(This was originally going to be part II of Is the United States Worth Defending? but that got too long to continue.)
What are my political priorities? Quite simply, I want to make the world as a whole and the United States in particular better places to live. I want people to live longer, richer, safer, happier lives. I want people both here and in the rest of the world to be able to do what they want as long as it doesn’t mess up anybody else, and by anybody else I mean people.
Part and parcel of making the world better is not allowing it to get any worse. We have scratched and clawed our way up from the primordial slime, and whether you’re talking 750 million years since life began on earth, or just the last hundred thousand or so when our species has identifiably existed, it was a long hard brutal slog up the slope, and the further down we fall, the harder it will be to start our way up again. Only in the last few hundred years have we come up with the idea that as we learn more about the world around us, maybe we know more than our ancestors. It’s only been a couple of centuries since we started to drive out the idea that the people with the important ancestors are the important people. They certainly can be as is witnessed by any number of families of brilliant people, but this fallacy is to blame for the slowness of progress throughout most of human history. If your daddy was a peasant, you were a peasant, and if you didn’t want to break your back to grow food for the rest of your life, you’d damned well better do it anyway until you prove that you can do something else – and because your daddy was a peasant, nobody believes you can be anything more, either. If your daddy was a king – even a king who accomplished nothing more than falling asleep and drooling on himself, the supposition that you deserved to be important also was overwhelming. History is largely the study of those people who made themselves important. It’s only by oblique examination of the attitudes of the time that you find out how truly amazing the exceptions were.
It’s only been a couple hundred years since the notion of democracy really took root, first in western culture, and recently spreading elsewhere. The idea that perhaps the sum of everybody’s wisdom was greater than any one person’s is a profound conceptual change. The idea of patent and copyright, that someone who invented something that potentially made everyone’s life easier was entitled to some of the good of their invention, as opposed to it being just taken over by whatever noble (i.e. those who already had the resources to take advantage of it) first saw the uses, was likely what really ignited the industrial revolution.
It’s been less than a century since people first really began to practice the idea that perhaps we ought to give everyone those same chances, not merely those who happened to be of the ruling sex, race, class, or ethnicity. It’s only been a few decades even here in the United States where it has really been practiced. It’s only been a few decades that sciences from medicine to physics to chemistry started advancing rapidly.
I could go on for hours, but the point I’m trying to make is that the ideals and elements of western civilization, and the United States in particular, however unpopular they may be with certain elements (who, I might add, would never give them up!) are worth defending. Hell, they are worth circling the wagons and retreating into the mountains and fighting guerilla style as our enemies have done and fighting to the last man, woman, and child, if we have to, rather than giving them up. If you don’t substantially agree with me on this point, you might as well stop reading right now. I am not giving up our Freedoms which permitted all of this to happen. Not a chance in anybody’s hell. And there are whole armies of people, good decent people who spend their lives as schoolteachers and police and firefighters and scoutmasters and military defenders of our country, and even bureaucrats, who will not allow it either. I am humbled by the knowledge that they would even permit me to stand with them if it came down to the necessity, and yet there is no doubt in that they would, and that they would be similarly humbled that I would permit them to stand with me.
The beauty of this society that we have built here in this country just beggars the imagination, and every time I think I understand it all, something comes along and knocks the feet out from under me and picks me up and slaps me around and shakes me and rubs my nose in the fact that we live in the most wonderful society anywhere throughout human history, and I am moved by the experience every time. Because of the great ideas of our civilization and our country, and the fact that they are so beautiful, so enabling of human dignity and human worth, they are so contagious that half the world wants to be an American, and most of the rest and a good deal of the first half wants to create an America wherever they happen to be. They may not speak English, they may never have so much as seen an American in the flesh, but they understand that they want to be American, and in that moment they have taken the first step in becoming Americans. Every year, millions of people want to be Americans so much that some of them will wait decades for the opportunity and come here to start all over again at an age when most people figure they have earned the right to take it easy for the rest of their lives. And millions more want to be Americans so much that they will break our laws, and risk, at least theoretically, a lifetime banishment in order to start becoming Americans right now. These people are more counterweight than the Chomsky brigades and other “America is Eeevil!” apologists can ever make up for even if they did put their lives where their mouths are and vote with their feet by actually going to live in one of those Fifth World hellhole “paradises” they keep telling us about, that would be wonderfully glad to have them and give them positions of privilege and importance, insulated from the everyday realities of life there, where they could rail to the world about how evil America is, and how wonderful their new homelands are, all the while living off the blood, the sweat, the tears of those who never were and never will be given any of the opportunities that these useful idiots take for granted. And yet these people haven’t left, and more new Americans cross our borders every day. That tells me something quite profound.
Unfortunately, the rest of the world is not America. In fact, the entire idea of America, and western civilization in general, is supremely dangerous to those who are powerful in many areas of the world. The idea of democracy, that says we will choose our leaders based upon the one who persuades us that we want to go the way they want to go, mocks and undercuts those who are leaders because their grandfather was a leader, and their grandfather’s grandfather before that, and instills no little amount of fear that perhaps they will not always be a leader. The idea of evolving wisdom based upon learning how the world works in ways that can be repeated, time and time again, and get the same answer no matter who conducts the tests, mocks and undercuts the idea of revealed wisdom, the idea that the Answer is always going to be the same because some priest hundreds of years ago said that was what God wanted, and instills no little amount of fear that perhaps the answer that priest put in God’s mouth may not be correct. The idea that anyone can become wealthy, important, one of our leaders if they only have good ideas, work hard, and stick to it, mocks and undercuts those who are wealthy and powerful because their family has owned the port concession for the past seven generations, and instills no little amount of fear that perhaps someday, someone else may be given another port concession and manage it enough better so as to put them out of business, or even that there may be no port concession and so whomever wants to run a port can try.
These people we threaten by spreading our ideas are not blind or stupid. If they were, they would have lost their positions of power and wealth and privilege in favor of a new leader who really is as inspired as grandpa was. They are typically competent enough, and it’s much easier to hang on to a position than to get it, and grandpa made certain daddy knew enough to hang on, and daddy made certain they did. But they feel threatened because however great a man grandpa, or grandpa’s grandpa was, they know deep down that they personally are nothing special. They know that any number of people could do just as well, given their positions starting from wealth and privilege and having connections that most people do not.
But however unintentional the threat may be, the threat that American values represent is nothing short of devastating to their way of life. The fact that this powerful man is the son of a line of chiefs going back to the days of the prophets means very little to people who have been infected by our ways of thought. It still means something, even here in America, else the Kennedy and DuPont and Ford families (among others) would not have the cachet they do. It’s a sign that it’s more likely that there may be something here worth watching. But not even being a member of those families will get you anything if you’re a loser (in fact, it will get you derision for being a waste of an opportunity), and it won’t get you any opportunities that someone from outside them cannot get, even if they have to work harder than you do.
But even this mode of thought is supremely threatening to the man who is what he is because he’s the son of the last king, or the son of a line of influential priests. Evolving wisdom, based upon experiments and observable, verifiable results, are a direct and immediate threat to the world of Revealed Wisdom and the Word of God (according to some priest or another, of course). Competition is anathema to those who have always been insulated from it, whose position depends upon being the only one with the legal ability to do some good or necessary thing, however artificial that ability may be.
So they want to stop these ideas, and the only way to stop them is at the source. So long as America and her allies stand strong and proud, America’s ideas are going to, as they see it, “infect” the rest of the world. But let America be humbled, let her confidence be broken, above all let her ideas be defeated, and these people can retain their positions of wealth and power and privilege, and maybe even expand them.
That the desire to strike at us is understandable in no way, shape or form means that I think it should succeed. It should not, in fact, if we want the world to continue to become a better place, it must not. It only means that these people are not, by their own lights, necessarily evil.
Just because they do not see themselves as evil does not mean that their prescription is the one the world should be following. Indeed, in the free competition marketplace of ideas, their method of striking back tells us that they know their ideas will lose. They cannot convince us by rational process, and they know they cannot really convince us by force, either. Their strength is a fraction of ours.
Where they do see a light of hope for their cause, however, is ironically in the very success of our ideas. Our ideas are so successful that not even our grandparents grandparents had any significant war or violence across an entire continent that their parents had conquered. It has been 140 years and counting since any large proportion of our population saw war “up close and personal” the way large proportions of most generations in the rest of the world have. There are still a large number of living Chinese who remember the events of the Communist Revolution. The violence of the Partition of India was contemporaneous with that. We sent something like ten million uniformed troops overseas in the second world war, but people from North Africa to the whole of Europe to the entire Western Pacific watched the war ravage their cropland, bomb their manufactories, and squash their homes. The generations since in Central and South America, all through Africa, and large swaths of Eurasia, have seen war just as closely. We have not. Many of us do not understand war. Many of us don’t understand the nature of war. Many of us don’t understand what it’s like, what it means, to have war come to you, and be fought over your land. Most of us especially don’t understand what it means to lose a war. It’s been too long since it really happened.
