Many folks have no idea how qualified they are as borrowers.
There are two ratios that, together with credit score, tell how qualified you are for a loan.
The more important of these two ratios is Debt-to-Income ratio, usually abbreviated DTI. The article on that ratio is here. The less important, but still critical, ratio is Loan to Value, abbreviated LTV. This is the ratio of the loan divided by the value of the property. For properties with multiple loans, we still have LTV, usually in the context of the loan we are dealing with right now, but there is also comprehensive loan to value, or CLTV, the ratio of the total of all loans against the property divided by the value of the property.
Note that for instances where you may be borrowing more than eighty percent of the value of the home, splitting your loan into two pieces, a first and a second, is usually going to save you money. (See here for an example)
The maximum loan to value ratio you’re going to qualify for is largely dependent upon your credit score. The higher your credit score, the lower your minimum equity requirement, which translates to lower down payment in the case of a mortgage.
Credit score, in mortgage terms, is the middle of your credit scores from the 3 major bureaus. If you have an 800, a 480, and a 500, the middle score, and thence your credit score, is 500. If the third score is 780 instead of 500, your score is 780. If you only have two scores, the lenders will use the lower of the two. If you have only one score, most lenders will not accept the loan. Now, I’ve never seen scores that divergent, but that doesn’t mean it couldn’t happen. Usually, the three scores are within twenty to thirty points, and a 100 point divergence is fairly unusual. Despite what you may have heard or seen in advertising, according to Fair Issacson the national median credit score is 720. See here for details.
In order to do business with a regulated lender, you need a minimum credit score of 500. There are tricks to the trade, but if you don’t have at least one credit score of 500 or higher, you’re going to a hard money lender or family member.
Now, exactly what the limits are for a given credit score is variable, both with time and lender, even when you get into A paper. Subprime lenders will go higher than A paper, but the rates will also be higher. Nonetheless, there are some broad guidelines. At 500, only subprime lenders will do business with you, and they will generally only go up to about 75 percent of the value of the home. A few will go to 80 percent, but this is not a good situation to be in.
Currently, at about 580 credit score, you can still find subprime lenders willing to lend you 100 percent of the value of the home, providing you can do a full documentation loan. At 580 is also where Alt-A and A minus lenders start being willing to do business with you, although they won’t go 100 percent until higher credit scores.
At 620, the A paper lenders start being willing, in theory, to consider your full documentation conforming loan. They won’t do cash out refinances or “jumbo” loans until a minimum of 640, but they will do both purchase money and rate term at 620 or higher. They may not go 100 percent of value until 680, but they will go about eighty or maybe higher.
At 640 is where subprime lenders will start considering 100 percent loans for self-employed stated income borrowers. Not too long ago, I could find these down to 600, but the lenders have been raising these requirements of late. For w2 stated income (essentially, people who get a salary and don’t want to document income) the minimum for 100 percent is about 660 now. Mind you, if you can document enough income, it is in your interest to do so.
660 is where A paper will start considering conforming stated income loans. They may not go above 75 percent of value, but they won’t just reject you out of hand. At 680, they will consider jumbo stated income.
Now, it is to be noted that just because you can get a loan for only so much equity, it does not follow that you should. Whereas the way the leverage equation works does tend to favor the smaller down payment, at least when prices are increasing, it can also sink your cash flow. So if the property is a stretch for you financially, it can be a smarter move to look at less expensive properties to purchase. I have seen many people recently who stretched to buy “too much house” only to lose everything because they bought right at market peak with a loan they could not keep up. Many of these not only lost every penny they invested, but also owe thousands of dollars in taxes due to debt forgiveness when the lender wrote off their loan.
There are other factors that are “deal-breakers”, but so long as your debt to income ratio is within guidelines and your loan to value is within these parameters, you stand an excellent chance of getting a loan. All too often, questionable loan officers will feed supremely qualified people a line about how they shouldn’t shop around because they’re a tough loan and “you don’t want to drive your credit score down.” First off, the National Association of Mortgage Brokers successfully lobbied congress to do consumers a major favor on that score a few years back. All mortgage inquiries within a fourteen day period count as the same one inquiry. Second, the vast majority of the time it’s just a line of bull to keep people from finding out how overpriced they are or to keep you from consulting people who may be able to do it on a better basis. I’ve talked to people with 750 plus credit scores, twenty years in their line of work, and a twenty percent down payment who had been told that, when the truth is that a monkey could probably get them a loan! By shopping around, you will save money and get more information about the current status of the market.
Caveat Emptor
Loan Qualification Standards – Debt to Income Ratio
Many people have no clue how qualified they are as buyers, or borrowers.
There are two ratios that, together with the credit score, determine how qualified someone is for a loan.
The first, and by far the more important, is debt to income ratio, usually abbreviated DTI. This is a measurement of how easy it will be for you to repay the loan given your current income level.
The debt to income ratio is measured by dividing total monthly mandatory outlays to service debt into your gross monthly income. Yes, due to the fact that the tax code gives you a deduction for mortgage interest, you qualify based upon your gross income. This ratio is broken into two discrete measurements, called front end ratio and back end ratio, for underwriting standards. The front end ratio is the payments upon the proposed loan only (i.e. principal and interest), whereas the back end ratio adds in all debt service: credit cards, installment loans, finance obligations, student loans, alimony and child support, and property taxes and homeowner’s insurance on the home as well. The front end ratio is almost ignored; I cannot remember an instance of when front-end was a deal-breaker. The thing that will break most loans is the back end ratio, to the point where some lenders don’t really care about the front end ratio anymore.
Now, as to what gets counted, the answer is simple. The minimum monthly payment on any given debt is what gets counted. It doesn’t matter if you’re paying $500 per month, if the minimum payment is $60, that’s what will be counted.
