“Banks Give Better Deals Than Brokers”

Better deals for the bank, that is.

Ken Harney has a recent article Study Shows Loan Brokers’ Better Side

But now a new, independent academic study has concluded the opposite: According to a team of researchers headed by Georgetown University’s Gregory Elliehausen, home mortgage applicants with less-than-perfect credit pay lower financing costs when they obtain their mortgages through brokers rather than from loan officers directly employed by lenders. The same pattern holds true for African American, Hispanic and low-income borrowers.

The study was limited to subprime borrowers, but the results are not surprising:

Overall, broker loans cost 1.13 points less for first mortgages, 1.98 less for second mortgages

For borrowers in predominantly black areas, the difference was 1 point and 1.9 points, respectively.

For borrowers in predominantly hispanic areas, the difference was 2 points and 2.4 points. The explanation as to why this gap is larger is probably as simple as the fact that many of these folks limit themselves to dealing with Spanish speakers.

Skolnik added, though, that the data overall could reflect that “brokers in general operate in a much lower-cost structure” compared with banks and retail mortgage companies that carry heavy overhead and employee costs. Moreover, he said, “brokers are far more agile and nimble than retail” lenders, when pushed to compete on pricing and terms.

That and any given lender may have anywhere from a dozen loan programs to fifty, all intended to hit specific niches and priced for given underwriting assumptions. A 3/1 is different from a 7/1 is different from a 30 year fixed, stated income is different from full doc is different from NINA. That’s nine programs right there, and this is A paper stuff. Subprime is even more varied. It doesn’t matter if you barely meet guidelines or soar through them. If you find a program with tougher underwriting guidelines that you still qualify for, than that lender will give you a better rate on the loan, because they will have fewer of them go sour, and therefore get a better rate on the secondary market. You can go around to all the lenders yourself – or you can go to a broker.

Furthermore, even if you’re one of those so slick that you fit into the top loan category of the toughest lender, brokers can typically get you a better price. Why? Two reasons. First, the lenders don’t have to pay broker’s overhead, making it more cost effective for the lender to do the same business through the broker. Second, and more importantly, when you walk into a lender’s office, they regard you as a “captive” client. Brokers know better. Brokers are not captive to anyone, and they know that you’re not captive to them. A good broker’s loan officer will price with at least a dozen lenders. I’ve shopped fifty or more for tough loans. Furthermore, there’s an efficiency factor at work. After a while, a good loan officer learns which lenders are likely to have good rates for a given type of client. Which do you, as a client, think is likely to be the best use of your time and resources? Going to all those lenders yourself, or going to a few brokers?

This article of mine is also highly relevant to this discussion.

Caveat Emptor

Passive Asset Allocation

A while ago I talked about Passive Asset Allocation as a way to beat market return as a strategy. So I’m going to write a bit about what it is, why it works, and how to do it.

Passive Asset Allocation is very simple at its heart. What you are doing is keeping the balance between asset classes that you have decided is best for your situation.

The way you do it is simple. The objective is to maintain a certain investment mix. You allocate your investment pool among the asset classes, and at strict intervals, rebalance to that allocation from whatever has happened over time. Typical period is once per year. You can do it either with individual stocks and bonds, or with mutual funds, variable subaccounts, or even a mix. For most folks, bonds especially are going to require mutual funds or variable subaccounts, as individual bonds tend to be high dollar values.

Here’s an example, based upon an established portfolio of $100,000. Average market growth is 10%, but it’s not evenly spread:

Large Cap growth $10000 @11%=$11100

Small cap growth $10000 @14%=$11400

Large cap value $10000 @14%=$11400

small cap value $10000 @20%=$12000

developing world $10000 @-5%= $9500

developed world $10000 @-2%= $9800

sector investment $10000 @24%=$12400

short bond $10000 @ 7%=$10700

intermediate bond $10000 @ 8%=$10800

long term bond $10000 @ 9%=$10900



The portfolio is now $110,000. Rebalancing (note that this is a taxable transaction unless it’s in a tax-sheltered account) to the original percentage allocation, we get these returns the next year:



Large Cap growth $11000 @18%=$12980

Small cap growth $11000 @ 4%=$11440

Large cap value $11000 @25%=$13750

small cap value $11000 @ 6%=$11660

developing world $11000 @20%=$13200

industrial foreign $11000 @14%=$12540

sector investment $11000 @-12%=$9680

short bond $11000 @ 6%=$11660

intermediate bond $11000 @ 8%=$11880

long term bond $11000 @11%=$12210



Total is $121000. Seems like right on 10% compounded, right? But look what would have happened if you didn’t rebalance:



Large Cap growth $11100 @18%=$13098

Small cap growth $11400 @ 4%=$11856

Large cap value $11400 @25%=$14250

small cap value $12000 @ 6%=$12720

developing world $9500 @20%=$11400

industrial foreign $9800 @14%=$11172

sector investment $12400 @-12%=$10912

short bond $10700 @ 6%=$11342

intermediate bond $10800 @ 8%=$11664

long term bond $10900 @11%=$12099



Total is $120,513. You’ve added $487 by moving money from where assets were relatively expensive, to where they were relatively cheap.
Let’s do it on more year:

Large Cap growth $12100 @-5%=$11495

Small cap growth $12100 @14%=$13794

Large cap value $12100 @-9%=$11011

small cap value $12100 @12%=$13552

developing world $12100 @18%=$14278

industrial foreign $12100 @20%=$14520

sector investment $12100 @24%=$15004

short bond $12100 @ 8%=$13068

intermediate bond $12100 @ 9%=$13189

long term bond $12100 @ 9%=$13189

Total is $133,100, If you rebalanced once per year. If you didn’t, here’s what you end up with:
Large Cap growth $13098 @-5%=$12443.10

Small cap growth $11856 @14%=$13515.84

Large cap value $14250 @-9%=$12967.50

small cap value $12720 @12%=$14246.40

developing world $11400 @18%=$13452.00

industrial foreign $11172 @20%=$13406.40

sector investment $10912 @24%=$13530.88

short bond $11342 @ 8%=$12249.36

intermediate bond $11664 @ 9%=$12713.76

long term bond $12099 @ 9%=$13187.91



For a total of 131713.15, a difference of 1386.85 you lost in just two years.

This works even better in real world circumstances. Here, I used a larger number of asset classes than most folks use, forced them to be exactly equal, and then forced the yearly returns to average exactly 10% in order to isolate the effects of rebalancing versus not rebalancing from all other concerns. The real market is not so neat. Some years you’ll be on top of the world because you gained 40 percent, some years you’ll be picking up pennies on street corners because you lost twenty (and it’s been better as well as worse than that within the last ten years).

The whole thing that makes this work is that you are moving money from where assets are relatively expensive to where they are relatively cheap at the moment. This is another real world example of the principle behind dollar cost averaging.

It would fall apart if one asset class outperformed all others, or underperformed all others, consistently over time. But this hasn’t happened yet. Even in the asset classes that do outperform others over time, the consistency is not there. These classes are volatile. They will do very well one year or two, then do very poorly. When I see or hear people talking about “letting their winners run” over a multi-year period, particularly if they’re talking mutual funds or the equivalent rather than a particular individual security, I know I shouldn’t trouble myself about their advice. If an individual security was bought as part of an asset class, that’s fine – as long as it still meets the definition of that asset class and you deal with it appropriately.

The one thing that kills this strategy is not sticking to it. “Google has doubled and is still going up!” (or Qualcomm, or Microsoft, or…). The idea is lock the gains in, buy where stuff is relatively cheap. The same asset classes do not do equally well from year to year. It is rare to find one year’s superior asset class among the next year’s superior performers. This can be hard with individual securities, so most folks who adopt this strategy use mutual funds or variable insurance instrument subaccounts.

What can sabotage you is a fund company or variable subaccount who will not sit on their fund managers and make certain they adhere to stated asset class. When a Large cap value allocation has forty percent of its stocks in common with a small cap growth allocation, you’ve got a problem, no matter how wonderful that forty percent performs. It’s likely buying apparent performance through demand, which only works short term. One mutual fund company got away with artificial inflation of this kind for about two and a half years back around the start of the decade before the market caught up with them. People are still holding their funds, though, confident that they’ll recover because they were doing so well for a while…

Speaking of which, I left financial planning a couple of years ago, but my former clients who did this had amazingly resilient accounts when the market went bust in 2000-2002. Nobody went much below peak account values, and they were all ahead of previous high account balances by the beginning of 2003 (even discounting the effects of contributions). One’s balance went from $44,000 to $86,000 over that period with about $10,000 in contributions. Why? Because they didn’t let greed rule them.

And before I close, I do need to say that past results are not guarantees of future returns, and this is not a panacea. Consult a currently qualified professional. If an asset class is getting obviously overbalanced or under-represented, it may be time to deal with the situation even though it’s only been six months, or one. If you’re holding security X, and you keep getting tips on how hot it is, it’s probably time to sell.

Caveat Emptor

Media a Privileged Class? I Don’t Think So!



Volokh Conspiracy has an excellent article on the state of the law vis-a-vis publicizing past felony convictions.

I ask, how can it be permitted for the media to do something that private citizens cannot? Does the media have more freedom of speech than a private citizen? I would submit that the first amendment was clearly intended to protect both equally.

Do we want privileged classes in the US? Admittedly, we have them de facto, but is this a practice we wish to discourage, or encourage, de jure?

As an additional note, at what point does it become media? Am I, with roughly 1300 visits and 2000 page views per day over the last week (making my articles more read than many small papers, newsletters, etcetera), a media publisher? Are the Volokhs, at roughly ten times that level? Michelle Malkin, at roughly ten times that level? Does it require incorporation? Financial Statements? What, precisely, is the factor or factors distinguishing media publication from non-media?

I mistrust, as a matter of principle, all lines dividing our nation into two or more parts as to legal rights, privileges, or obligations. The correct view to take, and definitely to start with, is that all citizens are equal before the law. If A is allowed to do something, what compelling societal reason do we have for forbidding B? If C is not allowed to do something else, what overriding concern allows it to be permissible for D? We may disagree on specific cases, but I believe that the reasoning is universal.

I submit that in this case, no valid distinction can be drawn between the rights of media and the rights on individuals.

As a final reductio ad absurdem, suppose it is permissible for something to be published by one media outlet or another. Can we visualize any scenario under which it should be illegal for one citizen to tell another what they saw in a news report? If this distinction is drawn, that is precisely the state of affairs we will find ourselves in.

