Is a Reverse Mortgage
Right for You? - February 24, 2010
Here's a brief explanation of how a reverse
mortgage works. Please consult your accountant, attorney,
and myself before taking one out.
In my opinion, they aren't for most people.
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Reverse Mortgage Basics
So what exactly is a reverse mortgage, and how does it work?
Well, as the name suggests, a reverse mortgage reverses the
traditional mortgage process. Think back to when you bought
your first home. Unless you had generous and affluent relatives,
you probably had to scrape together the money for the down
payment and seemingly never-ending closing costs. And then
you were likely saddled with what seemed like a mountain of
mortgage debt.
Every month, thereafter, you dutifully mailed to the mortgage
lender a check for the monthly mortgage payment. In the early
years of your mortgage, the vast majority of those monthly
mortgage payments went to pay interest on your outstanding
loan balance, but a small portion of each of those payments
went toward principal, in other words, reducing the loan balance.
(As the years roll by, the loan balance should pay down at
a faster and faster rate until, eventually, your mortgage
paid off.)
A reverse mortgage reverses the process. When you take out
a reverse mortgage, the mortgage lender typically sends you
a monthly check. Imagine that! You can spend the check in
any way your heart desires. And, because the check represents
a loan, the payment to you isn't taxable.
As the reverse mortgage lender gives you more payments, you
accumulate an outstanding loan balance. Unlike other loan
balances you may have, such as on a credit card or a business
loan, you typically don't have to pay single penny back on
your reverse mortgage loan until the home is sold (and then
the loan and the accrued interest is paid back from the sale
proceeds) or, with some reverse mortgage programs, when you
move out of the property.
This week's tip is an excerpt from "House Selling
for Dummies" by Eric Tyson and Ray Brown, reprinted by
kind permission of Ray Brown. In addition to being a frequent
guest and contributor to our show, Ray has authored many books
and is a syndicated real estate columnist for the San Francisco
Examiner, and has hosted the weekly radio program, "Ray
Brown on Real Estate," on KNBR in San Francisco for many
years.
Apprvd.BBDP
It's Getting Better
All the Time?
Is the Federal Reserve Telling Us Something? - February 18,
2010
When the credit crisis hit full force it took
a number of governing bodies to help us right the ship. The
Federal Reserve Bank and the Treasury were two key agencies.
I've always said that the Federal Reserve Bank will tell
us when things are getting better. Here are couple thoughts
on the Federal Reserve Bank (The Fed), the economy, and the
credit crisis:
1. The Fed stepped in during the heart of the credit crisis
to implement a number of critical programs to reflate the
economy. These programs added needed capital that was being
sucked out of the system through any number of types of defaulting
loans, etc. (Real estate loans are a good example of this.)
2. The Fed also stepped in to act as the banking system since
the global banking system has almost completely stopped lending
money; even bank to bank.
3. One sign I looked for which would likely indicate that
things were beginning to stabilize was the end of the period
where The Fed was considering and implementing new programs
to help the economy. This moment came and went without much
fanfare. Nonetheless, these not so mentioned moments can act
as indicators of changes in any given economic situation.
4. The Fed has kept things as is for going on a year now.
This shows me there has been stability in the economy with
no further deterioration.
5. Now we are hearing talk from The Fed and Fed watchers that
the agency is beginning to develop exit strategies from the
programs it developed to help the economy and to ease the
stresses in the banking system.
Despite all the day to day news of how the recovery is going;
the thing that strikes me as a sign of better times ahead
is The Fed plotting it course to unwind the programs it implemented
in the heart of the credit crisis. I see this as an indication
that they aren't so much worrying about more bad news and
events as they are about how having all the money in the system
coupled with historically low interest rates will affect our
inflationary outlook. My conclusion is that this is one of
the key signs we've been looking for in terms of things getting
better. When The Fed starts to think about unwinding their
programs, they are clearly more concerned about the economy
gaining too much steam than it regressing. That's my take
on things.
I've no crystal ball and don't know what the future will
hold; but, I feel that The Fed looking at keeping the pace
of the recovery under control is a good thing.