In this lack of understanding, our enemies see a window of opportunity. If they can just convince us that it’s not worth fighting, they can win. Indeed, if they convince us it’s not worth fighting, they will win. Once we concede that we’re not fighting any more, they automatically win. And because of the casualties and the allies we betray and the treasure we have wasted, if we later decide that we were wrong, it becomes much harder to change our minds. The South Vietnamese we encouraged to stand straight and tall and resist communism, and whom we then left to die because Democratic congress wanted to strike back at a Republican administration for domestic misdeeds were the genesis of the communist successes of the later seventies, when it seemed that the whole world was turning Communist. Angola, Mozambique, Nicaragua, the role call of countries that fell, or almost fell, goes on and on. Established, stable allies like Columbia and Venezuela fought off determined marxist insurgencies, both military and political, that sowed the seeds for modern troubles in those countries. The communists saw that they could bluff their way to victory, and those who would have opposed them saw that we left our allies to die when it became politically convenient to do so. So our enemies became emboldened, and our allies became fearful.
We rescued ourselves from that one, or actually Ronald Reagan and Margaret Thatcher rescued us by restoring our confidence. A good thing, too, else we probably would have learned all too soon what it’s like to really lose a war, in a way that we escaped with Vietnam, because it was so unexpected and our enemy never thought that we were really that stupid until we proved that we were, and next time we won’t be likely to be nearly as lucky. Losing a war means real, long term consequences. Just ask Germany, or Japan, and reflect that we treated them far more kindly than any other defeated adversary had ever been treated, any other time in the history of the world. Ask the Nationalist Chinese, or any of the losers from dozens of revolutions around the world in the last two generations. Ask the Bosnians, the Croatians, the Rwandans, the Angolans, the Sudanese, the Cambodians, both the Pakistanis and the Bangladeshis, ask the Afghanis. Only where the victorious armies were themselves civilized, and subject to morality based claims of right and wrong, as with the United States, Britain, and the Israelis, have any of these hard facts been somewhat lessened.
I would rather not be in this war. War is a nasty, dehumanizing business that makes people die unpleasantly, wasting lives and resources and treasure that might have won real advances for us as a species. Like it or not, though, one determined enemy makes a war – it is peace that takes the cooperation of both sides. The other side has been at war with us, whether they realized it or not, since at least the 1970s and perhaps since the 1930s. That we as a group did not wake up to this until September 11, 2001 in no way alters these facts. Consider the way that any Americans captured by them have always been singled out for special attention. Not Swedes, not Danes, and not Greeks. Americans. The only nationality which draws anything like the same degree of attention is Israeli, and I think we all understand why that is. Israel represents the presence in their area of the world, but the United States stands behind that.
Unfortunately, there is no way that we can not threaten this group of opponents. Our very way of life provides the threat, and we cannot change this without changing our way of life, the thing that makes us American, and therefore worthwhile. The threat we represent has nothing to do with our military, which although it may be the most advanced and most capable in the world, it in no way, shape or form threatened them prior to September 11, 2001. Okay, we had bases in Saudi Arabia, and elsewhere in the region. Our actions said, as clearly as it can possibly be said, that we had no territorial ambitions in the area, and that so long as our mercantile interests were not threatened, we just weren’t going to do anything. Why else would we have let Saddam Hussein off the hook the first time? We even went a far distance out of our normal ways to respect their ways of life and customs. I knew military women who were stationed in the middle east in the early 80s, ten years before Desert Storm, who were ordered to wear extra clothing in the desert heat so as not to offend their mores. Christians were told to keep their religion as low key as they possibly could, and public activities such as worship discouraged. And unless you yourself were Islamic and therefore permitted, for crying out loud don’t go anywhere near the holy places! (By contrast, our great ideas have no problem with the idea of nonbelievers visiting Bethlehem, or Jerusalem, or Rome, and even the Mormons have no problems so long as you stay out of the “sealed” areas of their actual churches. Indeed, no small number of converts have been won by precisely this approach!)
We have tried being low key and inoffensive. It hasn’t worked. The people we are fighting are threatened not by our guns, but by something a thousand times more powerful: our ideas. Indeed, it has finally become apparent to both sides in this war exactly what it is we are fighting over. This great clash between civilizations is over nothing less than the future direction of the world. Forward looking, evolving wisdom based upon observable reality, or Revealed Wisdom of words put into the mouth of God by a priest over a thousand years ago. Finding leadership in whichever of our citizens can best provide it, or looking to the sons and grandsons of chiefs. Remember, our enemy is not evil by his own lights, I would even argue that the vast majority are not really evil at all, but instead merely threatened by ideas that they cannot counteract with ideas of his own. Indeed, the thought of allowing those ideas to do battle in the intellectual marketplace is itself alien and threatening to him. Nonetheless, our enemy must be defeated. However imperfectly we practice and however recently we have come to it, the idea of allowing any citizen to lead who can convince us that they are worth following trumps the idea of following the son of the last leader. The idea that we should all be free, within limits of not harming others, to do what we want trumps the idea that our actions are prescribed by the place in society where we were born. The idea that members of all groups should have at least the same opportunities as anyone else trumps the idea that that the tribe that has always ruled gets all the goodies. The idea that women can make their own roles trumps the idea that women are housewives and mothers whose role is to support their husbands and raise their sons to treat their wives in the same way (“Women should not be beaten with a stick thicker than your forefinger”), second class citizens in every way. The idea that everyone can, should, must be allowed input into the decision-making process and that the daughter of a bricklayer may be more correct than the son of our leaders for the last hundred years trumps that the idea that the nobles and educated elite should make all the decisions because their clans have always led us and always been educated. You see, the real reason why they are losing the war – why they’ve already lost it, unless we throw away the victory by refusing to fight, or refusing to follow up the victories that have already been won – is that they waste so damned much of the human capital they are given, and that alone is more than reason enough why they must be defeated, and gives us ten thousand times more justice and right than our real enemies will ever have on their side. Not to say that we don’t waste any, but they cannot hope to beat us except by becoming like us, and that in itself spells defeat for them, or by seducing us into a forfeit. The system we have beats anything that has come before it so hollow that there is no competition, which is why millions of ordinary people every year want to become Americans, and why we are a example held out as a symbol of hope by those fighting oppression elsewhere in the world. It is not to the Secretary General of the United Nations that they appeal, not to the head of the EU, nor even to the executive of NATO, but to the President of the United States. It is to his eternal credit, and ours, that he has shown he understands what really is at stake here and has shown himself willing, et enormous risk and cost to himself, to take the proper actions.
Asset and Income Rentals – Borrowing Trouble at Usurious Rates
I found this article by Ken Harney in the paper.
WASHINGTON – Call it funny money for the housing boom: Now you don’t need actual cash in the bank to buy a house. All you need is somebody who says you’ve got money in the bank.
Need a hundred grand on deposit to convince a lender that you deserve a million-dollar mortgage? You’ve got it . . . even though you haven’t really got it because you “rented” it from a company in Nevada for an upfront fee of 5 percent – $5,000.
Sound bizarre? Welcome to the wonder world of “asset rentals” now being investigated by bank and mortgage industry fraud experts. It works like this: Say your loan officer discovers that you lack the financial wherewithal needed to qualify for the mortgage you want. Rather than lose your business, however, the loan officer turns to a service that offers “asset rentals.” For a flat fee of 5 percent of the amount you need, the service will verify to anyone who asks that the $100,000, $500,000 or $1 million in bank deposits you’ve claimed on your loan application documents are yours indeed.
I am sorry to say that this is not the first time I’ve encountered said phenomenon. Nor lenders. This is why assets require seasoning or sourcing. In other words, the lender requires you to show that you’ve had it and built it up over a period of time, or they want to know where and how you got it.
Most loans should not require a large amount of assets – A paper loans, the best loans of all, want one to two months Principal, Interest, Taxes, and Insurance (PITI) for full documentation (and I can usually get it reduced), or six months PITI for stated income loans. Neither of these is a large number if you’re really making the money, and they can be in a variety of places.
Some sub-prime lenders, however, will take large amounts of money in an account somewhere as evidence that you can afford the loan. These loans usually end up looking more like a propagandized No Income, No Asset loan than anything else. They don’t get the best rates and terms, even for sub-prime, and there’s likely to be a nastily long pre-payment penalty on them as a GOTCHA! The loan provider, be it broker or lender, is likely to make a lot of money on them – In California there is a thing called section 32 limiting total loan compensation to six points, which on a $400,000 loan is $24,000, and many so-called “discount” real estate agents turn around and require their clients to do the loan with them. It doesn’t do you a bit of good to save a couple thousand on the sale or purchase in order to get ripped for twenty on the loan, where it’s easier to conceal it. I can point you to many of these so-called “discount” houses who do these loans all day, but they are not loans you should want. If a friend came to me and asked for one, I’d try my best to talk them out of it.
But wait! It gets better!
This and other e-mail pitches, copies of which were provided to me by mortgage industry recipients, carried the sender name of Loren Gastwirth, identified on the e-mail as vice president-marketing for Morgan Sheridan Inc. of Mesquite, Nev. The asset rental attachment carried the name Independent Global Financial Services Ltd., with an address in Las Vegas.
… to a Zexxis Co., with the same Mesquite, Nev., address on Loren Gastwirth’s Morgan Sheridan card. When I called the number listed for Gastwirth, I received no reply, but instead heard back from a person identifying himself as Allen Paule. Paule is listed in corporate filings with the Nevada secretary of state as the “registered agent” for Morgan Sheridan, Independent Global Financial Services, and Zexxis Corp.
