Many people get confused between small ‘a’ atheism and Atheism.
atheists (small a) do not believe in the divine. Even as a non-christian, I may have an opinion that believes they are being willfully blind, but that’s okay. Turn it around 180 degrees, and they think I’m hallucinating – seeing things that don’t exist. The vast majority have developed an ethos that may differ from mine, but deals with what is and is not ethical behavior in a manner consistent with civilized behavior. I have several atheist friends and acquaintances. They’re willing to live and let live. We don’t have religious quarrels.
Atheists with a capital A believe with all their heart and mind (no soul, by definition) in a particular religion. According to their beliefs, followers of other religions are weak minded superstitious fools, if not actively Evil and Subversive, and they are bound and determined to bring us all to See The Truth Of Their Way. In all ways, including the presence of a deity, these people are practicing a religion of intolerance. To them, those of other religions are Infidel, and must be converted, or if that fail despite best efforts, be prevented at all costs from passing our weak-minded foolishness and Evil to the next generation. Because they are often able to camouflage their agenda behind the aegis of a country and society that is constitutionally neutral on religion, capital-A Atheists do a lot of damage. In many circumstances, they can be hard to distinguish from “small a atheists” and those of other religions who have learned to live and let live. There are only a few ways to reliably reveal capital A Atheists, and you know, until they start in on how everyone has to follow their preaching, usually no need. This is a matter of faith, and if anyone could prove their faith to be the Truth it would no longer be faith; instead it would be science and the opposite would be denial. Mostly, I consider Capital A Atheists to be weak in their faith, as they seem to be incapable of following it unless everyone else does, as well. Do not mistake them for small ‘a’ atheists, either. A small ‘a’ atheist is willing to live and let live – their faith is strong. Capital A Atheists do more damage to the religiously neutral cohesion of our society than any fundamentalist bible thumper or Islamic extremist, because their religion teaches that there must be no restraint in the pursuit of removing that Evil superstition called religion from the face of the earth. That they do not realize they do it in the name of an intolerant religion of their own is one of the supreme ironies of life I have thus far encountered.
Asset and Income Rentals
I found this article by Ken Harney in the Sunday 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
Production Metrics versus Consumer Metrics
When I originally wrote this, every day I was passing by another real estate office where the agent had a big banner outside “I SOLD 101 HOMES IN 2004!”
This is what is called a production metric, and this one sounds fairly impressive at first glance, right?
The question I want to ask is how good the price was for the seller. Anybody can sell homes quickly by pricing them 10% under the market. Last year’s market was a hot seller’s market. In some neighborhoods, a monkey could have sold it for $20,000 over the asking price.
Is there a general “did you sell it for a good price?” metric? Not really. The best I can come up with is whether the appraiser has difficulty getting value to support the sales price so the loan can fund. If the appraisal comes in less than the sale price, the loan will be based off of the appraised value, rather than sale value, and so whereas this is always a difficult situation to be in, that your sale in in this situation says that your agent really did get you a good price. It’s comparatively rare, and with the buyer’s market we have now, practically non-existent.
Production metrics of this nature are easy to game. When I worked in the financial planning business, the metric used was GDC – Gross Dealer Compensation. How much your firm got paid because of your work. Problem was, it always has two components: how much business you really brought in, and how much turnover there is in your clients accounts. I know people who work at the “no load” fund houses, also. That’s their metric as well.
It’s a good metric to have. Firms that don’t get paid enough, don’t stay in business. But, as a consumer, it’s not precisely the sort of metric you want your financial planner to be judged on, and neither of these components measures anything important to you. Actually, I take that back. If there’s a high ratio of turnover in the client account, it’s always bad. There’s always the temptation to call an existing client and sell them the “hot new investment” than it is to generate new business. If I was shopping for a planner, I’d look for a low ratio of Gross Dealer Compensation to total assets under management.