“Can I pay off debt in order to qualify?” is a question I see quite a lot and the answer depends upon your lender and the market you’re in. For top of the market A paper lenders, who have to underwrite to Fannie Mae and Freddie Mac standards, the answer is largely no. If you pay off a credit card where the balance is $x, there’s nothing to prevent you going out and charging it up again. Even if you close is out completely, the thinking (borne out in practice, I might add) is that you can get another one for the same amount trivially. “Won’t they just trust me to be intelligent and responsible?” some people will ask. The answer is no. Actually, it’s bleep no. A paper is not about trust. A paper is about you demonstrating that you’re a great credit risk. Even installment debt is at the discretion of the lender’s guidelines. If they believe that what you really did was borrow money from a friend or family member who expects to be repaid, expect it to be disallowed. Therefore, the time to pay off or pay down your debts is at least 30 days before your credit is run and before you apply for a loan.
For subprime loans, the standards are looser because the lender controls the money. As long as they can see where the money is coming from, they will usually allow the payoff in order to qualify.
Now many folks think that stated income loans don’t have a DTI requirement. They do. As a matter of fact, stated income is even less forgiving than full documentation loans in this regard. As I keep telling folks, for full documentation, I don’t have to prove every penny you make, I only have to prove enough to justify the loan. If what I proved before falls short, but if the client has more income, I can always prove more. For stated income, we still have to come up with a believable income for your occupation, and then the debt to income ratio is figured off of that. Even if the lender is agreeing not to verify income, they’re still going to be skeptical if you change your story. “You told me you make $6000 per month three days ago. Now you’re telling me you make $7000 per month. Which is it? Please show me your documentation!” In short, this loan has now essentially changed to a full documentation loan at stated income rates. Nor are they going to believe a fast food counter employee makes $80,000 per year. They have resources that tell them how much people of a given occupation make in the area, and if you’re outside the range it will be disallowed. So you need to be very careful to make certain the loan officer knows about all the monthly payments on debt you’re required to make. Sometimes it doesn’t show up on the credit report and the lender finds out anyway. This has nothing to do with utilities (unless you’re in the process of paying one of them back). That’s just living expenses, and you could, in theory, cancel cable TV if you needed to. Once you owe the money, you are obligated to pay it back.
As for what is allowable: A paper maximum back end debt to income ratios vary from thirty-eight to forty-five percent of gross monthly income. I’m a big fan of hybrid adjustables, but they are, perversely, harder to qualify for under A paper rules than the standard 30 year fixed rate loan despite the lower payments. This is because there will be an adjustment to your payment at a known point in time, and you’re likely to need more money when it does. Note that for high credit scores, Fannie Mae and Freddie Mac have automated underwriting programs with a considerable amount of slack cut in.
Some things count for more income than you actually receive. Social security is the classic example of this. The idea is that it’s not subject to loss. Once you’re getting it, you will be getting it forever, unlike a regular paycheck where you can lose the job and many people do.
Subprime lenders will usually, depending upon the company and their guidelines, go higher than A paper. It’s a riskier loan, and you can expect to pay for that risk via a higher interest rate, but even with the higher rate, most people qualify for bigger loans subprime than they will A paper. Some subprime lenders will go as high as sixty percent of gross income on a full documentation loan.
Whatever the debt to income ratio guideline is, it’s usually a razor sharp dividing line. On one side you qualify, on the other, you probably don’t. If the guidline is DTI of 45 or less, and you are at 44.9, you’re in, at least as far as the debt to income ratio goes. On the high side, waivers do exist but they are something to be leery of. Whereas many waivers are approved deviations from guidelines that may be mostly a technicality, debt-to-income ratio cuts to the heart of whether you can afford the loan, and if you’re not within this guideline, it may be best to let the loan go. You’ve got to eat, you probably want to pay your utility bills, and you only make so much. Debt to Income ratio is there for your protection as much as the bank’s.
Caveat Emptor.
The Deposit
A search I just noticed asked the question “Who gets the deposit if escrow falls through?”
The theory of the deposit is that here is an amount of cash that the buyer is putting up as evidence of their ability to consummate the transaction.
This is a good question. I’ve only dealt with real estate sales in California, so I’m going to deal with it from a California perspective. California is a widespread model for real estate practices (as New York is for insurance), but I can’t speak to the specifics which states are and aren’t following this model and to what degree.
Most of what happens in real estate sales contracts has a default, but is subject to specific negotiation. In other words, there’s a standard way of doing it, but you can change that by negotiation with the other party. CAR has a specific set of forms that are encouraged, in order to make these questions somewhat more clear cut.
The standard here in California is that the purchase is contingent for seventeen calendar days, after which the buyer’s deposit will belong to the seller whether escrow closes or not. From the time the contract is accepted by both sides, the buyer has seventeen days to finish all inspections, and to obtain a commitment for acceptable financing. If they call it off within those seventeen days, they get the deposit back. If the purchase falls through later than the seventeen days, the seller is usually entitled to the deposit, within limits. The seller can’t just arbitrarily cancel the transaction on the eighteenth day and keep the deposit. The time specified in the purchase contract has to have expired, there must be evidence of bad faith dealing on the buyer’s behalf – something.
Let me make very clear that the seller is indeed giving the buyer something when the purchase contract is signed. To be precise, the exclusive right to purchase that property for a certain amount of time. There are expenses of selling that they must pay and that they don’t get back if you can’t carry through, not to mention expenses related to preparing to move, at least potentially having the house sit vacant, etcetera. They cannot conclude a purchase contract with anyone else while the current buyer’s contract is going on. If I’m selling, I insist upon retaining the deposit if the buyer can’t carry though. If I were to be unable to consummate a purchase, I certainly understand that the seller will retain the deposit in most circumstances.