Paule said the asset rental and employment pitches – including downloadable attachments and forms carried on Morgan Sheridan’s Web site – were not connected to his firms. He said, “somebody hijacked our Web site.” He confirmed that a Loren Gastwirth works for Morgan Sheridan. And he also confirmed that Independent Global Financial Services, Morgan Sheridan and Zexxis Corp. have overlapping ownership and management. According to Nevada corporate records, a Paul Gastwirth is listed as president and director of Morgan Sheridan.
The Web site of Vault Financial Services Inc. of Las Vegas lists Paul Gastwirth as CEO of that firm, and president of Independent Global Financial Services, “a company specializing in asset rentals and enhanced credit facilities for individuals and companies worldwide.”
In other words, they are playing a Nevada Corporation shell game. A long head swallowing tail chain of corporations, each of which is likely to be a shell set up to insulate criminals from the consequences of their actions. The stuff about “somebody hijacked our web site” is almost certainly bogus.
but it gets better yet!
That’s where the asset rental service’s “VOE” (verification of employment) program comes in. Essentially you indicate on a faxed form what annual or monthly income you or a home buyer client needs to qualify for a mortgage, and the asset rental company will verify to anyone who asks that you have been paid those amounts.
The cost: just 1 percent of the claimed annual income. “For example,” says the pitch, “$100,000 of annual income – cost of $1,000. Minimum is $50,000.” The e-mail came with attachments that directed payments for asset rentals and employment verifications to an account number at Wachovia Bank in Roanoke, Va
In other words, they’re also volunteering to help you circumvent one of the most basic protections to the whole process, making sure for both the lender and the borrower that the borrower can afford the loan. If you cannot afford the loan, you are probably better off without it, although many people don’t realize that this requirement is partially for their own protection. If you can’t make the payments, you’re going to get foreclosed on. If you get foreclosed on, you’re likely to lose everything you put into the house and get socked with a 1099 form which the IRS will use to go after you for taxes as well.
Lest you not have realized this by now, all of this is FRAUD. Serious, felony level FRAUD. Lose your home and go to jail FRAUD.
I’m going to share a little secret with you, widely known within the industry but not in the general public. That real estate agent or loan officer getting you your house or your loan may not be the brightest financial lightbulb in the world. Many loan companies and real estate offices select for this, usually by only hiring people who have never been in the industry before. Some of them are even among the biggest names in the business. They select for sales ability and “make sales” attitude, not the knowledge (and more importantly, willingness) to say, “Wait a minute! Something is not right here!” Especially when it may cost them a commission. And hey, if the companies involved lose a few low-level sacrificial victims to lawsuits and the regulators, that’s no skin off the owners’ noses and they still get commissions out of it. These schemes are pitched to the agents and loan officers as a way to “save” a client. Sounds like it’s in your best interest when you put it that way, right? It is not. The bank discovers this (and Nevada Corporations, among others, are a red flag that loan underwriters look very hard at) Most of these deceptions are discovered before the loan gets funded – meaning that the client they were helping to commit FRAUD wasted their money, and they have a case against the agent and employing broker, whose insurance will probably not cover the issue.
The ones that do get funded are even worse. When the bank discovers the FRAUD, they have a right to call the loan. This means you have a few days to repay the loan, or they take the house. All of those wonderful consumer protections the federal and state governments have enacted become mostly null and void, because you committed FRAUD. You can count upon losing all of your equity in the home, and getting thrown out with nothing. Furthermore, depending upon company policy of the lender, you may find yourself sued in court, and possibly even under criminal indictment. Judgements for FRAUD are nasty, and they don’t go away. Convictions for FRAUD can really mess up your life completely and forever, not just in applying for credit, but in employment and other ways as well. If your loan is sold to another lender before the discovery happens, the probability rises even further, because the new lender is going to sue the old lender, who is going to take action against you as part of a defense that says they were acting in good faith. The shell corporations that pretended you worked for them or had deposits with them will be long gone (or untouchable) of course. You may have a claim against the agent, loan officer, broker or possibly even original lender, but if someone else beat you to it or they are out of business for some other reason, good luck in actually collecting.
In short, relying upon an agent or loan officer as an expert without doing your own due diligence is likely to get you in hot water. As good rules of thumb: Never lie. Never allow someone to lie on your behalf. No matter how desperate you are, it’s likely to buy a lot more trouble than it’s worth.
Caveat Emptor
Shopping for Long Term Care Insurance – Who Should and Shouldn’t Buy, and Policy Characteristics
I’ve run two prior articles this week on the theme of Long Term Care, one on Long Term Care Issues, and one on Non-Tax-Qualified versus Tax-Qualified, and Partnership Insurance Policies. Now, I’m getting down to nuts and bolts of what you need to know while shopping for a policy.
The two most important characteristics are the total benefits and the daily benefits. It may be helpful for many people to think of total benefits as a lake, where instead of water, it contains the total amount that is available to you, and the daily benefits as the size of the pipe that brings those benefits to you when you need them. It doesn’t do you much good to have a huge lake and a too-small pipe that can’t put out the fire, which is the daily bills you have to pay for care.
The way policies are generally sold is that they are for X number of years, with a daily benefit limit of $Y. The product of these numbers (and 360 days per year) is the initial total benefits limit. A one year policy with a $150 per day limit is good for $54,000 of total coverage. A three year policy with a limit of $300 per day is worth $324,000 of total benefits. A five year policy with a limit of $180 per day has that exact same aggregate coverage limit of $324,000. There are lifetime policies available; these have no aggregate limit but are limited to whatever the daily benefit is.
Note that a three year $300 per day policy is superior to a five year $180 per day policy in that although they both have the same “lake” of benefits, the former has a larger “pipe” (or “stream”, if you’d prefer) to get them to you. Therefore, the policy with the large pipe will be more expensive. It is an often misunderstood part of policies that there is no time limit for benefits. You can use less if you like, but you can’t use it faster than the pipe brings it to you. If it takes you three, five, seven, or seventeen years to exhaust the “lake” that’s how long it takes. I’ve known agents who did not understand this clearly. If you only use $60 per day, either of these policies will last fifteen years. But if you use $250 per day, the former will pay off the full amount of your daily benefit until exhausted (about 3.6 years), whereas if you have the latter, you’re going to be out of pocket $70 per day from day one. This can cause you to exhaust the resources you were trying to protect well before the policy is done paying benefits. The “time duration stated” – the Y years part – is the shortest amount of time in which it is possible to exhaust your lake of benefits. It has nothing to do with how long the benefits can last, which is always “until exhaustion.” Given the facts of the situation, it is better to have a big “pipe” than a long duration, and in the example given, the 3 year $300 per day policy will be the more expensive. It’s also likely to be worth the difference. For Partnership policies, the state of California currently has a minimum daily benefit limit of $130.
It is to be noted that for the Partnership policies, at least in California, the limit is actually a monthly limit of thirty times the daily limit. Many other policies follow this as well. This means if you get something that costs extra once or twice a week, like physical therapy, as long as your entire monthly care does not exceed thirty times the daily benefit, you won’t be out of pocket for those not-so-little extras.
Policies are sold as home care only, facility care only, or comprehensive, so called because it covers care where ever you may need it. Actually, here is a Glossary of terms you may want to refer to. Partnership is only sold in facility care only and comprehensive policies. My advice to to buy a comprehensive policy, because you never know what your situation will be when you actually need to use benefits. The difference in cost is typically small.
One of the really sneaky ways some insurance companies can stick you with a gotcha! is to require you to continue paying premiums while you are receiving care. Since you’re likely in a situation of incompetence, or just plain unable, this is a good way to get out of paying benefits. (“But your honor, Ms. Jones did not continue to pay her premiums as is clearly required by the policy! We are clearly within our rights to cancel”). Insist upon a policy with waiver of premium upon commencement of benefits. This means you don’t have to continue paying your premiums when you may not be mentally capable, or able to get new checks, or any of dozens of other possible hitches. In California, waiver of premium is required for all Partnership policies.
Policy Lapse Protection is similar, having to do with reinstating your policy if you neglect to pay the premium before you are diagnosed as needing care and it lapses for that reason, but good policy lapse protection is actually fairly widespread. You’re going to have to pay the back premiums, “bring your payments current,” and there may be an administrative or interest charge, but better that than needing an entirely new policy. This is not “don’t make your payments for ten years and drop a lump sum on them when your doctor diagnoses you with Alzheimer’s.” About six months to maybe a year in some cases, is about the limit of lapse protection.
Elimination period is the time after you start receiving care, before your policy starts paying benefits. It’s analogous to the “deductible” on your automobile insurance. Short elimination periods are more expensive, longer ones less so. I would not consider an elimination period of less than ninety days, or more than six months. Even at $200 per day, the person who is an appropriate buyer of long term care insurance should be able to fund three to six months or so. Lengthening the Elimination period makes the policy cheaper. Indeed, a three year policy with a six month elimination period may be cheaper that an equivalent two year policy with a three month elimination period. The average stay in long term care is something approximating two years, but in a large number of cases it is five years or more. If you’ve got assets to protect, you can likely afford three to six months, but fewer people can afford years of coverage. If you’re lucky enough to live in one of the states with an active Partnership for Long Term Care, the asset protection function means you continue to receive benefits even after the policy is exhausted. Even if you don’t live in one of those states, the policy can get you through the “lookback period” where Medicaid will go back and attach any assets you transferred elsewhere. I know I’ve said Medicaid coverage is awful, but if you still have money, or people willing to spend money on your behalf, you can make it a lot more tolerable than it is for someone who is truly destitute.