Matter of fact, there really isn’t a metric in the investment world to measure how good an investment person is on any objective scale. What I’d really like to know is something like the return on investment of their lowest 25 percent of clients and highest 25 percent of clients, and compare that market averages and each other. This would tell me things like “How much (of any gain or loss) is the environment of the market, and how much is them?” and “Are they giving consistent advice?” (Low spread = yes, high spread = no). And not one firm I’m aware of computes this information. Not to pull any punches, what they are all set up to reward is sales ability, not investment genius.
The same can be found in real estate. There are any number of production metrics, but none of “Did Agent A’s clients get the best price?”, or on the purchase side “Did Agent B’s clients pay no more than they needed to?”
Nonetheless, here are a couple of other ideas. If everything I sell is bought by real estate agents acting for themselves, it’s not a good sign. The average real estate agent is buying property because the price is below market. They think they can re-sell for a profit, and it’s usually not a little one. They’re probably not interested in the property that doesn’t have immediate equity built in.
If everything I sell is back on the market within a few months for a higher price, that’s also not a good sign. That also means it was probably priced below the market.
The agent I talked about at the beginning of this article? I picked up a flyer listing about a third of those sales (thirty-two). Then I went to MLS and did a little search. Over half (18) were back on the market within 6 months for much higher prices. Almost forty percent (12) of total number of new owners identified themselves as being owned by licensed real estate agents on the listing. Seven been subsequently resold for at least a 10% profit, closing within three months of the original sale, even in what became a softening market. Only three are still active. The rest have sold, all at a significant profit, even in this market.
So now tell me, does this agent’s “101 houses sold” seem like something that would cause you to want to do business with them?
Didn’t think so.
Caveat Emptor
How to Use The Consumer Information Here
Yesterday, I checked my referral logs and found an article where somebody was essentially saying “If you want to be depressed, go read this site and then go rent somewhere for the rest of your life”.
I can understand where the sentiment is coming from, particularly if they were of the sort of person who wants to meander around occasionally looking at houses until they find one they like, then sign a couple of papers and move in. Lest it not be obvious to you, these are the elements of disaster. I would never put an offer in without looking at at least ten to fifteen properties in the area, without aggresively shopping the mortgage market, or without taking positive steps to insure that I have at least as much leverage over the service providers as they do over me.
The fact is that for most people, the largest transactions of their life are all going to be real estate related. When the average transaction is in the hundreds of thousands of dollars, and those transactions are so complex as to defy understanding by non-professionals, you have the elements for a system that’s going to suffer abuses. Many past abuses have been corrected through the passage of legal impediments, but many others remain, and some are illegal but keep happening anyway (See my article on “What to beware in Third Party Services linked at the bottom of this article).
What I am trying to do here is give you the insider’s appreciation for what goes on (although not the professional’s specialized knowledge. It may not be “rocket science”, but to pretend you can pick up everything a working professional learns and gets exposed to every day by reading a few articles would be false, and of no service to you). With this information, you can debunk the worst of the nonsense that you are told and get a better bargain for yourself no matter who your real estate agents and loan providers and financial planners and whatnot are. I am writing about knowledge that you need to have to understand the system, and I’m not pulling any punches about what goes on, anywhere in the transaction. I’m trying to show you limitations and blind spots in the information you may receive, and show you strategies that put you in a stronger position. Most of the articles I have written thus far pertain to real estate and mortgages, but this applies to other areas I intend to work in as well.
So if you’re the sort of person who prefers to go on in an “ignorance is bliss” state of mind, the education may be disturbing. Indeed, many people seem determined to go about their real estate (and other) transactions in this state of mind. They resist when I attempt to educate them in the realities of the market, figuratively in the same vein as people who put their hands over their ears and say “la-la-la! I am not listening! la-la-la! I am not listening!” It’s like they want to get taken, or at least not having to think about it is worth more to them than the money they’re being taken for. Since the money they’re being taken for can easily go into five figures whether it’s a purchase or a refinance, I find this difficult to believe. If you’re making that much, you shouldn’t need a loan.
