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.
_____________________________________________________________________________

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

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

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

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

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

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.

2009 Review & 2010 Outlook

Apprvd.BBDP

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

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.

Apprvd.BBDP