Loan Qualification Standards – “Loanbusters”

This is definitely not a “Who you gonna call?”

I’ve done a couple articles in the recent past on the two ratios, debt to income and loan to value. Nonetheless, there exist a plethora of reasons why someone can be turned down for a loan even though they make it on the ratios.

The first of these is time in line of work. A paper looks for two years in the exact same line of work. One change that trips a lot of people is going from being employed by a company to being self employed in the same line of work. Believe it or not, a promotion can also sink a loan if your job title changed, for instance from salesperson to sales manager. If it was with the same company, it can sometimes be okay, but if you changed companies to get the promotion, that’s a really tough loan. Subprime loans will accept shorter time periods.

Making payments on time is probably the biggest deal buster for A paper. In general, you are allowed no more than one mortgage late, or no more than two other lates. The reason does not matter. It does not matter how justified you were in not paying. The fact remains that you are reported as being late. The only way to remove them is for the company to admit it was in error in reporting you late. Many people will not pay the charge as it gets marked later and later and later. This is self defeating. Pay it now, dispute it afterwards. Yes, it’s harder to get your money back – but the money it saves you on your home loan is typically much larger.

Store credit cards are one of the biggest headaches here. If you buy merchandise with a generic credit card, you’ve got the card company, who are neutral, looking at the transaction. Both you and the merchant are their customers, and the merchant needs to take credit cards. They’re not going to quit taking them. If you use your store credit card, the dispute department is going to take the view that you bought that merchandise at their store and therefore you owe the money. I run across five or six store card problems for every generic card problem I encounter.

Bankruptcy is another deal buster. People in Chapter 13, or just out of Chapter 7. Most banks won’t touch them. It’s not really rational, but you there you are.

Reserves can be a deal buster, particularly for stated income loans. A paper stated income requires six months PITI reserves somewhere that you can get to it. Subprime is less demanding, but if you don’t have the lender’s requirements, you won’t get the loan. Would you loan money to someone with absolutely no cash in the bank? Payment shock, where your monthly cost of housing is increasing, can increase the reserve requirements.

Related Party Transfers are another questionable point. All of the background for loans assumes that the transaction is between unrelated parties, who have no reason to cooperate in order to do the lender dirt. If you’re buying the house from your brother, that assumption goes out the window. Some lenders will do them with caveats, others won’t touch them at all. Some will but charge extra. Others will but have special requirements. Whatever they are, you have to meet them.

The appraisal coming in low is another. The lender evaluates the property on a “lower of cost or market” basis. The Appraisal is the “market” part of that, and the lender will only loan money based upon the lower of these two methods of evaluation. I have people tell me all the time that their new purchase is worth $20,000 more than the appraised value (or the purchase price). No it isn’t. By definition – it’s worth what a willing buyer and a willing seller agree upon. The bank’s evaluations are necessarily conservative, and they don’t want to take over the property. They’re not in that business. They want you to pay back the loan.

Late payments. Whatever you do, while the loan is in progress, keep making all your payments on time. Whether just indirectly due to the credit score dropping, or directly because now you’ve got a(nother) thirty day mortgage late, this can raise your rate or even break the loan.

Sourcing and seasoning of funds to close. Just because you’ve got $100,000 in the bank doesn’t mean the bank is happy. Nobody rational keeps that kind of money outside of investment accounts. At least nobody rational who needs a loan – Bill Gates might. Lots of folks hide loans that way. The bank is going to what to see that you’ve had it a while (seasoning) or prove where you got it from (sourcing). If you really just got $400,000 from the sale of a previous property, you’re going to have the escrow papers and HUD 1.

Final credit check: I have a set spiel I go through, “Until this loan is funded and recorded, don’t breathe different without getting my okay. Make the payments you’ve been making. Make them on time. Don’t take out any new credit. Don’t allow anyone (other than mortgage providers!) to run your credit. Just before the loan gets recorded, the lender will pull a final credit report. Woe be unto the person whose situation has deteriorated, and it means we’ll have to start all over again, if there even is a loan that makes sense.”

Failures of verification. Three biggies here: employment, rent or mortgage, and deposit. I do not know why people bother lying, but they do. Don’t you be one of them. World of hurt if the lender wants to prove a point.

Lines of credit/credit history/no credit score: Most lenders want to see at least 3 lines of credit with a 24 month history of making payments on time. Freezing your credit cards is a wonderful idea, but you need to use them to demonstrate a payment history. Once per month, I use mine for something small and stupid that I would otherwise pay cash for – just to show payment history (it also helps your credit score). Pay if off as soon as the bill gets there. Waivers for two lines of credit are fairly easy, but if a given bureau doesn’t know you have two open lines of credit, they may not score your credit profile. If you don’t have at least two credit scores among the big three – no loan.

Property is structurally unsound, is not certified for habitation, unsuitable or not zoned for intended use, etcetera. Wouldn’t you really find out about this before you have a very large debt to pay? Okay, this can cost you money, but it’s a “Thank (deity) I found out now!” moment.

So there you have them, most of the most common reasons why loans – and therefore real estate deals – fall through.