Nobody does loans for free. Nobody does real estate for free (nobody does financial planning for free, legal advice for free, etcetera). “Free” is likely to be the most expensive service of all (This is different from at such a rate that yield spread pays all costs). If you’re of the school that forewarned is forearmed, what you’re reading here should give you the information you need to guard yourself against the deceits in the system. I’ve done lists of “red flags,” warning signs not to do business there, “Questions to ask” that you can print out and take with you, “Salesgoodspeakian to English,” debunking of pat phrases used to mislead you and what they really mean. I’ve given you strategies (apply for back up loans, order the appraisal yourself, don’t sign exclusive buyer’s agreements, etcetera) that give you more leverage down the line. I’ve gone through what real closing costs are, what points are, and warned you of the dangers of shopping for loans or real estate by what they tell you the payment will be. Most importantly, I’ve shown you how to keep control of your transaction by being aware at the start of the process what the likely bumps are going to be.
Not everyone in the business does everything I’ve warned you about. There are ethical providers out there; people like myself who will walk away from business or tell clients the pitfalls if something is not in the client’s best interest. You can find us if you look for us. Nor are those who practice otherwise necessarily evil. Real Estate, financial planning, and many other fields are set up such that someone new in the business learns from somebody experienced. In many cases, they’ve been told “This is the way things are,” and they just don’t know any better. The person who taught them didn’t know any better. It is my aim to ensure that people “know better.” The change is not going to come from within the industry – the system is set up for their best advantage, and any one agent or loan provider unwilling to toe the industry line is at a competitive disadvantage, and their business is likely to fail. It’s kind of the tragedy of the commons: their own individual behavior shows them nothing to gain, and everything to lose, by full truthful disclosure, and where there are people who do it anyway, we are comparatively few. Therefore, the change must come from outside the industry. So by being knowledgeable consumers and helping yourselves, you provide impetus for practitioners to reform their practices for everyone. It may take a long time, and it may never be complete, but if it’s never started I can guarantee it won’t get done.
Exclusive versus Non-Exclusive Buyer’s Agent Agreement
From an email:
I was in the process of buying and selling the house when we saw a FSBO house we liked was for sale. But sale fell through, which is a good thing anyway because of contigency on our house. But I also suspected it failed ecause the seller refuses to pay commission to our buyer agent.
My question is that this real estate agent that would represent us as a listing agent is also a buyers agent. However, I had another friend look into the contract and the buyer’s agent agreement is valid until December 31, 2005. So that means anytime we find a house, he will be paid? We do the work to find a house and he gets paid? It didn’t strike to me as ethical or fair. It will simply takes us off the real estate market until January 1, 2006 when we can start all over with a clean slate. Correct?
We don’t think it should’ve been in effect until December 31. It should be in effect only for that FSBO house we liked, and if the deal falls through, then his job as a buyer’s agent also stops.
Am I dealing with a greedy real estate agent or is this typical?
Can I have one agent to sell our house and another agent that represents us to buy a house?
This depends upon the nature of the agreement you signed with him. I use non-exclusive buyer’s agreements, which basically say that if I introduce you to the house, then I get paid when you buy it. Others use exclusive buyer’s agreements, where they get paid no matter who finds the house.
If I have an exclusive buyer’s agreement with you, then I am going to get paid on any house you buy. If I have an non-exclusive agreement, I will only get paid if I introduce you to the house, and you may have any number of non-exclusive agreements in effect as long as you are careful to inform each agent you are working with that you have previously been introduced to a given property, and therefore, any commission that takes place will be paid to the other agent. All of the forms used by California Association of Realtors state that you will pay a commission to the agent if the seller won’t, so an agent has comparatively little stake in which house you buy, as long as you buy one through them. This gives them the largest possible incentive to work on your behalf, without binding you to one particular agent who rather be working with another client who came along with a bigger budget, and therefore a bigger commission in the offing. When looking for homes to show, ethical agents won’t seek out a For Sale By Owner (FSBO) for reasons I go into near the bottom of this article (basically, protecting your pocketbook), but these do not apply if you, the client, choose to make an offer on a FSBO.