Pre-existing conditions are not something to unduly worry about here, in my experience. If you have a pre-existing condition, the insurer is only allowed to exclude paying to treat it for six months in California, and I believe (but I am not certain) that this is an NAIC rule, which would mean it applies nationwide. This can mean that you will be flat out rejected until/unless you recover, but this is in accordance with the principles of insurance. You buy insurance when it’s a risk, not a certainty. You don’t wait to buy health insurance until the heart attack starts, you don’t wait until you’ve got terminal cancer to buy a life insurance policy, and you don’t wait until the doctor diagnoses you with Alzheimer’s to buy a policy of Long Term Care Insurance. You would be quite properly rejected for coverage in all three cases.
Other bells and whistles you should be interested in include “step down” options for if the premium increases beyond your ability to pay. This gives you the ability to change to a less expensive policy without new underwriting, rather than simply losing coverage, if your circumstances change..
One protection I strongly advise everyone to get is inflation protection. If you buy a $200 per day policy, that may be adequate now. It may not be adequate when you need to use benefits. All California Partnership policies require compound interest inflation coverage if you are less than seventy at time of purchase. This is a good thing. If you are over seventy when you first buy, simple interest inflation protection is permitted, but I wouldn’t advise it unless you are going to use benefits within the next couple of years or not at all.
Inflation protection applies to both daily benefit and total available benefits. So if you start with a 3 year, $300 per day policy, after one year of 5 percent inflation protection, it goes to a $315 per day policy with a total benefit pool of $340,200. Let’s say it’s twenty years down the line, and your “total pool” of dollars has gone to $871,000, but now you start using them. Let’s say you use $21,000 of benefits that year, leaving $850,000. That $850,000 pool becomes $892,500 the next year, demonstrating that even after you start using benefits, it is still possible for your “available lake” to increase if you have inflation protection. Now the last I was aware, actual cost rises were running about 7% per year, so 5% isn’t really long-term adequate, but it’s what’s available. If you’re relatively young, you probably want to overbuy by some factor to compensate for this.
One rider that you probably do not want is return of premium. Return of premium means if you die without using benefits, your estate gets the money you paid in premiums back. This is very attractive to laypersons, and it makes a nice addition to the salesperson’s commission. Unfortunately, it can also double – or more – your cost of coverage, and the older you are, the larger the multiplier will be. This can cause people who can and should buy a policy to buy a smaller policy benefit than they really need, smaller than they should have. Even though they are spending the same amount of money on the premium, their coverage is far less. Furthermore, the return of premium is usually with only a very small interest, or none at all. It takes comparatively little time before you would have been better off investing the difference.
Now, who should and should not buy a policy of long term care insurance. There are no hard and fast rules, but if you have no assets to protect or the policy premiums are a real hardship, then you should not buy a policy. The state of California defines this as assets between $50,000 and $250,000, but those standards are the same as when I took my training, and would suspect that a truer picture would be those with liquid assets under $75,000 should not bother. On the other hand, California has some very smart millionaires with top of the line advisers buying Partnership policies because they are never certain their circumstances will not change. Income wise, the state of California has a .pdf document that they referred me to. Furthermore, someone who could afford long term care indefinitely would have no reason to purchase an insurance policy – the insurance company doesn’t work for free. In California Partnership Policies, at least, you do have an additional protection in that the company is required to advise you if you are not within the income and asset guidelines for policy purchase, and offer a full refund.
The best time of life to buy long term care is as early as practical. If you buy at 40, your premiums will always be less – a lot less – than someone who buys the same policy at 50, who in turn will save a lot over someone who buys at 60, and so on. Typically, if you wait until after you are sixty, you will have to pay far more in yearly premiums than you saved by waiting – even considering the time value of money. I always called this the “penalty box”, and it makes sense for the same reason life insurance is cheaper the younger you buy it. This is not to say it doesn’t make sense to buy after age 60; what I’m saying is that the statistically average person will save a lot of money over the course of their life expectancy by buying earlier. I’ve had people eighty years old ask me for quotes, and are surprised when minimal coverage is thousands of dollars per year. This is because, first, if you’re buying at age 80, you are overall more likely to use benefits, and for a longer time, and second, because it’s likely to be sooner rather than later, leaving less time for the insurance company to invest your premium dollars and earn a return.
Caveat Emptor
Privacy Concerns in Real Estate Transactions
Every once in a while I get someone who is unhappy with required paperwork for privacy reasons. There are three forms that are the driving force behind this.
The first is the standard form for a mortgage loan application, known in the business as the 1003. Admittedly, the form does ask for rather a lot of information. It’s comprehensive, and intended to paint your complete financial picture, so they can make a decision on whether or not to grant the loan. It also asks for irrelevant items like ethnicity so that the government can track whether the lender is discriminating (and they are dead serious about requiring ethnicity. If you decline to state, whoever takes the application has to take a guess). This also means it asks for a lot of information that a lot of people would, justifiably, rather not give out. Plus it’s a pain to fill out. So some people don’t want to, and quite frankly, I understand where they are coming from. Unfortunately, this is a government mandated form, designed to collect not only the necessary financial position data but also additional government mandated information. If you want a real estate loan, filling one out is is a legal requirement. There are only two ways to avoid filling out this form completely and accurately. In order to avoid filling it out completely and accurately, you must either 1) Lie or 2) Buy the property without a loan from any regulated entity. Lying is not recommended. It is a very bad idea. Lying on a 1003 is perjury, and there’s likely to be a charge of fraud added into it. You are told point blank on the form that the information required to make a decision on your request for a loan. Misrepresenting your financial position in order to induce someone to lend you money is pretty much textbook fraud. Or you could do without a loan – buy the property for cash, by trade, for services rendered, etcetera. There really are all sorts of possibilities, but even if you put all of them together I don’t think they amount to one percent of all transactions. Finally, you could get a loan from an unregulated entity. Basically, this means individuals. Borrow the money from Mom, from the mafia, or from a hard money lender. Unfortunately, even if Mom has the money, she may not lend it to you. And the latter two possibilities charge a lot more interest than the regulated banks, as well as other potential problems.
The second form that often become the issue is form 4506. This is the one that says your lender has a right to look at your tax returns. Many people think that this means they are violating the terms of a so-called “Stated Income” loan whereby they say what their income is, and the bank agrees not to verify the amount, but only the fact of the source of income. Well, the lender always has the right to insist on tax forms for documentation of income, and sometimes they do. But they don’t often use this form for it, and it isn’t to your advantage to force them to use it. As the form states, the IRS typically takes 60 days to respond to this request, and loans need to be done within 30. You want it done within 30 days if you have a rate lock, and if you don’t have a rate lock, whatever you were quoted isn’t real because it’s gone now – the rates have changed. If the lender wants your information, they’re going to require it whether you’ve signed this form or not. In either case, if they want the information, it’s better for you to furnish it directly and immediately.
What they really use this form for is when they get ready to sell the loan. Since all lenders want to able to do this whether or not they make a habit of it, and they get a better price for the loan if they can verify that your income qualifies, they want you to sign the form. If they pull it and you qualify, they get a better price for the loan. If they pull it and you don’t, they tried. If you refuse to sign the form, they are well within their rights to deny the loan. So they are going to require you to sign the form as a condition of getting the loan. I can commiserate with you all you want, but it wouldn’t make any difference. Options to get around this are basically the same as for the Loan Application: Friends, family, or Lenny the Loan Shark.
The final form that causes resistance is the Statement of Information. Like the Loan Application, this form has a lot of detailed information, and sometimes people don’t remember all of it. This form has nonetheless become a routine requirement, but of title companies, not of lenders. The reason for this is fairly easy. Let’s say your name is John Smith. Let’s say you live in Los Angeles County. There are going to be a large number of documents in the public database in which John Smith or some close variant (e.g Jack Schmidt, Eoin Smythe, or Jon Smitt, among others). Any one of these could have an effect upon the title transaction. Some of them, like a child welfare lien, never go away. Back when I worked for title companies, I could tell you about having to go back forty years, and in some cases further, looking for documents which might pertain to the person in the transaction. In populous counties, the list of documents alone can go to a hundred pages of single spaced stuff, and the title company has to be certain that 1) it isn’t you, or 2) it doesn’t effect the transaction for some reason, before they agree to issue the policy of title insurance. Guess what? The reason the document list is so long is because of the commonality of the name, so the long lists come up a lot more often than the short ones. Even if your name is something truly unusual (mine is uncommon), they’ve got to check out all close variants, anglicizations, and whatnot. So to toss out as many documents as they can, as quickly as they can, the title company requires a Statement of Information. Without that, it can be prohibitive to even run through the preliminary check. These people they are paying to do these searches rapidly become skilled and fairly high paid employees, even if they start out cheap. So the title companies want you to fill out the Statement of Information. It’s one of those forms you don’t want to lie on or conceal information on as well.