Caveat Emptor

Naming Beneficiaries – Do It, and Keep Them Current

what happen when 401K leave blank on beneficiary

Nothing unless you die, and it’s not covered in your will or other documents. Then the state’s intestate code takes effect. Each state has a law for how the estates of those who die intestate will be divvied up. These laws were typically made generations ago, and the societal assumptions that they make are no longer valid. Furthermore, by failing to name a beneficiary, you are passing up on the chance to avoid probate, the legal process by which your estate is gotten to your heirs. Everybody has a probate, and fees are levied on the basis of the value of the assets that are in probate. For many assets, such as bank accounts and investment accounts, avoiding probate is as easy as naming someone a beneficiary, and any accounts where you have named someone a beneficiary go to them immediately upon proof of your death, outside of probate.

This is important because your heirs do not have access to those assets until probate is settled. This is a minimum of nine months, and in large complex cases can be a couple of decades. Probate fees are about seven percent per year, and until probate is settled, they might get to live in the house you left – but they can’t sell the house if they need to move, or if, for instance, all of your assets are tied up in probate and they can’t make the payments on the loan.

Most people do not understand the naming of beneficiaries, and never give it a second thought. Many times this translates to the first spouse still being the beneficiary of a policy of life insurance, when you divorced without children fifteen years ago, and now your second spouse has two young children to bring up without you, and without your life insurance proceeds. Even if the first spouse is generous enough to disclaim the money, since you obviously did not name your second spouse as a beneficiary, the money now has to go through probate.

Contingent beneficiaries are also important. Primary beneficiaries sometimes predecease you, or perish in the same accident. One common (and often worthwhile) tactic is to name spouses as primary beneficiaries, children as contingent beneficiaries. Many accounts allow the naming of secondary contingent beneficiaries as well. One approach is to name them individually, another to name them as a class (“all natural and adopted children of John and Jane Smith”), and two ways of accounting for their as yet unknown numbers of people who may be born later, “per stirpes” which is by branch, and “per capita” which is by head.

Every time you have a major life event, such as marriage, divorce, birth of a child, or the death of someone who is one of your beneficiaries, you should make a habit of going through all of your accounts and making certain the beneficiary designations are up to date with the new developments. Of course, if you have trusts and the like, this is also an ongoing requirement for them, and trusts are even better for avoiding unnecessary estate complications.

Caveat Emptor

Mortgages and RAMs in Later Life

“Should People in their sixties take out a mortgage?”


The short answer is “Not if you don’t have to.” Now if I suddenly vanish, the explanation will be that the loan industry put a contract out on me.

Success in loans, and sales in general, is often attributable to selling people stuff they don’t need. If you don’t sell something, you don’t eat. Getting people to call or stop by is expensive. The traditional idea of sales is that you have to make a sale at every opportunity, whether it really makes sense for the client or not.

The various tricks of selling a mortgage to retired folks is a case in point. “It’s a cushion,” “It’s there in case you need it,” and all sorts of other stuff to that effect. Combine this with the “If you wait until you need it, you won’t qualify!” and most folks who don’t know any better will cave in and apply.

This is exacerbated by the fact that most people seem to want to stay in the same home they raised their family in. This is very understandable, emotionally, and often the worst thing you can do financially.

Let’s consider the typical three or four bedroom house with a yard, and the retired couple. It becomes more and more difficult, physically, for them to do the required routine cleaning, and even more difficult to do the maintenance and repairs that any home needs from time to time. Sometimes the kids are close enough and willing to help, sometimes they aren’t. If their finances are tight in the first place, they get tighter and tighter over time.

Into this environment comes the guy with a Reverse Annuity Mortgage (RAM) to sell. This is a special kind of mortgage, with a special protection for the homeowner (here in California, and in many other states as well) that they cannot foreclose in your lifetime. You cannot be forced out. Well, what if you’re sixty-five and live to 100, as a far larger proportion of today’s 65 year olds will? That’s thirty-five years they are locking this money up for, and there is always the possibility that by the time they consider the cost of selling, etcetera, there will be no equity.

Lending is a risk based business, and that kind of lending carries its own risks. Who pays for the risk to the lender? You do. Especially as opposed to the typical loan where half have refinanced in two years and ninety-five percent in five, this is a long term loan they are being exposed to. Yes, the recipient could get cancer and die in a few years, but they could well survive that. The lender has no way of knowing what the interest rate environment for the money will be in a few years. So either the rate the clients get is variable, or the clients pay a higher rate to have a fixed interest rate.

Once you start taking money out of the RAM, it starts earning interest. Since in the most common forms you are typically not making payments, it accrues interest. If you are making payments, it makes your cash flow even tighter, and you need to take more money. In either case, your balance is increasing, faster and faster with time, until you hit the limit, at which point you can no longer get additional money. This often happens surprisingly quickly, as you have the power of compound interest working against you. This all but guarantees that the family will have to sell the home, often for less than they could have gotten had they the luxury of a longer sale time. Furthermore, if keeping the home in the family is something you would like, a Reverse Annuity Mortgage is almost certain to torpedo the hope.

Contrast this with the swap down option. Suppose instead that adult children buy a small place suited to the parents needs such as a condominium, and the parents live there, while they live in the parents home. This minimizes cleaning, upkeep, and maintenance that the parents need done.

