it his retirement nest egg, which accounted for half his net worth. When hurricane Katrina completed its destruction, the Senator’s home, and his nest egg, were wiped out. He estimates he lost the $400,000 he built up in home equity, and he’s still fighting with the insurance company to pay claims so his loss doesn’t grow any higher. The reason is many insurers are balking at paying claims citing that the damages were the result of floods, not hurricane winds.

Senator Lott was not the only politician that was affected. The Mayor from Port Arthur, TX had his house burned down in the aftermath of hurricane Rita. His comment was “the sad thing is we just paid off our house.” Even when those affected by the storms do settle with the insurance companies, it will take a long time to rebuild or repair there homes and be in position to take out their equity.

As the victims of these hurricanes found out, home equity is not as safe as they originally thought. It can be wiped out completely in a short period of time. The Senator and Mayor would have been better off if they had separated their homes’ equity and placed it in a safe, conservative bank account prior to the storms. In fact, all homeowners are better suited to keep as little cash in their homes as possible, and instead allow their home’s equity to build up in a safe side investment account.

Those homeowners that had separated their home’s equity prior to the hurricanes were able to get back on their feet much quicker. The reason is they had cash available to them and were not dependent upon the insurance companies to decide whether their damage is covered. This is a good example of how cash is king and the ones with cash hold all the cards. In Senator Lott’s case, if he had the $400,000 in an investment account, he would have many more options and more leverage while dealing with the loss of his home. Instead, the insurance company is in control and he is dependent upon them to replace his cash.

With another busy hurricane season forecasted, will there be more disasters? How many people affected will have their homes paid off and lose their nest egg? How many will reposition their equity into a safe investment account and be prepared?

With mortgage rates being around 6.5% today (about 4.7% after tax savings), it’s relatively easy to realize a higher rate of return in a conservative investment account. In addition to increasing safety and liquidity, a higher rate of return can be achieved and allow your money to grow and compound also! For more information on strategic mortgage planning concepts, contact Robert D. Ashby, CMPS at (954) 432-3450 or visit www.solidrockmortgage.com. As Florida’s first Certified Mortgage Planning Specialist, he can verify if it makes sense which mortgage solution is best for a particular family to better protect their home equity, increase their liquidity, and build their wealth.

Stimulus Package Means Recession is Over

I am sure you have heard it, but the House has put together a bi-partisan plan to provide tax rebates to stimulate the economy.  That means the recession is over.  Or does it?

The details are basically this, you may receive a tax rebate check from $300 to $1,200 (what I have heard was the max) and that is supposed to get you to spend more money and keep the economy from tanking.  Yeah, that'll be enough to get me to buy that Hummer I always wanted.

Let me make a suggestion, which you can take or leave, but take the money and invest it instead, and I mean throw it into something that will have the potential for great returns, what have you got to lose?  Put the money at risk because you wouldn't have had it anyway.

You think I am nuts?  If you take this money and invest it and the market tanks more, you only lose that money and you continue your life as it ways before you ever received the check.  However, if you invest that money reap great returns, the money will multiply over time, becoming an even greater "stimulus" later.  Your chances are better now that the markets have been beat up for a while, so much so that virtually the only way for the markets to move is up.

So, if and when you get that check, fight the urge to spend it and go out and invest it instead.

Don’t Pay Off That Mortgage, It Could Be the Biggest Mistake!

(This is a repost of an article I wrote back in 2006, even before I started blogging)

Paying additional principal toward your mortgage, or even getting a bi-weekly mortgage program, could be detrimental to your financial health?

That’s right. In most cases, instead of paying extra principal, there may be a better way to pay that mortgage off and experience financial freedom faster. “The truth is, you may never want to pay off your mortgage,” says Robert D. Ashby, President of Solid Rock Mortgage Corporation.

Mr. Ashby continues, “Why? Your home’s equity is not a safe investment. Equity has no rate of return and has no liquidity. You cannot access your equity without qualifying for a mortgage of some kind, which requires you to pay fees, and borrow your equity on the banks’ terms, plus you must prove you can qualify.” This is especially true in cases of job loss or some other financial crisis.

Additionally, by taking the money normally put toward extra principal and investing them in other safe investment vehicles, families can increase their liquidity, and realistically be able to pay off their mortgages faster. Families may even want to take out a new loan or refinance their current loan to increase safety, liquidity, and rate of return.

The majority of Americans carry huge credit card balances with high interest rates and most do not have enough money in savings to tide them over in a financial emergency. For this reason, refinancing or taking out a new loan may be even more beneficial for them by increasing their cash flow, which can then be invested to create a college savings plan, vacation plan, or even increase their retirement plan.

There are several strategies for the homeowner to consider that can allow them to experience financial freedom sooner than trying to pay off their mortgage as quickly as possible. Obviously, these strategies will not be advisable to everyone, so seeking the guidance of a Certified Mortgage Planning Specialist to find out which strategy is the best is a wise decision.

For more information regarding these concepts, contact Robert D. Ashby, Certified Mortgage Planning Specialist, at (954) 432-3450 or visit www.solidrockmortgage.com.

