I had to laugh the other day, though, when a post requested a referral to a financial planner who “could explain all the options for paying for college that people use.”  This person wanted unbiased advice and essentially the a la carte menu of possibilities. That would be a little like me walking into the paint store and saying, “I just want to see all the colors people use to paint their walls.”  Have you ever seen how many colors there are, how many different shades of the same color, and how many brands of paints?  That’s before you get to oil or acrylic.  Don’t get me started on brushes. And have you ever taken a sample of favorite paint home from the store, put it on the wall and hated it?  This original poster would have been better off with a survey.

Your advisor should advise YOU.

Here are the many ways I’ve seen college get funded:

• Kid decides not to go to college or not to go right away.
• Kid decides to live at home and attend two-year college.
• 529 plans.
• Paying out of income as the child goes to college.  In other words, not using savings at all.  (Heck, in one instance, the family’s annual tuition expense went down when the kid left a private high school and went to a state university and the family bought a new car.)
• Brokerage and investment accounts.
• Grandparents or other family members paid for it.
• Scholarships.
• Work-study programs.
• Loans.  (Remember, you can borrow for education but not retirement)
• Life insurance cash values.
• Investment properties (either selling them or using rental income).
• Inheritances and inheritance advances.

I could go on.  My point is that there is no right way to do this, you need someone who can listen to you, understand your values and know who you are, and help you navigate among the many options with a presentation of the beauties and pitfalls of each. That’s what good advisors do:  they listen well, they have opinions, they articulate them, and help their clients come to their own decisions about their financial lives.  This is why good advice is worth it.  It saves you time, money, anguish and agony.  A strategy for college funding is not always easy to just paint over.  Make sure you get as good of a look as you can at the start.

As home loans get harder to obtain, the number of renters increases, and so will rent

Come October 2011, buyers’ purchasing power is will reduce even further:

• The FNMA (Fannie Mae) loan limit will be reduced from $729,000 to $625,500, pushing more buyers into jumbo loans for which there are fewer lenders and consolidators.

• Jumbo loans require 6-12 months of reserves, which is more than FNMA requires.

• Interest rates will likely rise, making qualifying for a loan even harder.

• Mortgage insurance for FHA loans will increase by 30% in April 2011.

• Credit scores are on the decline.

• As home equity has vanished, buyers who want bigger homes will not have the equity from the sale of their current home to put toward the new purchase, which will likely require a 30% down payment.

What does this means?  More people staying in their homes, more people unable to qualify for a loan, more people renting instead of buying.  This is all true before we get to the conversation of the recurring suggestions in Congress that the mortgage interest deduction should be reduced or eliminated.  There are times when it’s good to be a landlord. This is one of them.  And, yes, we do investment property loans, too.  Give us a call.

A better economy usually means higher rates

Remember, this is a blog—oversimplification will prevail.

Lesson #1:  Rates are driven by the mortgage-backed securities (MBS) market.  MBSs are more similar to bonds than stocks.  Money managers who have to produce returns for their clients invest in stocks (more risky but higher returns) and bonds (less risky but lower returns).  When money managers think companies will produce higher stock returns, they invest in stocks. When the economy shows signs of improvement, company stock prices tend to rise.  So, said another way, when the economy shows signs of improvement, that generally means stock prices will rise, which will cause money to flow to stocks and not bonds (or MBSs).

Lesson #2:  When bond prices decrease, mortgage interest rates worsen.  A bond’s price and its yield are inversely related. That means that when the bond price goes down, the yield goes up (and vice-versa).  Mortgage interest rates track with the yield.  So, as bond prices go down, the yield goes up, mortgage interest rates go up.  The price of a bond will go down when there’s less demand for it.  If money flows to stocks, that means it moves away from bonds.  As bonds are in lower demand, the price will drop, and the yield will increase.  Remember, mortgage interest rates track to the yield.  To review: the less demand for bonds (or MBSs), the lower the price, the higher the yield, the higher mortgage interest rates will go.

The Million Dollar Question: Will the economy improve that much this year?  This is where my crystal ball gets fuzzy.  I think the nightmare of the financial crisis of 2008 is over.  We’re stabilizing.  High unemployment is a problem, and I see it getting slightly better.  I’m a believer that the consumer tends to drive the economy and if they have money to spend, the economy picks up.  I’m a believer that until we start to support the small business person, who employs most of the people in this country, unemployment will remain stagnant and the recovery will be sluggish.  The Fed’s quantitative easing (QE2) and the financial stability of the European countries are the wildcards here.  Given all that, I’m predicting that the economy has a good year and rates will increase a bit to 5.5% on the 30-year.

