The scope of the problems that exist in the United States Mortgage market are huge. Enormously, mind-bogglingly, “How Big Is Space?” type huge. Yet, the problems are almost entirely on a retail level, when one provider works with one consumer. The system works, and it works extremely well. Consider:
Most consumers in Europe or any other country in the world would trade their loans for yours in a heartbeat. Rates there are typically around nine percent or so. Here, that’s a ratty sub-prime rate. Mexican rates start at about fourteen percent. Hard money lenders here can sometimes do better than that.
No matter where you are in the United States, you have ready access to home loan capital. It’s considered almost a one of our inalienable rights. Due to our secondary markets, as long as you can meet some pretty basic guidelines, you can find somebody eager to lend to you. You can find very long mortgage terms and very short terms. You can find loans without prepayment penalties, and you can choose to get a lower rate by taking a prepayment penalty. You may end up with something that’s not as good as someone else if their situation is better, and the lender wants more money to compensate them for the risk of your loan, but even so, the rates here are better than almost anywhere else in the world.
Consumer protections are also better here than almost anywhere else in the world. There are federal laws that give you time to call off a transaction if you change your mind, disclosure requirements, consumer protections against builders with teeth in them, and a tort system that, if it does go overboard some times, still gives you an excellent chance at recovering what unethical people took from you. Many states (California, for instance) go well beyond mandatory federal consumer protections.
So keep this in mind when you see me ranting on and on about the problems with our financial markets here. Consider a capital market willing to loan the average person several years worth of wages. I can get a family making $6000 per month a loan for nearly $400,000 on an A paper 30 year fixed rate basis – most expensive loan there is in the most favorable, hardest to qualify for loan market – no surprises, no prepayment penalties, no “gotchas!” of any kind, and I can do it without hiding or shading the truth in the least. That’s more than every dollar they will make for the next five years, and this family is every bit as chased after as the richest person in the world (more actually, because there are more of them). When you stop and think about it, that’s a pretty wonderful situation. For all of the rants I make, the unethical things that happen, and the problems that exist in our capital markets, they are pretty damned good, and have chosen a set of tradeoffs that appears to be working better than anywhere else in the world, at any other time in history
Estate Tax
I have never liked or favored the estate tax, and yet I was very much of two minds about actually abolishing it. It actually did die for a year, before the legislation sunsetted and things reverted to the previous status quo, although it’s to be admitted the exemption amounts are now significantly larger. Estate tax reform was extremely popular, yet I suspect lawyers and accountants of being the culprits behind its return, in violation of client interest. Planning for estate tax it is only one of the issues involved in planning for what happens after your death.
The benefit of no estate tax (or one that doesn’t impact a particular estate) is obvious: people don’t get taxed, so their heirs get what they earned rather than the government. This is a good thing, and I favor it for that reason.
On the other hand, there were so many mechanisms varying from outright gifting to 529 accounts to life insurance to trusts, each of which except the first can be used to retain control and benefits of assets while avoiding estate tax liability, that estate tax was basically voluntary. You had to just not plan in order to pay estate tax, and some of the mechanisms available actually increase your available estate over what would have been its original gross value otherwise. Since we know that death is something each of us is going to have to face, there can be no reason except stupidity for not undertaking to plan for it. Whatever else it may be, estate tax is a voluntarily paid tax on stupidity.
Furthermore, there are other estate and contingency planning options that people need to take care of, and fewer people are doing so as estate tax was one of the primary levers that moved people to do it. All of this planning is just as necessary as estate tax planning, and usually taken care of at the same time.
Here are just a few of the other issues:
Will: The will probably should not be used for financial purposes, but resolves other functions such as who gets custody of minor children. Please note that a will is not necessarily binding upon the states where your will is probated, and can be challenged. Many wills are challenged, a large portion of them successfully, and even if your estate wins the battle it will be diminished in the process.
Durable Power of Attorney for Health Care: if you can’t make health care decisions, this tells who you delegate that power to. If there’s a court case brought, it’s going to be very short and abrupt. Case closed.
Trusts, revocable and irrevocable. I’m not certain it’s possible to successfully challenge a well-constructed trust where the assets that are actually transferred to it are concerned. You didn’t own them. The trust does, and the trust didn’t die. The instructions live on, like a corporation. The named successor trustee also usually gets the ability to manage the trust’s assets if you are alive but incapable. Assets in a trust can avoid not only estate tax, but probate as well. If you want to be certain of the disposition of what you leave, particularly in a speedy manner, this is probably the way to go. Many estates are not finished with probates for years, and until they are, your heirs don’t get control of the assets. Probate is also expensive, time consuming, and lucrative for attorneys. Seven percent of probated assets seems to be about the minimum cost, and it can easily top thirty percent. I haven’t investigated, but I suspect the trial lawyers would be solidly behind the return of estate tax for this reason.
Business operations: many small to medium sized businesses have no plan to keep them going in the event the owner-operator dies or becomes disabled. Certainly nobody else working there has the knowledge, the experience, and often the necessary licenses. If the business closes because the proprietor isn’t there, it’s worthless. If there’s a plan of succession to keep it open and operating, however, you or your family can likely sell it as a going concern with consistent profit.
Retirement plans: If you have certain types of tax deferred retirement plans, they can be expensive to convert to assets in your heirs’ possession, even without estate tax. Better to draw these down and keep other accounts available.
Life Insurance: There are going to be expenses when you go. These vary from taking care of the body you leave behind to probate to keeping your business running if you have one. The people doing these things want cash. Life insurance is usually the cheapest way to pay them. Your family is also likely to need something to replace your income. Life insurance is about the only choice.
One hopes you begin to get the idea. Consult an attorney and financial professional in your area to find out how it works, but all of this needs to be taken care of, or your family will wish you had.