I suspect that you signed an Exclusive Buyer’s Agent Contract with him, something I would not do unless he’s providing you with lists of foreclosures or something. Once such a thing is signed, that agent is going to get paid no matter what house you buy during the agreed upon period. I would never agree to either a listing or buyer’s agents period longer than six months. This gives the agent plenty of time to sell your house or find you one. So if the agreed upon expiration is six months from now, then if you buy before then, that agent will be paid – out of your pocket, if not the seller’s.
There are two competing factors here. One is your desire not to pay for services not provided for this particular transaction, versus the agents desire to get paid if they actually do the work anyway. If they serve as your negotiating agent, or help expedite the transaction by providing services, they are ethically entitled to be paid whether or not they introduced you to the property. On the other hand, if all they do is obstruct, there is neither a legal nor an ethical reason why they should be paid. Depending upon the nature of their obstruction and how much it cost you, you may wish to contact an attorney to recover, or your state’s Department of Real Estate
Sad to say, there are agents out there looking to line their own pockets in any way they can. A better agent wants to get paid, but realizes they will make an excellent living – better in the long term – by putting your interests first. Without more evidence, I cannot say for certain, but it appears at first glance that this agent had you sign an exclusive buyer’s agent agreement in order to represent you in a transaction you found. I am not aware of any regulation prohibiting this, but it does seem like it’s excessive from a neutral viewpoint. It is probably not voidable, however.
There are standard California Association of Realtors (CAR) forms for both exclusive and non-exclusive buyer’s agents agreements. Look up at the title of your copy. If it says “Exclusive”, you are stuck with this person. If it says “Non-exclusive” you may do business with anyone you please, as it applies only to those properties this particular agent works on. Of course, many agents and brokers use non-standard forms for this, as the standard CAR forms are readable and understandable by anybody. If they want to throw curves, non-standard forms are one of the best ways to do it.
As to whether you are dealing with a greedy agent or if this is typical, the truth lies somewhere in the middle. As in all sales occupations, the idea of locking up your business creates powerful motivations for them to have you sign exclusive agreements. There are nonetheless, people such as myself who feel that if I am not helping you, I don’t deserve to be paid, and let someone else have a shot. But if I’ve got an exclusive agreement with you, I should be providing daily foreclosure lists, copies of all new listings, or at least something that goes above and beyond sitting on my hands.
Many agents want you to sign an exclusive buyer’s agent agreement before they do anything else. Unless you’re getting something special out of it, you shouldn’t sign one at all. Offer to sign a non-exclusive buyer’s agent agreement – that way you have leverage over them, not them over you. They are motivated to work for you and find you a property that is attractive to you at a price you want to pay, because if they don’t, someone else will. Even the best agent can’t find stuff that doesn’t exist, like a 3 bedroom home in La Jolla for $250,000, but if it does exist I’m going to work to find it first, and I will get paid for it because our agreement says I will get paid if I introduce you to it. If you have signed an exclusive agreement, there is no particular hurry for them to help you.
Finally, listing agreements for sale are (in general) individual agreements for a particular piece of property for a particular period of time. As long as there is no more than one listing agreement per property in effect at a time, you can have any number of different agents for sales, even if you have signed an exclusive buyer’s agreement for purchases.
Please let me know if this does or does not answer all of your questions.
Able Danger, Databases, and the Right to Privacy
While I was reading up on the Able Danger controversy this morning, I ran across some side information on a recurring theme of mine. I want to bring this to the attention of my readers:
From the CNN interview of Colenel Shaffer
What I did was I married the land information warfare activity, LIMA, at Fort Belvoir, Virginia, an Army unit, Army capability, to the special operations command for the purposes of this exercise, this targeting exercise of al Qaeda. What the LIWA did — and it was their ability to go through massive amounts of open-source data, 2.5 terabytes, and look for patterns that related to previously-known terrorists. It was that information then which popped up…
S. O’BRIEN: So, by trolling the Internet and LexusNexus, things like that, I think that’s what you mean by open source data? Am I right about that?