If this won’t work, another option is selling the home and buying something smaller. Remember, a RAM will almost certainly cause the family to lose the home anyway. You get more mileage out of cashing in the equity by selling, and investing the equity, than you will from borrowing against the equity. Instead of working against you, compound interest is on your side. Most states have laws preserving property tax basis if that’s something that is advantageous.

Let’s say that with a $500,000 home, moving down to a $200,000 condo. Net of costs, you net at least $250,000 to invest, and let’s say you do so at 7 percent, well below a well invested portfolio. This gets you $17500 per year, or about $1460 per month, indefinitely, and you keep both the condo and the $250,000. Contrast this with taking the $1460 per month out of your equity. Even if you can find a RAM at the same 7 percent, the entire equity is gone out of your home in a little over fifteen years, and that’s without including initial loan charges.

Nobody can make you do this, and there are many reasons why you might not want to. But looking at it from a strictly financial viewpoint, it’s hard to find the justification for a Reverse Annuity Mortgage.

As a resource, here’s the AARP page on reverse mortgages.

Caveat Emptor

What Drives Loan Rates?

Supply and Demand.

Now that I’ve given the short answer, it’s time to explain the macro factors behind interest rate variations. But I’m going to keep referring to those first three words. It is a tradeoff between the supply of money and demand for it.

The most obvious thing influencing loan rates is inflation. This is a general environmental factor. If the inflation rate is higher, then other factors being equal, there will be fewer people willing to lend at a given rate, and more people willing to borrow. Who wouldn’t want to borrow money if the money you have to pay back is actually worth less than they money you borrowed? All loans are priced such that a given inflation is part of the background assumptions of making it. If inflation is 4 percent, someone lending money at seven is making an effective 3 percent. If inflation is ten percent, they are losing that selfsame three percent. Which scenario would you prefer to loan money in? Which scenario would you prefer to borrow money in?

On the other hand, when inflation is high, loan rates usually rise to compensate. When the prime rate is twenty-one percent, that means that a business borrower has to make a minimum of twenty-one percent on the money just to break even. That’s if they’re a prime customer. Making twenty one percent is tough. The reason you borrowed (“rented”) the money was because you have a use for it to make money. There’s a lot fewer opportunities that make enough over twenty-one percent to make them worthwhile, than there are opportunities making enough over seven. This is one reason why inflation is a Bad Thing.

What alternatives exist is a major factor on the supply side, as well. If you absolutely must invest your money in US Government securities, that’s where you’re going to invest, and since you’re increasing the supply of money to the treasury, the price is less. Supply and Demand. This is one of the many reasons why Congress’ handling of the trust fund is a national disgrace. If they were private trustees, they would be help liable for not investing it where the best returns are. If, however, you think that stocks are looking more attractive now, that means that the supply of money for loans will shrink by whatever dollars you move out, and the rates will rise. The effect for any one person is small, but there are a lot of people in the market. In aggregate, it’s many trillions of dollars. Supply and demand.

Savings rates means a lot, also. When there is a lot of new money coming available in the borrowers market that money is going to be cheaper to borrow, in the form of lower interest rates. This is partially why rates went down throughout 2002, and stayed down into 2003, and 2004. People who had been burned in stocks wanted nice “safe” mortgage bonds. When there is comparatively little new money coming into the market, the only source becomes old loans being paid off. Negative savings or negative investments in the bond market means that what money is coming off older loans is at least partially being used to fund the withdrawals. Competition for money gets fierce, and price – by which I mean interest rate – rises. Supply and Demand.

Competition for money is also a part of the demand side. When the government needs to borrow a lot, for instance, that increases the competition. Even on the scale of our capital markets, whether the government is breaking even or needs to borrow the odd $100 billion has a real and noticeable effect When they need to borrow $400 billion, you can bet it’ll raise the cost of money. The government doesn’t care, and the bureaucrats running the treasury have been told to get this money. They will do their jobs and get the money, whether it costs 4 percent, 14, or 24. Every time competition from the government drives up rates, a certain number of borrowers whose profit margin on the loan was likely to be marginal will drop out of the auction. But government spending rarely grows the tax base. It’s those corporations and small businesses investing in future opportunities that grow the tax base, and they are the ones dropping out of the auctions as money gets more expensive. This is why government deficits are a Bad Thing. Supply and Demand.

The desirability of the alternatives is another factor on the demand side, as well. There’s more than one way to make money for most. If it become prohibitively expensive to borrow (bonds), sell part ownership instead (stock). There is a point at which even the most die-hard sole proprietor needs the money, and just can’t afford it as opposed to selling some stock to new investors. This can dilute earnings, and cause you to lose control of the company (there were multiple reasons why the high inflation period of the seventies and eighties was followed by the era of the corporate raider, but that’s one part), but better to dilute your share of the pool by ten percent while increasing the size of the pool by fifteen. That is a net win, while borrowing the money at twenty-something percent is likely not.

Now, let us consider the money supply here in this country, and thence the state of likely interest rates. We have increased government borrowing. We have the social security trust putting decreasing amounts of money into the government. We have a national savings rate that’s negative (and it is the overall rate, not just working adults that we’re concerned with, here). More and more people are becoming comfortable with foreign investment. And mortgage bonds are looking jittery right now, with foreclosures up. Supply and Demand, remember?

