December 2005 Archives

Reading the papers, I see all kinds of garbage about mutual funds. Probably the biggest single piece of garbage is that only the so-called "no load" funds are any good. They focus only on the cost of the "loaded" fund, as if there is no benefit to be had from the fact that the "load" pays a professional advisor to help you out. Indeed, it has been well established by DALBAR that net returns of investors with paid advisors, in aggregate, tend to significantly outperform those of investors without.



It's not just investment knowledge, no matter how much people protest that they know every bit as much as the professionals. If you aren't, you don't. It's investor psychology and not being so emotionally involved in the problems and knowing what to do in the first place so as not to spend so much of your money on basic mistakes. This isn't play money you're working with, and if it was, the experience wouldn't help when it came to making real investments. When you don't get do-overs, and the time you've lost and wasted is the worst thing about the situation, and when the average investor makes three avoidable mistakes costing twenty percent or more of their portfolio value, five percent plus a quarter of a percent per year doesn't look like such a bad investment. On the same theory that a lawyer who represents himself has a fool for a client, show me a financial adviser who handles his own "big money" without paying for advice and I'll show you an adviser to stay away from.



With that said, some people are bound and determined to do it all themselves. That's fine, so long as you admit to yourself that it's likely to cost you money, and that the ego thing is more important to you than the money.



What I look for, what most professionals look for, in a mutual fund family, is three things. Good Asset Class coverage. Sticking to a fund's stated modes. Willingness to change a fund management if the performance lags the class over time.



Good Asset Class coverage has to do with the standard categories of funds. Small versus large versus mid cap. Value versus Income versus growth. Bonds versus stocks. I want to see funds within the family that "hit the corners". Large Cap Growth, Small Cap Growth, Large Cap Value, Small Cap Value, Investment bond, Government bond, "High Yield" bond (aka "junk"), Income, and preferably multiple international choices as well. I may not put money in every category, but I want it available to me. I insist that Value be Value, not "growth and income." Real Value funds are harder to "sell" laypersons on, but long term, they tend to outperform growth.



The second thing I want is that the management sticks with the fund's asset class, and doesn't play funny games with the definition. I don't like funds that break type to chase today's returns. A full explanation as to why is beyond the scope of this essay, but For a quick illustration: A few years ago, there was a very hot no-load fund family. Literally top of the demand curve. Everyone wanted their funds. They advertised like hell to attract business, and it worked. They got almost fifty percent of the money coming into mutual funds for a while - and every single fund of theirs put their money into basically the same companies. I did a comparison on them and could not find two of their funds with less than a forty percent investment overlap. This was basically using increased demand to drive price, and hence, temporary paper returns. But this couldn't last, and they went from being the darlings of the market to absolute bottom in one year.



The third of the most important things that I look for is willingness to replace a bad fund manager on behalf of the family management. I'm not looking for immediate replacement if they lag the class for one quarter. I'm looking for family management that is willing to replace someone that consistently lags the class over time. This is harder to get than you might think. Typically by the time that someone has risen to fund manager, they've been with the family for a while and know where most of the bodies are buried. "Charlie" who heads the family goes golfing every week with "George" who's doing a rotten job and deserves to be replaced, but you don't fire your golfing partner. It's all among friends, right? Well, no. It's my money this clown is wasting.



There are a couple other things that are highly beneficial. Limited number of investments, preferably a maximum number set in the prospectus. Twenty to thirty investments is the optimal tradeoff between diversification and dilution, and most funds are too dilute. Availability of Sector funds is also a big plus. But none of them is as important as the big three.



Caveat Emptor.

Hmm, maybe I even scooped Armies of Liberation on this. YEMEN: Tens killed in remote landslide



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Michael Crichton, of all people, has something to say about complex systems and fear and cause and effect. (HT Roger Simon



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Iraq the Model has wonderful news about the Iraqi elections. Seems they've actually sat down like adults and accepted the actual counted results and figured out how to deal with the situation. Having a vote means having a voice, not necessarily getting what you want, as anyone other than the bluest of the blue who live in California could tell you. Seeing as I'm a reddish shade of purple myself, other than Arnold being elected governor, I can't remember the last time I voted for anything that won.



Looks like their equivalent of Bush Derangement Syndrome just died and didn't go to heaven.



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Dean's World notes that 2005 has been a great year for the prgress of freedom, and wonders what a difference it might make if the whole world was free.



Sorry. Out of time



I have a request to make of the 'sphere. You all approve or don't requests for advertising. Those "Mortgage rates hit record lows" ads are factually incorrect and misleading. Mortgage rates aren't anywhere near record lows anywhere in the country. They've increased significantly in the past few months. And those ads that say things like "$200,000 mortgage for $505 per month" are advertising the teaser payment for Negative amortization loans and are fundamentally dishonest.



Here is one loan calculator that figures what's missing from a loan's terms. Enter 12 payments per year, the loan amount, the payment amount, and 360 for the number of payments. Anything that comes out less than about 4.5% is undiluted BS. Lest you have any doubts, I will be happy to deconstruct any and all of it.



Here is a Google search for mortgage Interest Rate calculator.



Here is a Yahoo search for the same thing.



Ask Jeeves.



MSN Search.



If you're holding yourself out to be a seeker of truth, and running these kind of ads, you are deluding and defeating yourself, and furnishing both a platform and a vehicle for misleading your readers. It's one thing to run a "lenders compete for your business" ad, which are legitimate and promise nothing specific, only a general "Let's see if we can help you." It's quite another to run ads that offer teasers of something that is not available or completely misleading about what it purports to deliver.



I just saw too many of these misleading pieces of excrement today to let it pass unmentioned any longer. I clicked several, and they all went straight to sites that I have dealt with in the past, and will not any longer deal with. They lure potential clients with something that is not available, and then sell the information to multiple loan providers, and then sell it to resellers, who pass it on to more loan providers and information resellers.

Every few days, I get junk mail wanting me to buy Mortgage Life and/or Disability Insurance.



Buy regular policies instead.



These are not, in general, good policies of insurance, because the benefits go straight to someone else.



Mortgage Life Insurance is straightforward enough. It's decreasing term insurance - the insurance company's favorite kind of policy. As it goes along, the payments stay the same, but the coverage decreases as you pay off your mortgage. The problem is that until you get into your sixties the cost of insurance per thousand dollars should not increase swiftly enough to counterbalance the fact that you are theoretically paying your mortgage down. Not to mention the fact that level term policies exist for about the same amount of money, and that term is a poor form of life insurance in the first place.



The idea is that if you croak, the mortgage gets paid off. As in the money goes straight to the lender. Well, even assuming that you don't refinance, this is a bad deal for your family. Let's look at the situation, and the time value of money. I keep using $270,000 as a mortgage amount, so lets stick with that. Assume you have a 7 percent thirty year fixed rate. Or you can invest the money and keep paying the mortgage out of the proceeds. You pay the loan off, and your family have nothing, while still needing to come up with property taxes and homeowner's insurance and maintenance money. But let's say you put it into a variable annuity that earns a net of 9% (the market does 10-13 over time, depending upon who you ask). Your monthly payment is $1796.32, and adding reasonable amounts for property taxes and homeowner's insurance, it goes to about $2170 per month. You end up with 363 months of payments - 3 months more than you could possibly need. On a forty year schedule of payments ($2050 monthly PITI payment), the money would actually last 590 months - an even better situation. So instead of having nothing and needing to come up with money every month, your family's housing needs are completely taken care of, with a bit left over, and that's on a somewhat pessimistic projection. Even if the fact that the market isn't even over time messes them up, at a minimum they've got many years of making the full house payment before they have to think about selling. Additionally, they have the option of using some of the money for other things like say, college for the kids so that they can support the surviving spouse. Or college for the spouse, so that they can support themselves. One hopes that you get the idea. Furthermore, if you have a regular policy of life insurance, your family can always choose to use it to pay off the mortgage. With mortgage insurance, you do not have that option. I can tell stories of people who had it, and the family lost the house anyway because they didn't have the cash flow for the other expenses of owning a home.



Mortgage Disability Insurance is the same concept, applying to disability insurance instead of life insurance. If you are disabled, it makes your payment after some elimination period (the elimination period is the time after you qualify but before you receive benefits - short elimination periods are expensive!).



This has two problems, same as mortgage life insurance. First off, that's a horrible way to allocate tax-free money - straight to anyone else. The second problem, unlike mortgage life insurance, is that it's not enough money. Disability insurance should replace fifty to sixty five percent of your income, depending upon your situation. Depending upon the lender and the program, maximum qualifying debt-to-income ratio is 36 to 50. This is a total of all debts, including mortgage, property taxes, insurance, and any other monthly obligations like credit cards, car payments, etcetera. All mortgage disability pays is your actual mortgage loan payment, and it shouldn't take a mathematical whiz to see that this is clearly going to be insufficient unto the task. You're going to need another policy anyway, so why not just buy one good one and save yourself a second set of administrative costs?



Caveat Emptor.

Return to Service

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My host had a major server problem all day Wednesday December 28. I'm able to log in now and everything, but the main site URL isn't forwarding correctly.



UPDATE: Main site URL now working correctly. Everything seems updated

My Favorite Investing Books

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A week or so before Christmas, I got an e-mail asking me what my favorite books for investors and real estate folks were.



My response?







Unless you're going to practice professionally and undertake the study necessary to do a good job of it, personal financial advice books are largely a waste of money. The only reason I read them is to find out what the latest rationalizations are for avoiding professionals.



Every personal finance book I've ever read has an agenda of selling more (and future) books that conflicts with the ostensible purpose of making the reader as wealthy as possible. The one book in this category I've seen where this was outweighed by the good advice is Rich Dad, Poor Dad - which I suspect is already on your list. In fact, the best method of long term success is finding a good professional and making a long term individual plan, and the money you pay that professional is likely to be the best investment you'll ever make.



This is why the approach I take on my site is often weighted towards mathematical models, to debunk the nonsense and hype. My recommendations for reading would tend be in the way of college texts and similar things.



Any comprehensive logic text. Make valid arguments a habit. Spot bad links in an an argument.



A beginning psychology text is critical. Learn the importance of psychology in personal finance and get to the point where you always challenge your conclusions.



Double entry Accounting and tax texts. You cannot play the game well if you do not understand the system for keeping score.



One each freshman (college) calculus, physics, and chemistry books, that teach how to handle numbers and approaches that handle the entire system, with plusses, minuses, and second and third order effects. Learn that optimizing individual terms of an formula does not necessarily optimize the entire formula, and the more complex the system, the more likely this is to be true.



The NASD Series 6 and 7 license exam prep books. You have to be sponsored to take the tests, but anybody can read the books.



One of the California Principles of Life Insurance license exam prep books. I understand New York state may have an even better program.



Above all, believe it or not, various military works. Sun Tzu, Frederick the Great, and Von Clausewitz in particular. Sun Tzu is easy reading, but if you're not careful, you'll miss something critical. Frederick is fairly straightforward. Von Clausewitz can be heavy going

but teaches too much to be foregone.





For real estate investors, I would add a good real estate license prep course. For mortgage loans, well, the reason that's such a heavy area of concentration for this site is because there is nothing out there that I've found, and misapprehensions are legion.



There is no shortcut to competence or genius. Looking for shortcuts is a good way to waste your time, your money, and lose a substantial chunk of change when you could have made money instead. Nor is studying the market the only requisite for success. You won't often find people recommending you read a couple books and act as your own lawyer, and some of the best financial planners I know pay almost no attention to the day-to-day happenings of the market. Paying a professional puts somebody in your corner who should know better - and if they don't, if gives you someone that you can hold responsible, something that is not a feature of any of the self-help books that make a lot of people a very good living, but in my experience do more damage than good.



Caveat Emptor

Michael Yon makes an excellent point about propaganda. Everything you see that was selected by someone can be viewed as propaganda for their point of view. Sometimes propaganda is pretty much true and accurate, at other times it can be true but a horrible misrepresentation, still others any relationship between it and truth is coincidental. But just because it's propaganda doesn't mean it's wrong.



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As a public service announcement, may I state that this article on bankrate, Extra year-end mortgage payment could cut tax bill is flatly wrong by what I know of the tax code. What it looks like they are trying to do is jam 13 months of interest into twelve. However, according to my understanding, the current deduction in the actual code has to do with interest accrued to the bank. They accrued so much interest for the 365 days in 2005. They are not going to give you a 1098 for an amount higher than that. You didn't pay more than that. You may have paid some of your 2006 interest early, but this has precisely zero effect upon your 2005 taxes, as the banks are on accrual method. The IRS is not going to give you credit for the money in the year before the bank pays taxes on earning it. This is a good way to get in trouble. One more example of paying attention to journalists who have no clue getting you in trouble.



(And it was front page on the search engine, too. Lots of suckers out there.)



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Carnivals:



Best of Me Symphony



Carnival of Personal Finance. Recommended: fivecentnickel.com (detailing a phishig scam), A Financial Revolution (a short term phenomenon, but still useful)



Carnival of the Capitalists



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"A implies B, B implies C, then a miracle happens, D implies E"



That's the kind of argument TPM Cafe makes. It goes straight from identification as possibly terrorist involved and proceeds direct from there to automatically picking them all up for coercive interrogations. Okay, if they were going straight from monitoring programs picking up possible terrorists to hauling all such persons in for maximum toughness questioning, I'd be concerned, but they don't even do that with murder suspects. More likely, all hitting a false positive does is monitor more conversations and get a human involved. Small point, and easy to gloss over, but we haven't seen any indication that those identified get brought straight in for waterboarding. Furthermore, he assumes that the false positive bias is identical to the false negative bias, something that anyone involved in statistics and sampling knows methods of correcting.



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Armies of Liberation details the state of corruption in Yemen





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Kesher Talk asks: "Does anyone know what you are supposed to do if you get a feedback from Trackbacks that "You are pinging trackbacks too quickly." Is there a fix for that? Or just wait and trackback later on?"



As far as I know, other than trackback later, not really. This is a relatively new anti-trackback spam feature that needs a little more work. The difficulty is that Haloscan (and other) systems are making the assumption that any time there are multiple trackbacks from a post, it's obviously from a splog, not realizing that the originating post does reference both. This is a real issue for folks running carnivals, for instance, and while Powerblogs does auto discovery for me, it hits my "Links and Minifeatures" every time, so if I'm dead set on sending a trackback (rare), I have to come back with a manual one later.

HT to Unrepentant Individual, who also has some good information on what it means.



The genesis of all of this is Something's Gotta Give, a report (.pdf format) from the Center For Housing Policy. Furthermore, there is an article in the Washington Times from UPI that connects the dots on the tactical level.



The Center for Housing Policy report details some of the costs to society. Not surprisingly, when people are forced to spend a large portion of their income on housing, they have less to spend on other things, and so they can't spend as much on other things. Lest you think I'm talking about Lexuses, Lattes and Liposuction here, I am not. I'm talking about bare minimum things like food - as in people going hungry because they don't have enough to eat. Far from talking about liposuction, I am talking about basic medical care and insurance. I am talking about clothing, which, rightly or wrongly, people use to judge the worth of other people, and people who cannot afford good clothing are not given the opportunity to advance because no one will hire them. I am talking about basic transportation needs, without which people's job-hunting prospects are limited to the places they can walk. If you cannot get from work to home and back again in reasonable amounts of time, then you're either not going to live here or not going to work there.



Nor am I talking about the needs of some nebulous underclass. As the NHC report makes clear, these are people earning up to 120 percent of national median income. Furthermore, they are among the fastest growing classes of worker.



Below the first level effects, there are others lurking, largely unmentioned in the report. But malnutrition, parental depression, and lack of good medical care are the causes of many other ills. Malnutrition allows health problems to become chronic and generates more health problems. These are people who have more difficulty getting and holding jobs. So long as we have societal programs of social insurance, these folks are going to cost us, as a society, tens to hundreds of billions of dollars annually. If they can't hold a job, they've got to get money somewhere. No job means welfare or crime, and both are bad situations not only for that person, but for everyone else as well. Poor or no medical care makes any problems they have worse than they need to be, further increasing both explicit costs, what we actually spend on them, and implicit costs, money they don't make, taxes they don't pay, and other stuff that they suck out of society. Long commutes people suffer in order to buy housing they can afford means less parental supervision of children, leading to delinquency, increased crime, and other problems a few years out. Most critically, difficulty with money is the number one cause of divorce, and when families go through a divorce, the standard of living suffers even more and more long term societal troubles ensue.



Who is causing all this bad stuff? The short answer is that we all are. The cold hard fact of the matter is that they are not making any more land. Housing needs land. Land that is in use for other uses, whether it is industrial, commercial, open space, or other housing is not available for housing. Higher population means we (as a society) need more places to live. Anytime we add a person or a family, we add the need for that person to live somewhere. We can't just push them under the workbench in the garage until the next time we need them. Well, actually, I suppose we could, but I am certainly not going to vote for policies like that, nor, I imagine, is a majority of the electorate. So that fry cook at Lenny's, the cashier at the supermarket, and the nice lady who helps you carry your purchases out to the car at Home Despot, all need places to live.



Cold hard fact number two: In the high density places where jobs are to be found, land is expensive. In fact, it is far and away the most costly thing about a place to live. I can show you places where the lot goes for $350,000, while the finished home goes for $500,000. Considering the economic realities: Developer has to buy the land, then apply for permits that take years, then put the homes up for sale. Developer has to pay for the land, the cost of the money to own it for the years that are necessary, the property taxes, the cost of the permits, the cost of the people to get the permits, the labor and materials to build, and of course, they have to pay the people that sell the finished product. Except for the comparatively miniscule costs of labor and materials to build, these are all fixed costs! They are what they are. So if the developer pays another $5000 for labor and materials, and can sell the house for $200,000 more because it's got two more bedrooms and Italian marble floors, that is obviously the way for them to make a better profit. So they build the higher end home, which cannot be afforded by the lower income buyer. If the government requires so many homes to be set aside for lower income people, that merely increases the money they have to charge for the rest. Plus the "low income" buyers are likely to sell as soon as their contract limitation on doing so runs out. Just because Mr. and Mrs. Lower Income Couple only make $40,000 per year doesn't mean they don't realize they can make enough money to pay their rent for the rest of their life by selling the home that the city forced the developer to sell them at a reduced price for a huge profit. It's not like there's any difference between their home and the house next door that the developer sold for full price. I assure you that they are keenly aware of this. This makes getting into low income housing akin to winning the lottery in expensive parts of the country, and that is not what it is intended for.



There are obvious solutions to this. More housing. High density housing. Shortening the approval process, and making it less expensive and less uncertain. But the observable trend is in the other way. Why?



This is where it comes down to you and me. We're making it tougher for the developer to get those permits. When developers offer to buy property with the intent of building, neighbors come out in force to protest. Oh, we use all of the high-sounding names like "open space" and "habitat protection" and "quality of life" and even the mostly honest "No higher taxes to pay developers costs!" They come out and throw obstacles in the way of the project and sue in court and delay as best they can - which raises developer's costs, forcing the rest of us to pay for them. Or at least the people who buy those properties.



But the real issue, the elephant in the room that everyone desperately wants to ignore, is scarcity. We all want housing to be scarce. Why? Because we're already owners, that's why. If there's not enough of something, the price goes up and people wanting to buy have to pay the people who already have more money in order to buy. Whether people who obstruct developers will admit it to themselves or not, they are trying to vote themselves a profit at other's expense. The cashiers who work at the stores in the strip mall where you buy groceries need to live somewhere, and the lower on the socioeconomic scale they are, the closer that they have to live. It has almost nothing to do with the "Eeevil!" developers or any other corporate alleged malefactor. If they have to charge two million dollars per house to make a profit, they will build two million dollar houses. Or three. It's the buyers that pay for it, and these buyers are real people just like you are, who need a place to live just like you do, and if they can't get one in a sustainable way, will do it in an unsustainable way, as too many people have.



If you really want to watch something both amusing and eye opening some time, go to a planning commission approval hearing where you have nothing at stake. Let's say the proposal is thirty miles away on the other side of the city and you never go there. And watch them try to have a discussion about high density housing.



Oh!, the carrying on I've seen! The histrionics! The burying of the real issues! The hysteria! Ask for the mike and mention "property values" and the NIMBYs will go ballistic, guaranteed. "It's not about that!" some will scream. Then why, once all of the other concerns have been dealt with, do they continue to oppose the project? Or do you think it's really about a little bit more traffic on the roads, or open space that most of them can't see and never go use? "Ruining the character" of a neighborhood where they might know two or three other families at most? Why then, won't the people live near where they work? "Because it's not a nice neighborhood!" "Explain," you will say, and they will oblige with "Because it's all condos and apartments and it's a nasty neighborhood and and everything is expensive and property values don't go up!" And there the real agenda slips out. Figuring it out, and getting them to admit it, is about as challenging as dynamiting fish in a barrel.