Don’t want to do it? The title company will tell you they don’t want your business. No policy of title insurance, either owners or lenders. That’s your choice if you don’t need a loan on the property and you’re willing to take the seller’s word that they really do own it and that there are no title issues. I wouldn’t be. I’ve dealt with too many properties where there were known title issues. Nor are lenders nearly so glib about it. In order to get the loan, they require a lender’s policy of title insurance, and whether it’s a purchase or a refinance, you need a lender’s policy of title insurance. If you’re dealing with Lenny the Loan Shark, he doesn’t care that you’ve lost the property to the forgotten first wife (via a three day marriage) of Mr. Jones, three owners before you, whose brother apparently inherited and sold the property in 1976 but then the former Mrs. Jones just found out about it and sued for possession. If she (or her heirs) can prove her claim, she’s going to be awarded the property. So you want title insurance.
Now, there are some protections you have under law. In California, I cannot use information obtained by real estate loan applications to sell your information to third parties. Once the loan is closed, however, the lender can share your information with sister companies. Heck, I’ve had lenders take the information I’ve gathered and call the client to offer them a direct deal. Cancel the transaction with me, they say, and they’ll give the client what they think is likely to be a better deal. Pretty sweet, huh? Steal my payment for the client I spent my time, money, and effort to find, and then brought to them. Unfortunately for these lowlifes, I do loans cheaper than they usually expect, and instead of cancelling, the client reports it to me. Needless to say, these lenders don’t get any more business from me. Title and escrow companies can similarly share information for marketing purposes. I always tell people who are concerned to write that they opt out of all marketing on the first form the title or escrow company wants them to sign or fill out. That puts the onus on them not to share your information.
Caveat Emptor
Long Term Care Insurance: Non-Tax-Qualified versus Tax-Qualified, and Partnership
(Part 2 of a three part Series on Long Term Care)
I wrote in the previous column a lot about long term care issues. This column deals with the insurance policies available for long term care. There are two major types, with one subtype available for people who are lucky enough to live in one of four states. There is non-tax-qualified (NTQ), tax qualified (TQ), and for those lucky enough to live in California, Connecticut, New York, and Indiana, there is a superior brand of tax-qualified, Partnership. In many states, there are indemnity policies available for those who don’t like paperwork, but the gotcha is that they are all NTQ, non-tax-qualified.
Let me explain what’s going on here.
In all of the legal policies, there are listed Activities of Daily Living, or ADLs. For non-tax qualified, there are seven, and for tax-qualified, there are six. It is the inability to perform a certain number of these activities without assistance that triggers eligibility for benefits. For tax-qualified policies, these are Bathing, Eating, Transferring, Continence, Toileting, and Dressing. Non-tax qualified adds the ADL of Ambulating, for a total of seven possible qualifiers. Note that the preparation of food is not a qualifying factor, hence Meals on Wheels and similar programs, as well as the traditional family support structures. “Assistance” ranges the gamut from just having somebody there in case something happens (“Standby assistance”) to having to have someone do it completely for you.
Bathing is performing the functions to clean yourself.
Eating is feeding yourself food you are given.
Transferring is being able to “transfer” from one support mechanism to another – for example, bed to wheelchair or wheelchair to toilet.
Continence is what you’d think.
Toileting is ability to perform the tasks necessary to eliminate waste material in a normal fashion.
Dressing is the ability to get clothing on and off as required.
Ambulating is moving yourself under your own power on your own feet from place to place.
Of these ADLs, bathing is almost always among the first to go and hence a trigger for the policy. Eating is probably the least prevalent trigger for benefits, followed by dressing, but there are no solid study figures I can find. Ambulating always goes before or with Transferring. Within broad parameters, each individual insurance company can write their own definitions of each of these. For instance, a number of companies used to define “Transferring” more or less the same as most people think of as walking, thus making it easier to qualify for benefits, and hence, a better policy than competing policies. Of course, they will be priced accordingly, as well, but there is a lot of variance on pricing within the industry. Of the policies I used to sell, the one with the broadest coverage was usually the second-cheapest in the competitive quotes. So shop around.
Now the point needs to be made that just because you qualify for benefits now doesn’t mean you have to start taking benefits now. Sometimes people are in situations where family can take care of them right now, but may not be able to do so indefinitely. Taking care of someone in this manner is brutally tough, and there is no shame in not doing so, or in saying “That’s enough, I can’t take it any more!” For this reason, every policy sold also includes respite care, where a caregiver who is usually a family member can get relieved by a paid provider. If you think about it, it’s to the insurance company’s advantage as they pay out less money this way, as opposed to the person starting to use full benefits right away.
Non-tax-qualified (NTQ) policies have one more trigger for care – ambulating, which tends to make them attractive-seeming to most laymen. However, they usually require three triggers to be pulled (ADLs requiring assistance), as opposed to a limit of two for tax-qualified. This is kind of like showing pictures of something that looks like a Rolls-Royce, but the the interior is vinyl, the body is made out of plastic, and the engine came out of an old Yugo.
Indeed, almost all of the games you will hear about being played are with NTQ policies. The issue is this: In order to become Tax-qualified, the policies have to toe the line of legal requirements. So the NTQ folks, who don’t meet the guidelines anyway, offer all kinds of bells and whistles that don’t really mean anything to make their policies appear more attractive to those who don’t know any better.
You see, NTQ policies are NOT generally deductible on schedule A of your income tax as a medically related expense. Furthermore, if and when they pay you any benefits, those benefits are taxable income. Remember I told you in the previous column that median billing was about $200 per day? So if you’re in there the whole year, that’s about $73,000 of taxable income, on which someone in the 28 percent federal bracket pays $20,440 on federal taxes, never mind state taxes.
Tax Qualified, or TQ, policy premiums are deductible as medical expenses, and the benefits they pay out are not taxed.
Now, for those readers who like myself, may have some knowledge of the nature of the tax code, let me take a minute for an aside. I am well aware that, in general, the IRS only allows, at most, one end of a transaction to get away from taxes. So this kind of got my attention, and before I sold any policies I verified it extensively. I confirmed a few days ago that it is still that way. To further ease your mind, remember that these are health insurance policies. The premiums I pay to my HMO are deductible, and the dollar value of the care I receive is not taxed. Tax Qualified policies of Long Term Care Insurance are treated the same way.
What this means is that it is very hard for me to imagine a scenario where an NTQ policy is better than a Tax-Qualified one. Indeed, I’ve never sold any policies that weren’t. It is for this reason that the state of California requires all Long Term Care Policies to state whether or not they are designed to meet the requirements to be tax qualified. Ask the agent looking to sell you one of these straight out whether it’s a tax qualified policy. Any answer other than a one word straight “yes” or “no” is grounds for terminating the talk. Walk out of their office or throw them out of your home, and go find an agent who knows what they’re doing and is willing to give you straight answers. And if the answer is “no”, ask them to tell you about a policy that is tax qualified. You see, one of the ways NTQ policies get sold is by paying higher commissions. They are harder to sell, because they aren’t as good for most people, so the companies give the agents a reason why they want to sell them. More $$$. It’s your call, but I wouldn’t do business with anyone who tried to sell me an NTQ policy, and yes, that means jettisoning them and finding someone else for your future needs, even if you’ve been doing business with them for decades. They’ve just demonstrated that they don’t have your best interests at heart.
I also want to make the point that agent’s commission should not, in general, be one of your criteria for choosing a policy. That’s a good way to end up with a policy that’s too small to do you significant good, as smaller policies pay less in commission also. Shop by the cost and benefits to YOU. A good agent will show you how they arrived at the figure of the coverage they are recommending, and if you shop around, the good agents will all come up with similar figures and the same way of calculating it.
Back to the main subject: we can regard it as settled that, in general, you want a tax qualified policy. Let me tell you about a subtype of tax qualified policy that people who are lucky enough to live in California, Connecticut, Indiana, and New York are able to buy: Partnership.
All Partnership policies are tax qualified. But in addition to their ordinary benefits and their tax qualified nature, Partnership policies have an extra feature: Medicaid asset protection. If you’ll remember, when I was talking about Medicaid (Medi-Cal here in California), I explained that before they will give you benefits, you are required to spend your assets on your care (or give them a lien in the case of your house) down to where you are basically poverty stricken. And indeed, if the benefits you have purchased under any other long term care policy have run out, that is precisely what you still have to do. Indeed, many people give their assets away during their policy benefit periods, so that when the policy runs out, they no longer own or legally control the assets and are eligible for benefits without a spend down. Since California’s thirty month lookback was the shortest in the nation last I checked (many states are at five years), this means you need to buy a policy where the benefits are going to last longer than that.
But once a Partnership policy’s benefits are exhausted, it protects from Medicaid recovery not only the same assets everyone else gets to protect, but additional assets as well, on a dollar for dollar basis. For every dollar the policy paid out before you applied for medicaid, you get to keep an additional dollar in assets, in addition to whatever everyone else gets to keep. Say you had a two year policy at $200 per day. That’s $146,000 you still have and that you get to keep. The Partnership instructor I had told us in class that she calls her policy her Visitors Insurance. Because she’s still going to have money, her family and heirs are going to want to keep visiting her so that they don’t get written out of the estate. Horrible thought, but this wonderfully funny lady is in her sixties and has been working with nursing home issues her whole life. She has seen too much of what really happens in these instances to be ignored. Visitors also means better care. Not to mention the fact that she will have had a policy in the first place, which means that if the facility she ends up in takes Medi-Cal patients at all, they have to keep her, and that means if there’s no Medi-Cal bed, she stays in the non-indigents ward until there is, so she’s not going to end up in Barstow, where it’s tough for friends and family to visit, and she will have hundreds of thousands of dollars to make her life more tolerable when she is moved to the Medicaid ward.