Therefore, in my judgement, we are likely to see continued raises in the interest rate for some time. If you’re on a short term loan that is likely to adjust in the next couple of years, the time to refinance is now, unless you’re planning to sell before it adjusts. And if you had asked me a year ago if I’d ever be recommending thirty year fixed rate loans, I would have said, “Not likely”. I’m recommending them now. When it’s the same rate or higher to get a 5/1 ARM, there is no reason not to choose a thirty year fixed rate loan instead.

(If, on the other hand, you have a long term fixed rate loan, stay put. Once you’ve actually got the loan funded, they can’t just draw the money back unless you do something like fraud or default. Even if you go upside down on your loan for a while, if you’re already in a fixed rate loan, that’s okay. The market price of the home only matters at loan time and at sales time. If you don’t need a loan and you don’t plan on selling, why should you care? Note to the young: home prices will rise again.)

Caveat Emptor

Title Insurance, or Preventing Fifty Ways to Lose Your Money

Yes, I’ve always kind of liked Paul Simon. But this post was inspired by something I ran across from FATCO. And just to make certain you know, it’s fifty ways to lose your money if you don’t have title insurance.

You don’t want problems from prior ownerships to interfere with your rights to your property. And you don’t want to pay the potentially ruinous cost of defending your property rights in court.

A title insurance policy is your best protection against potential title defects, which can remain hidden despite the most thorough search of public records and the most careful escrow or closing.

For a one-time premium, a title company agrees to reimburse you for loss due to defects existing prior to the issue date of your policy, up to the policy amount. And, should it be needed, the policy also provides for the cost of legal defense of your title. The standard coverage policy protects you against such potential defects as:


Now, I’m going to star the ones I’ve got personal experience dealing with.

*Forged deeds, mortgages, satisfactions or releases.
*Deed by person who is insane or mentally incompetent.
Deed by minor (may be disavowed).
*Deed from corporation, unauthorized under corporate bylaws or given under falsified corporate resolution.
*Deed from partnership, unauthorized under partnership
agreement.
*Deed from purported trustee, unauthorized under trust agreement.
Deed to or from a “corporation” before incorporation, or after loss of corporate charter.
*Deed from a legal non-entity (styled, for example, as a church, charity or club).
*Deed by person in a foreign country, vulnerable to challenge as incompetent, unauthorized or defective under foreign laws.
*Claims resulting from use of “alias” or fictitious namestyle by a predecessor in title.
*Deed challenged as being given under fraud, undue influence or duress.
*Deed following non-judicial foreclosure, where required procedure was not followed.
*Deed affecting land in judicial proceedings (bankruptcy,
receivership, probate, conservatorship, dissolution of
marriage), unauthorized by court.
*Deed following judicial proceedings, subject to appeal or
further court order.
Deed following judicial proceedings, where all necessary
parties were not joined.
Lack of jurisdiction over persons or property in judicial
proceedings.
*Deed signed by mistake (grantor did not know what was
signed).
*Deed executed under falsified power of attorney.
*Deed executed under expired power or attorney (death, disability or insanity of principal).
Deed apparently valid, but actually delivered after death of
grantor or grantee, or without consent of grantor.
*Deed affecting property purported to be separate property of grantor, which is in fact community or jointly-owned
property.
Undisclosed divorce of one who conveys as sole heir of a
deceased former spouse.
*Deed affecting property of deceased person, not joining all
heirs.
Deed following administration of estate of missing person,
who later re-appears.
Conveyance by heir or survivor of a joint estate, who
murdered the decedent.
Conveyances and proceedings affecting rights of service-member protected by the Soldiers and Sailors Civil Relief Act.
Conveyance void as in violation of public policy (payment of gambling debt, payment for contract to commit crime, or conveyance made in restraint of trade).

*Deed to land including “wetlands” subject to public trust
(vesting title in government to protect public interest in navigation, commerce, fishing and recreation).
Deed from government entity, vulnerable to challenge as unauthorized or unlawful.
*Ineffective release of prior satisfied mortgage due to acquisition of note by bona fide purchaser (without notice of satisfaction).
*Ineffective release of prior satisfied mortgage due to bankruptcy of creditor prior to recording of release (avoiding powers in bankruptcy).
*Ineffective release of prior mortgage of lien, as fraudulently obtained by predecessor in title.
*Disputed release of prior mortgage or lien, as given under mistake or misunderstanding.
Ineffective subordination agreement, causing junior interest to be reinstated to priority.
*Deed recorded, but not properly indexed so as to be locatable in the land records.
*Undisclosed but recorded federal or state tax lien.
*Undisclosed but recorded judgment or spousal/child support lien.
*Undisclosed but recorded prior mortgage.
*Undisclosed but recorded notice of pending lawsuit affecting land.
Undisclosed but recorded environmental lien.
*Undisclosed but recorded option, or right of first refusal, to purchase property.
*Undisclosed but recorded covenants or restrictions, with (or without) rights of reverter.
*Undisclosed but recorded easements (for access, utilities, drainage, airspace, views) benefiting neighboring land.
*Undisclosed but recorded boundary, party wall or setback agreements.