Apprvd.BBDP
What is a Business Cycle
and Where Are We Now? - February 11, 2010
Our economic business cycle is a predictable
long term pattern of alternating periods of economic growth
(recovery) and decline(recession), characterized by changing
employment, industrial productivity, and interest rates.
Many investors get caught up in short term news and events.
The trouble that can arise from this short term thinking is
that they can lose track of their long term goals. This is
relevant because one fundamental way we make money long term
is by owning good companies benefitting from their growth
through various product developments and business cycles.
If investors react to short term news and events, they will
likely make business decisions unrelated to their long term
plans and fundamental goals. As such, those investors can
lose the benefits of the long term economic cycles they have
tied their goals and objectives to.
The past 12 - 16 months have presented many short term economic
and investment challenges and obstacles. Those challenges
and obstacles are not unrelated to the business cycles in
their own ways.
As with every downturn in the economy and financial markets
in the past, we've begun to rise out of the deepest part of
the declines and seem to be well on our way into recovery.
In my opinion, investing is about keeping track of the basics
and fundamentals. It's about staying with long term plans
through both the upside of an economic cycle and the downside.
As with life itself, investing and the economy are cyclical.
In my opinion, if you stick to this fundamental concept, you
should have a greater chance of success.
Apprvd.BBDP
Understanding the Dow
Jones Industrial Average - February 4, 2010
The Dow Jones Industrial Average is the most
widely use indicator of the overall condition of the stock
market, a price-weighted average of 30 actively traded blue
chip stocks, primarily industrials. The 30 stocks are chosen
by the editors of the Wall Street Journal (which is published
by Dow Jones & Company), a practice that dates back to
the beginning of the century. The Dow was officially started
by Charles Dow in 1896, at which time it consisted of only
11 stocks. The Dow is computed using a price-weighted indexing
system, rather than the more common market cap-weighted indexing
system. Simply put, the editors at WSJ add up the prices of
all the stocks and then divide by the number of stocks in
the index. (In actuality, the divisor is much higher today
in order to account for stock splits that have occurred in
the past.)
The thing about any index is that it is an indicator of the
market's trends. It is nothing more or nothing less. It also
can reflect the future of the economy as the financial markets
tend to be forward indicators looking to where the economy
and corporations are headed four to ten months out.
Good investment managers should be able to outperform the
index. I believe it's good to know how the indexes are doing.
I do not believe they are anything more than an indicator
or the economy and the financial markets health.
Apprvd.BBDP
Investing During an
Economic Recovery - January 27, 2010
One of the side effects of low interest rates
is they tend to lead people towards investments with higher
returns. Those investments have the potential for higher returns.
In turn, they usually have higher risks. So, as recessionary
expectations retreat, pessimism fades away and optimism works
its way back into people's minds. Moreover, investors re-examine
opportunities for riskier investments in the context of what
is usually a low interest rate period. They also become more
comfortable embracing greater risks. As a result, equity markets
can tend to do very well during an economic recovery.
Within equity markets, some of the best performing stocks
are those that use operating leverage or debt as part of their
ongoing business model, especially as these are often extremely
undervalued after being beat up during the bear market. Remember,
leverage works great during good times, and these firms tend
to grow earning faster than companies without leverage, but
they also greater real risks during weakening times. Moreover,
growth stocks and small stocks tend to do well as investors
embrace risk during an economic recovery.
As you know, I am a believer of broadly based professionally
managed portfolios; both here in the United States and abroad.
A balanced diversified portfolio generally handles the ups
and downs of long term market trends pretty well.
My sense is that we should see continued growth in the economy
as it shifts from recovery to growth again. It seems to me
that we should see continued growth in the financial markets
too as the economy grows and the profits of companies worldwide
grow. As a result of this, their value should increase as
well.
Finally, I believe we should see continued growth in the
financial markets as people shift assets from low interest
rate accounts back into the financial markets. There will
be greater risks being taken. I think too many investors became
frightened and moved long term money to short term accounts.