Recently, the City of San Diego made a rational attempt to plan for housing affordability, lessened commutes, etcetera. Called the "City of Villages" concept, it envisioned more decentralized and distributed services, employment, and shopping, and in particular, a lot more high density housing with neighborhood parks and social centers. It may still come about, but over the objections of suburbia which sees their future increase in property value drying up. Over the objections of members of my profession who have tried everything they can to obstruct it. Let's face it, when everybody who has a job in a county of about three million people is trying to get to one of three places, and then out of those same three zones where everyone works, all at the same time, it's a recipe for a traffic jam. Add in the fact that the median commute is something over twenty miles, and many people drive well into the next county over (80-120 miles) and it's a recipe for an extended traffic jam. We have three full-blown interstates and at least a dozen spur and connecting freeways, and they're all jammed solid at least ten miles and two hours one way every morning, and the other way at night.



People in my profession aren't exactly blameless for the high cost of housing. Real Estate, as a profession, is responsible for a significant amount of price increases due to encouraging speculation and selling exclusive lifestyles. Actually let's stop for one quick moment and consider the idea of "exclusive lifestyle." Doesn't it have to do with excluding the masses? Making yourself one of the well off? Raising ones' self? It's not like the money to buy you out is coming from nowhere, and the poor schmuck who buys the property is going to have to deal with every penny of it.



Everytime I go into the MLS, a large percentage of the results have the statement "Quiet cul-de-sac," and these are all homes built within about the last thirty years. Cul-de-sacs were comparatively rare before then. Even in San Diego, with all of our hills and slopes and irregular terrain, neighborhoods older than that are designed for open access. The streets are laid out on a grid. Major and secondary roads cut all the way across entire developments. You can get from point A to point B without going around the whole thing. Cul-de-sacs were rare, and mostly there because the developer could get a few more homes into irregular terrain that way.



This suddenly changed sometime right around 1970. Suddenly developers realized that the "exclusive" label added to the value they could receive. Now streets were designed not to encourage access, but to discourage it. They start and stop and start again for no reason other than to discourage access. The quickest way to get from one major road to another, on the other side of the development, is to go all the way around the development. The developers lost very few homes to the redesign, if any, but now they could sell the cachet of "exclusivity," as in keeping the helots out. The start of accelerated growth in home prices traces to this period. It's also worthwhile to note that when these "keep the peasants out" neighborhoods start downhill, they tend to go a long way down, very fast.



The motivations for driving the prices up on the behalf of my profession are certainly understandable human motivations. We make more money on bigger transactions from the same amount of work and expense. That doesn't make them good for society, but higher profit for performing your professional function is at least an honest motivation. Ditto for the City, County and State. You're taking up X number of square feet of land, and they're not getting any more land in their jurisdiction. If the price goes up, they can sock you and they can sock the merchants and they can sock everyone in the area for more money. More money means more money for salaries - their salary. Their cronies. More lucrative contracts, necessitating more campaign contributions.



Fact: Given the current economic situation, the only way to get developers to build more housing that low income people can afford is to make housing for low income people more profitable than other housing.



How do you accomplish that? Allow more high density housing, but force them to plan the impact correctly. Enough parking, water capacity, sewage. Give the developers the parameters up front, so they know whether or not they can meet it, and enact a "must issue if standards met" law. Let the community get involved in setting the standards, if they want, but make them universal throughout the jurisdiction. Same standards for hoity-toity-ville as for the wrong side of the tracks. And make the citizens themselves subject to the same requirements. Make waivers as tough to get for homeowners as for developers, and come down hard on non-permitted activity. I just pulled up a couple dozen properties on MLS, and the well over half of the listings had the notation somewhere that "X may not be permitted." In my experience the owners know damned well that they didn't have the proper permits, but that it's very easy for the people who buy it from them to get a waiver as theoretically innocent, and they know that there's very little enforcement even if the new owner doesn't get it retroactively approved. So they put on an extra bedroom or bathroom without permits, knowing it made the property more valuable when they sell it, and because if they don't get a building permit, their property won't be reassessed until they sell. Incidentally, most of them don't use licensed contractors, either, but rather what our wonderful government euphemistically calls "undocumented workers" because contractors have to report where they did the work and woe be unto the contractor that does something without the proper permits. This means that the people who go through the process that society has agreed is necessary to perform competent, safe work in accordance with code, pay their people in accordance with the law, report their income so that a fair share of taxes are paid - the people who are playing by the rules - get cut out. Either do away with those rules or come down on the people who violate them, please. But I suppose that since it's "the little guy" who wants to make some money illegally, that makes it Okay? Even when in order to buy the property, this "little guy" has to have income in the top ten percent of the population? Didn't think so.



I am not trying to get all holier than thou on anyone here. I am as much of a capitalist as anyone, and more so than most. Capitalism works, but it works better when everyone has to follow the same set of rules. I'm tired and disgusted of bending the rules on behalf of one class but not another, because of lying, self-serving propaganda. My younger brother works - when he can find work - as an on the books construction worker at about $13 an hour or so. This works out to $26,000 per year if he was working full time all the time. This is well below the federal poverty line for a family. So far below that were he married and his wife working a minimum wage job, they still wouldn't beat the poverty line. Compare this to the "handymen" who work off the books, without any qualification beyond their word that they can do the job right, and who claim they make $80,000 per year when they're asked how much they make in order to get a loan. The taxes they don't pay means that you and I pay more. The property taxes their clients don't pay mean that you and I pay more. The permits that their clients didn't get means that there are more building code issues out there that someone else is going to have to deal with - after said client makes the inflated profit on the sale of the home, despite not having properly paid the increased property taxes they should have.



Contrast this with the hell a developer has to go through, often for years, in order to get a project greenlighted and never knowing for certain whether some stupid technicality will put the whole thing back to square one. For smaller developments, it's hard to find a place where it they are economically feasible, even with higher sale prices.



Furthermore, no developer with a lick of sense is building condominiums here in California right now. For ten years, they have unlimited liability for anything that can be considered a "construction defect." There are several highly profitable law offices that actually make a career out of going around nine to nine and a half years after the project is sold out, and telling homeowner's boards they can get them money. Usually this is done without any prior complaints, and they don't have any knowledge of actual conditions there - they just know they can get money. There was a period not too long ago where you just couldn't find condos that weren't going through a lawsuit, which is why it was eventually dropped from many underwriter's standards. I'm certain that a certain percentage of them had legitimate complaints, but there were just too many lawsuits filed with exactly the same sort of timing for anything else to be the explanation. For the record, what the developers are doing is building them as apartments, and then they are being converted after the unlimited liability period has expired. This is a severely bad thing, societally, but a full explanation would digress too far.



If a developer wants to build high density housing, there should be a fixed set of steps - parking, utility upgrades, etcetera - they have to go through, and then approval is immediate and mandatory - provided they actually sell the units for the stated price. If they renege, they are prevented from selling at all until they've gone through the whole approval process from the start, with no mandatory approval.



Put this into law, and watch the prices of available housing drop. We could even structure it into tiers, Tier A where the approval process is basic and automatic, Tier B with somewhat higher prices but more hoops and less certainty, and so on. I would love to be able to find young families affordable three or four bedroom condos - but three bedroom condos are like hens's teeth whether or not they are affordable, and four bedroom just doesn't exist, period, affordable or not.



For the last decade or so, the various governmental entities even been requiring developers to set aside infrastructure projects which, under current rules, are more properly the realm of government. They have to build schools and deed them to the government. Funny, but I thought with the increased tax base they are getting, that was the government's job. It doesn't do anything beneficial for the price of the homes in the rest of the development. Ditto parks, which are an excellent and admirable idea, particularly near high density housing, but should not be part of a government shakedown to cut down on the profit margin of land the developer paid their own money for, and went through an extended approval process for. The population is already there, and whether the developer builds new housing for them or not, the government would be responsible for finding school and park space. At the very least, the government should reimburse the developer for the proportional cost of the land and utility capacity, and do the building themselves.



Many of you reading this are thinking about money - dollars and cents. And you know, that's fine. I like it when clients make money on their property. It's part of my job to help them make money on their property. But there's a difference between a reasonable profit at 5% increase per year, and extortion because you happen to own a place to live and there isn't enough housing to go around because you're doing your best to get policies enacted to make certain that there isn't enough housing to go around.



The gentrification has reached the point in many areas of the country where you need to be in the top ten percent of all income earners in order to afford to buy a place to live - any place to live. That's great and wonderful if you're seventy years old and you can sell your home for a three quarter of a million dollar profit to your retirement nest egg and go live somewhere cheap. It's not so hot if you're a young working class couple looking for a place to live that you can afford and here is where all the jobs are. The damage done to the latter far outweighs the benefits that accrue to society because of the former.



If this continues, what happens next? Instead of having to be in the top 10 percent, now you've got to be in the top five percent, or the top one percent. If mommy and daddy never owned a house, or were so unlucky as to sell for less than stellar profit, you won't either. If there's no place to live that you can afford, you have to stay with mom and dad - but what if they don't want you, or they're in no shape to host you, or they just don't live in the only place you can get a living wage job? Suppose now you're twenty-five or thirty, engaged or even married, and still cannot afford a place to live? This is a recipe for social disaster.



At one percent homeownership rates, we're below what the homeownership rates were when we had tenements and slum lords, even if they are single family homes in older areas of town. And many people who have been engaged in "condo flipping" are themselves priced out of the market. There are damned few folks who cannot be priced out of the market if it gets bad enough, and if policies remain unchanged, who is to say that it will stop just before you become one of the victims, the permanent underclass? Even if you're one of that fortunate class who isn't priced out, when there are ninety-nine people who want housing for every one who can actually afford it, what do you think is going to happen at the ballot box, or in the streets if necessary? I'd rather start now, while we can plan it rationally, as opposed to later when any old low quality crackerbox will be thrown up in panic mode anywhere and anyway it can be just to keep people from rioting in the streets.



Other things that need to happen. Tax codes need to be rewritten. this article traces the most recent acceleration to 1998 - coincidentally about two years after the $250,000 profit exclusion on housing ($500,000 for married couples) was enacted. All you had to do was live in it for two years, and bang! you didn't pay taxes on the gain. I believe that instead of keeping it in the current "cliff" form (after two years you qualify for the full exclusion), I think it needs to be phased in over a longer period of occupancy. Two years gets you maybe $50,000, then another $25,000 per year until ten years are done. It's hard to argue that someone who makes more on flipping houses every two years than they do on their day job deserves to make that money tax free, when the poor shlub who can't qualify to get into the first house pays taxes on every penny he earns.



I also suspect that we would benefit from more limits on Section 1031 exchanges (and reverse exchanges), which has to do with not taxing profits from real estate when it's replaced within six months with other real estate. Don't get me wrong, it's a beneficial code section overall and I'll keep helping clients with them, but I have to question whether someone who makes an exchange and then refinances to strip equity is really doing something to earn all that tax free money, or just engaging in paper transactions that make it look like they contributed something. I don't blame the participants for taking advantage of what is in the code, but some of what I have seen, and much of what I have heard about, is of questionable economic benefit to the country.



Zoning also needs to be heavily looked at, and not just for high density housing. "Granny flats" are just too useful, but prohibited by blanket R1 zonings with no exceptions allowed in too many neighborhoods. Many folks don't want and don't have room for granny to live in the same dwelling, but if they could put up a small second dwelling, whether attached or not, granny could live there rather than off somewhere else where the choices are often "completely alone" or "in a nursing home," by which I mean they are one of the best ways to keep granny out of a nursing home. Furthermore, granny flats are also good for young adults who may not be able to easily afford housing on their own. None of this was a problem before 1970, and it's not a problem now - except in so called "modern" "exclusive" neighborhoods where we've made it a problem.



I hope this article will start a certain amount of discussion about what's really going on, and whether it is of net benefit to the country, and the people in it.



Zoo Trip 12/24/2005

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Took the family to the zoo on the 24th. A true example of why I love San Diego. Christmas Eve, and it's Sunny and warm, temperatures in low to mid seventies, even turned on the air conditioner in the car on the freeway. Marine layer moved in around 3, so it cooled off a few more degrees, but we were warm enough from walking by that time. Being Christmas eve, of course not many folks there, and perfect weather for a lot of the animals, many of whom come from colder climes. Since we're members, all it costs is gas money.



Took the camera, got some decent photos, and thought I'd experiment to see how well frappr works.



Malayan Tapir baby was nursing. Still has baby stripes! This is one of the worse enclosures, had to zoom and crop to get the photo you see.



Jabba, the daddy hippo, was getting an enrichment hosing. This is a little bit cropped, but otherwise unretouched.



Panda mother and baby. This is Bai Yun with her third cub. This was the one crowded exhibit there was. Su Lin was just climbing up and settling as we arrived, but too quick to get a good picture. It really is a better exhibit for watching than taking pictures. This one is slightly zoomed and cropped.



Daddy Panda. Gao Gao, in the neighboring enclosure, was quite active. This is a little bit cropped. Got a picture of him stretching up a tree, but there was too much foliage in the way. The two year old, Mei Sheng, was off exhibit. He's probably going back to China quite soon.



This black Jaguar has been one of our favorites for a long time. He's usually active, and usually in the front of his cage. The photo is exactly as taken, no zoom, no crop. My wife got some others that will probably be better once we hit them with snapfish.



Rhino crash! Don't let anyone tell you these guys can't move fast. He plowed through that headbutting target faster than I could bring the camera to bear. This is a little zoomed and cropped (You do not want to stand too close behind a rhino! I saw four people get a full frontal spray a few years ago, and I've seen several other close calls)



Orangutan up in tree substitute. I (IMHO wisely) waited until the one in the hammock had stopped urinating. You don't want to know.



Orangutan up close and personal. I cropped just a little bit, but there's enough foreground left to see exactly how close she was.



Pygmy Hippos! This is in the new Heart of the Zoo, and is a wonderful exhibit. Ran out of camera power, but they were playing around, and the one in the water actually did a barrel roll a couple minutes later.

"I don't care what kind of ceremony it is," says 16 year-old high school student Koam Chanrasmey.



"I just want to celebrate it because a lot of other youths will do the same thing and have fun. That's it," he says.



Now that's a healthy attitude (by most people's measure - it agrees with me). I would like more people here to have it. But he's in Cambodia



Sometimes you'd just with the ACLU would come up to Foamy's (NSFW - severe foul language advisory!) level of thinking. It's a party. Have fun. Nobody is forcing you into church. Nobody is forcing you to worship baby Jesus, to light a menorah, or bow down towards Mecca, or even burn a Yule log. I'm not religious in any kind of organized sense. But let them have their fun, and just maybe, you might have a little more fun because of it. And you know, it really isn't painful. What are you, some kind of Puritan?



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Slinging mud at the wall, desperately hoping it'll stick. Alito Defended Officials From Wiretap Suits, This was his job - to promulgate his client's point of view. I don't recall any of this sort of nonsense when Ginsberg was nominated, or Breyer.



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Housing sector has problems - big problems - but this is over the top. New Home Sales Fall More Than Expected. How many people do you know who want to move just before Christmas? This happens every year. It's why most of my time away from the work is in December. It's why I had no problem hosting Carnival of Liberty twice in a row.



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Iraqis March to Denounce Election Results



See how successful we're been in creating an Iraqi democracy. Already at their equivalent of Bush Derangement Syndrome! :-)



Follow the development of the story at Iraq the Model here, here, here, and here. What it's looking like is everybody's favorite, control those who are counting the ballots.

Mister Snitch has the idea for a Best Posts of 2005.



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Q and O has more on whether the President's surveillance was legal. I am not qualified to pass judgment on the legality. I am qualified to say it was rational, logical, and correct, even if it is emotionally unwelcome to most or politically frightening to the testicularly challenged. These days, nothing makes people stupid or crazy like the notion that the government might be watching.



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Carnival of The Vanities is up! Recommended: Smallest Minority, Sophistpundit,



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Think your boss is a jerk? No whining or we'll fire you, a compilation of employer horror stories.



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So we won't actually enter into insanity for six more months. Senate passes Patriot Act extension.



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Michael Yon has some perspective on the elections in Iraq.



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I got an email from a reporter about my little blurb on the proposed Sheboygan spaceport in this Links and Minifeatures. I suspect he's never really paid attention to a launch or launch broadcast, because the email said something about turning downtown Sheboygan into a pile of glass. Well, I've never been to the proposed spaceport or anywhere close, but I doubt it. There's not that much energy in a launch. On the other hand, it might not be the most wonderful thing in the case of an abort, and the extreme noise would likely be a factor as well.



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Speaking of being a RINO, is anyone else uncomfortable with the Kitzmiller decision due to the fact it is an unelected judge overruling the desires of elected school board members? Similar to Roe vs. Wade, I like the result, but am seriously unhappy with the means, which was a bad precedent. Yes, Intelligent Design is creationism in secularist's clothing, and no, I don't want it taught in science classrooms. It falls flat on its ridiculous backside as a scientific theory for a mind boggling number of reasons. Nonetheless, this is not the way to deal with the issue.



If I don't like judges overstepping their authority, I must be against it when they happen to agree with me also.



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Dean's World has some good advice for the Donkeys that I heartily agree with. However, I must point out that the exceptions to the offyear elections rules of thumb are, ahem - the most recent two offyear elections. In fact, the last time that rule's predictions were validated was 1994. We only get offyear elections once every four years.



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He chose... poorly



Wizbang has details



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I know it's a hard appeal right now. There have been too many causes with legitimate needs this year. If you have a few extra bucks, though, please consider helping the little girl Mudville Gazette talks about. American soldiers are trying to save her from spinal bifida, routinely treatable here in the United States. The donation page is here.



"No one is so wrong as he who does nothing because he can only do a little."



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Victor Davis Hanson brings some moral focus to our day.



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Volokh Conspiracy deconstructs some mind-numbing stupidity.



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HT to Hugh Hewitt for directing us to the Department of Justice laying out its case in the NSA wiretap brouhaha, and also The Faculty Blog from the University of Chicago.



Powerline also has its own thoughts on the matter.



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HT to Instapundit for a link to The Agitator and many Cory Maye items. This man is guilty of nothing except being a victim of bad procedure.



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I do not know if I will have time for any more of these until the 27th. I'm working on several "full" articles as time permits.



If I don't post another fest before then, here is wishing you and yours well.



If you are a regular reader who wants to give me something, might I request the gift of your participation? Not that I can't use money, but there have been no donations in the six months the donation button has been up, and the little girl above (among many others) needs it worse than I do. But participation costs nothing. Ask me about things that don't make sense to you. Challenge me if you think I'm wrong. Tell me when you think I've done something noteworthy - good or bad. If nothing else, ask me a question. So long as we keep it oriented towards the issues, it helps both of us to disagree (I keep trying to recruit an old friend who is a rational liberal as a co-writer here). Sometimes I feel like Voyager - broadcasting out into empty space and nobody is listening, despite the fact that most days my server logs now show somewhere over 1000 visits most days and nearly twice that number of page requests.



Amending the Budget Process

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Over at Q and O they've got a good anti-pork proposal - that of unbundling, mandatory separation of each line item on the budget from every other. Conjectures and Refutations has a good games theory treatment of one side.



Well, this is all well and good, and I support it fully, in the "Whatever fraction of a loaf we can get is better than none" sense. However, one thing overlooked is that the various legislative branches, both in Congress and the individual states, now have a long history of backing each other on this particular Prisoner's Dilemma. It is the Way Things Are Done. This is analogous to subjecting a number of mobsters to the Prisoner's Dilemma, each of whom knows that the others not only have a history of not squealing on each other, but also a code whereby any who does break Omerta will have to face severe consequences later. The prognosis doesn't look good for the police in my example, or the taxpayers or economy in the real-world budget situation.



I have come to believe that the only way we are going to see real budgetary reform is to force the special interests and their pet congresscritters to fight each other by putting limits on what is available. The only realistic way I see of making this happen is to Constitutionally reform the budget process. My dream would be something like force a yearly fight on what is available, in the form of a yearly tax collection bill. This is one fight that everyone who wants a limited budget can weigh in on, to keep the number of projected tax dollars smaller. Mandatory set aside of whatever the interest on the national debt is. Mandatory set aside of ten percent of the gross amount for emergency spending, which requires the same approval process as any other public law, and anything left over from that must go towards debt reduction or investment after that gets paid off (If you're not an economist, you would likely be amazed at the positive difference this would make in our economy, as it would have the result of making investment capital plentiful, and therefore cheap). After these two set asides, the remaining pool of dollars is all that Congress is allowed to spend. Constitutionally, they could spend it all on pork, yet practically, where there are real national priorities at stake which make a real difference to their constituents, this is likely to force them, in most cases, to spend responsibly first.

I've run two prior articles this week on the theme of Long Term Care, one on Long Term Care Issues, and one on Non-Tax-Qualified versus Tax-Qualified, and Partnership Insurance Policies. Now, I'm getting down to nuts and bolts of what you need to know while shopping for a policy.



The two most important characteristics are the total benefits and the daily benefits. It may be helpful for many people to think of total benefits as a lake, where instead of water, it contains the total amount that is available to you, and the daily benefits as the size of the pipe that brings those benefits to you when you need them. It doesn't do you much good to have a huge lake and a too-small pipe that can't put out the fire, which is the daily bills you have to pay for care.