Caveat Emptor
Let us Disagree Without Being Disagreeable
Scott Kirwin of Dean’s World directs us to Harry Stein column in City Journal, and then amplifies on one aspect, saying that he, too has a mixed marriage, and that it works very well and helps make him and his wife better people. He quotes Gerald Ford, “We can disagree without being disagreeable.”
First off, I want to corroborate his story. My wife’s family are all democrats, she marched with Cesar Chavez as a young girl. Mind you, they’ve pretty much stayed in the same place politically while the Donkeys drifted further to the left, to the point where she has actually considered registering Republican in the last year or so. Furthermore, most of the people I tend to hang out with are either Libertarian or Democratic, and they keep me from going to far towards the right.
Second, when exactly did we lose the ability to disagree without being disagreeable? When and where did people start automatically assuming that the opposition is evil? Particularly if they don’t convert to your point of view upon a first exposure to what you regard as pertinent facts?
Out of personal experience, I can trace the phenomenon back to 1976 on the left. Some members of my family are what we today call die-hard moonbats. I remember when Ronald Reagan was challenging Gerald Ford for the Elephant nomination back then them using some significantly over the top rhetoric on their part, “crazy attack dog who needs to go back to the B movies,” “He’d have us in a nuclear war in twenty minutes”, etcetera. I seem to remember him serving as president for eight years, correct me if I’m wrong but I don’t recall any nuclear wars during that period.
On the right the first I encountered it was Rush Limbaugh. I can remember the first time I listened to him, thinking, “Okay, he’s funny, he’s willing to call it like he sees it, he is a breath of something pointed vaguely in my direction politically, but he’s dangerous.” I haven’t listened to Rush in quite some time. I stopped years ago because even when he and I agree, I could detect no pretenses towards what I see as rational thought process on his part.
People are entitled to hold to different viewpoints than my own. Some of these people are rational, thinking human beings. The universe knows my own views on many subjects have evolved over time. Why can’t somebody with a different starting place be different now? Why can’t they have gone further, or not as far, or off in a completely different direction? Some of the smartest people I know think differently than I do. My father, who was beyond doubt the best man I’ve ever had the privilege of knowing, was a Democratic New Deal man to the core. He voted the straight Democratic ticket every election his entire life. You could have run a Democratic slate pulled from their KKK wing and their Communist wing, and he’d have voted for them all. I loved him anyway.
Why do people believe differently than I do? First off, they have different value systems. Somebody who legitimately believes that surrender is preferable to war is not going to agree with me on much having to do with national defense. I take solace in the thought that there are a lot more people whose values coincide with my own on this point than there are of them.
Second, we’ve had different life experiences. Someone who’s family comes from Central America, for example, is going to have a completely different viewpoint on the CIA and our national defense structure, as for a large part of the 20th century the US didn’t exactly treat those countries with a whole lot of respect.
Third, we may even see different facts differently. I am completely convinced that Lee Harvey Oswald was solely responsible for the murder of John F. Kennedy, but we have major films from people who aren’t. These people have regular conventions, periodicals, etecetera. I think they’re in denial and even if they’re right, it wouldn’t make a difference today. They think I am the one in denial, and that by so believing, make myself into a Tool. Maybe one of these days I’ll come across a fact, verified and vetted, that causes me to change my mind (not likely, I’ll admit. But the possibility is there.)
Fourth, we have different competencies. I’ve got a fairly broad spectrum of general stuff that I’m pretty good at, with areas of specialization here and there. Some of these are because of college coursework, some due to vocational concerns, and a whole lot of them because I find them fascinating (For instance, the intertwining of military, political, and technological history). On the other hand, aside from marveling at the skill involved in a masterwork painting, I have no clue about painting. I can sometimes spot that “This looks like a Van Gogh” before somebody tells me, but that’s about it. I have no idea of the artistic heritage that led to Van Gogh, who his influences were, or anything else that crowd finds fascinating. Similar situations apply in other fields. It’s not that I despise these people, it’s just that I’m interested in other things. When I talk about Napoleon’s influence on Clausewitz and through him on the Prussian (later German) army, or influences on tactics derived from the advent of rapid fire weapons, and how the American Civil War was a prelude tactically to World War I, I see the same blank stares back as I give them when they’re talking about Rembrandt or Picasso. That’s okay. But it means I see things through a different prism of learning than I do. Through the things I have studied, I am going to understand background facts without needing them explicitly covered, sometimes they are. And sometimes even after we have them explained, we’re not going to change our minds. It may not be rational, but it is human. It doesn’t make us evil.
Now, how do we disagree with someone without being disagreeable? First off, to the extent practical, we can aim our opposition at the issue, not the individual. It is not the same to say that “2 plus 2 equals four” as it is to say, “only an idiot wouldn’t realize two plus two equals four.” Second, spend some time listening to them. Try to understand what they’re saying. It doesn’t cause cancer. Maybe there’s a fact in there that one or the other of you has wrong. Maybe there’s a misunderstanding that you can clear up. Maybe you have a misunderstanding that they can clear up. And maybe the metaphorical temples that both of us listen to for our daily wisdom are both in the habit of ignoring inconvenient facts, and the real truth lies somewhere in the middle.
Once upon a time not too long ago we could disagree without automatically hating each other’s guts. Back in the 1950s it was a national joke about the wife’s vote cancelling out the husband’s (or vice versa). If two people who agree about nothing political can nonetheless be and stay happily married for life then, why can’t we be civil to those who disagree with us in public discourse today?
The 2006-8 Housing Bubble
“Housing Bubbles” were invented by stock brokers, and real estate remains, and will almost assuredly remain, your absolute best investment.”