And by the way, let me put this back into perspective for you.  5.5% is still historically pretty doggone good.  So, if you’ve been “left out” of this past year’s refinance opportunities, this will still be a great year to get it done.  Give us a call.

I’m not saying you shouldn’t have dreams and goals.  What I’m saying is that the chances that you’ll success in achieving those dreams and goals will increase if you don’t take action in January.  Set whatever wishes, goals, and dreams you want for 2011.  Write them down. Put them in a box somewhere where you’ll see it no sooner than February 2nd.  Then, go back to your long winter’s nap.  In February or March, open these notes up, and start sowing the seeds that will make those dreams come true this year.  In the Northern Hemisphere, in this time of the year, it is hard to grow anything.  It’s dark. It’s cold.  We just crossed over the longest night of the year (winter solstice, December 21st).

All things grow better in light and warmth.  Your resolutions do, too.  And it takes the pressure off during a season when you don’t need more.  Enjoy the nap.

How to make the most of family bonding time

When I’m working with clients, I will often ask questions like these:

• Do you think you will inherit money from your parents or extended family?

• Do you believe you will have to support your parents or other family members financially now or in the future?

• Do you think your parents would be willing to contribute toward college education?

• How is the health of your parents? Are they taking any medications?

I would guess that somewhere around 80% of the time, I get blank stares or guesses as a response to these questions.  What that tells me is that aging parents are not sharing with their adult children the status of their financial lives.  This probably started generations ago and was passed down when the adult children were young and parents didn’t want to share financial information with young children who might share that information with friends and neighbors.  The habit stuck.  Now the information is not shared for any number of reasons—privacy, embarrassment, unequal inheritance allocations, etc.

This is bad news for everyone.  It’s bad news for aging parents who need to assign the task of Power of Attorney to someone, who want to maintain family harmony, who may need financial or other support in the future as they age.  And it’s bad news for adult children raising their own children, probably instituting the generations-old habit into the next generation, and are clueless about what their parents might need or what they might be able to anticipate inheriting in the future (or not!)

Take time during your family vacations to talk, bond and laugh.  You do not need to talk finances.  But you do need to start building the relationship and trust with your family members so that when there is an opening to talk about serious financial issues, the bridge is there to make that conversation happen easily, timely, and when everyone has their faculties.  The last thing you want to do is have this conversation when someone is medically, physically, or psychologically impaired by illness or old age.

Get the conversation going.  Start with the weather.

The irony of the timing

Look, I’m not saying this is all bad, ridiculous, time-wasting, and frivolous.  There are some states that weren’t licensing mortgage professionals at all.  Buying a home and getting a mortgage are usually the two biggest financial transactions that anyone will make in a lifetime.  The people who are involved in those transactions ought to have some sort of licensing and compliance control.  If we choose as a society to regulate my hairdresser, then we probably ought to regulate people who care for people’s financial health.

Be aware:  Securities and Exchange Commission did this, too, many many years ago.  Decades later, the SEC failed for years to stop the biggest Ponzi scheme known to this country and its licensee.  I’m not sure when ethics became defined as knowing which regulatory agency would fine you or put you in jail if you ripped off your client, but that’s what I studied.  I’m not sure why it’s important for me to know that the Truth-in-Lending-Act is also known as Regulation Z or that the Real Estate Settlement and Procedures Act is also known as Regulation X.  I do know that the exams that the SEC requires are not dissimilar in the rote memorization that is required to pass the exams that allow financial professionals to manage money.  While the intentions may be good here, I’m not convinced it will have the effect it intends to have.  Bad people find ways to do bad things and seemingly do it best when someone is supposedly watching.

So, feel safer, I guess.  The bar to entry to this profession has been raised for sure.  You’ll be pleased to know that’s true even for me.  I have had to register with a national registration system, I’ve had to take a national test, I’ve had to take a state test, I’ve had my fingerprints taken (again), I’ve allowed someone to pull my credit report, and I will disclose my net worth.  Nevermind that I’ve passed the Bar Exam, the Certified Financial Planner exam, two industry certifications exams, a state exam to get my salesperson’s and then my broker’s license, and maintained my state required 45 units of continuing education credit to maintain my licensing.  I supposed DNA testing and electroshock therapy are next.

The silver lining (because I will always find one):  It’s been good for the economy.  I’ve spent over $1100 getting this done, which I hadn’t planned on spending this year.  The facilitator at the testing site said that he had been closed three days a week for the last six weeks and things were picking up again.  He was pleased to see all us mortgage people showing up to get tested.  So it goes.