The way policies are generally sold is that they are for X number of years, with a daily benefit limit of $Y. The product of these numbers (and 360 days per year) is the initial total benefits limit. A one year policy with a $150 per day limit is good for $54,000 of total coverage. A three year policy with a limit of $300 per day is worth $324,000 of total benefits. A five year policy with a limit of $180 per day has that exact same aggregate coverage limit of $324,000. There are lifetime policies available; these have no aggregate limit but are limited to whatever the daily benefit is.



Note that a three year $300 per day policy is superior to a five year $180 per day policy in that although they both have the same "lake" of benefits, the former has a larger "pipe" (or "stream", if you'd prefer) to get them to you. Therefore, the policy with the large pipe will be more expensive. It is an often misunderstood part of policies that there is no time limit for benefits. You can use less if you like, but you can't use it faster than the pipe brings it to you. If it takes you three, five, seven, or seventeen years to exhaust the "lake" that's how long it takes. I've known agents who did not understand this clearly. If you only use $60 per day, either of these policies will last fifteen years. But if you use $250 per day, the former will pay off the full amount of your daily benefit until exhausted (about 3.6 years), whereas if you have the latter, you're going to be out of pocket $70 per day from day one. This can cause you to exhaust the resources you were trying to protect well before the policy is done paying benefits. The "time duration stated" - the Y years part - is the shortest amount of time in which it is possible to exhaust your lake of benefits. It has nothing to do with how long the benefits can last, which is always "until exhaustion." Given the facts of the situation, it is better to have a big "pipe" than a long duration, and in the example given, the 3 year $300 per day policy will be the more expensive. It's also likely to be worth the difference. For Partnership policies, the state of California currently has a minimum daily benefit limit of $130.



It is to be noted that for the Partnership policies, at least in California, the limit is actually a monthly limit of thirty times the daily limit. Many other policies follow this as well. This means if you get something that costs extra once or twice a week, like physical therapy, as long as your entire monthly care does not exceed thirty times the daily benefit, you won't be out of pocket for those not-so-little extras.



Policies are sold as home care only, facility care only, or comprehensive, so called because it covers care where ever you may need it. Actually, here is a Glossary of terms you may want to refer to. Partnership is only sold in facility care only and comprehensive policies. My advice to to buy a comprehensive policy, because you never know what your situation will be when you actually need to use benefits. The difference in cost is typically small.



One of the really sneaky ways some insurance companies can stick you with a gotcha! is to require you to continue paying premiums while you are receiving care. Since you're likely in a situation of incompetence, or just plain unable, this is a good way to get out of paying benefits. ("But your honor, Ms. Jones did not continue to pay her premiums as is clearly required by the policy! We are clearly within our rights to cancel"). Insist upon a policy with waiver of premium upon commencement of benefits. This means you don't have to continue paying your premiums when you may not be mentally capable, or able to get new checks, or any of dozens of other possible hitches. In California, waiver of premium is required for all Partnership policies.



Policy Lapse Protection is similar, having to do with reinstating your policy if you neglect to pay the premium before you are diagnosed as needing care and it lapses for that reason, but good policy lapse protection is actually fairly widespread. You're going to have to pay the back premiums, "bring your payments current," and there may be an administrative or interest charge, but better that than needing an entirely new policy. This is not "don't make your payments for ten years and drop a lump sum on them when your doctor diagnoses you with Alzheimer's." About six months to maybe a year in some cases, is about the limit of lapse protection.



Elimination period is the time after you start receiving care, before your policy starts paying benefits. It's analogous to the "deductible" on your automobile insurance. Short elimination periods are more expensive, longer ones less so. I would not consider an elimination period of less than ninety days, or more than six months. Even at $200 per day, the person who is an appropriate buyer of long term care insurance should be able to fund three to six months or so. Lengthening the Elimination period makes the policy cheaper. Indeed, a three year policy with a six month elimination period may be cheaper that an equaivalent two year policy with a three month elimination period. The average stay in long term care is something approximating two years, but in a large number of cases it is five years or more. If you've got assets to protect, you can likely afford three to six months, but fewer people can afford years of coverage. If you're lucky enough to live in one of the states with an active Partnership for Long Term Care, the asset protection function means you continue to receive benefits even after the policy is exhausted. Even if you don't live in one of those states, the policy can get you through the "lookback period" where Medicaid will go back and attach any assets you transferred elsewhere. I know I've said Medicaid coverage is awful, but if you still have money, or people willing to spend money on your behalf, you can make it a lot more tolerable than it is for someone who is truly destitute.



Pre-existing conditions are not something to unduly worry about here, in my experience. If you have a pre-existing condition, the insurer is only allowed to exclude paying to treat it for six months in California, and I believe (but I am not certain) that this is an NAIC rule, which would mean it likely applies nationwide. This can mean that you will be flat out rejected until/unless you recover, but this is in accordance with the principles of insurance. You buy insurance when it's a risk, not a certainty. You don't wait to buy health insurance until the heart attack starts, you don't wait until you've got terminal cancer to buy a life insurance policy, and you don't wait until the doctor diagnoses you with Alzheimer's to buy a policy of Long Term Care Insurance. You would be quite properly rejected for coverage in all three cases.



Other bells and whistles you should be interested in include "step down" options for if the premium increases beyond your ability to pay. This gives you the ability to change to a less expensive policy without new underwriting, rather than simply losing coverage, if your circumstances change..



One protection I strongly advise everyone to get is inflation protection. If you buy a $200 per day policy, that may be adequate now. It may not be adequate when you need to use benefits. All California Partnership policies require compound interest inflation coverage if you are less than seventy at time of purchase. This is a good thing. If you are over seventy when you first buy, simple interest inflation protection is permitted, but I wouldn't advise it unless you are going to use benefits within the next couple of years or not at all.



Inflation protection applies to both daily benefit and total available benefits. So if you start with a 3 year, $300 per day policy, after one year of 5 percent inflation protection, it goes to a $315 per day policy with a total benefit pool of $340,200. Let's say it's twenty years down the line, and your "total pool" of dollars has gone to $871,000, but now you start using them. Let's say you use $21,000 of benefits that year, leaving $850,000. That $850,000 pool becomes $892,500 the next year, demonstrating that even after you start using benefits, it is still possible for your "available lake" to increase if you have inflation protection. Now the last I was aware, actual cost rises were running about 7% per year, so 5% isn't really long-term adequate, but it's what's available. If you're relatively young, you probably want to overbuy by some factor to compensate for this.



One rider that you probably do not want is return of premium. Return of premium means if you die without using benefits, your estate gets the money you paid in premiums back. This is very attractive to laypersons, and it makes a nice addition to the salesperson's commission. Unfortunately, it can also double - or more - your cost of coverage, and the older you are, the larger the multiplier will be. This can cause people who can and should buy a policy to buy a smaller policy benefit than they really need, smaller than they should have. Even though they are spending the same amount of money on the premium, their coverage is far less. Furthermore, the return of premium is usually with only a very small interest, or none at all. It takes comparatively little time before you would have been better off investing the difference.



Now, who should and should not buy a policy of long term care insurance. There are no hard and fast rules, but if you have no assets to protect or the policy premiums are a real hardship, then you should not buy a policy. The state of California defines this as assets between $50,000 and $250,000, but those standards are the same as when I took my training, and would suspect that a truer picture would be those with liquid assets under $75,000 should not bother. On the other hand, California has some very smart millionaires with top of the line advisers buying Partnership policies because they are never certain their circumstances will not change. Income wise, the state of California has a .pdf document that they referred me to. Furthermore, someone who could afford long term care indefinitely would have no reason to purchase an insurance policy - the insurance company doesn't work for free. In California Partnership Policies, at least, you do have an additional protection in that the company is required to advise you if you are not within the income and asset guidelines for policy purchase, and offer a full refund.



The best time of life to buy long term care is as early as practical. If you buy at 40, your premiums will always be less - a lot less - than someone who buys the same policy at 50, who in turn will save a lot over someone who buys at 60, and so on. Typically, if you wait until after you are sixty, you will have to pay far more in yearly premiums than you saved by waiting - even considering the time value of money. I always called this the "penalty box", and it makes sense for the same reason life insurance is cheaper the younger you buy it. This is not to say it doesn't make sense to buy after age 60; what I'm saying is that the statistically average person will save a lot of money over the course of their life expectancy by buying earlier. I've had people eighty years old ask me for quotes, and are surprised when minimal coverage is thousands of dollars per year. This is because, first, if you're buying at age 80, you are overall more likey to use benefits, and for a longer time, and second, because it's likely to be sooner rather than later, leaving less time for the insurance company to invest your premium dollars and earn a return.



Caveat Emptor

UPDATED here

(Part 2 of a three part Series on Long Term Care)



I wrote in the previous column a lot about long term care issues. This column deals with the insurance policies available for long term care. There are two major types, with one subtype available for people who are lucky enough to live in one of four states. There is non-tax-qualified (NTQ), tax qualified (TQ), and for those lucky enough to live in California, Connecticut, New York, and Indiana, there is a superior brand of tax-qualified, Partnership. In many states, there are indemnity policies available for those who don't like paperwork, but the gotcha is that they are all NTQ, non-tax-qualified.



Let me explain what's going on here.



In all of the legal policies, there are listed Activities of Daily Living, or ADLs. For non-tax qualified, there are seven, and for tax-qualified, there are six. It is the inability to perform a certain number of these activities without assistance that triggers eligibility for benefits. For tax-qualified policies, these are Bathing, Eating, Transferring, Continence, Toileting, and Dressing. Non-tax qualified adds the ADL of Ambulating, for a total of seven possible qualifiers. Note that the preparation of food is not a qualifying factor, hence Meals on Wheels and similar programs, as well as the traditional family support structures. "Assistance" ranges the gamut from just having somebody there in case something happens ("Standby assistance") to having to have someone do it completely for you.



Bathing is performing the functions to clean yourself.

Eating is feeding yourself food you are given.

Transferring is being able to "transfer" from one support mechanism to another - for example, bed to wheelchair or wheelchair to toilet.

Continence is what you'd think.

Toileting is ability to perform the tasks necessary to eliminate waste material in a normal fashion.

Dressing is the ability to get clothing on and off as required.

Ambulating is moving yourself under your own power on your own feet from place to place.



Of these ADLs, bathing is almost always among the first to go and hence a trigger for the policy. Eating is probably the least prevalent trigger for benefits, followed by dressing, but there are no solid study figures I can find. Ambulating always goes before or with Transferring. Within broad parameters, each individual insurance company can write their own definitions of each of these. For instance, a number of companies used to define "Transferring" more or less the same as most people think of as walking, thus making it easier to qualify for benefits, and hence, a better policy than competing policies. Of course, they will be priced accordingly, as well, but there is a lot of variance on pricing within the industry. Of the policies I used to sell, the one with the broadest coverage was usually the second-cheapest in the competitive quotes. So shop around.



Now the point needs to be made that just because you qualify for benefits now doesn't mean you have to start taking benefits now. Sometimes people are in situations where family can take care of them right now, but may not be able to do so indefinitely. Taking care of someone in this manner is brutally tough, and there is no shame in not doing so, or in saying "That's enough, I can't take it any more!" For this reason, every policy sold also includes respite care, where a caregiver who is usually a family member can get relieved by a paid provider. If you think about it, it's to the insurance company's advantage as they pay out less money this way, as opposed to the person starting to use full benefits right away.



Non-tax-qualified (NTQ) policies have one more trigger for care - ambulating, which tends to make them attractive-seeming to most laymen. However, they usually require three triggers to be pulled (ADLs requiring assistance), as opposed to a limit of two for tax-qualified. This is kind of like showing pictures of something that looks like a Rolls-Royce, but the the interior is vinyl, the body is made out of plastic, and the engine came out of an old Yugo.



Indeed, almost all of the games you will hear about being played are with NTQ policies. The issue is this: In order to become Tax-qualified, the policies have to toe the line of legal requirements. So the NTQ folks, who don't meet the guidelines anyway, offer all kinds of bells and whistles that don't really mean anything to make their policies appear more attractive to those who don't know any better.



You see, NTQ policies are NOT generally deductible on schedule A of your income tax as a medically related expense. Furthermore, if and when they pay you any benefits, those benefits are taxable income. Remember I told you in the previous column that median billing was about $200 per day? So if you're in there the whole year, that's about $73,000 of taxable income, on which someone in the 28 percent federal bracket pays $20,440 on federal taxes, never mind state taxes.



Tax Qualified, or TQ, policy premiums are deductible as medical expenses, and the benefits they pay out are not taxed.



Now, for those readers who like myself, may have some knowledge of the nature of the tax code, let me take a minute for an aside. I am well aware that, in general, the IRS only allows, at most, one end of a transaction to get away from taxes. So this kind of got my attention, and before I sold any policies I verified it extensively. I confirmed a few days ago that it is still that way. To further ease your mind, remember that these are health insurance policies. The premiums I pay to my HMO are deductible, and the dollar value of the care I receive is not taxed. Tax Qualified policies of Long Term Care Insurance are treated the same way.



What this means is that it is very hard for me to imagine a scenario where an NTQ policy is better than a Tax-Qualified one. Indeed, I've never sold any policies that weren't. It is for this reason that the state of California requires all Long Term Care Policies to state whether or not they are designed to meet the requirements to be tax qualified. Ask the agent looking to sell you one of these straight out whether it's a tax qualified policy. Any answer other than a one word straight "yes" or "no" is grounds for terminating the talk. Walk out of their office or throw them out of your home, and go find an agent who knows what they're doing and is willing to give you straight answers. And if the answer is "no", ask them to tell you about a policy that is tax qualified. You see, one of the ways NTQ policies get sold is by paying higher commissions. They are harder to sell, because they aren't as good for most people, so the companies give the agents a reason why they want to sell them. More $$$. It's your call, but I wouldn't do business with anyone who tried to sell me an NTQ policy, and yes, that means jettisoning them and finding someone else for your future needs, even if you've been doing business with them for decades. They've just demonstrated that they don't have your best interests at heart.



I also want to make the point that agent's commission should not, in general, be one of your criteria for choosing a policy. That's a good way to end up with a policy that's too small to do you significant good, as smaller policies pay less in commission also. Shop by the cost and benefits to YOU. A good agent will show you how they arrived at the figure of the coverage they are recommending, and if you shop around, the good agents will all come up with similar figures and the same way of calculating it.



Back to the main subject: we can regard it as settled that, in general, you want a tax qualified policy. Let me tell you about a subtype of tax qualified policy that people who are lucky enough to live in California, Connecticut, Indiana, and New York are able to buy: Partnership.



All Partnership policies are tax qualified. But in addition to their ordinary benefits and their tax qualified nature, Partnership policies have an extra feature: Medicaid asset protection. If you'll remember, when I was talking about Medicaid (Medi-Cal here in California), I explained that before they will give you benefits, you are required to spend your assets on your care (or give them a lien in the case of your house) down to where you are basically poverty stricken. And indeed, if the benefits you have purchased under any other long term care policy have run out, that is precisely what you still have to do. Indeed, many people give their assets away during their policy benefit periods, so that when the policy runs out, they no longer own or legally control the assets and are eligible for benefits without a spend down. Since California's thirty month lookback was the shortest in the nation last I checked (many states are at five years), this means you need to buy a policy where the benefits are going to last longer than that.



But once a Partnership policy's benefits are exhausted, it protects from Medicaid recovery not only the same assets everyone else gets to protect, but additional assets as well, on a dollar for dollar basis. For every dollar the policy paid out before you applied for medicaid, you get to keep an additional dollar in assets, in addition to whatever everyone else gets to keep. Say you had a two year policy at $200 per day. That's $146,000 you still have and that you get to keep. The Partnership instructor I had told us in class that she calls her policy her Visitors Insurance. Because she's still going to have money, her family and heirs are going to want to keep visiting her so that they don't get written out of the estate. Horrible thought, but this wonderfully funny lady is in her sixties and has been working with nursing home issues her whole life. She has seen too much of what really happens in these instances to be ignored. Visitors also means better care. Not to mention the fact that she will have had a policy in the first place, which means that if the facility she ends up in takes Medi-Cal patients at all, they have to keep her, and that means if there's no Medi-Cal bed, she stays in the non-indigents ward until there is, so she's not going to end up in Barstow, where it's tough for friends and family to visit, and she will have hundreds of thousands of dollars to make her life more tolerable when she is moved to the Medicaid ward.



For this reason, the thing that makes sense with Partnership policies is to buy enough to protect your liquid assets (The New York program uses a different, in my mind far more onerous and less cost effective, plan where you have to buy a minimum of three years of policy benefits). In other words, the dollar value of whatever investments you may have. Since I'm in a Partnership state, this makes it easy to calculate how much of a policy would accomplish that. In non-partnership states, there's more guesswork involved, and a large amount of sheer guts on behalf of the client.



Let me state emphatically that by inducing people who can afford them to actually buy Long Term Care Policies, Partnership policies save the states who have them a large amount of money - billions of dollars - as those people who would have needed state based aid now have insurance policies to cover their needs. The folks at the California, as well as New York, Connecticut, and Indiana Partnerships for Long Term Care, have saved their states blortloads of money by having this program in place. Luckily for all concerned, this includes two of the three most populous states.



(Supporting articles here and here and here)



However, back in 1993, OBRA (Section 1917 Paragraph 3, about halfway down the page, is the reference) was passed, which at the explicit insistence of Congressman Henry Waxman, who was then chair of the Commerce Committee's Subcommittee on Health and the Environment, removed from all future states the ability to waive or modify the asset recovery requirement of medicaid. (I understand that Iowa and Massachusetts also have plan documents dated early enough, but have not actually implemented a Partnership program, and the Massachusetts document is even more onerous than the New York one, but better something than nothing). I understand Congressman Waxman's concern for the budget, yet nonetheless by their propaganda you would expect Democrats to be in favor of something that benefits the middle class like this - particularly the lower middle class blue collar worker, and actually ends up saving the taxpayers money, to boot. Of course, Congresscritter Waxman is from California, which already had a program in place, and he grand-standed against "Money for the poor being used to pay for care of millionaires". He represents a heavily blue collar district in Los Angeles, so you'd have thought he'd have done more research as to who it actually benefits. So due to this gutting of the primary benefit of having a Partnership policy, there will be no more of these wonderful programs until the law is changed back to what it was prior to 1993. In my opinion, whichever politician gets such a law through Congress should be a national hero. It gives people real incentive to buy a policy if they can afford it, secure in the knowledge that even if it doesn't cover everything they need, they won't be destitute after it runs out, while saving the Medicaid program tens to hundreds of thousands of dollars per patient.



So there really is such a thing as an insurance policy that keeps paying you even after the benefits are exhausted. Partnership policies are no more expensive that any other policy, and they provide asset protection, as well as additional benefits. If you are in a state that has a Partnership for Long Term Care, I would not consider any policy that was not a Partnership policy. Here in California, every policy sold must state whether it is or is not a Partnership policy. If it makes sense for you to buy a Policy for Long Term Care Insurance (a subject I will tackle in the next article), and you are in a state that has such a program, make certain that the policy you buy is one of those policies available through your state's Partnership for Long Term Care.



Links to the four states with Active Partnership Programs:

California

New York

Connecticut

Indiana



(Continued in Part III here.)

Caveat Emptor

UPDATED here

Carnival of Liberty

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Carnival of Liberty 25


Under the law of nature, all men are born free, every one comes into the world with a right to his own person, which includes the liberty of moving and using it at his own will. This is what is called personal liberty, and is given him by the Author of nature, because necessary for his own sustenance. -Thomas Jefferson

The Liberty Papers presents The Gadsden Flag

Ignorance is preferable to error; and he is less remote from the truth who believes nothing, than he who believes what is wrong. -Thomas Jefferson

The Unrepentant Individual presents Smokers are Personas Non Grata

Mad, adj. Affected with a high degree of intellectual independence; not conforming to standards of thought, speech, and action derived by the conformants [sic] from study of themselves; at odds with the majority; in short, unusual. It is noteworthy that persons are pronounced mad by officials destitute of evidence that they themselves are sane. -Ambrose Bierce

T. F. Sterns Rantings presents Senate Majority Leader's Survey

"A newspaper is a device for making the ignorant more ignorant and the crazy crazier." -H. L. Mencken

Don Surber presents Podcast: Don't Oversell The Iraq Election

"Dad always thought laughter was the best medicine, which I guess is why several of us died of tuberculosis." - Jack Handy

Let's Get Something Straight Between Us presents THE THREE JIHADIS: Abdul, Mohammed and Curley Sayyed

"Marriage: A community consisting of a master, a mistress, and two slaves, making in all, two." -Ambrose Bierce

Expressions Of Liberty presents Marriage A Right To Pursue Happiness Issue

"The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand." -Sun Tzu

Left Brain Female . . . in a Right Brain World presents Scenarios

"Businessmen are the one group that distinguishes capitalism and the American way of life from the totalitarian statism that is swallowing the rest of the world. All the other social groups- workers, farmers, professional men, scientists, soldiers- exist under dictatorships, even though they exist in chains, in terror, in misery, and in progressive self-destruction. But there is no such group as businessmen under a dictatorship. Their place is taken by armed thugs: by bureaucrats and commissars. Businessmen are the symbol of a free society- the symbol of America." -Ayn Rand

Your host submits Privacy Concerns in Real Estate Transactions

By a free country, I mean a country where people are allowed, so long as they do not hurt their neighbors, to do as they like. I do not mean a country where six men may make five men do exactly as they like. -Robert Gascoyne-Cecil, 3rd Marquess of Salisbury

Eidelblog presents Smoker's rights?