(me again)
Actually, California pricing has reliably gone through cycles within my lifetime. We have hit the peak of the fifth one I remember (1991 was the last peak, which makes this the longest period between peaks ever. Previous peaks were mid 80s, about 1978, about 1970, and one when I was very young), and started a downslide. Right now it is primarily the higher end properties which have been hit, but it’s starting to push the middle down as well. It is important to note that with the exception of the slide of 1929 to 1932 (when real estate prices fell, as well, and didn’t come back to 1929 levels in most of the country until after the war), the stock market has not had a slump which it didn’t come back from within ten years, either. Furthermore, when you consider returns uncorrected for leverage, the stock market reliably outperforms real estate over the long term.
In fact, nobody that I’m aware of has said that anyone who intends to buy and hold for years cannot make money – a lot of it – in the current market, even if prices do fall for a while. The problem is in the formerly large number of people looking to buy a property with the intent of “flipping” it for a quick profit. As the ability to buy your average property with the goal of selling it in six months for a substantial profit even after paying transaction costs is just about dead, so too are those deals that would have been made by those buyers. This has the effect of reducing marginal demand, and voila!, the prices are starting to slip. I (and every other bubble proponent out there that I have read) am confident that the prices will come back eventually. The question now, as in the stock market bubble that ended in 2000, will be how long it will take to come back and how far down it’s going to go. Right now, lots of people are still down more than 50% from the stock market peak in March 2000. If they need to retire, or need the money for some other reason now, they are stuck. The same goes with housing, which due to the increased leverage of the investment can be much better when it’s good to much worse when it’s bad. There are at least three “short sales” (where proceeds will not cover obligations) in process in my office right now. If you can’t hang on, it does not help you that prices will come back eventually. There’s an awful lot of “Negative Amortization” loans out there that will be coming up on recast in the next 18 months, as well as “interest only” loans where the people just cannot afford the amortized payment. Be prepared for problems when they do, as this is going to significantly enlarge the supply (Inventory in many markets is over 200 percent of last years levels already, and mean time on market is even higher as number of transactions slips). The fact that prices have slipped will place many people temporarily upside down, and so unable to make their payments and unable to refinance when their loan adjusts or starts amortizing. Expect foreclosures to further increase the supply of available units.
If you are heavily leveraged on a short term loan (total loans against property total over 70% of current value, and most especially over 80%), I seriously suggest refinancing it into a longer term fixed rate loan now, while appraisers can still find justifiable comparables that use peak real estate values. It is entirely likely that any property which has changed hands in the last couple of years, at least here in urban or urban fringe California (and many other markets, as well), is going to end up upside down for an unknowable period of time.
I am a Loan Officer and Real Estate Agent, and still have current financial licenses which I have not yet abandoned. Real Estate Bubbles are not “invented” by stock brokers; the just ended bull market run in housing was the longest in recent memory partially due to peripheral psychological factors on behalf of investors “chasing returns” in what many will tell them is a “safe market”, as well as things having to do with the financial aftermath of 9/11 as well as overcompetitiveness on the part of many pieces of the financial market, most particularly the subprime and Alt-A market. As a particular prediction, when the fall off from the current market is over and done with, I wouldn’t expect there to be any lenders willing to go 100 percent on the value of a property for quite some time. There are many people out there too young to remember previous housing cycles, and partially for this reason and partially because the housing markets are more heavily leveraged than at any point since the Depression, I expect to be in for a couple of UGLY years.
I would be delighted to be wrong. Nobody will be happier than me if you can crow at me in a few years time “Told ya!” But I see what I see, and I won’t lie about it to anyone (especially not clients) simply because it makes it easier to earn a commission. If you happen to be in the real estate business, be very careful what you tell your clients, or, at least in California, you’ll likely wish you had.
Both real estate and the stock market go through periodic downturns. The question is not if, but “when” and “how much” and “how long.” You always need a place to live, and you can make money if you invest prudently in any market, and the permitted leverage upon real estate together with favorable tax treatment gives it an advantage that’s hard to beat. I had clients make double digit positive returns in each of 2000, 2001, and 2002 in the stock market, too. They were the ones who didn’t get greedy (2003 was a rising tide that lifted all boats. It isn’t genius when everybody makes 25%). Even in this market, you can make money on real estate, just like you could in the stock market when it was sliding.
In both cases, “time in” counts for more than “timing”, but that’s not the mentality you encounter in the average client. See my post Getting Rich Quick In Real Estate and Cold Hard Numbers for more information, but although real estate can be the best possible investment if you handle it correctly, it is not liquid. In fact, it is just about the least liquid investment you can make. You cannot go to your real estate person, as you can to a financial person, and say “liquidate it for cash” and expect to have a check for market value within a few days. You have to find a willing buyer. This is one reason for the existence of the “bigger fool theory,” and sometimes that bigger fool doesn’t come along when you need him to.
Caveat Emptor
For Sale By Owner
I’ve been taking a long look at the world of For Sale By Owner and similar concepts lately. With the digital revolution, you always want to be watching the tide to figure out if you’re in a business that’s about to go the way of milk delivery and diaper service – a few left, but only a tiny fraction of the size they were. Since blogs and online magazines replacing or at least greatly supplementing mainstream journalism is one thing I’m constantly reading about, it might be good information to know if my real career is about to go the way of journalism.
At this point, I’m not worried about needing to change professions. The world of For Sale By Owner (FSBO) does seem to be figuring out the legal ramifications fairly well. There are resources available to get most, if not all, of the legally required disclosures for sellers to avoid future liability to the buyers. I’m going to go on record as believing from the things that I have read that they are not as assiduously practiced as they are by people with real estate agents working for them. Reading the groups, I am seeing all kinds of whining about “Do I have to disclose X?” “Do I really have to disclose Y?” Sometimes, the stuff is minor and inconsequential (leaky toilet, drippy faucet), but a lot of times it’s pretty major as well (water leak in/under slab, lead based paint, asbestos, “minor” cracks in the slab). Mind you, I’ve heard similar whining from real estate agents, particularly new ones. But the real estate agents at least want to be in business (and not sued) for a long professional career with many transactions every year, and so have motivation to disclose everything they find out about, lest one transaction cost them their license. Many individual owners, it seems, even the ones who have been made aware of the legal requirement to disclose, are hoping to get through the one transaction unscathed. After all, they hope they’re going to be long gone when the problem crops up. To this, I say, don’t count on it, and failure to disclose can often make your legal liability worse than it needs to be.