Email Conversation With a Fellow Mortgage Broker Who Sells Money Merge Accounts...

This past November, I had an email conversation with a fellow mortgage broker from Florida that centered around how the Money Merge Accounts and CMG Homeownership Accelerator can be beneficial and that I am doing more harm than good with "general blanket statements like 'most likely not right for you.'"  He even claimed "you are missing the main point: The MMA/CMG systems focus is to PAY OFF THE MORTGAGE, not claim to have the best investment strategy".

Well, you can imagine how the conversation went, but here is a quick breakdown...

He continues to believe that I am missing the point and my running the numbers is doing a disservice to the consumer, commenting "WHAT I AM STANDING UP FOR I DO NOT SEE YOU DOING IS JUST THAT. WHICH IS THE GREATER GOOD FOR THE MAJORITY OF PEOPLE? DO YOU EVER PAUSE TO CONSIDER SOMEONE LOOKING ON THE INTERNET TO UNDERSTAND THE CMG OR MMA SYSTEM WILL NOT FOLLOW YOUR FINANCIAL ADVICE BUT SEE YOUR COMMENTS & DECIDE THESE SYSTEMS ARE FALLACIES OR SCAMS?"  Educating the public on how these works allows the consumer, not the salesman, to decide if these programs are in their best interest.  By presenting other options and a little education, how can that be not helpful to the vast majority of people.  I have no problem calling fallacies and scams by what they are?  I also want the consumer to know there are other options and those options are most likely more beneficial, both short and long term.

His belief is that I go solely based on a spreadsheet and not look at the client's overall picture, yet I have talked repeatedly about my unique process called MEDS™ which runs people through a process that ensures there mortgage matches their goals.  Sure spreadsheets are involved, but they are like every other financial plan, they predict or forecast the future and need to be updated regularly because that picture changes.

He also lumped separated the "average homeowner" from a "highly disciplined investor".  Why?  All it takes is a little education to bring the "average homeowner" an understanding of how money works and then they can make an educated decision on what is in their best interests, which is likely not the Money Merge Account or even CMG HOA.

I could go on and on with this, but I think you get the point.  The man did demonstrate that he tries to find the best solution for his clients.  A visit to his company website shows he has taken some material from my own and reworded it, interestingly enough.  Just check out his company's page and mine. 

So, if you think I am doing a disservice or would like to here what Rich has to say about your situation, check him out.  Also, if you think I am doing a disservice, let me know, but with client testimonials like this one from those I don't even get paid for helping, I would beg to differ.

Poole Does Have Something of Value to Say to Mortgage Brokers

I know I ripped on what Fed President Poole said today in his speech, but now I would like to look at the good he talked about.  That good advice can be found within what he addressed by this question:  How could better education and financial decision-making have helped people avoid these mistakes?

He broke the question down into three responses, those for borrowers, mortgage brokers and investors.  I am going to provide his statements which can be found here, followed by my own commentary.

Borrowers. Too many know too little about credit and what its costs and risks are. Starting with coursework on credit usage in elementary and middle schools and continuing with financial literacy and economics in high school would go a long way toward equipping borrowers with the information they need, or at least give them enough knowledge to ask the right questions about what they can afford and what lending terms mean.

While I agree with this statement, I lack faith in our school systems to provide a solid foundation in this area.  There is plenty of good information on the 'net when you spend a little time looking for it.  One of the best resources should be that of your mortgage professional when looking for a home loan, but that leaves the borrower on their own for other sources.  However, if you have a trusted mortgage professional you work with, they can help with other credit issues as well.

Mortgage brokers. Many have closed their doors and gone out of business through unsatisfactory lending. In the July realtor speech I mentioned earlier, I emphasized that a durable stream of profits in mortgage lending requires a continuing flow of capital from investors willing to buy the mortgages an originator wants to sell and securitize. Given the difficulty any mortgage broker faces in differentiating its own products, the best way to stand out and survive over the long term is to give outstanding service to mortgage shoppers. Turning outstanding service into future business prospects is precisely the role for reputation. A firm’s good name spread through word of mouth will pay the highest dividends over the long term. And going the extra mile by making certain that borrowers understand lending terms and are able to service those loans can cement that reputation and keep those doors open a long time.

Thank God many of these guys have left the business already and many more will likely leave this year.  That being said, not all that have left, and many that remain, still do business that screws up the borrower's financial strength.  Many that remain have just grabbed onto the latest "fad" to provide an added revenue stream at their clients' expense. I have underlined his best statements that all mortgage professionals should take to heart.

Investors. Here I want to look at individual investors, the ones you know so well. It may be true that many if not most such investors put their money heavily into mutual funds, reducing some of the risk of holding individual stocks and bonds. What would help them greatly, I believe, is a much better understanding of what their funds hold. Mutual funds are professionally managed, but the subprime fallout has hit the pros hard, too. In one example from our Federal Reserve District, two investors in two Regions Morgan Keegan mutual funds severely affected by subprime mortgage problems are suing over sharp declines in the values of their investments. As of Dec. 13, 2007, the Select Intermediate Bond Fund and the Select High Income Fund were down 47 and 56 percent, respectively. News media accounts tell of disastrous results being faced by other investors in similar types of securities. Would investors equipped with better knowledge have avoided such steep losses? More organizations should get behind efforts to improve investor knowledge.