For this reason, the thing that makes sense with Partnership policies is to buy enough to protect your liquid assets (The New York program uses a different, in my mind far more onerous and less cost effective, plan where you have to buy a minimum of three years of policy benefits). In other words, the dollar value of whatever investments you may have. Since I’m in a Partnership state, this makes it easy to calculate how much of a policy would accomplish that. In non-partnership states, there’s more guesswork involved, and a large amount of sheer guts on behalf of the client.
Let me state emphatically that by inducing people who can afford them to actually buy Long Term Care Policies, Partnership policies save the states who have them a large amount of money – billions of dollars – as those people who would have needed state based aid now have insurance policies to cover their needs. The folks at the California, as well as New York, Connecticut, and Indiana Partnerships for Long Term Care, have saved their states blortloads of money by having this program in place. Luckily for all concerned, this includes two of the three most populous states.
(Supporting articles here and here and here)
However, back in 1993, OBRA (Section 1917 Paragraph 3, about halfway down the page, is the reference) was passed, which at the explicit insistence of Congressman Henry Waxman, who was then chair of the Commerce Committee’s Subcommittee on Health and the Environment, removed from all future states the ability to waive or modify the asset recovery requirement of medicaid. (I understand that Iowa and Massachusetts also have plan documents dated early enough, but have not actually implemented a Partnership program, and the Massachusetts document is even more onerous than the New York one, but better something than nothing). I understand Congressman Waxman’s concern for the budget, yet nonetheless by their propaganda you would expect Democrats to be in favor of something that benefits the middle class like this – particularly the lower middle class blue collar worker, and actually ends up saving the taxpayers money, to boot. Of course, Congresscritter Waxman is from California, which already had a program in place, and he grand-standed against “Money for the poor being used to pay for care of millionaires”. He represents a heavily blue collar district in Los Angeles, so you’d have thought he’d have done more research as to who it actually benefits. So due to this gutting of the primary benefit of having a Partnership policy, there will be no more of these wonderful programs until the law is changed back to what it was prior to 1993. In my opinion, whichever politician gets such a law through Congress should be a national hero. It gives people real incentive to buy a policy if they can afford it, secure in the knowledge that even if it doesn’t cover everything they need, they won’t be destitute after it runs out, while saving the Medicaid program tens to hundreds of thousands of dollars per patient.
So there really is such a thing as an insurance policy that keeps paying you even after the benefits are exhausted. Partnership policies are no more expensive that any other policy, and they provide asset protection, as well as additional benefits. If you are in a state that has a Partnership for Long Term Care, I would not consider any policy that was not a Partnership policy. Here in California, every policy sold must state whether it is or is not a Partnership policy. If it makes sense for you to buy a Policy for Long Term Care Insurance (a subject I will tackle in the next article), and you are in a state that has such a program, make certain that the policy you buy is one of those policies available through your state’s Partnership for Long Term Care.
Links to the four states with Active Partnership Programs:
California
New York
Connecticut
Indiana
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Long Term Care Issues
One of the two most undersold financial products is long term care insurance. Yet it is a critical need, ranking just below disability insurance in the estimation of most financial planning agencies.
Long Term Care is already a large part of our nation’s health care costs. In 2002, the last year I actively worked as a financial planner, in the state of California, approximately 2 percent of the recipients of Medi-Cal (California’s version of Medicaid) were in long term care of one sort or another. Those 2 percent used approximately 47 percent of the budget. A little over fifty percent of the population is expected to need long term care of a year or longer, and this percentage has been rising and is expected to rise further. With medical science able to stabilize people to live longer lives, the probability of people living years after they reach that level of frailty rises.
The reason they use so much money is simple. Once you’re in them, you tend to be in them for a long time. You may be in the hospital overnight, or for a week, and it costs a thousand dollars or two per day. Long term care may only cost $150 to $200 per day, but it costs that much every day for months, if not years or the rest of your life. So one seventh to one tenth the money per day, but for a hundred or a thousand times longer.
End of life is not the only time someone uses long term care. Approximately 40 percent of the inhabitants of long term care facilities are under the age of 65. For whatever reason, they have a disability or a condition that requires around the clock watchful care.
California licenses two types of residential long term care facility: Skilled Nursing Facilities (SNF), and Residential Care Facilities (RCF). The SNF has more medical requirements to meet, and is therefore the more expensive of the two, both to operate and to reside in. There are also Senior Daycare Centers (much like child daycare centers) and various in-home options.
Many people think that the federal medicare program covers long term care. It doesn’t. The Federal Medicare program provides only a very small part of long term care. For a one time stay, it will cover the costs of a stay of up to twenty days, and pick up days 21 through 100 with a copay of about $110 per day. This means that for the first three months, you’re out about nearly $9000. After that, you’re on your own, as far as the federal government is concerned. So if you’re talking about hospice care for a terminal patient, Medicare may or may not stretch to cover it, depending upon how close they were to death when the doctors gave up on curative treatment.
Even so-called “medi-gap” policies only cover a tiny amount of long term care. The reason why is because its costly insurance. So for the same reason you don’t find cars on your supermarket shelves across from the bread, you have to go to a special policy to get significant coverage.
The median billing here in California runs about two hundred dollars per day, and it can go much higher for Skilled Nursing Facilities. This works out to $73,000 per year for as long as it lasts. Not a big deal if you’re a multi-millionaire, but if all you’ve managed to save is $150,000, two years and it is gone. So for most folks, self insurance just doesn’t cut it.
Now there is one program that will cover Long Term Care – state-run Medicaid (called Medi-Cal here in California). Unfortunately, in order to get coverage, you’ve got to pay yourself down into practical poverty first. Nor are you allowed to give assets away or put them into trusts. The various states have “lookback” periods ranging from thirty months to five years prior to your application for benefits. Anything given away in that period is subject to asset recovery – in other words, the person you gave it to is going to have to cough it back up, even if it was already spent.
Let me give you an idea of what poverty looks like. Many people make a big deal of the “community spouse” regulations, that permit the keeping of $2000 per month and eighty-some thousand dollars of liquid assets, as well as a life interest for a married couple in one piece of real estate. First concern, let’s say hubby goes in to care while wife stays out. Can wife live on $2000 per month? Maybe, if she doesn’t have any huge medical problems. But if she’s not drawing a pension herself, most of income is likely to be attached for hubby’s care, and it doesn’t take long to draw down $80,000 in assets when that’s all you’ve got to live on. Plus medicare is not the greatest care in the world, so there is always the need to purchase side items. Also, these places are not high margin. They are not making money hand over fist, and they make a truly rotten investment. Many of them go bankrupt, and the ones that survive and provide good care tend to be in lower cost areas. So if you live in Los Angeles, your spouse could well be in a home in Barstow because that’s the only place you could find that had a spare bed. Far away means visitors are rare, and visitors being common is one of the best predictors of how good the treatment will be, and how well they will respond.
Finally, this is just not what happens, statistically speaking. What usually happens is when one spouse gets sick, the healthy spouse takes care of them as well as they can for as long as they can, either with or without assistance. Then the first spouse is gone, and at some later point in time the second spouse becomes ill, and that’s when long term care happens. Less that ten percent of the people in long term care have living spouses, and this includes counting the situations where both spouses are in long term care. (this .pdf document has a decent explanation)
Many attorneys will advertise structured trusts and other weird schemes to get you to qualify for Medicaid care while still retaining your assets. Spend a couple of thousand dollars on a one time basis, the pitch goes, and you’ll be able to shelter your assets from the state. Unfortunately for this, the states narrow the gaps in the regulations every year, because they want to catch cheaters and people doing precisely this. A good general rule is that if you own the asset, if you control it, or if it can be used for your benefit, the state will force it to be spent or attach it in order to provide your care. Medicaid was meant for the poverty stricken, not to provide medical care for the wealthy. So it’s a little change here for $1000, another little change there for $1000, and pretty soon you’ve spent all your money on the attorney. Best way to nip this in the bud is to ask said attorney point blank: “So you’re going to write out a commitment to pay for my care yourself if this doesn’t work, right?” Needless to say, this is not going to happen.
Furthermore, assuming it does work out and you manage to retain assets while the state pays for your care. Well then, I say, “Congratulations! You’ve won WELFARE!”, in my best Monty Hall voice, and you can imagine the curtains coming back on “Let’s Make A Deal” to reveal their gorgeous hostess, smiling from ear to ear while holding the lead on an old sway-backed donkey.
The medicaid package is not a lavish one. Remember I told you that nursing homes average billing is about $200 per day, and that they go bankrupt a lot? Well here in California, the state will pay about $110 per day for medicaid patients in long term care. You should be able to imagine the implications from there. I’ve visited a couple of medicaid wings, and the “Eeewww!” factor is significant. It starts with the smell, which hits even people like me who don’t have much of a sense of smell, and goes downhill from there.