Needless to say, this is a big “let the buyer beware,” when dealing with FSBO properties. You’re standing across the table from someone with an immediate motivation to not tell you about whatever metaphorical bodies are buried in the property because once told you may not still want to buy, and most particularly you may wish to reduce your offering price. They have only a hazy motivation to tell you – the indefinite threat of perhaps some legal action sometime in the future. If it doesn’t make you uneasy, something is wrong.
One area FSBO is falling short in is picking an appropriate asking price. By the evidence, this is not only lack of information but also homeowner ego speaking here. Some people are not aware of what their home is really worth, or if they are aware then they are ignoring the evidence. Speaking from personal experience in the current market, persuading people to put an appropriate asking price on their property is one of the most difficult parts of the listing interview. They are still mentally in the seller’s market we had last year, where they could automatically expect to get more than their neighbor got a couple of months ago. Also significantly, in the long seller’s market just concluded, many real estate professionals were making a lot of money buying “For Sale By Owner” properties that were under-priced, and immediately “flipping” them for $30,000 to $50,000 profit, often more. Here’s the math for a property that sells for $460,000 but should have sold for $500,000: In the latter case, assuming you pay a standard 5%, you paid a $25,000 commission, split between the buying and selling brokers. But you come away with a net that’s $15,000 higher. I personally know of several sales where an agent purchasing a FSBO property then sold it again before escrow was even completed for profit of $75,000 or more.
There is still some of that going on, but the problem right now with most FSBO properties seems to be over-pricing the market, rather than under. Their neighbors house sold for $500,000, and by god they are going to get $525,000. Never mind that the neighbor house has an extra bedroom, an extra bathroom, 800 more square feet, sits on a corner lot that’s twice the size, and most importantly, sold when demand was high and supply was low. They are going to get that price, come hell or high water. So they put that out as the asking price, and they wonder why the one or two people to express an interest vanish as soon as they’ve seen it. The reason is simple: They’ve priced themselves out of the market. There are better homes to be had for less money. In the past few years, this was a survivable defect. When prices are rising as fast as they were, the market would catch up to anything that was vaguely reasonable. That has changed now. It’s bad enough with people who have a real estate agent for their listing. Two of the hardest fights with listing clients in this market are keeping the property priced to the market, and getting them to accept what in today’s market is a good offer rather than hoping for last year’s “bigger fool.” Seems that most people who don’t have an agent are just in denial. There’s a FSBO two doors down the block from a corner listing we had where I held an open house. Even with me drawing the traffic to him, he didn’t get a single offer because his asking price was too high. That’s fine if you would be happy and able to stay if the property doesn’t sell. If you’re not in that situation, it’s not.
Another area where FSBO properties are falling short is in marketing. They’ve got an internet advertisement and a sign in the yard. Maybe they’ve got an advertisement in the paper (usually the wrong one), and maybe they are holding open houses. All of these are nice. None of these are optimal. First thing is that internet advertisement you have is often on one site where even internet savvy buyers don’t necessarily see it. Even if that is free, it’s probably worth money to list on a co-operating network of sites. For Sale By Owner signs in the yard are more bait for agents than a prospective buyer. I’ll put a sign out there when I get a listing also – it does catch a few people, and a sign with an agent or broker’s name on it keeps other agents from bothering you. But it’s a long shot at actually selling the property.
There are places to advertise your property to actually sell it, and there are places where agents advertise their business to attract new clients. Most of the FSBO ads I see seem to be in the latter sort of place. I don’t think I recall a “For Sale By Owner” ad in the places where I’d expect it to generate significant actual interest in buying that particular property. There are reasons for this. The ones that are likely to generate interest require more lead time. I don’t mind spending the money (especially amalgamating my listing with other listings in the office). Even if it sells before then, it helps the office generate more clients we’re going to go out and show similar properties with, and I get a certain proportion of those. But For Sale By Owners tend to balk, as they are thinking one transaction. There are also resources that make an Open House effective, but are not cost effective for somebody looking to sell one house.
Number one resource for actually selling the property is the Multiple Listing Service (MLS). Put it out there where the agents who the buyers come to will see it. My primary specialty is buyer’s agent. I know they are ready, willing and able to buy a property. Do I even take them to look at “For Sale By Owner” properties? Not unless I know ahead of time that the seller will pay my commission. Nor does any other buyer’s agent I know of. Before you “For Sale By Owner” types start cursing us, remember first, we’ve got to make a living so we’ll be there for the next buyer. Second, we’re actually living up to our fiduciary responsibility when we do this, as I’ve got their signature on a piece of paper that says they’ll pay me if you don’t. So unless your property is priced far enough under the market to justify the expense on my client’s part, your property is not a contender, and I’d better be prepared to justify the expense on my client’s part in court, so your under-pricing the market has got to be by more than my commission. Furthermore, going back to legal requirements, I’ve got to figure that there is a higher than usual chance that the seller will not make all the necessary disclosures, or perhaps won’t tell the complete truth and nothing but the truth on them. This puts my clients, and through them, me in a bind: Sure my clients can and will sue you, but if you don’t have the money my insurance is likely going to end up paying out, because even though I’ve done everything I reasonably could have done, you didn’t have an agent.