Everyone falls into a category of investor, even if you are simply contributing to your company 401(k) or even just owning a home.  While investment professionals should be doing a better job of managing their funds, you as an individual should be watching what your fund is doing. 

I am willing to bet the vast majority (if not all) of you reading this do not know the top ten holdings in each of your mutual funds.  I am also willing to bet that those top ten holdings have a lot of "overlap" in them, meaning if one fund goes down, the other does as well.  While you may think spreading your money across a variety of funds, even fund strategies, equates to diversification, it doesn't.  Don't worry though, you are not alone as many financial professionals believe that same thing.

What about your real estate holdings?  What about even your own home?  Many financial professionals fail to take the truths of home equity into consideration and provide erroneous advice in this area as well, including advice in relation to your personal residence.  Studies have shown that financial professionals do not consider their clients' real estate holdings, especially not how the mortgage is working for them, as an integral part of their clients' financial plan.  That can lead to financial disaster.

You need to educate yourself, find a team of advisors you can trust (covering the spectrum), and develop your financial and investments plans to meet your financial goals and dreams.  Developing a team of like-minded individuals that understand the strategies and concepts will help you achieve financial freedom.

And for those in the business of real estate and financial planning, aligning yourself with those who truly understand the strategies and concepts will help you grow your business.  For the mortgage professionals, you better be up to speed on "mortgage planning" or you will become another statistic.  Understanding how money works, the strategies involved, and the essential concepts will be a requirement to survive as more and more home owners will be seeking that type of advice.

Personal Finance In Its Simplest Form

Now, once you can master this, then we can talk about how the bigger picture and how to incorporate your mortgage into it to maximize your chances of achieving your financial goals and dreams.

(Note:  Picture source was forgotten, so if it is yours, send me an email and I will link back to you.)

I Take a Vacation and the World Goes to...

Well, I guess I can't take a vacation from my blog anymore as the world just seems to find ways to screw things up.  That's right, bankruptcies were reported 40% higher, credit cards are reporting more and more delinquencies and even home equity loans are gaining on the delinquency acts.  Heck, even Florida got cold, what's up with that?

Will people ever start paying their bills, or has the home ATM machine dried up and no real money exists to pay those accelerated debts?

I guess everything is all fine and dandy since the Fed will likely set up a bail out program for credit card companies, like the 33.6% APR they charge is not a big enough ripoff.  Oh, wait, they will dream up a fancy name to try to pretend it is not a bailout program for anyone other than consumers.  Like we are going to fall for that one again.

Apparently there is some good news from this last week.  Mortgage rates are headed lower on all sorts of both fake and real news.  Also, people are apparently getting paid more, but more of them are finding themselves without a job.  Cool, huh?  But are the BS (sorry, I meant BLS) statistics trustworthy?  I doubt it, though we will have to wait until next month to see just which direction the revisions will actually go.

On a side note, one of my predictions for 2008 was that we would see unemployment break 5.0% and we saw that this morning.  I am guessing it will still go higher before people realize they need people to work in order to maintain competitiveness.

So, what is real and what is fake?

Real - Slowing economy, stagflation, inflation rising, weakening dollar.

Fake - "Strong Dollar Policy", "Strong Economy", just about everything out of the government's mouth right now.

Ok, I know I am being harsh (with a hint of sarcasm), but fundamentals have not changed, so why are bonds soaring?  Sure, bad economic news, but are we to believe that inflation is not going to push bonds back down?  Do we think the Fed is not going to continue to allow the dollar to lower in value?  Do we really believe that the economy is strong and growing?

The proof is in the pudding and eventually the numbers cannot be hidden.  Though I am glad that bonds are rallying and mortgage rates are heading lower, they are likely going to reverse course as we head into the "inflation" data coming, such as CPI, PPI and definitely PCE.

What Do You Do With Your Loose Change?

I do not advocate keeping your change lying around the house as it should be at least earning some interest somewhere, but here's a story about a man's "coin jar" (courtesy of 5 Min. Forecast)...

Paul Brant, a 70 year old man from Indiana, strolled into his local Dodge dealership and purchased a $25,000 half ton pickup.  The strange part of the story is not him purchasing the truck, but rather how.  He used hundreds of pounds of coins, spare change stored for such a day.

“(The old truck) didn’t have four-wheel drive, and living in the country, I figured I better get a new one to help get me through the snow,” Brant humbly explained. That old truck, by the way, was also bought with spare change. Brant’s 2007 pickup will be the third car he’s purchased using only coins.

“As long as you don’t put your hands back in the till, it really adds up,” he said.

We can only speculate as to how many more cars or how much more of a car he could have purchased had he invested the money instead, or at least placed the money into a high yield savings account, but that was apparently not his style.

I will hand it to him, though.  He certainly knew how to save a lot better than the vast majority of Americans.