Now the escrow company won’t just give the deposit to the seller. They are paid to be a neutral third party, to stand in the middle and make sure that everybody gets what everybody agreed upon, but it is not their place to settle a dispute. For that, you’re going to have to go through whatever dispute resolution process is appropriate. This can be mediation, arbitration, the courts, or possibly something else. You can spend a lot of money fighting what the contract says, but in the end you can also expect to have to live up to it, and likely to pay the other party’s costs as well as your own, so better not to fight something the contract says you should have done. The escrow company will often also charge a cancellation fee from out of the deposit, by the way. They do an awful lot of work, and if the transaction gets cancelled for whatever reason, they do not otherwise get paid.
Probably the number one reason for failed escrow is loan providers leading borrowers down the primrose path. “I can do that,” and no, they can’t. Unfortunately, I’ve never seen anyone able to recover damages from a failed loan provider.
You can change the standard contract by specific negotiation. If you’re a seller who wants to get the deposit no matter what on day 30, you can ask for that as a condition of the initial sales contract. In a hot market, this is easy to ask for and get, but in a buyer’s market, you are likely to lose the buyer. If you’re a buyer who doesn’t want to lose the deposit no matter what, you can ask to put that into the contract you propose, but most sellers, even in a buyer’s market, are going to tell you to take a hike somewhere else. No big deal if it was “Hey, let’s make a bid on this and see how desperate they are!” A real problem if you fell in love with the property and just have to have it. Over-playing your hand in negotiations is as disastrous as under-playing, and I’ve seen people so intent on being Mr. (usually) Tough Negotiator that they diddled themselves out of an excellent transaction. In any case, being too sticky on the deposit is a good way not to get as good of a price as you otherwise might have. For a seller, you have this property and you want cash. You need somebody to agree to pay it – the cash is not going to materialize out of thin air. For a buyer, the whole idea is that this property is attractive to you for some reason, or you would not be making an offer. You are asking the seller to trust thousands of dollars to your ability to swing the deal as much as you are trusting their ability to deliver a clear title to a property without hidden defects.
Whether you are a buyer or a seller, once that contract is signed, you want to get cracking on whatever your obligations under it are. Get it Done. The alternative is that you’re likely to forfeit whatever rights to the deposit you may have had if you had been prompt. Just becuase Things Take Time in Real Estate Transactions is no excuse for you to waste time. Wasting time is expensive for everyone, and one of the strongest signs of a sour transaction I know. Buyers and borrowers pay increased loan and other costs, sellers lose money from delay. This is equally true in refinancing, by the way. The loan you are quoted today does not exist tomorrow unless you act on it today. In summer 2003, when rates hit fifty year lows, many people were in no hurry. They insisted upon thinking, in the face of evidence and testimony to the contrary, that the rates would always be there, and they lost out. If rates go down after locking, a good broker can usually get you better rates. If they go up, you’ve got the lock. If rates go up and you didn’t lock, you get the higher rates. Period.
But the deposit is definitely something that the buyer can owe the seller if the transaction falls through, and that’s as it should be.
Caveat Emptor
Investment Property and Sophisticated Users
The majority of the protections that folks have are aimed at helping non-professionals have a chance in the complex and nearly incomprehensible maze that is real estate. The legal presumption is basically that you are a babe in the woods, and can easily be led astray by the fast-talking real estate broker and the big bad mortgage lender. And actually, this isn’t too far off. I have seen enough to know that however bad a choice Negative Amortization loans are for 99 percent of the population, an unscrupulous agent and/or an unscrupulous loan provider can talk 95 percent plus of the public into getting one of them simply by accentuating the low payment and not mentioning the fact that your balance increases, among other things that most folks regard as inimical about them. Particularly in combination, each of them hoping for a big commission (the agent from a house beyond what the client can really afford, the loan provider from the associated loan), they reinforce each other’s credibility beyond all but the most skeptical of laypersons to withstand.
When you get into investment property, however, this isn’t just your personal residence any more. This is no longer something every living person needs, a place to live.
You are now intending to make money.
You are now in business. You are a businessperson. It does happen, of course, but it is difficult to have much sympathy for a businessperson who doesn’t know enough to conduct business of that nature. Some Poor Guy who wants to get in on the American Dream is entitled to significant legal protection against all the sharp and smooth operators out there. But once you get out of the realm of personal use and get into the realm of making money, now you are telling the world that you know something about this (or at least that you should know something).
You have promoted yourself into the realm of sophisticated user. The legal presumption is no longer that you are a babe in the woods, although you may be every bit as much of one as the person in the earlier example. But because you have promoted yourself to someone trying to make money, many of the protections and disclosure rules do not apply.
It’s not like you went out and got a real estate license (unless you did) or passed the bar, which automatically gives you the right to a broker’s license in most states. There are still significant protections even there. But if they wanted to push the point, your agent and loan provider could probably eliminate half the forms you’re asked to sign. The three day right of rescission goes away because instead of being presumed to require consultation with professional experts, you are presumed to be a professional expert. Why are you in the business if you’re not an expert?
Needless to say, this point has become quite the illuminator of experience for many folks who see others making money via real estate investments, and think, “That’s easy! I can do it too!” All too often, people who may be used to the protection afforded the general public get burned when they are presumed to be experts by the law. Not that the government has done a particularly good job of protecting the general public, but the sharks in those waters have to make it look reasonable. The sharks who swim in the waters of investment property have no such limitation. They talked you into a bad loan? For your own personal use, you have the three day right of rescission and many banking laws designed to require that the bank show something that can be construed as a benefit to you, the borrower. Lower payment, lower interest rate, something that persuades a judge that a rational person might have done this. The person with an investment property doesn’t have even that protection. So what if it leads to bankruptcy? You did it. You must have had some reason.