Given that the Multiple Listing Service is far and away the best tool for selling any given property, if you’re not on it, you’re missing out on buyers. If you don’t have a selling agent’s commission listed on Multiple Listing Service that is at least what is specified in the default Buyer’s Agent Agreement in your area, you are missing out on buyers. If you don’t have an agent at all, you are missing more buyers. Because I, like other buyer’s agents, want to be certain we’re not wasting our time. I’ve done a real pre-qualification or even a preapproval on my buyers (if the transaction doesn’t actually go through, I don’t get paid by anyone). Compare that with Mr. P, whom I sent away the night before I finished this essay. He’s out there looking at houses he wants to buy, but the fact is that given the situation he should continue renting. A competent loan officer such as myself who was less ethical could maybe get him the loan anyway, or maybe not. It would certainly be an uphill fight. So he’s out low-balling “For Sale By Owner” properties on his own today. The one who’s desperate enough to sell at that price needs the transaction done with the first buyer who comes along, and is going to spend at least a month finding out there’s only a small chance of the transaction actually going through, a month that they likely don’t have to spare. The other For Sale By Owners are likely to get mightily annoyed with him, but he’s the customer they’re most likely to get.
Caveat Emptor (and Vendor)
What can I do to Qualify for a House or Mortage?
There are a fair number of specific helpful suggestions to make in helping you purchase a home. All of them revolve around the loan. Let’s face it, the loan is far and away the most hypothetical and uncertain part about most real estate transactions. If there is a non-loan related problem, chances are that you really didn’t want to buy that particular property anyway. Most of the time, these problems mean that you would be buying into trouble, and nothing but. Unless you have specialized knowledge in sorting out that particular problem, it’s likely to be more expensive than any money you saved through reduced purchase price.
A poor loan officer can always botch a loan, of course, and even the best may not be able to push it through if you are a marginal enough case. So how do you improve your case standing?
The first thing is to get a credit score above 720. If you’re there already, keep doing what you’re doing. Even if you’re not there yet, it’s easier to improve than most people think, although it takes time. Make all of your credit payments on time, especially any mortgages and rental payments. These are the most important things to mortgage lenders. Note that you make a payment a few days later than it is due, and you may even pay a penalty, but the lender will not report it as late until 30 days later, and that’s when it counts as late. In order to qualify for the A paper loan, at the top of the market, the general rule is no more than two 30 day late payments on revolving debts within two years, or one 30 day late on mortgages or rent.
Most lenders want you to have three lines of credit, and a twenty-four month credit history. If you don’t have at least two open lines of credit, a given reporting bureau may not report a score, and if you don’t have two different scores from the three big bureaus, only a few sub-prime lenders will give you a loan. The longer your lines of credit are open, the higher your score will be. So if you keep opening new lines of credit, expect your score to be low.
Revolving credit balances should be kept low, less than half of their limit. There is a significant hit if your credit line is more than half its limit, and the higher you go, the worse it is. If you have two $5000 limit credit cards, it is much better to have $1500 on each than $3000 on one and nothing on the other. It make even more difference if you have $2000 balance on each as opposed to $4000 on one. And if you’re one of those people who keeps buying off on the “transfer your balance to a new card and get zero interest for six months”, it will really impact your credit in a negative way, because if your credit balances sum to $8000, that’s usually what the limit on the new card will be, and so you’ve got a brand new credit card that’s maxed out, which is a major hit on your credit.
One of the best ways to improve your credit score relatively quickly is to use your credit regularly but pay it off every time you get a bill. Once per month, charge something small that you know you will be able to pay off when the bill arrives. This will still take some months, but better months than years.
The next way to improve your ability to afford a house is not to have any large monthly payments. The best rates are for full documentation loans, where you prove to the lender that you make enough money to be able to afford all of your payments. “A paper” lenders will allow you to have total monthly payments of 38 to 45 percent of your gross monthly income. Some sub-prime lenders will go to 55 percent. If your family makes $6000 per month, this means that total payments can be up to $2700 for certain A paper loans, up to $3300 for sub-prime and still qualify full documentation. This also means that the more income you can document, the more house you can afford.
This number includes not only the amount of the mortgage, but also the property taxes, homeowners insurance, association dues (if applicable), and anything else you may need to pay in order to keep the home, as well as car payments, credit card payments, and any other debts you may have. This means that somebody with other payments of $80 per month can afford a lot more house than somebody with other payments of $900 per month. This should be intuitive, but you’d be surprised how often people don’t realize it.
The final thing that is helpful is a down payment. The larger your down payment, the less you have to borrow. Lending money is a risk-based business. Up to a point, the lower the ratio of loan balance to value of the property will help you get a lower interest rate and more favorable terms, because the bank will be more certain of getting all of their money back. A 5% down payment is better than none. 10% is better than 5%. The first 5% makes the most difference, but every bit helps. Of course the larger your down payment, the less you have left over for other purposes. It seems to be a phenomenon today that people don’t want to risk any more of their own money that they have to, and 100% loans can be done right now, although how much longer that will be the case is anyone’s guess. Still, people who make a habit of saving money are always in a stronger position that those who do not.
Caveat Emptor
Two Things That Have Nothing To Do With Each Other
This really ticks me off. It happens that I agree with them that space is the better long term investment. I think a permanent presence in orbit and in the Asteroid Belt is likely to be one of the best things we can do for ourselves technologically and industrially (Kuiper Belt/Oort Cloud can come later). Colonies on other planets in this solar system is a cute idea, but until Mars and Venus are terraformed, we’re already sitting on the one worthwhile chunk of real estate in the solar system.
This has nothing to do with Iraq. Nor is Iraq the only thing our government is doing that we could cut in a trade to find the money for space exploration. Just cutting the number of Robert C. Byrd Projects in half would fund space exploration for the next century.