He loved Big Brother. -George Orwell, 1984

The Skwib presents Alternate History Friday: Dr. Tundra in the Dock

"A government which robs Peter to pay Paul can always depend on the support of Paul." -George Bernard Shaw
Not to mention the government that makes it easy for Paul to rob Peter.

TMH's Bacon Bits presents Ban Handguns? They Should Ban Liberals!

Go Lemmings, Go! -Popular button

Tom Rants presents Now All We Need Are Some Tariffs

Even the longest journey must start from where you stand -Chinese proverb

Mensa Barbie Welcomes You presents Reshaping a Continent

Your enemy is never a villain in his own eyes. Keep this in mind; it may offer a way to make him your friend. If not, you can kill him without hate--and quickly. -Robert A. Heinlein

You host submits The Basis of War


Next week's Carnival of Liberty will be hosted at Target Centermass

Carnival of Liberty can also be found through TTLB UberCarnival

Well, today marks six months that I've been at this.



Tomorrow I will be hosting the Carnival of Liberty again. Please stop back by for lots of good stuff.



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Monday seems to be Carnival Day. In order of discovery:



Carnival of the Capitalists. Coyote's got Acme products in the spotlight. Recommended: Bard's Eye View, Photon Courier, Insureblog



Best of Me Symphony. Recommended: Shiloh Musings



The Very First Carnival of Investing is up!



RINO Sightings is also up! Recommended: Argghhh!, Strata-Sphere,



By the way, boys and girls, we're all supposed to be adults here. If you've got popups on your site or your site tries to seize control of my browser, be advised 1) I am not coming back, 2) I am not going to bother sticking around to read, and 3) I definitely am not linking to or recommending your post, and in fact I will de-link you if you're already listed.



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Dean's World has more about what he wants to see Treason trials for the leakers.



Volokh Conspiracy appears to say that the surveilance may not have been within the limitations of the law.



Contrast with the latest rants from Kos



Powerline has some rational, as opposed to legal, thoughts on the matter.



Real Clear Politics considers political implications.



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Media bias confirmed.



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Opinion Journal has a long laundry list of which sex is valued more by society.



Long Term Care Issues

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One of the two most undersold financial products is long term care insurance. Yet it is a critical need, ranking just below disability insurance in the estimation of most financial planning agencies.



Long Term Care is already a large part of our nation's health care costs. In 2002, the last year I actively worked as a financial planner, in the state of California, approximately 2 percent of the recipients of Medi-Cal (California's version of Medicaid) were in long term care of one sort or another. Those 2 percent used approximately 47 percent of the budget. A little over fifty percent of the population is expected to need long term care of a year or longer, and this percentage has been rising and is expected to rise further. With medical science able to stabilize people to live longer lives, the probability of people living years after they reach that level of frailty rises.



The reason they use so much money is simple. Once you're in them, you tend to be in them for a long time. You may be in the hospital overnight, or for a week, and it costs a thousand dollars or two per day. Long term care may only cost $150 to $200 per day, but it costs that much every day for months, if not years or the rest of your life. So one seventh to one tenth the money per day, but for a hundred or a thousand times longer.



End of life is not the only time someone uses long term care. Approximately 40 percent of the inhabitants of long term care facilities are under the age of 65. For whatever reason, they have a disability or a condition that requires around the clock watchful care.



California licenses two types of residential long term care facility: Skilled Nursing Facilities (SNF), and Residential Care Facilities (RCF). The SNF has more medical requirements to meet, and is therefore the more expensive of the two, both to operate and to reside in. There are also Senior Daycare Centers (much like child daycare centers) and various in-home options.



Many people think that the federal medicare program covers long term care. It doesn't. The Federal Medicare program provides only a very small part of long term care. For a one time stay, it will cover the costs of a stay of up to twenty days, and pick up days 21 through 100 with a copay of about $110 per day. This means that for the first three months, you're out about nearly $9000. After that, you're on your own, as far as the federal government is concerned. So if you're talking about hospice care for a terminal patient, Medicare may or may not stretch to cover it, depending upon how close they were to death when the doctors gave up on curative treatment.



Even so-called "medi-gap" policies only cover a tiny amount of long term care. The reason why is because its costly insurance. So for the same reason you don't find cars on your supermarket shelves across from the bread, you have to go to a special policy to get significant coverage.



The median billing here in California runs about two hundred dollars per day, and it can go much higher for Skilled Nursing Facilities. This works out to $73,000 per year for as long as it lasts. Not a big deal if you're a multi-millionaire, but if all you've managed to save is $150,000, two years and it is gone. So for most folks, self insurance just doesn't cut it.



Now there is one program that will cover Long Term Care - state-run Medicaid (called Medi-Cal here in California). Unfortunately, in order to get coverage, you've got to pay yourself down into practical poverty first. Nor are you allowed to give assets away or put them into trusts. The various states have "lookback" periods ranging from thirty months to five years prior to your application for benefits. Anything given away in that period is subject to asset recovery - in other words, the person you gave it to is going to have to cough it back up, even if it was already spent.



Let me give you an idea of what poverty looks like. Many people make a big deal of the "community spouse" regulations, that permit the keeping of $2000 per month and eighty-some thousand dollars of liquid assets, as well as a life interest for a married couple in one piece of real estate. First concern, let's say hubby goes in to care while wife stays out. Can wife live on $2000 per month? Maybe, if she doesn't have any huge medical problems. But if she's not drawing a pension herself, most of income is likely to be attached for hubby's care, and it doesn't take long to draw down $80,000 in assets when that's all you've got to live on. Plus medicare is not the greatest care in the world, so there is always the need to purchase side items. Also, these places are not high margin. They are not making money hand over fist, and they make a truly rotten investment. Many of them go bankrupt, and the ones that survive and provide good care tend to be in lower cost areas. So if you live in Los Angeles, your spouse could well be in a home in Barstow because that's the only place you could find that had a spare bed. Far away means visitors are rare, and visitors being common is one of the best predictors of how good the treatment will be, and how well they will respond.



Finally, this is just not what happens, statistically speaking. What usually happens is when one spouse gets sick, the healthy spouse takes care of them as well as they can for as long as they can, either with or without assistance. Then the first spouse is gone, and at some later point in time the second spouse becomes ill, and that's when long term care happens. Less that ten percent of the people in long term care have living spouses, and this includes counting the situations where both spouses are in long term care. (this .pdf document has a decent explanation)



Many attorneys will advertise structured trusts and other weird schemes to get you to qualify for Medicaid care while still retaining your assets. Spend a couple of thousand dollars on a one time basis, the pitch goes, and you'll be able to shelter your assets from the state. Unfortunately for this, the states narrow the gaps in the regulations every year, because they want to catch cheaters and people doing precisely this. A good general rule is that if you own the asset, if you control it, or if it can be used for your benefit, the state will force it to be spent or attach it in order to provide your care. Medicaid was meant for the poverty stricken, not to provide medical care for the wealthy. So it's a little change here for $1000, another little change there for $1000, and pretty soon you've spent all your money on the attorney. Best way to nip this in the bud is to ask said attorney point blank: "So you're going to write out a commitment to pay for my care yourself if this doesn't work, right?" Needless to say, this is not going to happen.



Furthermore, assuming it does work out and you manage to retain assets while the state pays for your care. Well then, I say, "Congratulations! You've won WELFARE!", in my best Monty Hall voice, and you can imagine the curtains coming back on "Let's Make A Deal" to reveal their gorgeous hostess, smiling from ear to ear while holding the lead on an old sway-backed donkey.



The medicaid package is not a lavish one. Remember I told you that nursing homes average billing is about $200 per day, and that they go bankrupt a lot? Well here in California, the state will pay about $110 per day for medicaid patients in long term care. You should be able to imagine the implications from there. I've visited a couple of medicaid wings, and the "Eeewww!" factor is significant. It starts with the smell, which hits even people like me who don't have much of a sense of smell, and goes downhill from there.



The final option to avoid this is purchase Long Term Care Insurance. There are two major types, with one subtype available for people who are lucky enough to live in one of four states. There is non-tax-qualified, tax qualified, and for those lucky enough to live in California, Conneticut, New York, and Indiana, there is a superior brand of tax-qualified, Partnership.



Part II on "Long Term Care Insurance: Non-Tax-Qualified versus Tax-Qualified, and Partnership" is here

Part III on "Shopping for Long Term Care Insurance - Who Should and Shouldn't Buy, and Policy Characteristics" is here.

Caveat Emptor

UPDATED here

Dr. Sanity has THE ultimate round up on the events of the past few days. I guess you have to be a professional to deal with that much insanity.



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Decision '08 cites Rudy Giulani on the failure to renew the Patriot Act.



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I want really want to know how people can look at all the pictures of the elections in Iraq and NOT be profoundly moved? I'd like to understand this, really I would. I've seen hundreds, and the effect gets stronger with each one I see, not weaker. I've seen pictures of little kids who will be able to tell their younger siblings what it was like before. I've seen pictures of members of the new Iraqi Army, and Police Force, and even poll workers who will be able to tell their grandchildren that they helped make it happen, much like the heroes of our own Revolution. I've seen pictures of old women and their daughters beaming like they've won the lottery, the Oscar, and the Nobel Peace Prize all in one (and come to think of it, the Iraqi people would be a great nomination for that last). People who have helped turn their nation's back on barbarism and repression, however imperfectly, and onto a road of democracy. Free people, who now know the are free because they now have the power to do something at the most fundamental of all levels, determined never to become slaves again.



And I want to know, how can anyone with any pretensions at being an American not be moved?



Somebody sent Michael Yon a video.



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neo-neocon has an excellent argument about and debunking of Jane Fonda's "Killing machines"



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Captain's Quarters has the authoritative debunking of the New York times claim that the surveillance the president ordered was illegal. The president's action was logical, intelligent, correct, and legal. Had he failed to order it, we would be justified in accusing him of negligence, if not outright dereliction of duty.



Hugh Hewitt has more.



dean's World wants to see treason trials. Intellectually and emotionally, I'm all for it, as it appears there is evidence of treason. Politically, though, it would be a disaster, even with so-called "moderates".



The Basis of War

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(This was originally going to be part II of Is the United States Worth Defending? but that got too long to continue.)



What are my political priorities? Quite simply, I want to make the world as a whole and the United States in particular better places to live. I want people to live longer, richer, safer, happier lives. I want people both here and in the rest of the world to be able to do what they want as long as it doesn't mess up anybody else, and by anybody else I mean people.



Part and parcel of making the world better is not allowing it to get any worse. We have scratched and clawed our way up from the primordial slime, and whether you're talking 750 million years since life began on earth, or just the last hundred thousand or so when our species has identifiably existed, it was a long hard brutal slog up the slope, and the further down we fall, the harder it will be to start our way up again. Only in the last few hundred years have we come up with the idea that as we learn more about the world around us, maybe we know more than our ancestors. It's only been a couple of centuries since we started to drive out the idea that the people with the important ancestors are the important people. They certainly can be as is witnessed by any number of families of brilliant people, but this fallacy is to blame for the slowness of progress throughout most of human history. If your daddy was a peasant, you were a peasant, and if you didn't want to break your back to grow food for the rest of your life, you'd damned well better do it anyway until you prove that you can do something else - and because your daddy was a peasant, nobody believes you can be anything more, either. If your daddy was a king - even a king who accomplished nothing more than falling asleep and drooling on himself, the supposition that you deserved to be important also was overwhelming. History is largely the study of those people who made themselves important. It's only by oblique examination of the attitudes of the time that you find out how truly amazing the exceptions were.



It's only been a couple hundred years since the notion of democracy really took root, first in western culture, and recently spreading elsewhere. The idea that perhaps the sum of everybody's wisdom was greater than any one person's is a profound conceptual change. The idea of patent and copyright, that someone who invented something that potentially made everyone's life easier was entitled to some of the good of their invention, as opposed to it being just taken over by whatever noble (i.e. those who already had the resources to take advantage of it) first saw the uses, was likely what really ignited the industrial revolution.



It's been less than a century since people first really began to practice the idea that perhaps we ought to give everyone those same chances, not merely those who happened to be of the ruling sex, race, class, or ethnicity. It's only been a few decades even here in the United States where it has really been practiced. It's only been a few decades that sciences from medicine to physics to chemistry started advancing rapidly.



I could go on for hours, but the point I'm trying to make is that the ideals and elements of western civilization, and the United States in particular, however unpopular they may be with certain elements (who, I might add, would never give them up!) are worth defending. Hell, they are worth circling the wagons and retreating into the mountains and fighting guerilla style as our enemies have done and fighting to the last man, woman, and child, if we have to, rather than giving them up. If you don't substantially agree with me on this point, you might as well stop reading right now. I am not giving up our Freedoms which permitted all of this to happen. Not a chance in anybody's hell. And there are whole armies of people, good decent people who spend their lives as schoolteachers and police and firefighters and scoutmasters and military defenders of our country, and even bureaucrats, who will not allow it either. I am humbled by the knowledge that they would even permit me to stand with them if it came down to the necessity, and yet there is no doubt in that they would, and that they would be similarly humbled that I would permit them to stand with me.



The beauty of this society that we have built here in this country just beggars the imagination, and every time I think I understand it all, something comes along and knocks the feet out from under me and picks me up and slaps me around and shakes me and rubs my nose in the fact that we live in the most wonderful society anywhere throughout human history, and I am moved by the experience every time. Because of the great ideas of our civilization and our country, and the fact that they are so beautiful, so enabling of human dignity and human worth, they are so contagious that half the world wants to be an American, and most of the rest and a good deal of the first half wants to create an America wherever they happen to be. They may not speak English, they may never have so much as seen an American in the flesh, but they understand that they want to be American, and in that moment they have taken the first step in becoming Americans. Every year, millions of people want to be Americans so much that some of them will wait decades for the opportunity and come here to start all over again at an age when most people figure they have earned the right to take it easy for the rest of their lives. And millions more want to be Americans so much that they will break our laws, and risk, at least threoretically, a lifetime banishment in order to start becoming Americans right now. These people are more counterweight than the Chomsky brigades and other "America is Eeevil!" apologists can ever make up for even if they did put their lives where their mouths are and vote with their feet by actually going to live in one of those Fifth World hellhole "paradises" they keep telling us about, that would be wonderfully glad to have them and give them positions of privilege and importance, insulated from the everyday realities of life there, where they could rail to the world about how evil America is, and how wonderful their new homelands are, all the while living off the blood, the sweat, the tears of those who never were and never will be given any of the opportunities that these useful idiots take for granted. And yet these people haven't left, and more new Americans cross our borders every day. That tells me something quite profound.



Unfortunately, the rest of the world is not America. In fact, the entire idea of America, and western civilization in general, is supremely dangerous to those who are powerful in many areas of the world. The idea of democracy, that says we will choose our leaders based upon the one who persuades us that we want to go the way they want to go, mocks and undercuts those who are leaders because their grandfather was a leader, and their grandfather's grandfather before that, and instills no little amount of fear that perhaps they will not always be a leader. The idea of evolving wisdom based upon learning how the world works in ways that can be repeated, time and time again, and get the same answer no matter who conducts the tests, mocks and undercuts the idea of revealed wisdom, the idea that the Answer is always going to be the same because some priest hundreds of years ago said that was what God wanted, and instills no little amount of fear that perhaps the answer that priest put in God's mouth may not be correct. The idea that anyone can become wealthy, important, one of our leaders if they only have good ideas, work hard, and stick to it, mocks and undercuts those who are wealthy and powerful because their family has owned the port concession for the past seven generations, and instills no little amount of fear that perhaps someday, someone else may be given another port concession and manage it enough better so as to put them out of business, or even that there may be no port concession and so whomever wants to run the port can try.



These people we threaten by spreading our ideas are not blind or stupid. If they were, they would have lost their positions of power and wealth and privilege in favor of a new leader who really is as inspired as grandpa was. They are typically competent enough, and it's much easier to hang on to a position than to get it, and grandpa made certain daddy knew enough to hang on, and daddy made certain they did. But they feel threatened because however great a man grandpa, or grandpa's grandpa was, they know deep down that they personally are nothing special. They know that any number of people could do just as well, given their positions starting from wealth and privilege and having connections that most people do not.



But however unintentional the threat may be, the threat that American values represent is nothing short of devastating to their way of life. The fact that this powerful man is the son of a line of chiefs going back to the days of the prophets means very little to people who have been infected by our ways of thought. It still means something, even here in America, else the Kennedy and DuPont and Ford families (among others) would not have the cachet they do. It's a sign that it's more likely that there may be something here worth watching. But not even being a member of those families will get you anything if you're a loser (in fact, it will get you derision for being a waste of an opportunity), and it won't get you any opportunities that someone from outside them cannot get, even if they have to work harder than you do.



But even this mode of thought is supremely threatening to the man who is what he is because he's the son of the last king, or the son of a line of influential priests. Evolving wisdom, based upon experiments and observable, verifiable results, are a direct and immediate threat to the world of Revealed Wisdom and the Word of God (according to some priest or another, of course). Competition is anathema to those who have always been insulated from it, whose position depends upon being the only one with the ability to do some good or necessary thing, however artificial that ability may be.



So they want to stop these ideas, and the only way to stop them is at the source. So long as America and her allies stand strong and proud, America's ideas are going to, as they see it, "infect" the rest of the world. But let America be humbled, let her confidence be broken, above all let her ideas be defeated, and these people can retain their positions of wealth and power and privilege, and maybe even expand them.



That the desire to strike at us is understandable in no way, shape or form means that I think it should succeed. It should not, in fact, if we want the world to continue to become a better place, it must not. It only means that these people are not, by their own lights, necessarily evil.



Just because they do not see themselves as evil does not mean that their prescription is the one the world should be following. Indeed, in the free competition marketplace of ideas, their method of striking back tells us that they know their ideas will lose. They cannot convince us by rational process, and they know they cannot really convince us by force, either. Their strength is a fraction of ours.



Where they do see a light of hope for their cause, however, is ironically in the very successfulness of our ideas. Our ideas are so successful that not even our grandparents grandparents had any significant war or violence across an entire continent that their parents had conquered. It has been 140 years and counting since any large proportion of our population saw war "up close and personal" the way large proportions of most generations in the rest of the world have. There are still a large number of living Chinese who remember the events of the Communist Revolution. The violence of the Partition of India was contemporaneous with that. We sent something like ten million uniformed troops overseas in the second world war, but people from North Africa to the whole of Europe to the entire Western Pacific watched the war ravage their cropland, bomb their manufactories, and squash their homes. The generations since in Central and South America, all through Africa, and large swaths of Eurasia, have seen war just as closely. We have not. Many of us do not understand war. Many of us don't understand the nature of war. Many of us don't understand what it's like, what it means, to have war come to you, and be fought over your land. Most of us especially don't understand what it means to lose a war. It's been too long since it really happened.



In this lack of understanding, our enemies see a window of opportunity. If they can just convince us that it's not worth fighting, they can win. Indeed, if they convince us it's not worth fighting, they will win. Once we concede that we're not fighting any more, they automatically win. And because of the casualties and the allies we betray and the treasure we have wasted, if we later decide that we were wrong, it becomes much harder to change our minds. The South Vietnamese we encouraged to stand straight and tall and resist communism, and whom we then left to die because Democratic congress wanted to strike back at a Republican administration for domestic misdeeds were the genesis of the communist successes of the later seventies, when it seemed that the whole world was turning Communist. Angola, Mozambique, Nicaragua, the role call of countries that fell, or almost fell, goes on and on. Established, stable allies like Columbia and Venezuela fought off determined marxist insurgencies, both military and political, that sowed the seeds for modern troubles in those countries. The communists saw that they could bluff their way to victory, and those who would have opposed them saw that we left our allies to die when it became politically convenient to do so. So our enemies became emboldened, and our allies became fearful.



We rescued ourselves from that one, or actually Ronald Reagan and Margaret Thatcher rescued us by restoring our confidence. A good thing, too, else we probably would have learned all too soon what it's like to really lose a war, in a way that we escaped with Vietnam, because it was so unexpected and our enemy never thought that we were really that stupid until we proved that we were, and next time we won't be likely to be nearly as lucky. Losing a war means real, long term consequences. Just ask Germany, or Japan, and reflect that we treated them far more kindly than any other defeated adversary had ever been treated, any other time in the history of the world. Ask the Nationalist Chinese, or any of the losers from dozens of revolutions around the world in the last two generations. Ask the Bosnians, the Croatians, the Rwandans, the Angolans, the Sudanese, the Cambodians, both the Pakistanis and the Bangladeshis, ask the Afghanis. Only where the victorious armies were themselves civilized, and subject to morality based claims of right and wrong, as with the United States, Britain, and the Israelis, have any of these hard facts been somewhat lessened.