I am not a lawyer, and I am exaggerating a small amount for effect. Real Estate investments, handled correctly, can make you a humongous amount of money. The point I’m trying to make is that they can also lose the unwary a lot of money. The amount of loose money available in real estate for the picking is the lure for a large number of professional sharks.
Caveat Emptor
Annuities, Fixed and Variable
One of the most discounted investments available is the annuity.
An annuity can be thought of as the opposite of a life insurance policy. Instead of creating an lump sum of money, an annuity liquidates one by providing you instead with a stream of income.
The original idea is simple. Suppose you get a lump sum of money, and you have no immediate use for it. What’s more, you think you might waste it if it’s just sitting in the bank. So you decide to invest it with an insurance company, who will then pay you so much money per month, every month.
The real kicker, or reason for doing this, lies in the options for payoffs. These fall into three basic categories. Period certain, life, and life with period certain.
Period certain means you’ll get payments every month for however many years. If you die, your heirs get them. When that number of years is over, so is your payout.
Life payouts equally straightforward. You (or you and your spouse in joint life payouts) get those payments every month until you die. When you die, they stop. You could get hit by a bus the next month, or live another 150 years. However long it is, the payments continue for the full amount of time, and stop as soon as your life is over.
Life with period certain means that the payments will continue for your entire life, however long that is, but there will be a period of some number of years where if you are hit by that bus, your heirs will continue to get payments. This is highly useful to people who have minor children, who are thus assured that their children will continue to get something if they die.
The idea of either of these last two options is that you have an insurance company guaranteeing that you will not outlive the income you get from this money. This can be a very psychologically comforting thing for all sorts of people in all sorts of situations, who are thereby assured that they will have something to live on.
Annuities come in two flavors of beginning, immediate and deferred. Immediate means that here is this lump sum of money, annuitize me (start sending me a monthly check) right now. Deferred means I’m investing it with you, and I may invest more with you later, but let’s just let it grow for now as I don’t have any immediate need for the money. You can also withdraw money from a deferred annuity without annuitizing, but the tax treatment is not as favorable (see this article)
Annuities also come in two flavors of investment, fixed and variable. Fixed annuities are merged into the general assets and liabilities of the insurance company. You invest with them, they will guarantee you a fixed return, usually somewhere in the range of four to seven percent. Of course they turn around and invest your money and usually earn about 11 percent or so, but they assume the risk. The only risk you have is that the insurance company goes completely bust, but for this reason there are several rating services for insurance companies as to financial strength. One form of fixed annuity, Equity Indexed Annuities, are very popular right now with certain segments of the financial services industry, but any guarantee you can find in any fixed annuity can be found, usually in superior form with a superior product, in variable annuities. However, sales commissions for fixed annuities are much higher, so if you go to the insurance agent on the corner, you’re probably going to hear about a fixed annuity, especially if you don’t shop around.
In variable annuities, you assume the investment risk while the company still furnishes the insurance component. This is done via investing them in a set of mutual fund-like sub-accounts. Once annuitized, they make use of an assumed rate of return (ARR) on the underlying investment, which is usually between four and six percent. The higher an ARR you choose, the higher your initial payout, but if the results are less than ARR your payments can usually be reduced. Most if not all companies offering variable annuities do offer a minimum payout guarantee, and if your actual rate of return exceeds the ARR, your payments will be increased (indeed, this happens more often than not, within my experience). Variable annuities require not only an insurance license, but a securities license (NASD Series 6 or Series 7) in order to sell them, and are therefore usually purchased from financial advisors. The reason is because now you are assuming investment risk. I will caution the reader that while variable annuity sales commissions are not larger than advisor’s mutual funds, there is no reduction for higher investment amounts, so there may be incentive for some advisors to recommend variable annuities when mutual funds might be more appropriate. I have also seen “fee-only” planners take a fee for preparing an investment plan, then a commission for recommending these, where someone working on straight sales charge still gets the commission, but prepares the plan as “part of the package.” Nonetheless, when reading articles in the financial press, especially the “self-help” financial press, there is a heavy tendency to exaggerate the downsides of variable annuities, and the hypothesis that best explains the reasoning is that variable annuities require a financial professional to work with you as an individual. If you are working with a professional you trust, you’re not nearly as likely to go back to the bookstore or magazine stand for generic drivel with no fiduciary responsibility towards you. Admittedly, some advisors abuse it – and when they are caught, they are prosecuted and the insurance they are required to carry pays. The generic advice in books, newspaper, and magazines never has this responsibility in the first place. They are specifically exempted by the Investment Company Act of 1940.
I read a lot of, well, crap about variable annuity expenses. Most of it in the financial press, which should know better. How they have this expense and that expense and the other expense. The fact is that there are expenses associated with all annuities. The only additional expense that the variable annuity has that the fixed annuity does not is the expense of running the mutual fund-like sub-accounts, which actually average a bit lower than the equivalent mutual fund upon which these are usually based. Every other expense is part of every annuity – indeed, most of them are part of every insurance contract. Administration, Insurance, etcetera. They buy the stuff that makes an annuity an interesting and potentially worthwhile investment – that guarantee that you won’t outlive your money, among other possibilities. But because you’re dealing with something regulated by the SEC, the agent and the company have to tell you about them in variable annuities, whereas with every other insurance policy, they are a “black box” into which money goes and insurance comes out. Furthermore, variable annuities have a protection that fixed annuities do not. If the insurance company does encounter difficulty (rare for strong insurers), the variable sub-accounts are not assets of the insurance company, and cannot be attached by other creditors. They are yours.