This is a false choice. The two items have nothing to do with each other except as they are competing (with many thousands of other projects!) for the same resources. It would be equally valid to run an editorial “Welfare or Space? Which is the smartest investment?”. Then we could compare “Welfare or Iraq, which is the smartest investment?” (the latter, in case you are wondering).
Just because one investment is smarter than another doesn’t mean the other one doesn’t deserve – or require – funding.
Salesgoodspeakian to English
It may not come as a shock to you, but loan officers, along with many other salesfolk, speak a different language than the rest of the population. What will probably annoy you, however, is the number of times they’ll say something that sounds like a phrase out of English, but really is from Salesgoodspeakian, a bizarre Orwellian tongue in which the true meanings must be learned by osmosis from the particular subculture’s dialect, while intending to communicate something entirely different to the poor schmuck who, after all, doesn’t understand salesgoodspeakian.
This post is intended partially as humor, partially as education. I’m going to start it with a few of the most common ones, and update it by adding more and reposting from time to time. If you’ve got a good one, either with or without translation (and whether from one of my fields or not), please send it to me along with the context, if appropriate (dm at). Even if you don’t have a translation, I’m pretty good at major dialects of salesgoodspeakian. It is to be noted that these phrases are not red flags, but more in the nature of yellow flags. If they just occur on a stand-alone basis, it’s something that’s likely to proceed from yellow to a red flag, particularly with repeated yellows. On the other hand, if the person uttering them proceeds to issue a clarification in plain English, issues an amplification rendering the translation void, or translates and explains the salesgoodspeakian, it’s possible you’ve just been given a real world green flag that this is an ethical person. For instance, my absolute favorite loan to do is a true zero cost to the consumer A paper loan (and no prepayment penalty!), which I usually explain as “Nothing added to your mortgage. You’ve just got to do the paperwork with me, and come up with the money for the appraisal, which will be returned to you when the loan funds”. And it’s also possible you’ve been given a reinforced red because they lied.
And yes, I’ve had clients who came to me report every one of these. Some of the translations are a little exaggerated to make the point, but the spirit remains the same.
The salesgoodspeakian to English phrasebook:
Mortgage dialect:
“Stress free loans” two percent higher than you’d qualify for with better documentation and a little more work and less greed on the loan officer’s behalf.
“Won’t cost you anything out of your pocket” – Six points and $5000 in well-padded closing costs added to your mortgage loan balance, though.
“Thirty Year Loan” fixed for the first two, if they’re feeling generous that day, but it does have a thirty year amortization. With five year prepayment penalty of course!
“How does a 1% rate sound?” Like you’re a misleading weasel trying to get me to do a loan that digs me in deeper every month with a three year prepayment penalty that keeps me trapped even after I figure it out (See Negative Amortization Loans when I get that finished)
“Industry standard” – Everybody else at this company does it that way, too, because the boss says to, and I don’t know any better. (This is very much the “G” rated translation. Please note that there are industry standards – things that pretty much every company in the industry does. Some of these standards need to change, some just are, and some are actually beneficial).
“Everybody knows there’s 2% origination fee.” Actually, everybody knows no such thing. But if I told you about it in the first place, you might have gone with somebody honest.
Found on the same billboard:
“Rates as low as 4%!” on an “adjusts every month” loan that’s going to 6% next month and who knows what thereafter. With five points. While I have you on the phone, let’s sign you up for it.
“No Points!” we’ve got no points loans. Not on the loan we quoted above. I’m really so terribly sorry you misunderstood. Now, about that 4% loan, what’s your name?
“Low Fees!” compared to the multimillion dollar Oil For Food bribes, $23,000 is low. Now about that 4% loan, what’s your social?
“Easy paperwork” but the start rate goes to 6% for the first month, adjusting to 8% next month. Still five points. Not for the rate we quoted above. I’m really so terribly sorry you misunderstood. Now, about that 4% loan, when can you come in to sign?
Caveat Emptor
Pre-requisites of Investing
It shouldn’t surprise anyone that there are things you should do before you make your first investment. The SEC, NASD and all of the various other financial planning organizations all explicitly list three things that should be in place in most cases prior to making your first investment in anything.
The first of these is an operating reserve. This is a fund of ready cash outside of any investment account, that you can use for emergencies. The minimum is three months of your normal expenditures, but six months is better. People lose jobs, have accidents, have health problems, things come up – you get the idea. Unless your job is rock steady, your cash flow predictable, and you can live on less than fifty percent of your take home pay, you really want to have living expenses for six months saved up, and for some self employed situations where your cash flow is uneven (like say, financial planner or real estate), twelve months is better. Having this much cash on hand gives you a certain security, and you likely won’t have to cash in your investment for some minor emergency.
The second of these is a life insurance policy. This isn’t from any deep-seated desire to sell you a life insurance policy. Investment professionals have only been getting insurance licenses since about 1980, and this recommendation is far older than that. Almost everyone is going to need a life insurance policy at some point in their life, and it is cheaper and more effective to purchase while you are young. As I’ve found out, sometimes things happen to you that prevent you from obtaining life insurance (as in no company will issue you a policy, or will only do so on prohibitive terms), and if you want a family eventually, it is wise to take care of this now. Furthermore, certain life insurance policies are among the very best investments you can make, and more effective the sooner you start them. This is not to say that life insurance is for everyone. I have a client who’s older, has no dependents and never will, has plenty of assets to cover final expenses, and those assets are titled so that they will pass immediately and correctly to his heirs. A life insurance policy would still be of benefit if he had certain goals, but he doesn’t. So we’ve decided it’s not for him.