I would rather not be in this war. War is a nasty, dehumanizing business that makes people die unpleasantly, wasting lives and resources and treasure that might have won real advances for us as a species. Like it or not, though, one determined enemy makes a war - it is peace that takes the cooperation of both sides. The other side has been at war with us, whether they realized it or not, since at least the 1970s and perhaps since the 1930s. That we as a group did not wake up to this until September 11, 2001 in no way alters these facts. Consider the way that any Americans captured by them have always been singled out for special attention. Not Swedes, not Danes, and not Greeks. Americans. The only nationality which draws anything like the same degree of attention is Israeli, and I think we all understand why that is. Israel represents the presence in their area of the world, but the United States stands behind that.



Unfortunately, there is no way that we can not threaten this group of opponents. Our very way of life provides the threat, and we cannot change this without changing our way of life, the thing that makes us American, and therefore worthwhile. The threat we represent has nothing to do with our military, which although it may be the most advanced and most capable in the world, it in no way, shape or form threatened them prior to September 11, 2001. Okay, we had bases in Saudi Arabia, and elsewhere in the region. Our actions said, as clearly as it can possibly be said, that we had no territorial ambitions in the area, and that so long as our mercantile interests were not threatened, we just weren't going to do anything. Why else would we have let Saddam Hussein off the hook the first time? We even went a far distance out of our normal ways to respect their ways of life and customs. I knew military women who were stationed in the middle east in the early 80s, ten years before Desert Storm, who were ordered to wear extra clothing in the desert heat so as not to offend their mores. Christians were told to keep their religion as low key as they possibly could, and public activities such as worship discouraged. And unless you yourself were Islamic and therefore permitted, for crying out loud don't go anywhere near the holy places! (By contrast, our great ideas have no problem with the idea of nonbelievers visiting Bethlehem, or Jerusalem, or Rome, and even the Mormons have no problems so long as you stay out of the "sealed" areas of their actual churches. Indeed, no small number of converts have been won by precisely this approach!)



We have tried being low key and inoffensive. It hasn't worked. The people we are fighting are threatened not by our guns, but by something a thousand times more powerful: our ideas. Indeed, it has finally become apparent to both sides in this war exactly what it is we are fighting over. This great clash between civilizations is over nothing less than the future direction of the world. Forward looking, evolving wisdom based upon observable reality, or Revealed Wisdom of words put into the mouth of God by a priest over a thousand years ago. Finding leadership in whichever of our citizens can best provide it, or looking to the sons and grandsons of chiefs. Remember, our enemy is not evil by his own lights, I would even argue that the vast majority are not really evil at all, but instead merely threatened by ideas that they cannot counteract with ideas of his own. Indeed, the thought of allowing those ideas to do battle in the intellectual marketplace is itself alien and threatening to him. Nonetheless, our enemy must be defeated. However imperfectly we practice and however recently we have come to it, the idea of allowing any citizen to lead who can convince us that they are worth following trumps the idea of following the son of the last leader. The idea that we should all be free, within limits of not harming others, to do what we want trumps the idea that our actions are prescribed by the place in society where we were born. The idea that members of all groups should have at least the same opportunities as anyone else trumps the idea that that the tribe that has always ruled gets all the goodies. The idea that women can make their own roles trumps the idea that women are housewives and mothers whose role is to support their husbands and raise their sons to treat their wives in the same way ("Women should not be beaten with a stick thicker than your forefinger"), second class citizens in every way. The idea that everyone can, should, must be allowed input into the decision-making process and that the daughter of a bricklayer may be more correct than the son of our leaders for the last hundred years trumps that the idea that the nobles and educated elite should make all the decisions because their clans have always led us and always been educated. You see, the real reason why they are losing the war - why they've already lost it, unless we throw away the victory by refusing to fight, or refusing to follow up the victories that have already been won - is that they waste so damned much of the human capital they are given, and that alone is more than reason enough why they must be defeated, and gives us ten thousand times more justice and right than our real enemies will ever have on their side. Not to say that we don't waste any, but they cannot hope to beat us except by becoming like us, and that in itself spells defeat for them, or by seducing us into a forfeit. The system we have beats anything that has come before it so hollow that there is no competition, which is why millions of ordinary people every year want to become Americans, and why we are a example held out as a symbol of hope by those fighting opression elsewhere in the world. It is not to the Secretary General of the United Nations that they appeal, not to the head of the EU, nor even to the executive of NATO, but to the President of the United States. It is to his eternal credit, and ours, that he has shown he understands what really is at stake here and has shown himself willing, et enormous risk and cost to himself, to take the proper actions.

Camp Katrina wrote to tell us to compare and contrast the treatment the media gives conservatives with a given problem, with the treatment they give liberals with the exact same problem. In other words: Oh. That liberal media bias.



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If you don't know who he is, don't release him until you do. This is not a difficult concept, but at least one Iraqi evidently needs some remedial on it: Iraq Freed al-Zarqawi Last Year



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Let me get this straight. Instead of being heartless corporate drones, some Ralphs managers had a heart and snuck around the company to rehire some people who couldn't afford to miss work due to a lockout, and Now they're being criminally indicted?



Folks, that particular strike was felony level stupidity on behalf of the union leadership. They led their workers right off a cliff over the "principle" of 100% covered health benefits - something the supermarkets who deal with the union could no longer afford and stay competitive. If it had been the supermarkets intent to break the union over it, they easily could have. Instead they gave the union a pretty decent contract at a point when otherwise the union would have been as dead as PATCO. If the individual workers don't want to go out, if they want to keep working, if they're willing to stand up and tell the union that it's being unreasonable in the first place, shouldn't that be their option?



Given the competitiveness and thin net margins in the local grocery market, it would have been to the stores' advantage to crush the union while it had the chance, especially since they had made the investment of the three month strike. That they did not indicates they're trying to be good citizens - better citizens than their nonunion competition. For the government to then come down on them for their acts of compassion is real incentive not to be so nice next time. And people say that corporations have undue influence over the political process.



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I'm not certain a Fatah victory would have made that much difference, but Hamas rolls to victory in local West Bank voting is not good news.



Captain's Quarters analyses Hamas strategy, and what could be done to counter it.



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Wizbang has a post up debunking the worst media myths about the flooding in New Orleans. I don't agree 100 percent (how many cities are not only below sea level but below a large adjacent lake that hurricanes regularly funnel water into as well?). Nonetheless, a lot of valid points.



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HT to Mudville Gazette for a pointer to the stirring story of a Wall Street Journal writer who has become one of our newest Marine lieutenants today. Go read the whole thing.



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Iraq the Model has extensive election coverage, much of it personally observed. Estimates are that the turnout was around an incredible 70%! I don't think any american state has hit that in thirty years. Congratulations to the Iraqi people. Like Ben Franklin told us two hundred eighteen years ago: You've got a democracy if you can keep it.



Mudville Gazette has a wonderful roundup of the Iraqi elections.



Indepundit has a concise synopsis, and compares it to what various large media outlets are saying.



Victor Davis Hanson has the strategic level review.



On the Unhinged front, Decision '08 has found the top ten Kos reactions so we don't have to.



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A dose of much needed budget rationality from Asymmetrical Information. That A may be a worse problem than B is in no wise an excuse for not dealing with B. Quite frankly, I doubt that the political will to stop the social security/medicare trainwreck exists. Nonetheless, it is in everyone's best interest to start dealing with it now. The longer we wait, the worse the coming torture going to be. Right now we're at "Rogue Police Interrogation." I'd really prefer to deal with it before we get to "Inquisition," let alone "People shredder."



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Looks like the Yemeni regime is really unhappy with Armies of Liberation, They're speaking in Tongues!



There are many who interested on writing about the Yemeni affairs. But only few of them who put the hand on the defectiveness places to diagnosing the situation in the country. May be the American journalist and political analyst Jane Novak taking advanced position on the experts list of the Yemeni cases. However, she is new epoch in interesting the Yemeni Affaires.



There is no dubiety that the media campaign against Novak powered by the governmental and rule party media and others which orb in it's falk supported it's thesis. It was busy with attacking Novak and harassing her instead of explaining the wrong thing in which she was talking about. It was thinking that in this way they will kill her theses against the corruption in the state.





Gate. Hinge. Ne'er the twain shall meet.



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Here's some rationality from a Hollywood personality: Freeman Criticizes Black History Month



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Michelle Malkin lays the smackdown on the NY Times on the whole "domestic spying" thing.



The reaction I had when I heard about it was basically "Hooray!!", and now I say "Hooray!!" wholeheartedly for someone willing to stand up and call BS BS. The whole privacy issue is over-rated and wrong headed, a product of wrong assumptions, as I go over in the articles here. Get over it.



Scrappleface hits the nail dead on the head.



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HT to Instapundit for a link to a Club for Growth article about Sugar protectionism killing the domestic candy industry.



I get to go to my daughter's play! Bye for now!

I found this article by Ken Harney in the paper.



WASHINGTON - Call it funny money for the housing boom: Now you don't need actual cash in the bank to buy a house. All you need is somebody who says you've got money in the bank.



Need a hundred grand on deposit to convince a lender that you deserve a million-dollar mortgage? You've got it . . . even though you haven't really got it because you "rented" it from a company in Nevada for an upfront fee of 5 percent - $5,000.



Sound bizarre? Welcome to the wonder world of "asset rentals" now being investigated by bank and mortgage industry fraud experts. It works like this: Say your loan officer discovers that you lack the financial wherewithal needed to qualify for the mortgage you want. Rather than lose your business, however, the loan officer turns to a service that offers "asset rentals." For a flat fee of 5 percent of the amount you need, the service will verify to anyone who asks that the $100,000, $500,000 or $1 million in bank deposits you've claimed on your loan application documents are yours indeed.





I am sorry to say that this is not the first time I've encountered said phenomenon. Nor lenders. This is why assets require seasoning or sourcing. In other words, the lender requires you to show that you've had it and built it up over a period of time, or they want to know where and how you got it.



Most loans should not require a large amount of assets - A paper loans, the best loans of all, want one to two months Principal, Interest, Taxes, and Insurance (PITI) for full documentation (and I can usually get it reduced), or six months PITI for stated income loans. Neither of these is a large number if you're really making the money, and they can be in a variety of places.



Some sub-prime lenders, however, will take large amounts of money in an account somewhere as evidence that you can afford the loan. These loans usually end up looking more like a propagandized No Income, No Asset loan than anything else. They don't get the best rates and terms, even for sub-prime, and there's likely to be a nastily long pre-payment penalty on them as a GOTCHA! The loan provider, be it broker or lender, is likely to make a lot of money on them - In California there is a thing called section 32 limiting total loan compensation to six points, which on a $400,000 loan is $24,000, and many so-called "discount" real estate agents turn around and require their clients to do the loan with them. It doesn't do you a bit of good to save a couple thousand on the sale or purchase in order to get ripped for twenty on the loan, where it's easier to conceal it. I can point you to many of these so-called "discount" houses who do these loans all day, but they are not loans you should want. If a friend came to me and asked for one, I'd try my best to talk them out of it.



But wait! It gets better!



This and other e-mail pitches, copies of which were provided to me by mortgage industry recipients, carried the sender name of Loren Gastwirth, identified on the e-mail as vice president-marketing for Morgan Sheridan Inc. of Mesquite, Nev. The asset rental attachment carried the name Independent Global Financial Services Ltd., with an address in Las Vegas.



... to a Zexxis Co., with the same Mesquite, Nev., address on Loren Gastwirth's Morgan Sheridan card. When I called the number listed for Gastwirth, I received no reply, but instead heard back from a person identifying himself as Allen Paule. Paule is listed in corporate filings with the Nevada secretary of state as the "registered agent" for Morgan Sheridan, Independent Global Financial Services, and Zexxis Corp.



Paule said the asset rental and employment pitches - including downloadable attachments and forms carried on Morgan Sheridan's Web site - were not connected to his firms. He said, "somebody hijacked our Web site." He confirmed that a Loren Gastwirth works for Morgan Sheridan. And he also confirmed that Independent Global Financial Services, Morgan Sheridan and Zexxis Corp. have overlapping ownership and management. According to Nevada corporate records, a Paul Gastwirth is listed as president and director of Morgan Sheridan.



The Web site of Vault Financial Services Inc. of Las Vegas lists Paul Gastwirth as CEO of that firm, and president of Independent Global Financial Services, "a company specializing in asset rentals and enhanced credit facilities for individuals and companies worldwide."





In other words, they are playing a Nevada Corporation shell game. A long head swallowing tail chain of corporations, each of which is likely to be a shell set up to insulate criminals from the consequences of their actions. The stuff about "somebody hijacked our web site" is almost certainly bogus.



but it gets better yet!



That's where the asset rental service's "VOE" (verification of employment) program comes in. Essentially you indicate on a faxed form what annual or monthly income you or a home buyer client needs to qualify for a mortgage, and the asset rental company will verify to anyone who asks that you have been paid those amounts.



The cost: just 1 percent of the claimed annual income. "For example," says the pitch, "$100,000 of annual income - cost of $1,000. Minimum is $50,000." The e-mail came with attachments that directed payments for asset rentals and employment verifications to an account number at Wachovia Bank in Roanoke, Va





In other words, they're also volunteering to help you circumvent one of the most basic protections to the whole process, making sure for both the lender and the borrower that the borrower can afford the loan. If you cannot afford the loan, you are probably better off without it, although many people don't realize that this requirement is partially for their own protection. If you can't make the payments, you're going to get foreclosed on. If you get foreclosed on, you're likely to lose everything you put into the house and get socked with a 1099 form which the IRS will use to go after you for taxes as well.



Lest you not have realized this by now, all of this is FRAUD. Serious, felony level FRAUD. Lose your home and go to jail FRAUD.



I'm going to share a little secret with you, widely known within the industry but not in the general public. That real estate agent or loan officer getting you your house or your loan may not be the brightest financial lightbulb in the world. Many loan companies and real estate offices select for this, usually by only hiring people who have never been in the industry before. Some of them are even among the biggest names in the business. They select for sales ability and "make sales" attitude, not the knowledge (and more importantly, willingness) to say, "Wait a minute! Something is not right here!" Especially when it may cost them a commission. And hey, if the companies involved lose a few low-level sacrificial victims to lawsuits and the regulators, that's no skin off the owners' noses and they still get commissions out of it. These schemes are pitched to the agents and loan officers as a way to "save" a client. Sounds like it's in your best interest when you put it that way, right? It is not. The bank discovers this (and Nevada Corporations, among others, are a red flag that loan underwriters look very hard at) Most of these deceptions are discovered before the loan gets funded - meaning that the client they were helping to commit FRAUD wasted their money, and they have a case against the agent and employing broker, whose insurance will probably not cover the issue.



The ones that do get funded are even worse. When the bank discovers the FRAUD, they have a right to call the loan. This means you have a few days to repay the loan, or they take the house. All of those wonderful consumer protections the federal and state governments have enacted become mostly null and void, because you committed FRAUD. You can count upon losing all of your equity in the home, and getting thrown out with nothing. Furthermore, depending upon company policy of the lender, you may find yourself sued in court, and possibly even under criminal indictment. Judgements for FRAUD are nasty, and they don't go away. Convictions for FRAUD can really mess up your life completely and forever, not just in applying for credit, but in employment and other ways as well. If your loan is sold to another lender before the discovery happens, the probability rises even further, because the new lender is going to sue the old lender, who is going to take action against you as part of a defense that says they were acting in good faith. The shell corporations that pretended you worked for them or had deposits with them will be long gone (or untouchable) of course. You may have a claim against the agent, loan officer, broker or possibly even original lender, but if someone else beat you to it or they are out of business for some other reason, good luck in actually collecting.



In short, relying upon an agent or loan officer as an expert without doing your own due diligence is likely to get you in hot water. As good rules of thumb: Never lie. Never allow someone to lie on your behalf. No matter how desperate you are, it's likely to buy a lot more trouble than it's worth.



Caveat Emptor

UPDATED here

Every once in a while I get someone who is unhappy with required paperwork for privacy reasons. There are three forms that are the driving force behind this.



The first is the standard form for a mortgage loan application, known in the business as the 1003. Admittedly, the form does ask for rather a lot of information. It's comprehensive, and intended to paint your complete financial picture, so they can make a decision on whether or not to grant the loan. It also asks for irrelevant items like ethnicity so that the government can track whether the lender is discriminating (and they are dead serious about requiring ethnicity. If you decline to state, whoever takes the application has to take a guess). This also means it asks for a lot of information that a lot of people would, justifiably, rather not give out. Plus it's a pain to fill out. So some people don't want to, and quite frankly, I understand where they are coming from. Unfortunately, this is a government mandated form, designed to collect not only the necessary financial position data but also additional government mandated information. If you want a real estate loan, filling one out is is a legal requirement. There are only two ways to avoid filling out this form completely and accurately. In order to avoid filling it out completely and accurately, you must either 1) Lie or 2) Buy the property without a loan from any regulated entity. Lying is not recommended. It is a very bad idea. Lying on a 1003 is perjury, and there's likely to be a charge of fraud added into it. You are told point blank on the form that the information required to make a decision on your request for a loan. Misrepresenting your financial position in order to induce someone to lend you money is pretty much textbook fraud. Or you could do without a loan - buy the property for cash, by trade, for services rendered, etcetera. There really are all sorts of possibilities, but even if you put all of them together I don't think they amount to one percent of all transactions. Finally, you could get a loan from an unregulated entity. Basically, this means individuals. Borrow the money from Mom, from the mafia, or from a hard money lender. Unfortunately, even if Mom has the money, she may not lend it to you. And the latter two possibilities charge a lot more interest than the regulated banks, as well as other potential problems.



The second form that often become the issue is form 4506. This is the one that says your lender has a right to look at your tax returns. Many people think that this means they are violating the terms of a so-called "Stated Income" loan whereby they say what their income is, and the bank agrees not to verify the amount, but only the fact of the source of income. Well, the lender always has the right to insist on tax forms for documentation of income, and sometimes they do. But they don't often use this form for it, and it isn't to your advantage to force them to use it. As the form states, the IRS typically takes 60 days to respond to this request, and loans need to be done within 30. You want it done within 30 days if you have a rate lock, and if you don't have a rate lock, whatever you were quoted isn't real because it's gone now - the rates have changed. If the lender wants your information, they're going to require it whether you've signed this form or not. In either case, if they want the information, it's better for you to furnish it directly and immediately.



What they really use this form for is when they get ready to sell the loan. Since all lenders want to able to do this whether or not they make a habit of it, and they get a better price for the loan if they can verify that your income qualifies, they want you to sign the form. If they pull it and you qualify, they get a better price for the loan. If they pull it and you don't, they tried. If you refuse to sign the form, they are well within their rights to deny the loan. So they are going to require you to sign the form as a condition of getting the loan. I can commiserate with you all you want, but it wouldn't make any difference. Options to get around this are basically the same as for the Loan Application: Friends, family, or Lenny the Loan Shark.



The final form that causes resistance is the Statement of Information. Like the Loan Application, this form has a lot of detailed information, and sometimes people don't remember all of it. This form has nonetheless become a routine requirement, but of title companies, not of lenders. The reason for this is fairly easy. Let's say your name is John Smith. Let's say you live in Los Angeles County. There are going to be a large number of documents in the public database in which John Smith or some close variant (e.g Jack Schmidt, Eoin Smythe, or Jon Smitt, among others). Any one of these could have an effect upon the title transaction. Some of them, like a child welfare lien, never go away. Back when I worked for title companies, I could tell you about having to go back forty years, and in some cases further, looking for documents which might pertain to the person in the transaction. In populous counties, the list of documents alone can go to a hundred pages of single spaced stuff, and the title company has to be certain that 1) it isn't you, or 2) it doesn't effect the transaction for some reason, before they agree to issue the policy of title insurance. Guess what? The reason the document list is so long is because of the commonality of the name, so the long lists come up a lot more often than the short ones. Even if your name is something truly unusual (mine is uncommon), they've got to check out all close variants, anglicizations, and whatnot. So to toss out as many documents as they can, as quickly as they can, the title company requires a Statement of Information. Without that, it can be prohibitive to even run through the preliminary check. These people they are paying to do these searches rapidly become skilled and fairly high paid employees, even if they start out cheap. So the title companies want you to fill out the Statement of Information. It's one of those forms you don't want to lie on or conceal information on as well.



Don't want to do it? The title company will tell you they don't want your business. No policy of title insurance, either owners or lenders. That's your choice if you don't need a loan on the property and you're willing to take the seller's word that they really do own it and that there are no title issues. I wouldn't be. I've dealt with too many properties where there were known title issues. Nor are lenders nearly so glib about it. In order to get the loan, they require a lender's policy of title insurance, and whether it's a purchase or a refinance, you need a lender's policy of title insurance. If you're dealing with Lenny the Loan Shark, he doesn't care that you've lost the property to the forgotten first wife (via a three day marriage) of Mr. Jones, three owners before you, whose brother apparently inherited and sold the property in 1976 but then the former Mrs. Jones just found out about it and sued for possession. If she (or her heirs) can prove her claim, she's going to be awarded the property. So you want title insurance.