Most companies offering annuities offer several options, depending upon what a prospective client really needs, and in what proportions. When I was in the business, the company whose variable annuities I most often sold when variable annuities were appropriate had twelve different annuities, offering this option or that option, depending upon which fit the clients needs, and they all had the same underlying subaccounts. On the other hand, I was appointed with a multitude of annuity companies, most of which I found had something to offer a certain client that was superior for that client’s purposes to other offerings. Furthermore, variable annuity offerings evolve over time. I ran across a reference to one that I used to sell in its II and III editions the other day, and it’s now in the VI form due to regulatory changes and a couple of product improvements.
On the pure investment scale, variable annuities have two significant upsides and one significant downside as opposed to mutual funds. The downside is easiest to explain. As previously discussed, they have a so-called “MIE” expense and charge ratio that goes from about one and a quarter to one and two-thirds percent per year (although some designed for asset-based management fees go as low as forty basis points), as opposed to 12-b-1 fees that for most mutual funds are about a quarter of a percent per year.
The first upside is the fact that all monies invested in an annuity earn money tax deferred. This means that you’re not paying taxes on money invested in annuities as you go, only when you withdraw it. This has the minor downside associated that it’s all ordinary income, none of it capital gains, and capital gains may be taxed at a lower rate. Nonetheless, because you’re not losing a fraction of your gains, you are earning interest on your taxes for those years until it’s time to pay, as opposed to paying taxes on your earnings, after which they are gone. Depending upon various assumptions, this direct trade-off between higher MIE charges and deferred taxes will have a mutual fund theoretically leading an equivalent variable annuity sub-account for about fifteen years (I can get results varying from ten years to twenty-two without unduly torturing the assumptions), after which the variable annuity sub-account (net after taxes and redemption) will take the lead. This does not take into account investment re-balancing, which would work in favor of the variable annuity sub-account, as moving money between those has no tax consequences, something that mutual funds cannot say.
On the other hand, if you’re talking about money that is tax-deferred by definition, such as IRA, Roth IRA, and many other sorts, the variable annuity sub-account does not gain the the benefit of the first advantage I just listed, as it is already present. Nonetheless, many very smart people nonetheless have tax deferred money in variable annuity subaccounts. Why? That’s the second upside I was going to mention. Because the managers of mutual funds have to sometimes make decisions for the fund based upon tax consequences to shareholders, as opposed to strictly what’s the smartest thing to do, investment-wise, as a large proportion of their shareholders investment dollars are not tax-deferred. But every last dollar invested in variable annuity subaccounts is tax deferred. So variable annuity subaccounts will usually outperform the equivalent mutual fund as far as investment return. I’ve seen estimates that range anywhere from fifty basis points to 150 basis points (0.5% to 1.5%) per year for the average of this number, depending upon who is doing the estimating. Given the 100 to 140 basis point difference in MIE vs. 12-b-1 charges, considered as a pure investment, this aspect of variable annuity subaccounts is likely to fall short of mutual fund returns considered from a strict “how many dollars do you end up with?” standpoint. Note, however, that the MIE buys some guarantees (insurance) in the areas of minimum returns, locking in high investment values, lifetime payouts, etcetera, which mutual fund 12-b-1 fees do not. If you’re prepared to undertake a lot more risks, mutual funds will probably (but only probably) come out ahead. If you want some guarantees, the variable annuity sub-account has a lot to be said for it. I know of many people who were looking to retire based upon mutual fund account balances in 1999, who are still down major percentages of what their portfolio value was then. If they had invested in a variable annuity, that 1999 value might have only been 99 percent of the mutual fund value, but they would still have every penny of it and then some.
Caveat Emptor
Libertarians and the Art Of Politics
(Originally written in 2005. Still valid)
Of all the political parties, my personal sympathies lie closest to the official platform of the Libertarian Party. Nonetheless, I have never been a registered Libertarian, never sent them money, and likely never will.
The Libertarian Party, you see, is primarily interested in ideological purity. They’ve been hijacked by those among the most extreme of all libertarians, and have consistently taken an “all or nothing” approach to politics. If you’re not for the purists ideological position, you don’t belong.
This is a good way to marginalize yourself, and indeed, the Libertarian Party has done just that. Their candidates consistently run somewhere in the mid single digits. You tell each other you’re “fighting the good fight” and congratulate yourself when everybody is disgusted enough with the major parties that you get 8 percent of the vote. This is a great way to keep the faithful together, but a truly awful way to move things in your direction politically. The impact on the political process of the Libertarian Party is basically zero. The majors may be aware that the Libertarians exist, but with all the libertarians off doing their own thing and no observable effect upon which of the two major parties wins, they have no reason to care.
Other groups no larger than the Libertarian Party wield an outsize political influence. For instance, the bisexual and homosexual political groups have a base that, depending upon who does the counting, runs from three to five percent of the electorate, but angering this constituency is something no politician does lightly. Why? They may be more affluent than average, but not notably so, and probably no more so than Libertarians. Well, they do give money, while libertarians are not noted for their generosity towards other parties’ politicians. But mostly, because they engage the major parties. They practically own the Democrats, but they have a lot of influence in Republican circles as well. More to the point, for a long time they have worked to earn political capital from the majors. For years, they endorsed – and worked for – any candidate who was less unfriendly to their issues than their major opposition, graduating to working harder for candidates that were actually friendly, to the point now where the issue is not usually which candidate is friendly to gay issues, but which candidate is friendlier. It was a long hard slog for them, and perhaps they’ve abused their power a little of late, but you have to respect and admire them for what they have accomplished. They have taught politicians nationwide that “gay-bashing” is hazardous to their political ambitions, while being “gay friendly” is conducive. They may not be a major block, but given how narrow many victories are, they are a critical one, including and especially if a major party wants control of the legislature. Three points away from your opposition’s candidate and towards yours might not tip every race, but it will tip enough such that if you’re competitive in the first place, you’ll win it. But in order to do it, you have to work with the major parties.