Okay, I’m done. Rant over.

What’s wrong with sharing real estate?

The problem with sharing real estate ownership or any other illiquid asset is the fact that it’s illiquid.  If you want out for whatever reason—there’s another opportunity, you don’t like the investment anymore, you need the cash, you get divorced, your partner dies, you have to fund college education, or whatever the reason—you can’t unload that asset without the consent of the other owners.  If the other owners do consent but still want to own their share, you now have an asset with little market viability.  Who’s going to want to own property with your previous partners?  Probably very few.  How will you sell?  You probably can’t.

Then there’s the flip side.  What if you don’t want to sell and your partner does?  Now you might have to sell an asset when it doesn’t work in your financial plan.  You might have to be in business with a new owner.  You might have to buy out your partner(s) when you don’t have the cash to do so.  This will create a layer of stress in your life you don’t need right now.

Any exceptions?  Not really.  I wouldn’t share a mountain chalet, a beach cottage, or any vacation property.  I wouldn’t share an investment property.  I wouldn’t share with friends, family, or colleagues.  The only time I’ve ever seen this happen successfully is in two instances:  (1) a business arrangement among friends to buy, fix, and flip (and they got very lucky on timing, picked a good property in a great location, and did a phenomenal upgrade); and (2) two family members bought a vacation home to share, were both very wealthy, and when one wanted out, the other had no problem buying out the share of the other owner (but again, good timing helped—the cash was available).

This is the same reason I’m not wild about REITs or TICs unless there’s an obvious exit strategy that can be executed at any time.  Real estate ownership shares:  Just don’t do it.

Mortgage Brokers Are an Asset to Lenders

What you need to understand is that mortgage brokering was the first outsourcing of mortgage services 30 years ago.  Lenders thought that if they could get a cheap sales force to send them loans that would be more profitable.  Think about it:  If a lender doesn’t have to pay to keep floor space, lights, a computer, toilet paper, coffee and benefits for a mortgage salesperson, it can make more on each loan.  So it outsourced everything but underwriting and document drawing to someone who would find the consumer, teach the consumer, hand-hold the consumer, and close the consumer and never pay that person unless the loan arrived at the bank.  It’s coming back into fashion.  Why?

     * Cheap sales force, easy to roll out new products.

     * Brokers build stronger relationships.

     * Brokers are more dependable, educated, and knowledgeable.

My favorite part of the article?  An author singing to the choir. This is what I have been saying for a year now:  “Plus, the brokering industry is curing itself naturally of its worst faults. During the real estate boom, all kinds of people flocked into the mortgage business, many of whom received little training and had no real industry knowledge. Those folks are gone, leaving the grizzled veterans who understand the business model and will do the right thing for the customer because they understand the value of long-term relationships.”

Have you called your friendly neighborhood mortgage broker lately?

What are your options?

     The stock market is not inherently a bad place to be.  Like every investment, it has a risk-reward trade-off.  You must decide how much risk you’re willing to take.  In the last several years, many people have re-evaluated for themselves what that means.  First things first:  figure out what kind of investor you are.

     Then, consider other options besides the stock market if you can.  If the better part of your savings is in your 401k at your employer, you’re most likely stuck with those investment options.  But if you have cash on the sidelines or you have IRA monies from previous employers, you have more options.  People think of the stock market because it’s what most publicized and most accessible online.  However, there are other pretty interesting and pretty great options in the insurance and real estate worlds where your returns might be greater and your risk perhaps lower.  You might consider these other opportunities.

Remember, Cash is King

So far, it is still impossible to take your ATM card and stick into the side of your home or your investment properties and pull out cash.  If you are in the habit of accelerating your mortgage pay-off, stop. Review what you’re doing and why. Just because that seemed like a good idea years ago doesn’t mean it’s a good idea now.  It’s hard to get that money back once you’ve put it in your house, especially in this lending environment.  Often, you’re better off keeping the mortgage, getting the mortgage interest deduction, taking the money you would have used to pay off that mortgage, having that money make money for you, and in the future be at choice as to whether to pay off the mortgage or keep it going.  The potential upside is more retirement income and more liquid assets available to you. To me, that equals financial security.  Having to sell a piece of real estate in a potentially down market to generate cash for retirement or other needs is terrible. Often it results in lower sales prices and less proceeds in the seller’s hands. What I want for my clients is options.  Keep your options open.  Keep your assets balanced.