SHAFFER: Open source — anything that’s not a classified database. We’re talking about commercial databases, financial databases. Anything that’s out there that relates to the real world.
And let me be specific on this. S. O’BRIEN: And his name pops up?
SHAFFER: Well, yes, because terrorists live in the real world. As we recognize from the London bombings, there’s a picture of the terrorist in a whitewater rafting trip. They live in the real world just like we do. They plan in the real world.
S. O’BRIEN: What were those documents that — give me a sense of what kinds of documents targeted Mohamed Atta a year before 9/11 as a potential terrorist.
Look at this. This man is telling you that you have no privacy. Just the illusion. If someone wants to find out about you, they can. So don’t do anything that you wouldn’t want to see on the front page of every paper in the world.
Now, this illusion of privacy allows for a lot of evil things to go on. Identity theft. Cons and scams. Evil men and women going from place to place to place to catch new victims. It allows the powerful to protect their privacy legally while invading yours in fact. They can prevent us from looking at them; it is much easier for them to look at us.
It also allows for the perpetuation of more hypocrisy than most people think about. If it were legal and trivial for me to find out if Mr. Rich or Ms. Powerful violated any number of vice statutes (drugs, prostitution, gambling, blue laws, etcetera), how long would the police be able to hassle ordinary citizens on these points? How long would vices of personal choice like this remain illegal? What would this do to the economic underpinnings of organized crime and gangs? Why should anyone pay Mr. Criminal Drug Dealer whatever the street price of illegal drugs is when they can go buy it at the pharmacy? How much would we save on all the enforcement activities and incarceration? How much would we lower theft, burglary, and mugging when the stuff is no more expensive than aspirin?
On the economic front, imagine if every Good Faith Estimate for every loan that every loan officer ever did was freely available to prospective clients, along with the subsequent HUD-1 when the loan funded. Prospective clients could see if a loan officer did or did not have a track record of delivering what they said they would. Imagine if every real estate transaction had a subsequent issues attachment in a public file, and you could search the database for past performance by an agent, by an owner, or by a property. Imagine if every piece of investment advice could be tracked on a database by who gave it, who followed it (and whether the person giving the advice was among them), and what the results were. The deadwood and parasites would vanish from all three of these professions. Con games and fraud would shrink to a fraction of their current size. Real Estate and loan transactions would have large portions of their costs demolished.
This is not a complete list, by any means. But I’ve long since decided that this illusion of privacy is far too expensive. It allow the powerful the ability to restrict our liberty while maintaining theirs. It allows the criminal to steal our property. It allows the incompetent to remain anonymous, and the con man to prevent their victims from being warned. It forces us to spend our tax money places it doesn’t need to be spent. It allows too much of the way we spend our tax money, and the process by which it is allocated, to remain unscrutinized. It allows the very process by which our tax money is collected to remain unscrutinized, and if potential IRS abuse of the tax code doesn’t bother you, or abuse of the tax code by those who can afford “protection money” (i.e. lawyers, accountants, etcetera), then something is wrong.
Bottom line: This illusion of privacy allows those who would do us harm to walk among us undiscovered. It allows those with power the ability to harass those who aren’t hurting anyone. It allows those who have harmed us to escape what should be the consequences of their actions.
This is one book with a very worthwhile explanation of the issues. I’ve been hitting this subject since before it came out, but Mr. Brin does a more comprehensive job here with these issues than I have seen elsewhere. It also discusses what some limits to transparency should be.