These are a great deal of the assets being moved back into
higher risks financial assets. People's portfolios came apart
and out of balance in more than one way. This should correct
itself over time.
Apprvd.BBDP
2009 Review & 2010
Outlook - January 20, 2010
The American Funds are viewed as a very well
respected investment company. Their investment philosophies
are often mimicked, but what make American Funds different
is the people behind their investments.
This Weekly Tip is a discussion with the President of the
American Funds and three of their longest tenured Portfolio
Counselors, their cumulative investment experience is over
90 years. Please watch the "2009 Review & 2010 Outlook",
it is a very informative and gives you an inside view with
the brains of the American Funds.
We've had quite a run in the financial markets
since their bottom last March. The Dow Jones 30 Industrials
average bottomed March 9, 2009 at 6,440.08. Since then, the
Dow has reached as high as 10,767.20. This is a recovery off
the bottom of roughly 67%. Making matters all the more interesting,
this has all occurred in a little more than ten months.
Many people panicked and sold investments which have recovered
nicely in the past ten months. While nothing is guaranteed
in this life, selling in market panics almost always seems
to leave the investor ridding themselves of assets on the
short side of the long term equation. I wonder how many of
those who sold during the market panic had the resilience
to get back into investments which they sold out of? I wonder
how many sold low on emotion and bought higher when getting
back in? I wonder how many haven't gotten back into investments
and still have money sitting in bank accounts or money market
funds yielding virtually nothing?
The lessons from the crash of 2008 and 2009 are not necessarily
new ones. The reasons for any crash or bear market are usually
somewhat unique; as every set of circumstances doesn't pair
up the same again. However, the way people handle tough markets
is almost always the same. Most people will be patient seeing
their holdings as long term in nature. Some will panic and
sell at or near bottoms. The old adage that markets make a
lousy market timer seems to prove out time and again. When
emotions get in the middle of logic based financial decisions
you get fear and greed. Neither tends to be a very good way
to go about your business long term.
The other lesson that comes into play on occasion is an old
Chinese proverb: In Crisis Comes Opportunity. When you step
back to review things, it's clear that more often than not,
there are opportunities to invest in sour markets. Yet, people
have a tendency to do just the opposite or nothing at all.
When times are tough, opportunities arise. Last year we saw
a few moments like those in the first quarter. Clearly, we
saw even more as the financial crisis hit at full strength
in the fall and winter months.
As we sit today, I believe that the bounce of the markets'
bottom is behind us. I think the gains to be made from the
panic selling of 2008 and 2009 are done. I do not think we'll
see the same kind of year in 2010 that we saw in 2009. I do
not think we'll see huge gains in common stocks. I say this
because the panic selling is long over. The oversold condition
of the financial markets seems to be behind us in my opinion.
Often, this is where we see big gains initially in recovery.
They are the gains from the bounce off the bottom which was
based on panic selling.
So if we have seen recovery in the financial markets based
on their being over-sold as a result of panic, what's next?
The next step in the market recovery should be based on continued
economic recovery and eventual economic growth. As we see
the economy recover and jobs improve in time, we should see
continued growth in the financial markets and company balance
sheets.
While I never know for sure, I believe we'll continue to
see improvements in the economy over time. I believe we'll
see unemployment eventually begin to improve. As a result,
I believe see continued positive results it the financial
markets. I believe we're in for better times ahead with much
of the risk of the credit crisis behind us.
Apprvd.BBDP
How Did 2009 Turn Out
Compared to My Prognosis? Let's Take a Look - January 8, 2010
As we entered 2009, it was clear things
looked anything but clear. I made some educated guesses about
how 2009 would go. I'll review them below as I look at each
thought from my January 7, 2009, Tip of The Week.
_____________________________________________________________________________
January 7, 2009 - What Could 2009 Look Like?
When I look back at 2008, I'll think of it as the year that
the credit markets froze, resulting in violent volatility
in the stock markets worldwide and a very difficult economy.
I think we could see the following in 2009. (Clearly, I do
not know what will happen, nor do I have a way to guarantee
that my thinking will come to fruition.)