*Errors in tax records (mailing tax bill to wrong party resulting in tax sale, or crediting payment to wrong property).
Erroneous release of tax or assessment liens, which are later reinstated to the tax rolls.
*Erroneous reports furnished by tax officials (not binding local government).
Special assessments which become liens upon passage of a law or ordinance, but before recorded notice or commencement of improvements for which assessment is made.
Adverse claim of vendor’s lien.
Adverse claim of equitable lien.
Ambiguous covenants or restrictions in ancient documents.
Misinterpretation of wills, deeds and other instruments.
Discovery of will of supposed intestate individual, after probate.
Discovery of later will after probate of first will.
*Erroneous or inadequate legal descriptions.
*Deed to land without a right of access to a public street or road.
Deed to land with legal access subject to undisclosed but recorded conditions or restrictions.
Right of access wiped out by foreclosure on neighboring land.
Patent defects in recorded instruments (for example, failure to attach notarial acknowledgment or a legal description).
Defective acknowledgment due to lack of authority of notary (acknowledgment taken before commission or after expiration of commission).
Forged notarization or witness acknowledgment.
*Deed not properly recorded (wrong county, missing pages or other contents, or without required payment).
Deed from grantor who is claimed to have acquired title through fraud upon creditors of a prior owner.


The ones below this require extended coverage from a title company

Deed to a purchaser from one who has previously sold or leased the same land to a third party under an unrecorded contract, where the third party is in possession of the premises.
Claimed prescriptive rights, not of record and not disclosed by survey.
*Physical location of easement (underground pipe or sewer line) which does not conform with easement of record.
*Deed to land with improvements encroaching upon land of another.
*Incorrect survey (misstating location, dimensions, area, easements or improvements upon land).
“Mechanics’ lien” claims (securing payment of contractors and material suppliers for improvements) which may attach without recorded notice.
Federal estate or state inheritance tax liens (may attach without recorded notice).
Pre-existing violation of subdivision mapping laws.
*Pre-existing violation of zoning ordinances.
*Pre-existing violation of conditions, covenants and restrictions affecting the land.

Post-policy forgery against the insured interest.
*Forced removal of residential improvements due to lack of an appropriate building permit (subject to deductible).
Post-policy construction of improvements by a neighbor onto insured land.
Damage to residential structures from use of the surface of insured land for extraction or development of minerals.



Many people talk themselves out of title insurance, claiming it won’t happen to them. They think they’ve just saved hundreds to a couple of thousand dollars. And they have, if none of the above things (as well as others) happens. But the reason you carry insurance to insure yourself against losses that you cannot afford. If you lose that bet, you’ve potentially lost the entire property, and many times this is precisely what happens. Mr. Jones owned the property for many years before he died, and his estate sold to Mr. Smith who lived in it for fifteen years and then sold it to you. But Mr. Jones had a quickie marriage before he went off to World War II, forgotten but never legally dealt with. That woman’s son finds the marriage certificate and checks to see if Mr. Jones left any property. Guess what he finds. Guess who may really own “your” property?

If I have a property, I’ll pay a second time to make certain there’s a policy of title insurance covering me. This stuff happens.

Caveat Emptor

The Manifesto in Defiance of Islamism

Stop the ACLU has an open letter (and open trackback) on opposition to Islamism. Among many other online sites, they print the following manifesto:

Together facing the new totalitarianism

After having overcome fascism, Nazism, and Stalinism, the world now faces a new totalitarian global threat: Islamism.

We, writers, journalists, intellectuals, call for resistance to religious totalitarianism and for the promotion of freedom, equal opportunity and secular values for all.

The recent events, which occurred after the publication of drawings of Muhammed in European newspapers, have revealed the necessity of the struggle for these universal values. This struggle will not be won by arms, but in the ideological field. It is not a clash of civilisations nor an antagonism of West and East that we are witnessing, but a global struggle that confronts democrats and theocrats.

Like all totalitarianisms, Islamism is nurtured by fears and frustrations. The hate preachers bet on these feelings in order to form battalions destined to impose a liberticidal and unegalitarian world. But we clearly and firmly state: nothing, not even despair, justifies the choice of obscurantism, totalitarianism and hatred. Islamism is a reactionary ideology which kills equality, freedom and secularism wherever it is present. Its success can only lead to a world of domination: man’s domination of woman, the Islamists’ domination of all the others. To counter this, we must assure universal rights to oppressed or discriminated people.

We reject « cultural relativism », which consists in accepting that men and women of Muslim culture should be deprived of the right to equality, freedom and secular values in the name of respect for cultures and traditions. We refuse to renounce our critical spirit out of fear of being accused of “Islamophobia”, an unfortunate concept which confuses criticism of Islam as a religion with stigmatisation of its believers.

We plead for the universality of freedom of expression, so that a critical spirit may be exercised on all continents, against all abuses and all dogmas.

We appeal to democrats and free spirits of all countries that our century should be one of Enlightenment, not of obscurantism.

(signed) Ayaan Hirsi Ali, Chahla Chafiq, Caroline Fourest, Bernard-Henri Lévy, Irshad Manji, Mehdi Mozaffari, Maryam Namazie, Taslima Nasreen, Salman Rushdie, Antoine Sfeir, Philippe Val, Ibn Warraq.

In case you weren’t aware, I’ve been against Islamism for a very long time. I was one of the few people who didn’t move anywhere politically as the result of 9/11 – I knew something like that was coming, and however much I wish I had been wrong, merely having my prediction confirmed is not grounds for moving further against Islamism’s insanity.