This is the lesson that libertarians need to learn if they want to have an effect on national policy. It may be very gratifying to a certain mindset to keep your ideals so pure that there is no chance of any actual effect upon the course of the country. But if you focus less on getting into office yourself, and more on rewarding politicians who come closer to your positions than their opposition, you wield more real power. Eight percent is a joke in an election, if that’s all you get. But the difference between forty-six and fifty-four percent is the difference between going back to your old career and going to the capitol. Newly elected legislators are known to be grateful to those who put them “over the top,” and to want to keep those folks on the list of people that are happy with them.
Furthermore, a lot of ordinary citizens really like moderate libertarian positions, but are profoundly uneasy with “purist” libertarians. Ronald Reagan’s coalition made smaller government one of their principal planks, and it won on two of the strongest electoral margins in living memory. Decriminalizing or legalizing marijuana polls very strong numbers, but change the question to “should every currently illegal drug be legalized?” and the vast majority will turn against you. The rational, obvious thing to do is take the easy victory, and see how it works out. In a few years, it may be that the electorate will support legalizing the next echelon of currently illegal drugs, and dropping restrictions on marginal cases. This also has the advantage that if it turns out that we’re wrong, we find out about it before we’ve got thirty million heroin junkies and fifty million cocaine addicts.
Indeed, true libertarian policies have never been tried on anything like the scale of the United States, so incremental steps in that direction is likely to be a good thing. Libertarian politics and economics and social science sure looks good on paper, but so does communism. One of the major things wrong with communism, it seems, is that it requires communists to acquire power. All the power, to where there is no opposition force with enough power to restrain them. And that following communists acquisition of power, they insisted upon an immediate and as radical shift as they could possibly manage, with the results anyone who hasn’t been living in a bubble these past eighty years is all too familiar with. It didn’t work, but the communist rulers would not admit it, and no one inside the system could force them to. I can hear people snorting with derision about the very notion of libertarians practicing censorship and coercion, but are you prepared to bet the future of the United States on it? Especially when there is no necessity, that’s a sucker bet – a pointless risk where you could lose but can’t really win because there is nothing to gain by giving any group a monopoly on power.
I see nothing in any major libertarian-backed policy that requires an “all or nothing” approach. Indeed, for most of them an experimental movement in that direction, intentionally either limited in scope or in accomplishment, would be important confirmation of libertarian theory, assuming it is successful. There is clearly not adequate evidence to presume that no further experimental proof is necessary, and that libertarian theory must be implemented in full without further error checking.
In short, I could be wrong. We could be wrong. If so, incrementalism will reveal it.
Therefore, there is no rational reason for libertarians not to engage with anybody “going their way”. Small government republicans and chamber of commerce republicans on one hand, and civil rights democratic groups on the other. Whichever politician, whichever major party, is willing to give more precedence and importance to libertarian values. Work with them, do your best to help them beat their opponent. Once upon a time, libertarians wielded significant power in this way. Indeed, I happen to believe that the statist ascendancy dates from the libertarian self-destruction as a potent political force. The country could only benefit from a libertarian return to the fold of the major parties.
Jihad versus Hirabah
Enrevanche sent me an email about a Chapomatic article and his own response on the distinction between Jihad (or “holy war”, a name for war in the name of religion), and hirabah, which to quote
The term hirabah refers to public terrorism in a war against society and civilization. In legal terminology it is defined as “spreading mischief in the land,” but its precise meaning, as defined by Professor Khalid Abou el Fadl, is “killing by stealth and targeting a defenseless victim in a way intended to cause terror in society.”
Well, I see the distinction, and the fact that so-called “moderate” islamics are starting to see and acknowledge the distinction is something of a good sign. But it is something to note that Chapomatic’s source is something of a fixture in the foreign policy community himself, and while railing against the foreign policy apparachtniks accommodation-ism, may thus himself be looking for a more accommodationist way than is truly appropriate.
I do not, and can not agree that it is ever appropriate to kill or commit violence in the name of religion. Period. End of Sentence. The whole concept is something that needs to become socially unacceptable worldwide. This may seem like a meme of intolerance on my part, and to a certain extent, it may even be correct. Nonetheless it is no more morally equivalent to the idea of killing or violence in the name of religion than those who resisted Attila the Hun were morally equivalent to him in that they believed in the use of violence to defend themselves against rape, pillage, and vandalism. Had Attila not assaulted the world, there would have been no need and no real desire to use violence against him and his people.
With this said, I find the concept of differentiating the two, as opposed to not, to be about as acceptable as the Mensheviks – marginally less bad than the Bolsheviks, but still a rotten, poisonous idea at the core. If the choice is that I must accept those who believe hirabah is distinct from jihad, or simply accept jihad as a permanent world idea, I’ll take the former. But neither has any component that is desirable, and jihad itself is an abominable idea.
The idea that it is acceptable to kill, to commit violence, or even to use force in the name of religion is part of what we are fighting here. And I mean nobody should be allowed any kind of illusion that it is acceptable in any way, shape or form. Not Atheists, not Christians, not Hindus, not Buddhists, not Jews, not anybody. (Actually, the Buddhists and especially the Jews have an excellent record of not doing so, at least within a longer time frame than other major religions**.) You can drag your minor children to worship if you so desire, but that’s the utter limit of what I’m willing to accept. Faith, by definition, is not subject to proof, scientific evidence, or any such. Faith must come from within, or it ceases to be faith and becomes a straightjacket. If your adult children wish to leave the faith, they must be free to do so and still be members of your society. Anything less takes us back at least to the Thirty Years War, if not all the way to the Dark Ages in Europe, where priests and kings all over Europe fought over who was to rule and who merely to reign. Every other world religion has come to terms with this philosophically. Islam, which otherwise has many admirable qualities to it, has not. It is this failure which we are fighting right now. When it is remedied, if it is ever remedied, the rest of the (current) terrorist problem will solve itself quickly.