Now, there are some protections you have under law. In California, I cannot use information obtained by real estate loan applications to sell your information to third parties. Once the loan is closed, however, the lender can share your information with sister companies. Heck, I've had lenders take the information I've gathered and call the client to offer them a direct deal. Cancel the transaction with me, they say, and they'll give the client what they think is likely to be a better deal. Pretty sweet, huh? Steal my payment for the client I spent my time, money, and effort to find, and then brought to them. Unfortunately for these lowlifes, I do loans cheaper than they usually expect, and instead of cancelling, the client reports it to me. Needless to say, these lenders don't get any more business from me. Title and escrow companies can similarly share information for marketing purposes. I always tell people who are concerned to write that they opt out of all marketing on the first form the title or escrow company wants them to sign or fill out. That puts the onus on them not to share your information.



Caveat Emptor

UPDATED here

Indepundit has a good article about why he's opposing the "Cut and run before we win" crowd. I support him fully.



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Carnival of The Vanities is up. Recommended: The Politics of CP,



(I was an editor's choice! The Happy Dance will now commence!)



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HT to Asymmetrical Information for a pointer to Vox Baby. who has a good compromise to the social security insolvency issue.



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Armies of Liberation has a whole list of pointers to vital statistic on Yemen, and more on the possible fallout if Saleh actually retires as he's said he will. In the second article as well, where the military of Yemen gets its experience.



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Captain's Quarters has an article detailing the problems with multilateralism in war. Apparently, our allies in Afghanistan aren't getting the job done like they said they would. If we'd just done it all with the help of a few real allies, maybe we'd be mostly done. Certainly the Iraqis are a lot more prepared to stand on their own than the Afghans.



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Michael Barone has a good article about executive pay that I find myself largely in agreement with. Yes, the person making the strategic decisions deserves to make more, but not 1,000 times more. Furthermore, bonuses and incentives should be contingent upon them actually doing something good for the company, causing profits, market share, share price, etcetera to rise over an extended period.



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Powerline has an excellent interview with Congressman (formerly Colenel) Kline, just returned from a trip to Iraq. Money Quote:



We were able to stay in Baghdad, not Kuwait, and we spent the whole time inside the Sunni Triangle. And in the time I was there I didn't hear a gunshot or explosion. But the most important thing was the prevalence of the Iraqi security forces. They are really out there now, and they are doing a good job.





Quagmire? Unwinnable? I think not.



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Scrappleface asks: "When you see a shimmering, transparent bubble wall, you gotta to ask yourself: Which side of it am I on?"



This is a real world concern and question. That so few are asking it is testament to how disconnected they are.



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The Instapundit himself has an excellent torture round up.

Carnival of Liberty

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I apologize on behalf of the Life Liberty and Property community for the lateness of this edition of Carnival of Liberty.



Carnival of Liberty 24




Being an alphabetically based recital of the state of liberty in the world



A is for Appropriate Penalties

Fearless Philosophy for Free Minds presents Some Thoughts on the Death Penalty



B is for Betraying Your Mission

Stop The ACLU presents Division at the ACLU



C is for Changing Tax Structure

Searchlight Crusade presents The Proposed Tax Change for Homeownership



D is for Democracy

The Idiom presents Azeri Elections



E is for Enemies of Liberty

TMH's Bacon Bits presents Condoleezza Rice on a Democratic Peace



F is for Freedoms Lost

The Pubcrawler presents How nationalized health care can destroy your liberty



DobbsReport.com presents The government and health insurance



G is for Gutting the Constitution

Expressions Of Liberty presents The Supreme Court Established Atheism As The State Religion



I is for Insanity

Blog Free! presents Safe Passage?



J is for John Locke

SpeckBlog presents John Locke "On The State Of Nature"



L is for Libertarian (Not Conservative!)

Below The Beltway presents Why We Are Not Conservatives



M is for Murder

NoSpeedBumps presents War, Democide, and China - Past and Future



N is for Nonogamous

The Wrightwing presents What about the Nonogamous?



O is for Over-regulation

The Unrepentant Individual presents Don't spit, or you'll create an EPA-protected wetland!



Below The Beltway presents The Price Of Regulation



S is for Slavery:

CommitteesofCorrespondence presents Arbeit Macht Frei



T is for Theft

Ogre's Politics and Views presents Eminent Domain - Riviera Beach, FL



Mover Mike presents Still Problems With Eminent Domain



V is for Victimocracy

The radical Libertarian presents The Measure of a Society



W is for World Wide Liberty

Searchlight Crusade presents Is the United States Worth Defending



Carnival of Liberty is also at TTLB Ubercarnival, and next week's carnival will also be here at Searchlight Crusade. Please use Conservative Cat's Meta-Carnival Submission Form or email me directly.



















On a regular basis, I see advertisements for real estate offices that say "discount broker - full service".



This is nonsense.



A discount broker has consciously chosen a business model whose economics do not permit them to give the same service provided by a full service provider. Here's the rundown.



A discount broker's listing agreement typically calls for them to receive 1 percent of the sales price, and the "selling broker" to receive the area standard, whether it's 2.5 or 3 percent (perhaps higher in some areas). Some few will reduce the selling broker's commission if it's them.



A Full Service broker's listing agreement typically calls for both sides to get the same 2.5 to 3 percent.



So a discount broker is saving you 1.5 to 2 percent of the cost of selling your home.



But what does a selling broker or agent do?



They put your property on MLS and put a sign in the yard, of course. And when there is an offer, they serve as "go between" on the negotiations.



This is all a discount broker can afford to do. They have expenses of being in business. Rent, machinery, assistant's salary, etcetera. It's not like they get to freely spend every dollar they are paid, and you're not paying them enough that they can do more. Furthermore, their business model requires them to sell more properties than a full service broker, just to stay in service. The difference in their compensation between a $450,000 sale and a $470,000 sale is only $200. Which would you rather have - the high likelihood of a $4500 paycheck in a couple weeks, or the hope of a $4700 paycheck eventually? They're human too. They are much more likely to advise you to take the sale in the hand now even when you would likely do better to wait. Even though it would make a difference of nearly $20,000 to you (and that may double the money you actually get from the sale in many cases), it's not important to them. Full service brokers are hardly perfect either, but they tend to be at least somewhat stronger negotiators on your behalf. At least the $20,000 difference it makes to you means $$500 or 600 to them.



A Full Service broker can afford not only the Multiple Listing Service and the sign in the yard, but also ads in the papers and other places that people actually see. MLS is the single best way to sell a house, but hardly the only one. Signs in the yard help me find clients and keep my fellow agents from bugging you for the listing, but rarely actually sell that house. Ads in the correct papers at the correct time are the second best way to sell the property, and full service brokers can not only afford them, but they are motivated to do them by the "carrot" of the doubled commission if they also find the buyer. Open houses also help significantly, and full service brokers and their agents have a business model which makes holding frequent open houses worthwhile and advertising them correctly a paying proposition. Furthermore, you're likely to see better offers off of these sale sources. MLS offers are more likely to be people looking to buy on the cheap, whereas advertisements and open houses target people who want to live in your neighborhood. Once you have an offer, full service types tend to be tougher negotiators. Finally, once you accept an offer, the prospect of getting a larger paycheck motivates them to work harder getting the sale consummated, including being at the property for inspectors so that you don't have to. Some discount houses do a decent job of this last, but full service do better.



Which of these alternatives is better? Well that depends upon the state of the market and your situation. In a white hot market where everything that gets listed gets four offers within three days and bidding wars break out between prospective buyers, a discount broker or agent is likely to be the way to go. If, on the other hand, the market is a much cooler one like most of the country nowadays, and it takes considerable effort to bring in any offer, or if your property has issues that make it undesirable (less 'curb appeal' than average), you're likely to want a full service broker or agent.



Your situation also plays a part. If you don't care if the property sells tomorrow, next year, or at all, a discount broker is more likely to meet your needs. After all, if you don't get a good offer, you'll just keep the property. On the other hand, if you need the property to sell fast, or if you need the offer to meet certain criteria, and most especially if it would be difficult for you to accommodate inspections yourself (for example, if you're now hundreds of miles away), a full service broker or agent is likely to be the choice for you.



I have seen many sales where paying a full service commission would have caused the seller to end up with more money in their pocket. See my article Production Metrics versus Consumer Metrics for more.



Discount Real Estate Brokers should also not be confused with Discount Mortgage Brokers. The "discount" part of a real estate broker's name usually refers only to listing agreements - people who want to sell a property. For customers who approach them as property buyers, these places usually receive the same full commission that anyone else does. There are exceptions where they rebate part or all of their commission for buyers, which should be disclosed and committed to in writing. But typically if you use them to buy, if it's 3% for the full service folks, it'll be 3% for them. Furthermore, I have directly encountered several of them who benefit from the presumption that any loans they provide will be as low cost as their real estate services, and this is far from the case. I've had direct dealings with very well known discount real estate brokerages, and their margin on the loan they got their borrower was much higher than mine - from triple to more than four times what mine would have been. My responsibility was to my clients, so I kept my mouth shut and got my clients their money for the sale of the property. But inwardly I was definitely wincing.



Caveat Emptor



UPDATED here

The Agitator has coverage on Cory Maye's gun. Now the cops are saying it's unregistered. If this hasn't come out before now, they have just convinced me that they screwed up and Maye is innocent. It's the first Agitator has seen of the allegation, and it wasn't mentioned in any of the news stories I linked SundayWhen you start throwing mud at someone to see what sticks, you're afraid that the facts won't support you in the case at hand.



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Carnival of the Capitalists is up! The carnival page is likely to be unsafe for work. Recommended: More Than Right, The Coyote Within, Sophistpundit,



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Tinkerty-Tonk has an excellent article on "Slow Pearl Harbors". Furthermore, their nature tends to make them more costly than any "fast" attacks, because we pay for them in installments.



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Sorry, out of time for today!



Ken Harney has a column I found in the local rag yesterday. It seems that there is (finally!) concern amongst the regulators for this risky loan which begs for trouble for consumer, lender, and the system as a whole when there are too many of them out there.



First off, Mr. Harney is wrong, or his editor really screwed up what he did write (The Washington Post? <sarcasm>Say it isn't so!</sarcasm>). Read the contract. The attraction of negative amortization loans has nothing to do with the actual rate. Zero. Zip. Zilch. Nada. It has everything to do with lower permitted payments. There is not one day, not one hour, not one second where the actual rate being charged is reduced even by a miniscule amount. But for a certain amount of time, the minimum payment is calculated as if the rate is lower than it actually is. This is why they are easy sells - because the average real estate consumer "buys" a loan based upon the payment. So when someone tells the average consumer that they can get a "$170,000 mortgage for $850 per month!", it sounds attractive and the majority of people won't investigate any further. A large portion will actively avoid anybody who tries to tell them what's really going on, as if the loan will somehow magically be alright if they manage not to hear about all the bad stuff.



Furthermore, the real rate on these loans is variable from day one. There literally is not one month where you can truly predict what the next month's payment will be. I have, and always have had, lower interest rate loans that are hybrid ARMS with truly fixed interest rate for five years or more, have lower costs to obtain them, and no hidden gotchas. Heck, from my first day in the business I've always had loans that fit all of the forgoing criteria and require interest payments only. If you cannot make a payment of at least the full amount of the monthly interest, it is quite likely you shouldn't make the purchase.



These loans do have a niche. But I can't think of a case where they should ever be the purchase money loan for a property. Even on refinances, they should be no more than one percent of total refinances - not the forty percent share of San Diego's purchase money market the last figures I saw had them having. Investment property, the rules should be somewhat looser, but still nowhere near 40 percent of the market is appropriate. If this were the securities or accounting industries, the regulators would be throwing people into jail over this, and shutting down offending companies completely and permanently. There's a world of hurt coming down the pike, and the prevalence of these pieces of garbage is going to greatly exacerbate the problems, particularly in high cost markets. Let's say, hypothetically, someone put 5% into a $500,000 home here in San Diego at the beginning of the year, at a nominal rate of 1%. They had one $400,000 mortgage and one $75,000 mortgage. Assuming the nominal rate on the first is 1% and that the second is "interest only" as is common, they would now owe $10,000 more on a home that is worth about $30,000 less. After three years, they owe a total of $505,000 even if the rates don't rise any more, which I can promise you they will. If values hold steady right now, their home is worth maybe $470,000, of which they would get about $440,000 if they sold without paying any closing costs for the buyer, which isn't happening right now. So under perfect theoretical conditions, they've gone from having $25,000 in the bank to having to come up with $65,000 just to get out from under. Since they likely can't, their credit is going to be ruined for ten years at least, plus they're going to get a love note from the IRS saying they owe taxes on $65,000 more income (which incidentally slides most folks into higher marginal brackets).



You can survive being "upside down", owing more on your mortgage than your house is worth, for a long time if you have the right loan. These are not the right loan for market conditions I see happening in the next few years. They are always risky, and mortgage lenders and brokers who do them do not have, in the aggregate, an even vaguely acceptable track record of disclosing their risks. Not that it's any great shakes of a prediction, but I predict that lawyers will be prosecuting a lot of these as civil cases in the next few years, and winning large judgments that are not going to be covered by insurance because it's neither an error nor an omission, but an intentional misrepresentation.



Under the right conditions, these can be useful loans. But the right conditions are rare, and when you have them, the lenders are not likely to approve the loan because the prospective borrower is not a good credit risk. In short, if you're approved for one of these, you almost certainly had better much options available to you. If negative amortization loans are actually appropriate for you, I'll bet a nickel your loan won't be approved. This is the kind of marketing strategy which has gotten many industries in serious trouble, and the lenders who are involved in this are likely to be hurting anyway when the house of cards they've been supporting comes tumbling down. Expect corporate bankruptcies, also.



Caveat Emptor.



P.S. If you haven't read anything on these previously, you might want to check out this article as well as this one.

UPDATED here

RINO Sightings is up! Recommended: The Agitator, Digger's Realm



Carnival of Personal Finance is also up!



Best of Me Symphony is also up. Recommended: ROFASix,



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Heartless Libertarian has some worthwhile thoughts on the case of Corey Maye, on death row for shooting a cop he had every reason to believe was a violent criminal invading his home.



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Below the Beltway has a good article of something I've said several times here: That the real reson behind the run up in housing prices is government regulation and obstacles to construction. People who say they want low cost housing for the less well off on one hand, and then throw as many roadblocks in the way of people trying to actually erect enough homes to keep the price down on the other. The one intelligent thing that the City of San Diego has tried in the last fifteen years or so was the "City of Villages" concept. You had to be here to witness the NIMBY backlash in order to believe it. Needless to say, it's dead, which is a real shame for those people who don't enjoy 90 minute commutes at 90 mph from Hemet or 2 hour plus commutes from the Imperial Valley.



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Nasdaq has altered the composition of the Nasdaq 100. Here's the Yahoo version with slightly more information, but likely a less permanent link. This is a market capitalization based Index, like the S&P 500, but is heavily weighted towards technology sector companies. If you're wondering how it compares to S&P for the purposes of asset class, smaller number of stocks better (not good) for non-dilution, heavily weighted towards one sector bad for diversification. They're also all large cap.



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Opinion Journal has a great article about war naysayers being afraid of success, and gets a HT for directions to this article on the great job John Bolton's been doing. I still think Reid's best option is to quietly cave and attach his confirmation as a rider to something uncontroversial and necessary.



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Captain's Quarters has the goods on what is likely a second Syrian assassination of an opponent in Lebanon within the past year. I have long been of the opinion that Syria is the most sensible next target in the War on Terror - easiest logistics, easiest conquest, smallest bite, obviously least tenable position of all the rogue states who are the opponents of civilization, most unstable politically. If the Assad regime has a lick of sense, when the US says "Boo!" he'll capitulate, because otherwise he's going to face the same sort of death the Ceaucescus did and for the same reason.



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I knew Arnold had it in him! Clemency denied for Tookie Williams. Here's another article in case the more informative Yahoo AP article gets moved. Suffice it to say, Arnold went right down the line noting the claims of Tookie's supporters that were not believable, and why they were not believable.



Michelle Malkin has a round up. Is it just me, or has she got to be the blogger with the strongest Technorati skills going?



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Iraq the Model covers the start of the elections in Iraq. Proof things are going well? I had a tough time finding one news story on it, but it was easy finding stories on them finding more tortured prisoners in Iraq, but I had to go to the Iraqi 'sphere to find anything on the election. Man bites dog is news. Dog bites man is not.



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Q and O discusses the well-known fact in financial circles that the measurements of inflation are larger than actual inflation by about two-thirds of a percent or so, in light of the Democrat's claims that real wages are slipping. Well, duh. This is depth charging fish in a barrel. Corporate margins have been declining since the 1950's too. We going to put the corporations on welfare too, to make up for their reduced profits? Insanity.



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Rhymes With Right has an article paying tribute to our one MIA soldier in Iraq.



It looks from a Google and Yahoo result that I'm coming to this one late, but it's still worth hitting. HT to Owner's Manual (an article worth reading) for turning me on to a story at The Agitator about a man on death row for shooting a police officer. What that doesn't tell you is he was peacefully asleep in his home when the police officer served a 'no-knock' warrant by breaking down the door to the wrong address. (it is in dispute whether announced or not.) This guy, named Cory Maye, should not be in jail at all, much less of death row. He was justifiably in fear for his life and the safety of his family. Oh, and I failed to mention that he's a black man, and his target was the white son of the police chief, and the jury was all white also. This looks like real racism. Why aren't Tookie's defenders leaping in? Where is all of the high profile help?



Here is the AJS summary.



here and here and here is the hometown news coverage.



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Strata-Sphere is in favor of a proposal to help modernize Poland's military. This makes sense. Everybody gets something they want by agreeing.



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State of Flux has an excellent article (even if it does use Wikipedia as a source) on the growth of the Iraqi economy, and how it is seemingly growing beyond an oil-based economy. If true, this could be the best long term news for Iraq out of the whole regime change operation.



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Eidelblog has a heck of a good post on pensions and pension guarantees. He misses the fact that the number one reason for pension shortfalls is timely funding of obligations, but nails the rest. Yeah, FASB put pension obligations on the reports back around 1991, and GM took a $23 Billion dollar hit because of it. There are even penalties for corporations who fail to make contributions in a timely manner. Nonetheless it happens (and Buddha only knows how many governmental employers play the same game). They decide they want the cash now, and "We'll make it up later"



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Louisiana Libertarian covers a "We Hate Bush" rally in New Orleans. That's not what they called it. But that's what it was. He also has photos posted. This is what comes of allowing idiocy to think it's valid. Moonbats, Moonbats, Stupid Brainless Moonbats...



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Carnival Of Insanity is up! Recommended: National Review Online



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Looks like there's been some sort of Explosion in a fuel depot near London. They're saying it wasn't caused by any third parties, although I'm not sure how they can tell that at this stage unless someone copped to something extremely stupid.



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The Jawa report has an editorial on something I've long wondered about - or actually, been certain of. Why is it that the Legacy Media don't give a rat's about the people in Iraq to rebuild it, only the "we're so sorry!" apologist surrender monkeys who aren't doing anything to help and have no intention of doing so?



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Indepundit is stirring up all kinds of activism. I confess that I've fallen behind while I'm sick. Perhaps I'll make some time to do catch-up tomorrow.



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Too much new good stuff over at Armies of Liberation to list individually. I suggest you go read the whole front page.



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Michael Barone has some very good advice on what we should do about failing high schools: Let them try different stuff and see what works. Let's not try to have a big national strategy - instead let all of the competing ideas try to sell the schools individually. That way, we find out which of them really does and does not work. Yes, we could do a disservice to many students, but if we wait for a national policy, they're all going to lose out.



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Affordable Housing Institute sees a canary in the national housing mine shaft - subprime delinquencies - and calls market top nationally. I'd be refreshed to see an incidence of subprime loans as low as 19%.



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Powerline has some points that are worth considering regarding the CIA undercutting the president.

The question of where anyone's priorities are begs the question of "Where do your loyalties lie?"



I am loyal first to the long term good of humanity. I want as many people as possible to live the best lives possible. I realize that this makes me sound like some sort of socialist or communist. Nothing could be further from the facts. As I've said before:



Except for killing tens of millions of people, sending large portions of the world economy backwards, causing billions to live in crushing poverty, setting the cause of personal liberty and human rights back decades, enriching and rewarding tyrants who oppress the people worse than any capitalist ever thought about doing, causing multi-decade famines in areas that once were breadbaskets, failing to feed its people for decades at a time, expanding the system of gulags worldwide, causing deadly and widespread environmental damage, literally destroying the means of production it inherited from its capitalist predecessors so nobody (except the rulers) got anything, stymieing the contributions billions of people could have made to the world,and doing its best to cover all of this up, including habitual executions of innocent people who simply stumbled on the wrong piece of evidence, I guess communism wasn't so bad.



At least the nobles in feudalistic societies A) didn't know any better, and B) Come the war, had an obligation/reason to stand in the front lines...



Each and every time it's been tried, communism has ended up in the exact same place. It's time to stop pretending this is a freak occurrence.