Take your time and decide which is more important to you: Being able to pretend in public, or not having to pretend because no one else can, either. Lies, Hypocrisy, and Demogoguery to distract us, or public disclosure and scrutiny of real issues. Criminals and incompetents and rip off artists being able to pretend in public that they are fine upstanding citizens with our interests at heart, or being carted off to jail, losing their licenses, and just plain being put out of business? Being able to escape accountability for your actions, or being able to ensure that everybody is accountable.
I know which side I’m on.
Saving Money by Being Realistic About Your Mortgage
If you haven’t heard about the thirty year fixed rate mortgage, welcome to planet earth and I hope we can be friends.
The thirty year fixed rate loan seems to be the holy grail of all mortgages. It’s what everyone wants, and what they’re calling about when they call me to talk about refinancing a loan.
Well, it is secure, and it is something you can count upon today, tomorrow, and next week, etcetera, until the mortgage will theoretically be paid off.
The problems are three fold: First, it is the most expensive loan out there. It always has had the highest rate of any loan available, and always will (Except for the 40 year loan which is making a comeback for no particularly good reason). This means you are paying more in interest charges every month for this loan. Second, according to data gathered by our government, the vast majority of the public will refinance or move about every two years, whether they need to or not, paying again for benefits they paid for last time, and didn’t use. This is essentially paying for 30 years of insurance your rate won’t change, and then buying another 30-year policy two years down the road, then another two years after that, etcetera. Finally, because it is always the highest rate and this is what everyone wants, many mortgage providers will play games with their quote. They will quote you a rate on a “thirty year loan”, meaning that it amortizes over thirty years, not that the rate is fixed the whole time. Or they’ll even call it a “thirty year fixed rate” loan, but the rate is only fixed for two or three years. Every time you hear either phrase, the question “How long is the rate fixed for?” should automatically pop into your mind and proceed from there out of your mouth.
The fact of the matter is that there are other loans out there that most people would be better off considering. In the top of the loan ladder “A Paper” world, there are thirty-year loans that are fixed for three, five, seven, and ten years, as well as interest only variants and shorter-term loans (25, 20, 15, 10, and even 5 year loans). The shorter-term loans tend to be fixed for the whole length, but of course they require higher payments.
I personally would never consider a 30 year fixed rate loan for myself, and here’s why. First, the available rates go up and down like a roller coaster. They are the most volatile rates out there. Given that I will lock it as soon as I decide I want it, it’s still subject to more variations that any other loan type. Back when I bought my first place, thirty year fixed rate loans were running around ten and a half percent. Five years before that, they were fourteen percent and up. Second, having some mortgage history, I can tell you I refinance about every five years. Why would I want to pay for thirty years of insurance when I’m only going to use about five?
Even in 2003 when I could do a 30 year fixed rate mortgage at 5 percent without any points, I could do a 5 year ARM (fixed for five years, then goes adjustable for the rest of thirty) for four percent on the same terms. I keep using a $270,000 mortgage as my default here, so let’s compare. The 30 year fixed rate loan gives you a payment of $1449, of which $1125 is interest and $324 is principal. The five-year fixed rate loan gives me a payment of $1289, of which $900 is principal and $389 is principal. I saved $225 in interest the first month and have a payment that is $160 lower, while actually paying $65 more in principal. What’s not to like? If I keep it the full five years, I pay $51,549 in interest, pay down $25,791 off my balance if I never pay an extra dollar, as opposed to paying $64,903 in interest on the thirty year fixed rate loan, while only paying down $22,062 of my balance – and I’ve got $13,500 in my pocket, as well as the $13,300 in interest expense I’ve saved and $3700 lower balance. If I choose the five-year ARM and make the thirty-year fixed-rate payment, I cut my interest expense to $50,539 while paying off $36,426 of principal (remember, every time I pay extra principal it cuts what I owe, and so on the amount of interest I pay next month.). If I then pay $3500 to refinance, adding it to my balance, I have saved many times that amount. I still only owe $237,074, as opposed to the 30 year fixed rate loan, which has a balance of $247,938. That’s over $10,800 off my balance I’ve saved myself, plus over $14,300 in interest expense, simply by realizing that I’m likely to refinance every five years. And the available ARM rates are more stable as well as lower. From the first, I haven’t had one with a rate that wasn’t in the sixes or lower. Finally, if I watch the rates and like what I see and so I don’t refinance, I’m perfectly welcome to keep the loan. And all of this presumes that the person who gets the thirty-year fixed rate loan doesn’t refinance or sell the home, which is not likely to be the case. Statistically, the median mortgage is less than two years old, and less than 5 percent are five years old or more.