(While I’m talking to their points, I also want to mention in passing the term “splodeydope” which both Chapomatic and Enrevanche use. I generally approve of it. I haven’t done any research but seem to recall something about the suicide bomber’s genesis in that the original suicide bombers were actually camels, and it was only later that they were replaced by humans for a variety of reasons. But splodeydope conveys contempt, derision, and all of the other suitable connotations, as well as a denotation sufficient unto the task of accurately describing the function. In conversation, I’ve never been asked to define it by anyone who had previously not encountered it, and I’ve caused several people to laugh significantly by its use, thus causing me to believe that they had not previously encountered it. I’ve confirmed it in a couple of cases. So it passes an intuition test as well. And I believe I first remember hearing it in the 1980s or early 1990s, so where LGF may have been instrumental in its spread, it’s much older than that)
UPDATE: A Commenter was confused as to what I was saying, and I see why, and so I edited. Original wording of starred paragraph:
With this said, I find the concept of Hirabah to be about as acceptable as the Mensheviks – marginally less bad than the Bolsheviks, but still a rotten, poisonous idea at the core. If the choice is that I must accept those who believe hirabah is distinct from jihad, or simply accept jihad as a permanent world idea, I’ll take the former. But neither has any component that is desirable.
**Also added the words “at least within a longer time frame than other major religions” to the succeeding paragraph
Improving your Credit Score and Tradelines
Working with a borrower all day today. Truly ugly situation because he doesn’t have a long history of credit, and this is the major obstacle to getting the loan done. He actually makes the money, and has a sufficient history of making the money to justify the loan “full documentation”. But: He only has one usable line of credit, and it is only 9 months old. Most lenders require a minimum of three tradelines, at least one of which must be open for 24 months.
On the other hand, there exists a method to help this person. What he is going to do is approach close relatives with long term stable, paid up lines of credit, and ask if he can be added to one of their revolving accounts as a co-user. He does not have to get a charge card, or actual access to the account, he just needs to be added to the account as a co-borrower, and he will get the benefit of however long the trade-line has been open. He doesn’t even have to know the account number (and the credit report omits several digits, so he doesn’t get it there, either).
This has two effects. First, he will get the benefit of the length of the trade lines, and second, he will get the benefit of the tradelines being paid promptly and on time for however long. Preferably, these are low limit and low to zero balance accounts, because he will be dinged for any necessary payments on his debt-to-income ratio. But it will likely raise his credit score significantly (I would guesstimate at least sixty points) by giving him a several year history of on-time payments, as well as giving him an adequate history of tradelines.
Nor is this fraudulent in any way, shape or form. This is being done in full consultation with the lender. The lender has been notified in writing and approved of this. It may seem like I’m always going off about fraud, but in this case something that may appear a little shady actually turns out to be something that both the bank and the regulators can live with. So if you’re thinking that loans are always about NO NO NO, here’s a very strong YES to go along with it.
Caveat Emptor
Buying One Property While Selling Another
Most people don’t stay in their first house their whole life. At some point, they want to move to a different home.
There are several ways to approach the transaction, but you have to decide which way fits you. You can approach it with an idea to maximizing profit, maximizing cash flow, maximizing speed, minimizing stress, or minimizing inconvenience. You really only get to choose one, but it’s a good idea to rank them from most important to least important so that both you and your agent know where your priorities lie, and perhaps you can do some things from your lesser priorities.
If this was a commercial site, looking to seduce you into listing with me, I’d probably have some corporate salespeak flack telling me to say you can have it all, but instead I’m going to tell you the blunt truth: You can’t, not reliably, and any representation to the contrary is a lie, the words of a fool, or both. You can certainly do things in each of the categories (and others) but if you don’t go into the transaction with a clear view of what is most important to you, chances are you won’t get whatever it is that is important to you. Some people do luck out, especially in hot markets, but when the market is cooler, the fact is that you take what you can get, and the probability is better that you will get what is most important if you decide what is most important and stick to it.
If you choose to maximize profit, move out of the old property and into a rental unit, and make whatever cosmetic alterations you’re planning before the property hits the market. Newly renovated vacant units show better, and therefore sell better, than anything else. Your time of highest interest is typically for the time period immediately after it hits the multiple listing service. Particularly if you have pets or children, who are both highly efficient entropy generators, you want to move out if you can afford to. Since this is very costly in terms of cash flow, many cannot afford it. Nonetheless, in most markets under most conditions, the return you will get will repay your investment, as there are few obstacles and conditions to your prospective buyer moving in as soon as they can consummate the sale. Furthermore, because the property is vacant, they can more easily picture themselves living in it. Ask any artist which is easier to work with – a blank canvas, or one that already has a painting on it? Then consider that the average buyer has the imagination of a rock, which is why properties with just a little more oomph are much easier to sell. The less of your family there is in the property, the more potential buyers can picture theirs in it.
Staying in the property causes not only stress from whether the property is clean enough to show every day, but also from prospective buyers and their agents having both a window of observation on your life and the potential opportunity to debark with some material piece. I imagine it happens, but not nearly so much as to warrant the stress sellers put themselves through on this point. As an agent, I’m always aware that my good name is on the line as well, and I’m always watching prospective buyers, even though I’ve never had anyone attempt to remove anything (that I’m aware of). Nonetheless, many sellers insist upon being physically present, which often has the effect of chasing people away that I, as the agent, could have sold the property to given a freer hand. Given real estate practicalities, your concern over a couple of $15 CDs that might have potentially wandered off could have just cost you tens of thousands. So if you’re concerned, move anything valuable or irreplaceable like jewelry and heirlooms out, and resign yourself to replacing anything remaining. You’ll likely come out ahead in the end.