What's the definition of insanity again?





and socialism is like communism lite. Oh it's got high ideals and everything, but the facts are that it invariably ends up in stagnation and stratification of society, slow economic growth (if any), and little opportunity for people to advance themselves, leading to all sorts of problems. There is a thing called the socio-economic pyramid. It's triangular in shape, with the point at the top. There are a few people at the very top, more a little lower down, more still the farther down you go, until at the bottom you get the largest number of people living in crushing poverty with no power to improve their position. Historically, this triangle has been the shape of every human society until the last couple of hundred years, and the majority of human societies even today.



Today in the United States and similar places with a market economy and a more or less free society, we can see indications that the triangle has become shaped more like a pear, or even a diamond if you're an optimist. It is very plausible that within our lifetimes it may become apple-shaped. We still have a few people at the very top, then progressively more people until you get to a certain point, then you start seeing fewer again, and fewer still as you lower into the lower economic strata. What this means is a lower proportion of people who are poor by current standards.



This is a very good thing. It means we are making more effective use of our human capital than any society ever before in the annals of history. It means there are fewer members of the lowest economic strata (poverty level and below) than there are middle class people. It means more opportunity for those at the lower levels to climb into higher economic strata. As a percentage of the population, participation in the investment markets is higher than any other society any time in the history of the world. This means that we have spare wealth to invest in our own economic betterment. This means there is more wealth for investment to grow the economy, and more sources of more wealth if you have an idea that you can persuade people might Make Them Money. Furthermore, this means further developments that benefit us all, of whatever nature, are going to continue to come more and more quickly. I want my children to be able to explore the solar system, and their children to be able to explore the galaxy, and deal with whatever they meet on the best terms possible. It's a matter of belief with me that other sentient species are out there, and that we are going to meet them eventually. It would be much better for our children's children to meet them ten thousand light years away in ships that can do everything you hear talked about in science fiction, than in low earth orbit with present capabilities. Such is the case even if they're so advanced that they are like magnanimous gods in their conduct towards us. If they are something less advanced and more predatory and our descendants are scrabbling over who has more subsistence level manual labor farms because we've exhausted earth's resources, that could be deadly embarrassing. Not to mention that we're all living better lives in the meantime.



I'm open to other systems of course. But those that have been tried repeatedly with the result of retaining, or returning to the old pyramid model, I'm not going to consider. It's all very well and good to hold yourself out, as most socialists and communists do, as noble and promulgating the common good, but if the predictable effects of trying your socio-economic model are a return to the pyramid with yourself as one of the nobles, then we all know what is paved with good intentions and I hope you travel it soon.



One lesson that is consistent across history is that government is a horrible allocator of resources. Sometimes it may be the necessary allocator of resources, but that does not mean we shouldn't look for alternatives. Government can be, and usually is, unduly influenced by those with current political power to keep them in their current position or improve it. Lest anyone think I'm talking purely about the wealthy, I'm not. Agricultural subsidies were not begun in the era of corporate farms, and they have created quite a few wealthy farmers. Indeed, the largest pieces of our government budgets are allocated for those who are powerful because of their large aggregate number of votes. Politicians aren't afraid of offending the wealthy, they preach class warfare to the detriment of all of us quite often. They are afraid of offending large groups of voters, particularly organized voters. NAACP. NOW. AARP. Those are the names that cause politicans hearts to tremble in fear, not Rockefeller, Kennedy, and Ford, or even Gates or Buffett.



Nor is government efficient. Indeed, the primary goal of government officers seems, predictably, to be improving their own position. More money, larger budgets, supervise more employees, more highly paid - it's time you got a raise! and a promotion! Never mind that the job could be done by a fraction of the personnel and at a fraction of the cost. Government is not set up to reward this. Until it's spending its own money instead of taking it from the people, this will continue. Since government's only source of significant revenue is taxation, that will be roughly never. Until government officers are spending their own money, they will endeavor to increase their budgets regardless of need. There are things government must do, but they should be as few as practical.



If it sounds like I'm talking economics rather than politics, the reason is that economics, usually bad economics, with bad history, is behind a large part of politics. A lot of people who do not understand it well denigrate capitalism because a few get very wealthy while many do not. Well, until recently, being wealthy was a very human capital intensive thing. This has changed, and is changing further, and capitalism and the free market economy have brought about the conditions for change. Everybody knows and has heard that democracy is the worst form of government except for everything else that's been tried. Similarly, free market capitalism is the worst system - except for everything else that has ever been tried. Yes, it allows people to fail, sometimes spectacularly, but it is this freedom to fail together with rewarding those who succeed that causes the system to succeed. People respond to a system of rewards and punishments, particularly when they are incremental and fairly immediate. When they can succeed greatly, and be rewarded commensurately, they are more likely to take the kind of risks that benefit us all. The difference between 2 percent growth - like Europe is seeing - and 3.5 to 4 percent growth like the United States is not 1.5 to 2 percent. It is 75 percent plus. It's the difference between 50 percent growth in a generation and hundred percent growth. Over a working lifetime of forty years, it's the difference between doubling the economy and quadrupling it.



This has implications in the lowest economic strata as well as the highest. Poverty level in the United States is extremely well off in most of the rest of the world. It may take some time, but a rising economic tide really does lift all boats. Not only do people make more money here, but the necessities of life are cheaper. This further raises the effective standard of living. Poverty stricken people in the United States live as well as the middle class in most of europe. Why? Because our model is more free market than theirs. Because we try more things than they do. Because we are free to fail. A certain number of ideas are always going to be failures, but we try them because we have reason to believe that they will succeed. We aren't required to prove to professional skeptics that it will succeed. And more of them do succeed than most people realize. Everybody quotes the old saw about only one business in five making it. But it isn't true. Indeed, the fastest growing segment of our economy is those individuals who make a living selling their own expertise, and the reason they eventually go out of business is that someone in corporate america makes them a job offer too good to refuse.



I am also loyal to the United States. Yes, I want to improve it. But I also think the place where all of these reforms first came to be practiced, and where they are most assiduously practiced today, is worth defending. Especially as our main rivals practice governmental or economic systems that have been shown to be less advantageous or even a step back into the dark ages. Those we are at war with would take us back to a tribal society of city-states, where the priesthood has the real final say in all matters of justice, or societal norm, of what is and is not to be tolerated. Those at the top of their hierarchy may be civilized cosmopolitan men of the world, but those at the base are little different from medieval peasantry in ther attitudes. We are forward looking, always trying to find a better way to do something. They would force us - all of us - into a cultural straightjacket that hardened in the eighth century. Those few at the top that we see, by virtue of their power and wealth, can get away with challenging their culture. For the vast majority of their culture, those in the lower economic strata of their pyramid, it is a straightjacket of thought, of behavior, and of any chance of advancement. This includes not only women, but all minorities, and all members of any other religions, or those who have none. They may grudgingly tolerate the presence of Christians because Mohammed told them to, but you are also distinctly second class citizens who had better keep to your place. Atheists and agnostics are not "peoples of the book" and their place in Islamic society is dependent upon being perceived to be members of the christian community.



So what we have achieved here in the United States is worth defending. The more so because cultures are subject not only to something akin to entropy, but also because despite the fact that the United States is the most powerful nation in the globe, we are not nearly as powerful as the rest of the world together. The high point of American power was right after World War II - had we wished to, we could have made a much stronger attempt at militarily conquering the world than Germany and Japan did. We would have failed, but that we didn't try, and instead came home and had it handed to us because most of the rest of the world wants to be Americans. If they didn't find our culture attractive, all of the Madison Avenue Marketing Gurus and all of the television shows and all of the movies in creation could not make them want it. Every salesman knows that you can't sell people something that they don't want. People want better stuff, and they want more individual, as opposed to governmental, control over their own lives. That they do want it is illustrated by how much American culture they have bought. I'm not certain there is any place in the world where you can't find something American. Certainly nowhere I've ever been, or any of the people I've talked to about their travels. From Coca Cola to Hollywood to McDonalds, American stuff is everywhere, and american ideals with them. Indeed, it's so ubiquitous worldwide that most places are now making American style stuff of their own, and living increasingly American lifestyles. There are even signs that a certain number of less developed countries are imitating the United States so far as to changing the economic pyramid into something pear-shaped.



That they have copied our model is one reason why they have kept up with us, indeed, nearly caught up with us in the case of several Asian countries. They did this - their entrenched powers allowed it or encouraged it - because they could see that they would be overwhelmed if they did not. They saw a more successful, more competitive model, and imitated as much of it as they could make themselves comfortable with. But certain of our ideals, specifically contempt or questioning of authority, the idea that everyone should have the same opportunities, the idea that anyone can come up with worthy ideas, and especialy the idea that no one is below being rewarded or above being punished, are very dangerous to those elites, whether wealthy, educated, or religious. They know that these ideas spell doom for their class, and have insulated their societies from them to the extent practical. The more socialist model prevailing in most of europe holds itself out to be superior, but clearly is not competing as well, and their elites can only retaliate by despising us.



One important feature of competitive evolutionary models is that the introduction of one example that competes better forces all of the other members of the system to become more effective, more competitive - or face evolutionary disadvantage. And evolutionary disadvantage, in the long term, is a fancy way of saying extinction. Societies must adapt to changing conditions or they die. The elites ruling in Asia made the choice that they were going to compete on the same level. The elites of Europe, perhaps because they are our parental society, are in denial that their current rules have a lot in common with those made by feudal lords protecting their peasants.



But if we remove the United States, the motivation to compete with us vanishes, along with the american style reforms. In only a few places is it rooted deeply enough that it would survive without us competing with them. Japan, Taiwan, and South Korea. Australia. Eastern Europe and India if they get another generation. Maybe one or two other places. Except for maybe India, all of these are more subject to being overwhelmed from without than we are. The older systems are still strong, and they are practiced in a much larger number of places.



So is the United States worth defending? Yes. Is it worth defending the cause of global freedoms, and global innovation? Absolutely. Is our society worth defending? You bet. Is defending the United States in the War on Terror a good thing for all of the above? There can be no other answer but yes.

My article on Option ARM and Pick a Pay - Negative Amortization Loans is one of my most popular. It's number one for multiple search engines and several ways of running the search. If I don't get at least 20 hits a day on it, it must be a sign that the public has caught on to this loan's horrific gotcha! On the other hand, given the number that are still written, I can get very depressed at how small a percentage of the population does simple research.



I intentionally left a lot of what goes on with these things out of that post, simply because I want to keep these posts readable and comprehensible within the space of no more than half an hour. But I keep getting hits asking questions I didn't deal with, so here goes:



A Negative Amortization loan is defined as any loan where the minimum required payment is less than the interest charges. Regular loans pay off part of the balance every month, whereas negative amortization loans typically have an increasing balance because the difference between the interest charges and what you pay is added to your balance owed.



Because the name "Negative Amortization" causes some difficulty in marketing, they are sold by all kinds of friendly sounding names. "Option ARM" (if you look at my article on loan types here, these are the about the only "true" ARMs with a significant portion of the residential loan market). "Pick A Pay." "Option Payment." "Cash Flow ARM." I've seen all kinds of combinations of these, as well.



Negative Amortization loan rates are typically quoted based upon a "nominal" ("in name only") interest rate. This rate is not the rate of interest that the people who have them are really being charged. It's a thing for purposes of computing the minimum payment. In other words, the minimum payment is computed by using this rate instead of the actual rate that you are being charged. They are being marketed more heavily right now than at any time in the previous twenty-odd years. If you are quoted a rate of 1%, 1.25%, 1.95%, 2.95%, or anything else under about 5% right now, they are talking about a negative amortization loan. If you look at the Truth-In-Lending form, it will list an APR somewhere in the sixes, usually several entire percentage points above the nominal rate. Another way to tell is the presence of several "Options" for payment. If they talk about three of four payment options, guess what? They're talking about a Negative Amortization loan. Note that this is a different situation from "A paper" loans that have no prepayment penalty, in that you are explicitly given these payment options, and may not have any others. "A paper" loans, the minimum payment at least covers the interest (if it's an interest only loan) or actually pays the loan down, and anything extra you pay is applied to principal to pay the loan down faster. I pay extra every month but that's my decision, my choice of amount, not theirs. A negative amortization loan gives you a limited number of choices. Furthermore, there are more of the so-called "one extra dollar" prepayment penalties on negative amortization loans than any other loan type.



Negative Amortization is generally a bad thing because with over 95 percent of those who have them, over 95 percent of the time they are making the minimum payment. That's why they got them, because they couldn't afford the real payment. So their balance increases. They owe more money every month, and due to compound interest, every month the difference between what they owe and what they pay gets wider. This can only end one of three ways. They sell the house. They refinance the house. They get to "recast" point on the loan. None of these is good.



If you sell, the loans come out of proceeds, and the bank gets more money than you originally borrowed, usually plus a prepayment penalty. I keep using a $270,000 loan amount as an example, so let's look at what happens. The minimum payment will be $868.42. But your real rate is not fixed, and even if you've got a good margin and your rate doesn't rise in upcoming months (It will rise), your real rate is something like 6.2%. That very first month, your interest charge is $1395.00. You have $526.58 added to your loan balance. Take this out one year. Your principal has become $276,501.57, an increase of $6501.57. Now the minimum payment increases by 7.5% (another characteristic of this loan) to $933.56. Take it out another 12 months, now at 6.25% (and I'm being really stingy with rate hikes, given how much I think the underlying rates will go up) and you now have a balance of $283,561.76. Now you sell, and as opposed to selling it two years ago, you have $13561 less from the sale than you otherwise would have had. Plus a prepayment penalty of $9484.00, a total of $23,045 the loan has cost you not counting whatever your initial fees were. This is money you are not going to have to buy your next property with. Not to mention that if the rise in value doesn't cover it, you may find yourself short - getting nothing, and maybe even getting a 1099 form for the IRS that says you owe them taxes.



Let's say you don't sell, but refinance, and unlike roughly 70% of everyone with one of these loans, you actually make it to the end of the prepayment penalty period, three years. Your payment has been $998.70 for these 12 months, but your balance has still increased to $291,815.16. Let's say rates have magically dropped back to where they are now. You get a 30 year fixed rate loan at par at 5.875%. Your payment will be $1746.90, as opposed to $1597.15 if you just did that in the first place. But wait, it get's better!



In the fourth year, your payment goes to $1063.84. But nine months in, you hit the recast point! Your balance has grown to $297,000 - 10% over what it was to bein with. It's a thirty year loan, and now it starts amortizing at the real rate for the last 315 months, or until you manage to dispose of it, whichever comes first. Assuming your rate is still "only" 6.5%, your payment jumps to $1967.60 in the forty-sixth month, and this payment is no more fixed than your rate is, which is to say, not at all.



Let's say you have one of the loans with a higher recast - 20 percent instead of 10. Your balance goes to $299,010.60. Then the final year of artificially lowered payment, $1128.98 per month is applied to your loan, but it's accruing $1619.64 in interest and rising. Your loan balance is $305,077 at the end of your minimum payment period. Now your payment (assuming your real rate is still 6.5%, which I think unlikely) goes to $2059.90. If you're able to get a thirty year fixed rate loan at today's rates, your payment is $1825.35. If you couldn't afford $1600 per month in the first place, what make you think you'll be able to afford any of these alternatives? The needless increase in payment amounts to sucking $1.34 per hour out of your pocket, or if you want to think of it another way, you'd have to make $3.00 per hour - $500 plus per month - more to qualify at the end of the period with all that added to your loan, as opposed to right now. And that's assuming the rates are as low in five years, which I do not believe will be the case.



Additionally, I attended a credit provider's seminar last month, and as I said then, credit rating agencies are currently considering making the fact that you have a negative amortization loan to be a heavy negative on your credit report, all by itself. From the writing above, it should not be hard to see why. Someone who has a negative amortization loan is not making a "break-even" payment. Their balance is increasing. This indicates a cash-flow problem, and cannot go on indefinitely. When the lowered payments expire, they find themselves in a nasty situation, worse than it would be if they had just gotten a different loan in the first place. So if the fact that you have a negative amortization loan knocks you down sixty, eighty, or a hundred points, there is a good likelihood that you will not qualify for any loan nearly so good as you would otherwise have gotten. The last news I had was that they were looking at the modeling data for exactly how strongly it influences your chance of a 90 day late. I don't work for Fair-Isaacson, but my guess, based upon working with people who have negative amortization loans, is that it's going to be towards the higher end of the range I cited.



In short, because most people concern themselves with quoted payment, not interest rate and type of loan, these things are most often sold via marketing gimmicks and hiding their true nature. Those selling them do not concern themselves with what will happen to you after they've gotten their commission check. They are designed (and appropriate for) a couple of specific niches that most people do not fall into. Last set of figures I saw was that they are the primary loan on about 40 percent of all purchases here locally - and owner occupied purchase is not one of the niches they are designed for. An appropriate proportion of the populace to have these might be four tenths of one percent, a figure a hundred times smaller. Shop by interest rate and type of loan, and these look a lot less attractive. As I said, the real rate on these right now (if you've got a good margin) is about 6.2 percent. At par, loans are available that are really fixed for five years at about 5.5 percent, or thirty years at about 5.875 percent, no hidden tricks, no surprises, no gotcha!s. These are not only lower rate, but also better loans.



Caveat Emptor

UPDATED here

Weblog Award Endorsements

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Weblog Awards Voting is in progress until December 15th. I've been voting, but at the request Letters From The Bostonian Exile, I'm going to make some endorsements. Not that I think it's going to make a difference, but here they are.



Best Blog: Captain's Quarters

Best New Blog: It's really hard to make this call, but since I have to go with one, it's Respectful Insolence winning a photo finish with Decision '08

Best Group Blog: The Moderate Voice

Best Humor: Another hard call. Scrappleface edges out Day by Day.

Best Conservative Blog: I've been voting for Jawa Report.

Best Media: I love Lileks, but nobody has done anything like Michael Yon. Please go vote for him.

Best Culture and Gossip: I've been voting for Lllama Butchers to help a fellow RINO.

Best LGBT: I've been voting for Gay Orbit because he's a RINO.

Best Milblog: Several strong contenders, but I have to go with Argghhh!

Law Blog: Professor Bainbridge is a very strong contender, but in all fairness, the nod has to go to Volokh Conspiracy.

Best Business Blog: Seems to actually be more of an Economics category by the nominees, but I'm going with Asymmetrical Information.

Best Canadian: Angry in the Great White North.

Best Middle East: Iraq the Model

Best Australian: Tim Blair

Best Caribbean: Babalu

Top 250: Dean's World

251-500: Ex-Donkey is a fellow RINO

501-1000: Armies of Liberation

1001-1750: I gotta go with Coyote

1751-2500: Forward Biased

2501-3500: World According to Nick

3501-5000: Evolution (Sorry, Bostonian Exile.)

Favorite Blogging software: Powerblogs (not listed, which is a severe oversight. Christopher Lansdown has a wonderful system with pretty much every feature you could want. When I was looking back in June, I did a survey of all the providers and nothing else came close. Dean's World, Volokh Conspiracy, and Moderate Voice, among others, also use it)



(Folks, my whole family is down with nasty colds, and that includes the baby. I'm better off than my wife because my allergy medication lessens some of the symptoms, but I'm not feeling good myself. I'm going to try to finish an article for tomorrow morning, but other than that I'm out for the day)

Having your Credit Run

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As of July 1, 2005, mortgage providers have to have explicit written authorization to run credit.



I am not certain of the political forces that made this bill, and it is still not clear to me whether this extends to non-mortgage credit providers. If it does, this is probably one of the niftiest consumer protection things to come down the pike in a long time. On the other hand, if it's limited to mortgage providers, then it's probably a stab at making life difficult for Internet brokerages, which may do business at a remove of thousands of miles.



An Internet broker employee is talking on the phone with a client, not physically in the client's presence. They can be some of the cheapest and best loan providers out there, if they are so minded (as I keep saying, a far more important concern is how low a provider is willing to go, not how low they can go. Internet brokerages can also be consummate ripoff artists). It becomes a real hardship on their business if they can't run credit without explicit written permission, whereas it's not a major issue with a more traditional brokerage or direct lender. A loan quote isn't real unless you can lock it right now. Your loan can't be locked without running credit. And I can't run your credit until I get a signed form that says you give me permission. No big deal if I'm sitting right there. A real pain if I'm in California and the client is in Florida. I'm not even certain facsimile permission (no original signature) is acceptable, as it's not something that enters into my current business. This means a delay potentially of days while the form gets back to the lender. So life for an ethical Internet broker suddenly gets a lot more difficult, while life for the crooks becomes no harder.



On the other hand, if the requirement for written permission extends to all providers of credit, then it becomes worth the game. Mind you, an adult should be aware of what's going to happen if they give a social security number to a car dealer, furniture store, or anyone else. I've never heard of anyone using it just for liar's poker ("Oooh, this is a good one - four 8s!"). If you give a merchant your social, then they are going to run your credit. Treat it as a mathematical certainty, because it might as well be.



Each time somebody runs credit, it's an inquiry - a ding on your credit. Inquiry dings are progressively damaging. They cause your score to go down, each and every time you have an inquiry, and the more inquiries you have, the more each new inquiry drives it down. There used to be a game among mortgage providers until the new rules a couple years ago - see if they could be the last ones to run your credit before it went under a threshold score, and some would run it multiple times if they could. Anybody running after that would be at a disadvantage.