At rates prevailing the day I wrote this, I can get the same loans at 5.75 and 5.125 percent (without points), respectively – which is about the narrowest I’ve ever seen the gap. Assuming a $270,000 loan, for the 30 year fixed rate loan that gives a payment of $1576, which five years out means that I have paid just under $74,996 of interest, $19542 of principal and have a balance of $250,457. If I choose the 5 year ARM, my payment is $1470, so if I keep it five years I’ve paid $66,581 in interest, $21,626 in principal, and my balance is $248,373. Plus I’ve kept $6300 in my pocket, or alternatively, if I used the $106 per month to pay down my loan, I’ve only paid $65,713 in interest, have paid $28,826 in principal, and have a balance of $241,174. Even if I then add $3500 in order to refinance and the thirty year fixed rate does not, I’m still ahead $5700 on my balance plus the $9200 in interest I’ve saved, and the chances of the person who chose the thirty year fixed rate loan not having refinanced is less than 5%.
ARM mortgages are not for everyone. If you’re certain you are never going to sell and never going to refinance, it makes a certain amount to sense to go for the thirty year fixed rate loan. And of course, if you’re going to lie in bed awake every night worrying about it, the savings work out to a few dollars a day and my sleep is worth more than that to me, and so I’m going to presume it is to you, as well.
But what most people should be trying to do is cut interest expense while not adding any more than necessary to the loan balance. As I’ve gone into elsewhere, money added to your balance sticks around an awful long time, usually long after you’ve sold or refinanced, and you end up paying interest on it, as well.
So even though various unethical loan providers tend to quote you rates on loans that aren’t really what you are looking for if you want a thirty year fixed rate loan, they’re actually doing you a favor in an oblique and unintentional way, and somebody who is up front about offering you a choice between the thirty year fixed rate loan and an ARM is quite likely trying to help you. Consider how long most people are likely to live in their home (average is about nine years right now), how long they’re likely to go between refinancings (less than two years), and your own mindset. It is quite likely you can save a lot of money on ARMs. Why pay a higher interest rate in order to buy thirty years of insurance that your rate won’t change, when you’re likely to voluntarily abandon it about two years from now anyway? Why not just buy less insurance in the first place?
Caveat Emptor
UPDATE: I had someone question the numbers in the paragraph comparing the 4% 5/1 ARM against the 5% 30 year fixed rate loan, both of which were available at the same time in the summer of 2003. Now I have had it pointed out to me that I made a mistake in calculations somewhere. The numbers for interest and balance savings are correct, but those for payment savings are $9623, not counting the time value of money. Your savings are not the sum of the three numbers. It depends upon your point of view as to which is most important to you. The interest savings and the dollars in your pocket plus lowered balance are essentially the same dollars. They are two sides of the same coin. It’s just a question of what you’re most interested in. Not that $13,000 plus is chump change, even on this scale, and no matter how you look at it, you’re $13,000 plus to the good. You’ve either got $9623 in payment savings plus $3670 in lowered balance, both of which are “in your pocket” in one sense or the other. You wrote checks totaling $9623 less, and you’ve got $3670 in lowered balance, which translates to increased equity – not to mention that you’re not paying interest on it any longer. Or you could look at it as simply 13,000 plus in interest you didn’t pay. Most folks will lose some of the interest in the form of taxes they don’t pay, but 1) That’s never dollar for dollar and 2) I wasn’t going that deep when I wrote this article.
Mortgage and Housing Market Virtues
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?