If you’re looking to maximize speed, moving out is a good idea also, but you’re also going to want to price your property significantly lower. The higher the price, the harder it is to sell the property, the fewer people that can be expected to look at it, and the harder it will be for them to qualify. If you’re priced 5 percent above anything comparable, the appraisal probably going to come in lower than the sale price, and not many people want to pay a premium for a property. It’s going to take longer to sell. If you’re priced a tad below the comparables, however, well everyone wants to buy homes with some built in equity, and the bank sees their loan as being less risky, so it’s a little easier to qualify (They’re still going to stick with the LCM principle, but from experience, they’re less sticky about the little stuff if the appraisal is a little above the price).
If you’re concerned about cash flow, on the other hand, moving out is not the way to go about things. For one thing, you don’t have the money, or if you do, you’re going into stress mode about whether some short deadline is going to be met, which can cause you to be forced to accept an awful deal that you would not otherwise have considered because you’re running out of money to pay for all the extra stuff you weren’t paying for before. If you think ahead, and make your agent aware of your concerns, you’ve got a better chance to come out ahead in the end.
Suppose your priority is to minimize stress? Then you typically stay put while researching other properties, and ask for a contingent sale, possibly with a leaseback that gives you a certain amount of time to find alternative lodgings. Alternatively, if cash flow isn’t an issue, you might start looking right away, either with or without a “bridge loan” (cash out against your current property, as a down payment on the new one). Bridge loans are great, they are wonderful, they can do all sorts of things for you, but they are aren’t cheap. Before you do one, consider whether there is a real need. If you have some cash and are a good credit risk, the better option may be to borrow more against the new property. Perhaps the better option is to split finance the new property and pay off the second loan on the new property when the current property sells. Because “bridege loans” are cash out refinances, then all things being equal, it’s probably a better idea to get the money through a purchase money loan. It’s even possible (albeit rare) that despite paying for two loans, the math may favor getting some money via a bridge loan, and borrowing the rest through the purchase loan on the new property.
If you want to minimize inconvenience, you probably want to stay in the property until it sells, and quite probably for a while thereafter, so you’re going to want a short term leaseback as a condition of the sale. Many people do this to avoid moving the kids out of school in the middle of an academic year. If they’re staying, it also gives them some time to find another property in the same district, or even that attends the same school. But here again, remember that you’re limiting your buyer’s options, which has the effect of possibly scaring off the ones who would otherwise have offered you the best price, or causing them to not be willing to pay so much for it (“Darn it, my kids are in the middle of a school year, too!”) If it’s a buyer’s market, you’re likely to pay a certain price – or rather, your buyers are likely to be willing to pay less – but if it’s worth it to you, you also get what you pay for.
There are other potential factors, certainly, and other strategies to maximize the blend of “goods” that’s best for you. But these are the ones that most people need to think about ahead of time, and these are the ones where failing to consider them ahead of time will reliably cost you the most.
Caveat Emptor
Surveillance – Should it be Illegal?
Balloon Juice has a piece on how you can get anyone’s phone records for just over $100. And this evidently surprises not only him but the place he got it. Since the 1970s, the technology has existed to monitor every conversation in any room that has windows from basically any distance. The great defenses have been anonymity (why should anyone care about this), expense (it wasn’t cheap) and processing power (somebody had to actually listen to all the garbage in order to extract any jewels). With modern programming, computers can take the place of human listeners at the first filtering, it’s becoming cheap enough such that most folks can afford to plant bugs in dozens of locations if they want to, and with it so cheap, anybody is a potential target.
The same thing goes with cameras. If it’s worth it to me, I can monitor anything you do from anywhere that is visible from public spaces, and most of the ones that aren’t. Credit reports (the social is both login and password, and anyone can find it out if they’re motivated enough). Any other information you’d care to name.
There is no defense. Not de facto, not really de jure. Outside of some pretty campy science fiction (the original Thunderbirds) I haven’t seen anyone seriously propose any kind of detector for this. Failing that, the only way to stop it is nearly microscopic level sweeps of surrounding terrain on a continuing basis. And it’s difficult to prove it belongs to anyone in particular.
Given this, there are essentially two options for individuals. Live in denial until you’re caught, as happened to Congressman Cunningham. Or don’t do anything such that you’d care if it was on page one of every newspaper and the lead of every newscast for a week.
Now, if there is one thing that everyone should have learned from recent celebrity trials, it’s how difficult it is to convict anyone with resources (money) of anything substantial. Given this, making it illegal to spy means that the powerful and wealthy can spy on the less powerful and wealthy, but that the average person could not spy on the powerful and/or wealthy.
I find this idea intolerable.
So we arrive by process of elimination at the conclusion that we need to make all of this specifically legal.
What we gain from this step is also non-trivial. Identity thieves are nailed much sooner. Criminals of every real sort find it much more difficult to ply their trade when they can be captured on film at any moment. The powerful, who would be especially scrutinized, learn to live clean or live poor or live in prison. Yeah, there would be “Exclusive pictures of Congressional orgy!” in all the tabloids. We’re all free not to purchase them, and the fact they undergo scrutiny of this sort constantly motivates them not to do anything they’d really care about being caught at. In fact, this kind of routine scrutiny would swiftly cause most sorts of victimless “crime” to be decriminalized, at the very least. There’d be some show trials, and after a very short period of time, it would become evident to even the most die-hard legislator of other people’s morality that this nonsense just isn’t viable any more.
I’m not exactly happy about the national security angles myself. But National Security is going to be the object of this sort of thing no matter how illegal it is. Treason and Espionage are two of the oldest and strongest death penalties on the books. The people who do these things know this, and do it anyway. On the other hand, legalizing scrutiny makes it much easier for those abiding by the law to find the real bad guys. And legalizing scrutiny means that we can watch our law enforcement, as well, and know if they are really staying within the limits that we have prescribed for them.