The third of these is estate planning. This is actually in the requirements as a will, but there are other elements such as durable power of attorney for health care, living trusts, and so on. These do cost a certain amount of money, but it’s money well spent. If something happens to you without doing this planning, every state in the US has a different law as to what happens to your assets, your minor children, your pets, etcetera. These are all cookie cutter approaches, and that cookie cutter was likely enacted a long time ago, to where the assumptions that the legislature made at that time are no longer valid for large numbers of people. The majority of your assets should not be transferred by a will, anyway – wills can be and are challenged successfully every day. Trusts are far better.
If the person you work with is any kind of financial planner, they should add two additional concerns to the list. They are disability income insurance and long term care insurance. The need for both goes away as you become more affluent. Remember, that insurance companies exist to make a profit and if you can afford the risk of losing what they insure, you shouldn’t buy a policy. So if you’ve got a couple million somewhere, and if you never made another penny you would be comfortable, there is no need for disability insurance. The same applies to Long Term Care, albeit probably requiring more affluence. Average per diem billing in California is $240+, with another $60 or so in supplemental charges. So when you can afford $300 per day (about $110,000 per year) for a period of several years in addition to what ever else you may need for your family to live, you are not a good candidate for this. On the other hand, long term care facility prices keep rising, and as medical capabilities for keeping you alive get better, you can expect to spend longer in such a facility.
(For all the money and research we throw at prolonging lives, you’d think we could spend more on making it a robust life, or allocate more of what we already spend towards that end. More and more, we are statistically tending towards living longer in an increasingly frail, helpless and joyless condition. As long as people are enjoying life, more power to them. When it becomes a miserable painful existence, as I have seen too much of, I just don’t see the point. When I see what so many people put themselves or their loved ones through, I’m making certain I’ll always have a “check out” option under my own control, and if I don’t have control to exercise, my wife and I are agreed that neither one of us wants to hang around).
Islam, Historical Christianity, and Reform
Done With Mirrors had a post that gave me the idea for this, and alerted me to an excellent article illuminating the subject at Donklephant
I want to compare and contrast the history of Islam with that of Christianity.
Christianity was founded in a time of a strong civilization and empire. At the time of Christianity’s birth, Rome was not merely the strongest polity in sight – her might was unchallengeable. By the time of the actual Roman conquest in 63BC, Rome had already been the power broker for the whole eastern Mediterreanean for a century. After Actium and the Egyptian conquest, there was no power capable of challenging Rome anywhere around. Military conquest wasn’t just out of the question; it was so far fetched as to be ridiculous. If it was a dream (and it was, a fact of which the Romans were well aware, which made the area completely unremarkable as far as the Romans were concerned), it was a dream clearly beyond reach for now.
It was into this situation that Christianity came into being. Certainly, given a chance, worldly power has always been one of the aims of any priesthood. However, military solutions were out of the question, and so the holy writings of Christianity, while certainly conducive to forceful conquest, emphasized individual faith, individual missionary work, and the powers of persuasion rather than of forcible conversion. In its early years, Christianity’s story was a story of persecution, of hiding in the shadows, at first from the entrenched Jews, later and more importantly from the Romans. Now, the degree to which they were persecuted by the Romans is frequently exaggerated by the Christians. But if they didn’t have to worship quite in secrecy, they were unable to worship publicly, much less forcibly convert others.
When Christianity became the official religion of the empire in Constantine’s reign (the preceding persecution by Diocletian being one reason the meme is so entrenched in the religion), it certainly had no problem with conversions by means other than persuasion (followers requiring conversion for advancement, among other motivations). But the roman empire was soon on the wane. First invasion ended the western empire, then Christianity found itself under attack from the north (Viking raiders), east (the Byzantines were in a war of survival from the eighth century onwards), and west (the Iberian peninsula was conquered), as well as riven by internal conflicts between church and state (beyond the scope of this essay, but consider the conflicts between the Fredericks of the Holy Roman Empire and the papacy.) These conflicts became the hothouse that bred the Renaissance and technological advances, and as soon as the Europeans figured out that there was a whole world out there a lot easier to conquer than their fellow Europeans were, they took advantage of it. Nonetheless, by this time the groundwork had been laid for some tolerance of religious differences, and by the time of the Peace of Westphalia this had been solidly grounded, at least in regards to religion not being used as a justification to invade other states.
So by the time of the colonial period, the rights of the various Christian sects to coexist had been basically accepted. If some were not encouraged or accepted so much as others by a given state, at least there was a level of tolerance between sects won on the battlefields of Europe. Later, even non-Christian religions became more accepted in Europe, and even the predominantly European colonies such as the United States and Canada. There are limits, strong limits with strong historical precedent, to the imposition of Christian faiths. Conquering the heathens and bringing the faith to them were regarded as two separate items upon the agenda, and if they were often prosecuted at the same time and one often used as an excuse for the other, the part about bringing the word of god was regarded as an opportunity for the natives, not as a mandatory “convert or suffer the consequences” sort of thing.
Islam was born in a region and era when the city state dominated. There was no overarching, overwhelming worldly power that could not be challenged. As a result, Mohammed was able to build in a large component of “spread the word upon the point of a sword.” Mohammed drew a much starker line between believer and non-believer than the early Christians would have been able to consider. Whereas in the Christian worldview, there are those that believe and those who have a chance to convert and be saved. God and the church are not one in the christian worldview. There is very little of this distinction in Islamic thinking.
The very name Islam translates as submission – submission to the will of god as dictated by his priests. Islamic priests. The concept of the person completely outside the faith does not enter into their thinking, as it does with Christianity as evidenced in Dante’s Inferno, among other classical references to “virtuous pagans,” who may have been good men and so are not punished, but are not admitted into what Christians see as god’s grace in the afterlife. The Islamic worldview divides starkly into those who have submitted to the will of god, and those who have not. Those who follow the word of god through his priests must follow the teachings or be damned unto the realm of Iblis. Islamic rulers are in many ways puppets of the priesthood. If the priesthood says that a certain act is against the teachings of Islam, then it will not be allowed.