1. In the beginning of the year, the economy will look terrible
as the numbers come out for the fourth quarter of 2008.
This was pretty clear for anyone to see. No surprises there.
2. These terrible numbers likely could continue through the
first quarter; I think it's possible that they could continue
through the second quarter of 2009.
This came to be true. The economy began to show some
signs of bottoming in the second quarter of 2009.
3. We may see a rise in the financial markets, with the arrival
of Barack Obama and a new optimism among Americans and people
around the world awaiting the change in administration.
We did see the new optimism and a little rally in the
financial markets. The rally didn't last as the markets didn't
bottom until March 2009.
4. The huge stimulus package the Federal government is expected
to enact within a month or so begins to take effect as the
year progresses; this engenders more confidence in consumers
and businesses, alike. This came to be true and should continue to show benefits
into 2010 as the monies as delivered to the economy through
various means through all of 2010.
5. The financial stimulus already put in place by the Federal
Reserve Bank and Treasury Department continues to work its
way into the economy, slowly having a positive impact.
We began to see a stabilizing in the credit markets
throughout the year. The three month LIBOR which I spoke about
throughout the financial crisis began to normalize in the
third and fourth quarters of last year.
6. The Federal Reserve Bank continues its creative approaches
to stimulate the economy and credit markets.
The Federal Reserve's creative programs were pretty
much in place by the end of the March 2009. Now, they are
working on ways to normalize money supply and interest rates.
I believe we'll see these issues come into play throughout
2010.
7. The economy could begin to settle down sometime during
the third or fourth quarter of 2009.
This happened sometime in the second quarter of 2009.
8. Unemployment continues to look bad all year; remember,
unemployment is a lagging indicator that can still rise as
the economy and financial markets improve. (I wrote a weekly
tip about this on November 12, 2008; it's on my website's
archives.)
This is still happening today; though unemployment is
beginning to bottom or show signs of life now.
9. The stock markets begin to rise again, based on future
economic improvement, sometime in the second or third quarter
of 2009. (They tend to be a forward-looking indicator of the
direction of the economy.) It's not uncommon to see the financial
markets begin to rebound four- to eight-months ahead of the
economy itself. This occurred as the markets bottomed in March 2009. It
was a little ahead of my thinking in terms of timing. Now,
we move forward based on economic improvements and growth.
10. The credit markets continue to slowly normalize throughout
2009.
This happened as I wrote.
11. The residential real estate markets find a bottom sometime
mid-year; some areas of the real estate markets are already
showing signs of improvement, as we begin the year.
This has happened as I've written. It's fair to say
that some areas are doing better than others. Real estate
is very regional. On the whole, I think the real estate market
is much today than it was a year ago.
12. Huge numbers of healthy homeowners refinance their home
at rates below 5%. (Be ready to act.)
This has happened and should continue to. If you haven't
already, act while mortgage rates are still low.
13. Economists begin to talk about the threats of inflation,
sometime near the end of 2009.
Inflation is still not yet an issue; though economists
are talking about it. We may not have to deal with inflation
as an issue until later this year or early next year.
14. The financial markets end the year higher than they were
on December 31, 2008, with US markets leading the way out.
This did occur. We ended the year way above the market
lows and above the crash levels of 2008. If the economy continues
to improve, I think 2010 could be a decent year for the financial
markets as well. I am not that partial to bonds as I think
they could be hurt when interest rates rise.
15. Money in money-market funds, Treasury notes and bills,
and bank deposits begin to find their way back into riskier
investments, as the year progresses. The reason for this is
that investors realize they can't meet long-term needs with
a zero-interest rate.
This has occurred and should this year as well.
2009 should be a very interesting year. This is a good year
to stay in touch and to be prepared to act on things like
buying low and refinancing your home. It's also a good year
to truly evaluate all aspects of your life financially, as
there could be lifetime opportunities presented that you may
want to try to take advantage of.
I would say that 2010 is going to be a much tamer year
than 2009. But, it's still a good idea to stay in touch and
take advantage of opportunities as they arise or as your life
changes.