To the Islamists, I say:

To hell with your demand that we all become Islamic.

To hell with your demand that we give Islamics preferential treatment.

To hell with your demand that we treat women as lesser beings.

To hell with your demand that we treat women as being guilty of anything they are accused of and unable to effectively testify in their own defense.

To hell with your demand that we allow your religion to dictate how we will respond to the universe.

To hell with your demand that the will of Allah as interpreted by your clerics shall be the supreme ruling word of the world. We did not elect Allah, we definitely did not elect his clerics, and we do not acknowledge any authority of theirs save that which is given them voluntarily by their own believers.

In short, I do not submit.

I will not submit.

I will exercise the rights reserved to me as a free individual by the United States Constitution and other such documents. I will aid by any means at my disposal the ability of others to do so. I will not stand by and permit others to be oppressed by my lack of action.

If you can’t handle it, that is your problem.

How Do You Think About Money?

I am profoundly lucky in that I read “I Will Fear No Evil” in high school. Not an assignment, I just like to read, and Robert A. Heinlein has always been one of my favorite authors.

A very few pages into the book, he has one of his characters toss off two fantastically good pieces of advice in quick succession, viewed from the point of view of thirty years later and multiple licenses in financial planning. He has one character, a lawyer no less, deal effectively and beyond challenge with two financial problems in quick succession. The first had to do with a very ill old gentleman with a will of longstanding effect, who doesn’t want the existing provisions upset, as often happens to people who die with a new will. This extremely wealthy man has decided he wants to leave his secretary a million dollars.

The solution? A single-pay policy of life insurance. Problem solved. But once he’s out of the room, the secretary protests, saying she’d just waste the money, or even get in trouble with it. She wants it given to charity.

Solution? Write it so she got an income off of it every week – essentially turn the lump sum into an income generating asset, with the additional advantage of a donation to charity when she shuffles off the mortal coil. She tells the lawyer she would never have thought of that solution.

His answer? “That’s because most people think of money as something to pay the rent. They don’t think of money in terms of what it can do.”

Okay, I always was a math geek, but this concept was something I understood immediately, and it made a huge difference in the way I thought about money forever afterwards. Money wasn’t just something to buy stuff with. Money could do things. Money could make more money. Money was potential, potential that got bigger all on its own if you only let it.

Now from a much later viewpoint, I see the flaws in Mr. Heinlein’s plan. If you don’t want your estate plan messed with, a living trust beats a will on every point. Furthermore, the interest rate imputed in the return of the life insurance proceeds was only a simple compounding at less than four percent – I can almost certainly do that much above inflation if I invest reasonably. Nonetheless, Mr. Heinlein grasped some very powerful concepts very well, and he was able to show the application to a teenager of no particular qualification. This is better than the vast majority of supposedly more sophisticated writers of serious “litracha” can usually do, and he did in almost in passing – no preaching, no grandstanding, just one heck of an effective example, twice in the space of a hundred words or so that were completely aside of the main plot.

These days, I still love reading fiction where the writers show they really understand economics and finance. They’re hard to find. I happened to be volunteering as an event coordinator at a con a couple years ago, and ended up assigned to a reading with an author who made a mistake so elementary it showed that he had done no research because it impacted a benefit that literally everyone gets – he just didn’t know about it. It really was critical to the plot, and if he had made one phone call when writing the story, any professional he called would have corrected the error. I very tactfully (for me, anyway) informed him of this gap, and I recently ran across the story in print. He hadn’t fixed the error. I’m not planning on buying any more of his stuff. Another highly hyped novel said that the author understood economics and finance. What the author understood was that illegal drugs were a highly profitable trade if there’s no real possibility of getting caught. Well, duh. He blew it, otherwise, not even considering the constraints of the problem he had set up. Despite the fact that I really enjoyed most of his writing, I may not buy the sequel just because what he missed was so painfully obvious to me that it really destroyed the rest of the story. As long time friends have heard me say many times, “I’m willing to suspend disbelief, but not hang it by the neck until dead!” This stuff is more constant than even the laws of physics, unless you postulate that you’re dealing with a non-human psychology, and even then they’re still there. Don’t even get me started on the stuff supposedly written for everyday, mundane situations. Just recently, I was watching a show set in Wyoming that was completely ignorant of the doctrine of adverse possession, which short-circuited the whole premise of the show. Maybe renters in New York don’t know about it, but I’d be amazed if there was a single person of adult age in the State of Wyoming who doesn’t. It’s important to them.

Still, some do get it right. S.M. Stirling in his Island In the Sea of Time stories, and to a lesser extent in Conquistador. Poul Anderson must have gone back through merchant records in the early Age of Sail, or known someone who did, for some of his Polesotechnic League stories, because he more than once cites some of the same sort of brutally coldblooded logic that was present then. Many of his other stories bear this same kind of mark. I was pleasantly surprised about a year ago by a side plot in a stand-alone novel from Michael P. Kube-McDowell – although he always seems to do solid research.

Got some suggestions? I’d love to hear about more such authors, who manage to teach, or at least stay in touch with economic realities while they entertain. Those authors who do a good job of this perform a real public service, while those who ignore it so that they can tell their story unencumbered by mere facts often earn their work a ceremonial throwing – twice across the room.

Caveat Emptor.