The concept of the missionary – a preacher who converts the unbelievers by persuasion, rather than at the point of a sword, was present in Mohammed himself, but at no subsequent time in Islam until the modern era. Whether westward from the Arabic peninsula into the (then Christian) north coast of Africa and thence into the Iberian peninsula, north into what was Christian territory in modern day Turkey and thence into central Asia, India, and into present day Indonesia, Islam was brought and enforced at the point of a sword. Existing religions in conquered areas that qualified as “peoples of the book” (Christians, Jews, and Zoroastrians) were not quite forcibly converted, and dealt with fairly up to a point, but were still (and are still) subjected to extra taxations as well as limitations upon their right to practice their religion, ability to advance outside their narrow community (The famous Alfred Dreyfuss would never have been permitted to serve an Islamic power, nor Benjamin Disraeli to hold his office. Israel, hated and vilified as the enemy of all Islam that in their media, has Islamic parties in the Knesset and Muslims throughout the government, including upon their Supreme Court), and flatly prohibited from making converts (As witness the Saudi treatment of Christians). It is to be noted that unlike Christianity, Islam has nothing analogous to excommunication or walking away from the faith. It is simple to become a Muslim – their simple profession takes less than ten seconds, and can be stated anywhere, anytime. But at least within the eyes of Islam, it is impossible to sever yourself from it. Once you take the pledge, you are bound forever in their eyes. Christianity, at least in theory, has always had the ability to leave the faith. In Islam, it is not even a theory. Once you make the profession of faith, you are Islamic forever, and the priests will always have dominion over you. You may be a heretic or apostate, but you are never beyond the reach of the priests, who understandably consider the cessation of practice as a matter to be urgently addressed. As an outgrowth of this, once an area is Islamic, it must forever more be considered Islamic in their eyes.
Islam, in short, does not have the historical limitations of proselytization placed upon it that Christianity does. Whereas Christian doctrine requires a good Christian to treat with all persons in good faith so long as they act in good faith, Islam does not. It has only the concept of a grudging truce between believers and non-believers, and this must only be done when there is something to be gained thereby (for instance, the Israelis do not conquer Damascus, Cairo or Baghdad within the next few weeks). In such instances, Islam permits its practitioners to make truce, and even to pretend it is permanent, but not for it actually to be permanent. As spoken by Islamic leaders from the very beginning to the religion and continuing today with every notable modern leader, the only permanent “peace” countenanced by Islam is when all the non-believers have been converted. Check out the translations provided by MEMRI for all of the evidence as to this which you should need. But the truce is exactly that – a breathing space meant to allow the Islamic soldiers time to force a more favorable situation, which they will then use to resolve the conflict in their favor. They are not giving up. Their religion does not permit them to give up. It’s only one more way to continue with the conquest of the dar-al-Harb.
Indeed, this situation is written into the Koran itself in ways which put the Old Testament to shame. Whereas the Israelites conquered themselves a homeland and proceeded to defend it, the Koran writes conquest and conversion into the very fabric of the religion, as from Mohammed’s days forward they were a religion of conquest. It is not clear to me that there is an available mechanism to change this. Unlike Christianity, it is the explicit injunction of the Koran that Islam value the pronouncements of living priests over that of dead ones, but this does not extend to the pronouncements of Mohammed, whence all of the Koran flows. Since it is with the pronouncements of Mohammed that we, the civilized west, have issue, we must accept that there may not be a way short of the extermination of Islam to permanently resolve the issue.
There are, to be certain, what we would call moderate Islamics. There is even, in modern Turkey, a secular state dominated by Islam. However, the continued existence of Turkey as a secular nation has been anything except easy since it’s creation after World War I. It has several times required the Turkish army to support governmental change or even to take over and run the country itself. I do not know how the meme that “Turkey is a secular nation” became engrained in their army and officer corps to the extent it has, but would be fascinated to learn it, if someone can point me at a good source or six. The process whereby it occurred could bear serious examination with an eye to adapting it elsewhere.
But despite the singular example of Turkey, the rest of the Islamic world remains locked in a jihad mindset, which if somewhat analogous to the Christian crusades on medieval times, both predates it and is much stronger in both religious and cultural senses of the term (Christians have always believed that a crusader who is evil will be banished to realms of punishment in the afterlife. Muslims do not and never have; the act of jihad is, in itself, a redemption). If individuals do not wish to join the jihad themselves, they are nonetheless required to admire and support those who do. Jihadists are to be allowed to preach, to convert, and to recruit. To do otherwise is contrary to the teachings of Mohammed, and woe betide the secular leader who wishes to hinder it, as the Saudis are discovering right now.
For us to win the war on terror without necessarily exterminating all Muslims, this has to change. And this reform can only come from within Islam. I have seen a few encouraging signs, but not nearly enough.
For those of Islam reading this, I do not wish a war of extermination between us. Despite all of the problems I see with Islam, it has aspects of tolerance and moral teaching lacking in many other faiths, including Christianity. I would like to see a broader understanding of your faith worldwide. But it must be done by the peaceable exchange of ideas, and those of other mind must have equal opportunity to convert you to their point of view. Your co-religionists cannot be permitted to continue jihad, and if you conspire with and support them, I must consider you their ally. It is not enough that you remain silent. You must remove the doubt that silence allows, and stand with the forces of civilization and tolerance for all, or with the forces that wish to bring the world back under the dominion of a priesthood that still has not left the dark ages behind. If you stand on one side, you will be among our most valued citizens. If you stand on the other, giving us a choice between submission and a life lived according to precepts that hardened in the eighth century, or death, then you must be stopped. All we ask is that you forswear the idea of conquest in the name of your religion. This is something that every other major religion has managed. It is now your turn.