The final option to avoid this is purchase Long Term Care Insurance. There are two major types, with one subtype available for people who are lucky enough to live in one of four states. There is non-tax-qualified, tax qualified, and for those lucky enough to live in California, Conneticut, New York, and Indiana, there is a superior brand of tax-qualified, Partnership.
Second Trust Deeds and Loan Subordination
When you have more than one loan on your property, there are some issues you should be aware of. Keep in mind the fact that some states still use the mortgage system, requiring court action to foreclose, as opposed to Deed of Trust, which does not. For practical purposes they are similar, yet I have never done significant work in a mortgage state so there may be small but significant differences.
Each loan is secured by a different Deed of Trust. Two loans, two Deeds of Trust. A Deed of Trust is a three way contract between the borrower (called the trustor), the lender (called the beneficiary), and a third party known as the Trustee, to whom title is nominally conveyed for purposes of selling the property if you default on the loan. The Trustee and the Beneficiary are often the same, and there while there is no legal impediment I’m aware of to the Trustor and Trustee being the same, I also cannot imagine a lender agreeing to it.
Trustees can be changed, and this is accomplished via a document known as “Substitution of Trustee,” which is required to be recorded with the appropriate county in every state I’ve done business in.
Each Trust Deed operates independently of all others there may be against a given property. They take priority in order of date. When a Trust Deed is recorded against an property on which there already is an active Trust Deed, it automatically becomes a Second Trust Deed, if another happens it is a Third Trust Deed, and so on.
The reason they have the ordinal is because they are paid off in the order they happened. Suppose the property is sold, and the sale price is not sufficient to pay all of the debts. The trust deeds are not paid proportionally; The First Trust Deed is paid off in full before the holder of the Second Trust Deed gets a penny. Then the Second is paid before the third, and so on. This is why Second trust Deeds carry higher rates than First, because they are riskier loans for the lender. As I’ve said elsewhere, just because the property is sold doesn’t mean you’re clear. If there is not sufficient money from the sale to pay all debts, you can expect the lender to hit you with a form 1099, reporting that you have income from debt forgiveness, and you will be expected to pay taxes on it.
If for whatever reason you pay off your First Trust Deed, the Second automatically goes into the first position, and any subsequent loan goes into second position. This is most common when people go to refinance the loan secured by their First Trust Deed. Even if you do not particularly want to pay off your Second Trust Deed, it may be the best thing to do. Because what happens if you just pay off the First Trust Deed (only) and get a new Trust Deed, is that the new Trust Deed will go into the second position. Unfortunately, in order to get the quoted rates for a primary loan, it is a requirement that the loan be in first position. If it’s not in first position, they will not actually fund it. In short, no loan.
This is not necessarily an impasse. Many times, the holder of the second trust deed, because their loan was priced to be second in line anyway, may agree to Subordinate their loan to the new loan, which is a fancy way of saying stand in line behind the new trust deed holder.
They don’t have to do this, and there is no way, other than paying off their loan in full, to force them to do so. Some companies never subordinate, while some others are never willing to stand second in line at all, and others are in both categories.
For those that will consider it, they are going to stipulate some conditions. First of all, the new loan is likely going to have to put the borrower into a position where it is easier, or at least no more difficult, to make payments and pay off the loan. So monthly payment usually cannot rise.
Second, they are going to want their trust deed to be in no worse of a position than it was when the loan was originally approved, as regards the value of the home being able to pay their loan off too if for some reason either loan is defaulted. They may even require than you agree to a higher rate, higher payments, or a different loan altogether – as I said, there is nothing you can do to force them to cooperate.
Assuming that they are willing to cooperate, they will require that the entire process on the prospective new loan be essentially complete – that is, ready to draw documents and fund when the Right of Rescission expires after three days, before they will even look at it. Some lenders take 48 hours to look at a subordination request, others take up to six weeks, and it can be even longer. For any given lender, it takes as long as it takes.
There is also going to be a fee involved. They have to pay their people to look at the loan situation and make certain it still falls within guidelines. They’re the ones doing you the favor, they certainly are not going to do the favor for free. Whether the Subordination request is eventually approved or not, the subordination fee is likely to be non-refundable, a sunk cost that you are not going to get back even if it’s not approved.
Even more important than that, however, subordination takes time. No loan quote is real unless locked, all locks are for a specified period of time, no lock is good past the original period of time unless you pay an extension fee, and if you need to lock for a longer period of time in order to subordinate, either the rate, the cost, or possibly both will be higher. Since this can add anywhere from two days under idea conditions to six weeks or more for a refinance that takes three weeks to get approved and get funded in the best of times, this means a longer lock period becomes advisable. Most often, the extra costs mean that it’s more cost effective to just pay off both loans rather than subordinating the second to the new loan.
Since Home Equity Lines of Credit are always secured by a trust deed, they count as any other second mortgage would. You’d be amazed how often people do not disclose Home Equity Lines of Credit even when directly asked about them. They are only hurting themselves, but they often get angry to no good purpose when, if they had been upfront about them, the loan officer could have designed around any difficulties. Furthermore, people are often resistant to the idea of paying off and closing Home Equity Lines, despite the fact that they are easy to get. I’ve had people stonewall, utterly in denial that this is a Deed of Trust opon their residence until I have the title company fax me a copy of the Trust Deed, and reference it with the Preliminary Report, and ask to see the Reconveyance (which is a fancy way of saying the piece of paper proving that the trust deed has been paid off). If it’s a legitimate lien, we have to deal with it. Actually, we have to deal with it if it’s not a legitimate lien as well, just in a different manner. On the other hand, about eighteen months ago I had some seasonal resident clients whose ex-caretaker had managed to take out a loan against the property. It does happen, and it’s a mess, but most times it’s just the people themselves who weren’t told – and didn’t figure out – that this financing agreement they signed for the pool or air conditioner or roof was a second trust deed on their house.
To summarize then, second loan means second trust deed, if you refinance they must be paid off or subordinated, and subordination takes time such that it may be better to pay it off than go through the rigamarole of subordination.
Caveat Emptor
Negative Amortization Loans – More Unfortunate Details
My article on Option ARM and Pick a Pay – Negative Amortization Loans is one of my most popular. It’s number one for multiple search engines and several ways of running the search. If I don’t get at least 20 hits a day on it, it must be a sign that the public has caught on to this loan’s horrific gotcha! On the other hand, given the number that are still written, I can get very depressed at how small a percentage of the population does simple research.
I intentionally left a lot of what goes on with these things out of that post, simply because I want to keep these posts readable and comprehensible within the space of no more than half an hour. But I keep getting hits asking questions I didn’t deal with, so here goes:
A Negative Amortization loan is defined as any loan where the minimum required payment is less than the interest charges. Regular loans pay off part of the balance every month, whereas negative amortization loans typically have an increasing balance because the difference between the interest charges and what you pay is added to your balance owed.
Because the name “Negative Amortization” causes some difficulty in marketing, they are sold by all kinds of friendly sounding names. “Option ARM” (if you look at my article on loan types here, these are the about the only “true” ARMs with a significant portion of the residential loan market). “Pick A Pay.” “Option Payment.” “Cash Flow ARM.” I’ve seen all kinds of combinations of these, as well.
Negative Amortization loan rates are typically quoted based upon a “nominal” (“in name only”) interest rate. This rate is not the rate of interest that the people who have them are really being charged. It’s a thing for purposes of computing the minimum payment. In other words, the minimum payment is computed by using this rate instead of the actual rate that you are being charged. They are being marketed more heavily right now than at any time in the previous twenty-odd years. If you are quoted a rate of 1%, 1.25%, 1.95%, 2.95%, or anything else under about 5% right now, they are talking about a negative amortization loan. If you look at the Truth-In-Lending form, it will list an APR somewhere in the sixes, usually several entire percentage points above the nominal rate. Another way to tell is the presence of several “Options” for payment. If they talk about three of four payment options, guess what? They’re talking about a Negative Amortization loan. Note that this is a different situation from “A paper” loans that have no prepayment penalty, in that you are explicitly given these payment options, and may not have any others. “A paper” loans, the minimum payment at least covers the interest (if it’s an interest only loan) or actually pays the loan down, and anything extra you pay is applied to principal to pay the loan down faster. I pay extra every month but that’s my decision, my choice of amount, not theirs. A negative amortization loan gives you a limited number of choices. Furthermore, there are more of the so-called “one extra dollar” prepayment penalties on negative amortization loans than any other loan type.
Negative Amortization is generally a bad thing because with over 95 percent of those who have them, over 95 percent of the time they are making the minimum payment. That’s why they got them, because they couldn’t afford the real payment. So their balance increases. They owe more money every month, and due to compound interest, every month the difference between what they owe and what they pay gets wider. This can only end one of three ways. They sell the house. They refinance the house. They get to “recast” point on the loan. None of these is good.
If you sell, the loans come out of proceeds, and the bank gets more money than you originally borrowed, usually plus a prepayment penalty. I keep using a $270,000 loan amount as an example, so let’s look at what happens. The minimum payment will be $868.42. But your real rate is not fixed, and even if you’ve got a good margin and your rate doesn’t rise in upcoming months (It will rise), your real rate is something like 6.2%. That very first month, your interest charge is $1395.00. You have $526.58 added to your loan balance. Take this out one year. Your principal has become $276,501.57, an increase of $6501.57. Now the minimum payment increases by 7.5% (another characteristic of this loan) to $933.56. Take it out another 12 months, now at 6.25% (and I’m being really stingy with rate hikes, given how much I think the underlying rates will go up) and you now have a balance of $283,561.76. Now you sell, and as opposed to selling it two years ago, you have $13561 less from the sale than you otherwise would have had. Plus a prepayment penalty of $9484.00, a total of $23,045 the loan has cost you not counting whatever your initial fees were. This is money you are not going to have to buy your next property with. Not to mention that if the rise in value doesn’t cover it, you may find yourself short – getting nothing, and maybe even getting a 1099 form for the IRS that says you owe them taxes.
Let’s say you don’t sell, but refinance, and unlike roughly 70% of everyone with one of these loans, you actually make it to the end of the prepayment penalty period, three years. Your payment has been $998.70 for these 12 months, but your balance has still increased to $291,815.16. Let’s say rates have magically dropped back to where they are now. You get a 30 year fixed rate loan at par at 5.875%. Your payment will be $1746.90, as opposed to $1597.15 if you just did that in the first place. But wait, it get’s better!
In the fourth year, your payment goes to $1063.84. But nine months in, you hit the recast point! Your balance has grown to $297,000 – 10% over what it was to bein with. It’s a thirty year loan, and now it starts amortizing at the real rate for the last 315 months, or until you manage to dispose of it, whichever comes first. Assuming your rate is still “only” 6.5%, your payment jumps to $1967.60 in the forty-sixth month, and this payment is no more fixed than your rate is, which is to say, not at all.
Let’s say you have one of the loans with a higher recast – 20 percent instead of 10. Your balance goes to $299,010.60. Then the final year of artificially lowered payment, $1128.98 per month is applied to your loan, but it’s accruing $1619.64 in interest and rising. Your loan balance is $305,077 at the end of your minimum payment period. Now your payment (assuming your real rate is still 6.5%, which I think unlikely) goes to $2059.90. If you’re able to get a thirty year fixed rate loan at today’s rates, your payment is $1825.35. If you couldn’t afford $1600 per month in the first place, what make you think you’ll be able to afford any of these alternatives? The needless increase in payment amounts to sucking $1.34 per hour out of your pocket, or if you want to think of it another way, you’d have to make $3.00 per hour – $500 plus per month – more to qualify at the end of the period with all that added to your loan, as opposed to right now. And that’s assuming the rates are as low in five years, which I do not believe will be the case.
Additionally, I attended a credit provider’s seminar last month, and as I said then, credit rating agencies are currently considering making the fact that you have a negative amortization loan to be a heavy negative on your credit report, all by itself. From the writing above, it should not be hard to see why. Someone who has a negative amortization loan is not making a “break-even” payment. Their balance is increasing. This indicates a cash-flow problem, and cannot go on indefinitely. When the lowered payments expire, they find themselves in a nasty situation, worse than it would be if they had just gotten a different loan in the first place. So if the fact that you have a negative amortization loan knocks you down sixty, eighty, or a hundred points, there is a good likelihood that you will not qualify for any loan nearly so good as you would otherwise have gotten. The last news I had was that they were looking at the modeling data for exactly how strongly it influences your chance of a 90 day late. I don’t work for Fair-Isaacson, but my guess, based upon working with people who have negative amortization loans, is that it’s going to be towards the higher end of the range I cited.
In short, because most people concern themselves with quoted payment, not interest rate and type of loan, these things are most often sold via marketing gimmicks and hiding their true nature. Those selling them do not concern themselves with what will happen to you after they’ve gotten their commission check. They are designed (and appropriate for) a couple of specific niches that most people do not fall into. Last set of figures I saw was that they are the primary loan on about 40 percent of all purchases here locally – and owner occupied purchase is not one of the niches they are designed for. An appropriate proportion of the populace to have these might be four tenths of one percent, a figure a hundred times smaller. Shop by interest rate and type of loan, and these look a lot less attractive. As I said, the real rate on these right now (if you’ve got a good margin) is about 6.2 percent. At par, loans are available that are really fixed for five years at about 5.5 percent, or thirty years at about 5.875 percent, no hidden tricks, no surprises, no gotcha!s. These are not only lower rate, but also better loans.
Caveat Emptor
The Three Day Right of Recission
One reason to check your referral logs every day: Sometimes you can find great material for an article. I got one about the three day right of rescission.
This is a feature (or bug, depending upon your situation) with every refinance on a home that is a primary residence. The reason it exists is that until you see the final documents at signing, there is literally no way to prove that what your prospective loan provider quoted you on the Mortgage Loan Disclosure Statement (California) or Good Faith Estimate (the other 49 states) is actually what they intend to deliver. There’s a lot of paperwork I can put under your nose to make it look like that’s what I intend to deliver, but until you have the final loan documents sitting in front of you, none of it means anything. Just because they give you those wonderful forms like a MLDS or GFE or TILA or anything else does not mean that is what they intend to deliver. The only document that is required to be an accurate accounting of the loan and all the money that goes into and comes out is the HUD-1, and that comes at the end of the process, and you get it at the same time as you sign the note.
I have said it before, but there are three documents you need to concentrate on at loan closing. Everything else is in support of those. They are the Trust Deed or Mortgage, the Note, and the aforementioned HUD-1. An unscrupulous lender certainly can slip stuff past you on other forms, but most won’t bother. These three forms will tell you about 99.9 percent of the shady dealings. Some lenders and brokers will actually train their loan officers in how to distract you from the numbers on these three documents.
Once you have signed all of the requisite paperwork to finalize your loan (the stuff you sign in front of a notary at the theoretical end of the process), there is potentially a waiting period that begins. Purchases have no federal right of rescission, nor do refinances of rental or investment property, but if it’s your primary residence and you are refinancing, you have three business days to call it off. Note that some states may broaden the right of rescission, and some may even lengthen it, but they can’t lessen what the federal government gives you.
As an aside, just because you have signed “final” documents does not necessarily mean your loan will fund. There are both “prior to docs” conditions as well as “prior to funding” conditions. The former means they must be satisfied before your final loan documents are generated, the latter means they must be satisfied as a condition of funding the loan. I want to emphasize that there will always be “prior to funding” conditions, but they should be routine things that make sense to do at that time, in that they cannot realistically be done any sooner. Many lenders, however, are moving “prior to docs” conditions to “prior to funding.” This has always been prevalent for so-called “hard money” loans, but recently subprime lenders in particular have been emulating their example. The reasoning for doing this is simple. Once you’ve signed documents, you are bound to them unless you exercise right of rescission. Once right of rescission expires, you are bound to them period, until they either fund the loan or give up on the possibility of funding it. I strongly advise you to ask for a copy of outstanding conditions on your loan commitment.
Assuming that there is a right of rescission applicable, once you have signed final documents, the clock starts ticking. The day you sign documents doesn’t count. Sundays and Holidays don’t count. It is possible that Saturdays don’t count, depending upon the law in your state. Here in California, Saturdays count unless they are holidays. It is three business days. So let’s say that you sign final documents with a notary on a Monday of a normal five day week. Tuesday, Wednesday, the Thursday all go by while you have still got your right of rescission. Thursday midnight the right of rescission expires, and the loan can fund on Friday. Note that no lender can or will fund a loan during your right of rescission period, and every so often an otherwise excellent loan officer will have you sign loan documents before some other conditions are finished so that the right of rescission will expire in timely fashion to fund your loan before your rate lock expires. Remember that if the rate is not locked, the rate is not real, but all locks have expirations.
Applicable rights of rescission cannot be waived, cannot be shortened, and cannot be circumvented. Ever. There literally is no provision to do so in the law. This is both intentional and, in my opinion, correct. Kind of defeats the purpose of having it, which is to give you a couple days to consult with professionals before it’s final, if it can be waived, because you can bet millions to milliamps that the sharks you are trying to protect folks from would have the folks sign such a document if it existed.
Just because the right of rescission has expired and the loan can be funded does not mean that it will be funded, much less on that day. For starters, good escrow officers will not request funding upon a Friday because the client will end up paying interest on both loans over the weekend for no good purpose. Once they request funding, the lender has up to two business days to provide it, and then the escrow officer has two business days to get everybody their money.
Also, remember those “prior to funding” conditions I spoke about a couple of paragraphs ago? If there’s something substantive, it usually should have been taken care of prior to signing docs, leaving procedural stuff for prior to funding. But sometimes it can be in your interest to move them, if it means your loan is more likely to fund within the lock period, so you don’t have to pay for lock extensions. On the other hand, there has been a movement towards making as many conditions prior to funding as possible, simply because once you have signed final documents you are more tightly bound to that lender.
In summary, if a right of rescission is applicable, start counting with the next business day after you sign final loan documents. After three business days, the right of rescission has expired and the loan can fund. Assuming a normal five day week, and that Saturday counts, as it does in every state I’ve worked in:
If you sign: Recission expires:
Monday — Thursday midnight
Tuesday — Friday midnight
Wednesday — Saturday midnight
Thursday — Monday midnight
Friday — Tuesday midnight
Saturday — Wednesday midnight
Sunday — Wednesday midnight
Caveat Emptor