With the new rules that every consumer should get down on their knees and give thanks to the National Association of Mortgage Brokers for getting through, consumers are now actually permitted to shop around for mortgage rates without getting dinged every time their credit is run - provided they run credit under a business code that say's "inquiry for mortgage." (So if you are mortgage shopping at a bank or credit union, be sure they run your credit under their mortgage inquiry code, and not a general inquiry code). All of the times it is run within fourteen days by mortgage providers count as exactly one inquiry. This gives consumers the ability to shop as much or more for a mortgage as they would for, say, a toaster oven, without being penalized.



But if the new rules apply to non-mortgage credit grantors also, this is a good thing. Here's why: Every time I start a loan, I have a set spiel that I go through. "Don't change anything, credit-wise, even if you think it will help. Don't buy anything. Don't charge anything on your credit cards. Make your normal payments - no more, no less, unless you ask me first. And don't allow anybody to run your credit for any reason. Don't even let them have your social. Because they will run your credit, I guarantee it."



On every home loan, one of the last things that will happen before your loan is recorded in official records at the county will be that the lender will run your credit again to make certain nothing has changed. And if anything has changed, you will very likely lose the loan (and the house if it's a purchase). Even if the escrow company has the money or it's actually been disbursed, the lender will pull it back. So there is a real need for prospective borrowers to understand that until the final documents are recorded with the county, they shouldn't so much as breathe differently.



For a certain personality type, being told she can't shop for curtains and furniture and paint for her new house is nothing short of torture, and so I've learned to be very explicit. "It's okay to look, to talk to the nice salesfolk, and to get an idea of what you want. But don't actually buy anything. Tell the nice salesman who says he just 'wants to get a head start on your order' that your mortgage loan officer said that you're right on the line, and anybody else runs your credit and drives you under the line the first consequence to the furniture or paint or drapery salesperson will be no order, because they're likely to cost you the loan.



So while you have a home loan pending, tell the nice salespersons that you're really protecting them by not giving him your social, because if they run your credit and cost you the loan you'll have to tell your uncle Bruno, who's best friends with Tony Soprano, about it. And we all know what happens then.



Back in the real world, things are not usually quite that bleak. But it's surprising how often people end up with higher rates and higher payments and worse loans because they didn't understand this one point. Suppose your monthly payment is $50 higher than you thought it would be, in addition to what you spent on the new stuff that caused money to go into that salesman's pocket. Doesn't that make you feel all Warm And Tingly towards that salesman? Didn't think so. And a certain percentage of the time, this new monthly payment you now have because you Bought Something means you Do Not Qualify for the loan. So: No loan. No house (if it's a purchase). No lower payment (if it's a refinance). No cash out of your equity (if that's what you were trying to do). And so now you've got this stuff, and no house to put it in. Now you've got to tap the vacation or retirement account to pay for it because you're not getting a refinance on reasonable terms. Not to mention all the times these people run credit and hurt people's credit scores without real permission when there's no mortgage loan in the offing. So I can put up with one segment of my industry have a slightly higher bar to jump over if that's the carrot.



Caveat Emptor



UPDATED here

Carnival of the Vanities is up! Recommended: Isaac Schrodinger (Actually worse than what I thought the situation was!), Ruminating Dude (I've written lots of snippets on AMT, including one today, but nothing this in-depth),



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It will come back to bite you, part 77,000. Supreme Court Rules in Student Loan Case. This guy, like many others, probably thought he was being smart by not repaying his student loans. Wrong. He wasted his money on legal fees all the way up to the Supreme Court fighting collection efforts. Just because they don't have any way to enforce collection now doesn't mean they never will. Unpaid student loans never go away - they stay on your credit report, too. I have no sympathy for this clown.



In another case, observers see six of nine justices acting sympathetically with the government case in FAIR vs. Rumsfield, the case that will determine if the government is allowed to withhold money from colleges who do not allow recruiters. Pentagon's case gets sympathies. Excellent! I'm not exactly happy about the military's gay policy, but there are some pretty sharp managers running the military. I have to concede they just might know more about making the military work well than I do - and their job is to make the military work well, not to make certain classes of citizens feel good about themselves. When Harry Truman ordered the integration of the military back in 1947, he did it in consultation with the leadership, and the military became integrated - really integrated - twenty years before the rest of the country seriously tried. They were extremely progressive then, and it's the same culture. Before accusing them of being social neanderthals, maybe we should take some time to understand their thinking.



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YOWZA! They're predicting half a million jobs in construction lost! Hang on to your assets, this could get rough.



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If they had done this in the first place, they might have won, or at least made it a lot uglier: Zawahri urges attacks on oil targets.



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This is moderately good news: U.S. House backs alternative minimum tax patch. It would be extremely good news if it was permanent.



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This explains the ugly black plume of smoke I saw this morning: Gas tanker trailer overturns, catches fire. Could have been much worse, though. It was right across the road from a major storage facility. If that went, the east end of Mission Valley would have been gone.



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Pigilito says has a goor article about assimilation in the United States versus assimilation in Europe. But we still need to require them to learn english if we want them to become truly a part of our society.



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Wizbang has an excellent post on the end of the battleship era, with which I must reluctantly agree. It's true that it's a good thing when your ammunition costs less than the target, and it's a bad thing when the reverse is true. But the Iowa class is just too far outside our current industrial support capabilities. The day of the battleship has been gone since before World War II began.



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Indepundit moves to phase II.



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HT to Volokh Conspiracy for a pointer to a Affordable Housing Institute article on how there's been a lot of wind but not much action on Kelo, and how even that is petering out. Go back to what I wrote for more analysis on how to deal realistically with the issue.



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Think of it as evolution in action: Federal air marshals shot and killed a man Wednesday who said he had a bomb



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Sixty-four years ago today, the United States was ambushed by the Japanese. Pearl Harbor was only the first of several coordinated attacks. We had been negotiating with their ambassadors for months. These negotiations were not in earnest; the Japanese had no intention of reaching an agreement, or of abiding by any agreement that was reached. They were simply lulling us with a false sense of security that while negotiations were in progress, they surely would not attack. Sixty-four years ago every congressman but one managed to figure out the implications. Have we become that much stupider, that much more gullible, or is a large segment of our population fixated on "If you really, truly, believe," type fairytales.



For those who were there and did their best with what they could, I will remember. I will make certain my children remember. But even if every one who fought and everyone who remembers is gone, the fact of what you accomplished will remain. Those of you who were there, and those of you who responded in our hour of need, kept the light of liberty alive for another generation. Millions, even hundreds of millions, lived free lives, better lives, because of what your deeds. No careless, forgetful human can ever erase that.



It seems wholly inadequate, but Thank You.



When you have more than one loan on your property, there are some issues you should be aware of. Keep in mind the fact that some states still use the mortgage system, requiring court action to foreclose, as opposed to Deed of Trust, which does not. For practical purposes they are similar, yet I have never done significant work in a mortgage state so there may be small but significant differences.



Each loan is secured by a different Deed of Trust. Two loans, two Deeds of Trust. A Deed of Trust is a three way contract between the borrower (called the trustor), the lender (called the beneficiary), and a third party known as the Trustee, to whom title is nominally conveyed for purposes of selling the property if you default on the loan. The Trustee and the Beneficiary are often the same, and there while there is no legal impediment I'm aware of to the Trustor and Trustee being the same, I also cannot imagine a lender agreeing to it.



Trustees can be changed, and this is accomplished via a document known as "Substitution of Trustee," which is required to be recorded with the appropriate county in every state I've done business in.



Each Trust Deed operates independently of all others there may be against a given property. They take priority in order of date. When a Trust Deed is recorded against an property on which there already is an active Trust Deed, it automatically becomes a Second Trust Deed, if another happens it is a Third Trust Deed, and so on.



The reason they have the ordinal is because they are paid off in the order they happened. Suppose the property is sold, and the sale price is not sufficient to pay all of the debts. The trust deeds are not paid proportionally; The First Trust Deed is paid off in full before the holder of the Second Trust Deed gets a penny. Then the Second is paid before the third, and so on. This is why Second trust Deeds carry higher rates than First, because they are riskier loans for the lender. As I've said elsewhere, just because the property is sold doesn't mean you're clear. If there is not sufficient money from the sale to pay all debts, you can expect the lender to hit you with a form 1099, reporting that you have income from debt forgiveness, and you will be expected to pay taxes on it.



Now, if for whatever reason you pay off your First Trust Deed, the Second automatically goes into the first position, and any subsequent loan goes into second position. This is most common when people go to refinance the loan secured by their First Trust Deed. Even if you do not particularly want to pay off your Second Trust Deed, it may be the best thing to do. Because what happens if you just pay off the First Trust Deed (only) and get a new Trust Deed, is that the new Trust Deed will go into the second position. Unfortunately, in order to get the quoted rates for a primary loan, it is a requirement that the loan be in first position. If it's not in first position, they will not actually fund it. In short, no loan.



This is not necessarily an impasse. Many times, the holder of the second trust deed, because their loan was priced to be second in line anyway, may agree to Subordinate their loan to the new loan, which is a fancy way of saying stand in line behind the new trust deed holder.



They don't have to do this, and there is no way, other than paying off their loan in full, to force them to do so. Some companies never subordinate, while some others are never willing to stand second in line at all, and others are in both categories.



For those that will consider it, they are going to stipulate some conditions. First of all, the new loan is likely going to have to put the borrower into a position where it is easier, or at least no more difficult, to make payments and pay off the loan. So monthly payment usually cannot rise.



Second, they are going to want their trust deed to be in no worse of a position than it was when the loan was originally approved, as regards the value of the home being able to pay their loan off too if for some reason either loan is defaulted. They may even require than you agree to a higher rate, higher payments, or a different loan altogether - as I said, there is nothing you can do to force them to cooperate.



Assuming that they are willing to cooperate, they will require that the entire process on the prospective new loan be essentially complete - that is, ready to draw documents and fund when the Right of Rescission expires after three days, before they will even look at it. Some lenders take 48 hours to look at a subordination request, others take up to six weeks, and it can be even longer. For any given lender, it takes as long as it takes.



There is also going to be a fee involved. They have to pay their people to look at the loan situation and make certain it still falls within guidelines. They're the ones doing you the favor, they certainly are not going to do the favor for free. Whether the Subordination request is evenutally approved or not, the subordination fee is likely to be non-refundable, a sunk cost that you are not going to get back even if it's not approved.



Even more important than that, however, subordination takes time. No loan quote is real unless locked, all locks are for a specified period of time, no lock is good past the original period of time unless you pay an extension fee, and if you need to lock for a longer period of time in order to subordinate, either the rate, the cost, or possibly both will be higher. Since this can add anywhere from two days under idea conditions to six weeks or more for a refinance that takes three weeks to get approved and get funded in the best of times, this means a longer lock period becomes advisable. Most often, the extra costs mean that it's more cost effective to just pay off both loans rather than subordinating the second to the new loan.



Since Home Equity Lines of Credit are always secured by a trust deed, they count as any other second mortgage would. You'd be amazed how often people do not disclose Home Equity Lines of Credit even when directly asked about them. They are only hurting themselves, but they often get angry to no good purpose when, if they had been upfront about them, the loan officer could have designed around any difficulties. Furthermore, people are often resistant to the idea of paying off and closing Home Equity Lines, despite the fact that they are easy to get. I've had people stonewall, utterly in denial that this is a Deed of Trust opon their residence until I have the title company fax me a copy of the Trust Deed, and reference it with the Preliminary Report, and ask to see the Reconveyance (which is a fancy way of saying the piece of paper proving that the trust deed has been paid off). If it's a legitimate lien, we have to deal with it. Actually, we have to deal with it if it's not a legitimate lien as well, just in a different manner. On the other hand, about eighteen months ago I had some seasonal resident clients whose ex-caretaker had managed to take out a loan against the property. It does happen, and it's a mess, but most times it's just the people themselves who weren't told - and didn't figure out - that this financing agreement they signed for the pool or air conditioner or roof was a second trust deed on their house.



To summarize then, second loan means second trust deed, if you refinance they must be paid off or subordinated, and subordination takes time such that it may be better to pay it off than go through the rigamarole of subordination.



Caveat Emptor.

Article UPDATED here

Best of Me Symphony is up!



So is Carnival of Personal Finance! Recommended: Old Niu's Blog (actually, he has a second, more important point in his article that even he apparently missed. To quote Dr. Laffer, "In order to capture an elephant, you don't plink its (backside) with arrows after it's already passed. You get out in front and DIG A HOLE!" For the forseeable future, healthcare is necessarily going to eat up an ever larger share of GDP. No, there are no immediately obvious killings to be made, but some investments in the sector - subject to diversity requirements - are likely to be extremely lucrative long term investments)



Carnival of The Capitalists is also up. Recommended: Blog Business World, Coyote Blog, The Common Room



most recently RINO Sightings has been posted, and a wonderful karaoke version it is, too. Recommended: Tinkerty-Tonk, Inside Larry's Head.



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9/11 Panel Cites Inadequate Security Steps. That's because there are two ways to take adequate security precautions. The first is by stopping the motivations and ability for attacks. We're doing pretty good at that. The second is through means that the American people will not accept, because Vulnerabilities Happen. It's easy to accuse someone else not fixing a problem when they are the ones that would have to pay the price politically.



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California teen wins science competition. He's homeschooled.



The website, with the presentations, is here



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Scrappleface on the sort of Justice Saddam evidently prefers. I promise not to cry for him.



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Hopeful news: Pigilito Says has an excellent article on how the Indonesian government has brought in prominent Muslim clerics - to debunk the terrorists religious claims. Score another one for the good guys!



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Argghhh! has a good article up, and good thoughts on, a major change in the Department of Defense. As someone who sees the benefits we got out of the European Recovery Plan (aka Marshall Plan) and will likely see out of Iraq, I think this is a very good thing on the balance.



He also directed me to The Officer's Club for some excellent ideas on how the next front in the war on terror could open. I hope not; as I've said, I think the mullahs in Iran are going down soon regardless, but if forcibly deposed by us, they'll always be able to say the evil americans did it, and quite likely spark a twenty-year civil war.



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Worth reading. I may have an answer for him once I think about it for a bit. (Via Vodkapundit.)



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Looks like Howard Dean has pushed Smash just a little too far. As I have said here (among other places), what he said does not rise to the level of treason. But it is in support of our enemies. And most of the populace seems to realize it's all for politics. As bad as Elephant numbers are (and they are putrid, for a host of good reasons), Donkey ones are worse (for a number of even better reasons). Their recent antics amount to dropping the last pretense that any of their opposition is for the good of the country, in favor of raw naked power. I'm not naive enough to believe the Elephants aren't part of the power game also, but the Elephants are at least waging most of the War on Terror intelligently and all of it wholeheartedly, realizing that if there's no country, there's no power to be had in ruling it. In 1944, Thomas Dewey declined to criticize Roosevelt's conduct of the War, saying he would rather lose the presidency than the war or the country. Today, the Donkeys don't even need to be running for anything, they just want to make trouble out of spite. It doesn't take committing treason to be counted among our country's enemies. I really feel sorry for those few Donkeys such as Joe Lieberman who have stood squarely against the enemies of this country. Because if this continues, next year will be their Waterloo. And to think that I was considering registering Donkey a few days ago so that I could vote in their primaries, because I thought they might still be salvageable.



(The only difference voter registration makes in this country is whose primaries you vote in. Since I figured there is, on the average, more difference in the intelligence with which Donkeys approach public office, I was hoping to make a small difference in who spoke for their party. I no longer believe this hope realistic, and if the Donkeys continue in present vein, we're going to need a new opposition party after next year because their coalition is dying as we watch).



Captain's Quarters has more.



Scrappleface shows the fundamental disconnect.



Michelle Malkin has a round up.



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Asymmetrical Information has some useful ideas on the state of the housing market, but working the retail end (and what I compete against every day) has shown me exactly how creative the financing has gotten. When I tell people exactly how many Negative Amortization and Short term hybrid interest only loans there are out there, particularly in high cost areas such as Southern California, the most common reaction is simple denial. As in, "I don't believe you." The problem is that it's really hard for people to believe the numbers are what they are. They are real, but people don't believe them.



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From Armies of Liberation, looks like the Saleh regime is pulling out it's last line of peaceful defense: Claiming some articles by the opposition journalists insult Islam. And when they increase the budget by this much, they must need the money for something, and the only thing I can think of is military action. Here's hoping I'm wrong.



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Anne Althouse has some great coverage of the arguments and issues in FAIR vs. Rumsfield.



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Michael Barone has an excellent article about Britain's reformed House of Lords. I strongly suspect that eventually, that will be remembered as Tony' Blair's main accomplishment as Prime Minister, and it won't be remembered fondly. The British threw away a system where an institution that was reluctant to challenge Commons at all but nonetheless had a verifiable long term vested interest in the health of the nation, for one dominated by cultural elites with no such position.

There has been a recent proposal for a 15% interest credit for homeowners rather than a deduction of all of the mortgage interest.



Now a credit is a direct allowance off of taxes you owe, but it doesn't effect any of those wonderful measures on what the income cutoffs are for certain other deductions, the way a homeowner's deduction does. On the other hand, there's no "magic" number of dollars of deductions you need to accumulate before it's worthwhile for file a Schedule of Itemized Deductions (Schedule A) as opposed to just taking the standard deduction. So it helps more people, but it helps them less. Furthermore, such a proposal would greatly restrict the amount of property tax that is deductible as well. Right now property tax and the homeowner's interest deduction mutually reinforce (by adding) within the itemized deductions category. Take homeowner's interest out of that, and the deduction for property tax suffers (unless of course, you make that a credit as well). On the other hand, many married couples, particularly in lower cost areas of the country, get no help now from these two deductions where they would on a direct credit. Back to the first hand, most people, particularly homeowners, are above the 15% income tax bracket. So such a move would likely help a few more people, but help those it helps by a considerably lessened amount.



(It is to be noted in passing that none of this makes a direct difference to non-owner occupied property, which falls under a different set of rules)



It has been said (correctly, in my opinion) that current tax policy amounts to a subsidy of real estate prices, in that due to the deductibility of interest and property tax, you are effectively paying less than the "true" market cost of your home, and therefore are being subsidized by the government, and so those with lower interest and property tax deductions are effectively subsidizing those with higher deuctions. Given my political proclivities (vaguely libertarian), I am hardly in a position to argue that taking away this deduction is unjust.



However, this was a choice that Congress intentionally took over half a century ago to subsidize home ownership as a public good. Having just completed preliminary work on a program that gives an honest, complete answer to which of some competing investment options is likely to be better (and fiddled with the assumptions and relationships quite a bit) home ownership has, even without the tax deductions, some advantages that are hard to overcome in the medium to long term. In an area that currently has homes selling for around $500,000, the difference between buying a home and not buying a home can easily get to be well over a million dollars down the line. I knew most of the relationships involved, and I was surprised at how strongly the numbers came out in favor of home ownership.



Now perhaps giving people an incentive to do something that is in their long term best interest (without making it mandatory) has some value in the public policy arena. Nonetheless, when AICPA and other financial planning organizations came out against abolishing the estate tax, I took a point of view that said "If it's good for the clients, it will be good for us" and have stuck with it despite having left the financial planning profession. There are things I'd rather the government do with any prospective money, like index Alternative Minimum Tax to inflation, but if my choice is limited to thumbs up or thumbs down on the idea of abolishing estate tax, both of my thumbs are emphatically up.



In the same light, let us examine whether making this change would be good for the average person.



Married couple with two kids making $36,000 (basically, poverty level) per year between them, with a small mortgage on a manufactured home on an eighth of an acre and light property taxes will see some benefit. If their mortgage is $800 per month and their property taxes $100, their deductions don't hit the minimum to make it worthwhile to file for itemized deductions as opposed to standard. But they could still take the credit. So they would see some benefit of about $1000.



Married couple with two kids making middle class wages of $70,000 per year. Let's say their mortgage is $2000/month and their taxes are $300 per month. Currently, their interest deductions would be about $21,000 from this. depending upon their exact situation, they get the benefit of $21,000 plus $3600 is $24,600, minus $10,000 is 14,600, times 28 percent tax rate is $4088. This would be replaced by a flat 15 percent credit (on the mortgage only) or about $3150. Say bye-bye to almost $1000 per year of disposable income.



Say we have a married couple making $150,000 per year, with $5000 per month of housing expenses. Let's say they can deduct $4600 of it now, or $55200, minus $1000, times 28% tax rate is $12,656 of tax savings. By comparison, the credit would give them (holding assumptions constant) about $7400. Farewell to $5200 for them.



The theme runs consistently. The people it helps see maybe $1000 per year of benefit, and they are actually comparatively few, albeit likely to be lower income. Far more people would be hurt, many of them significantly, although the argument can certainly be made that they can afford it more. I don't think anybody feels a huge amount of intense sympathy for a couple making $250,000 per year that that lose $10,000 of it either via this proposal or a limit on the mortgage interest deduction (unless, of course, they're the $250,000 per year couple).



So on a social benefit model, this looks like a definite loser on the balance. If we're talking ridding ourselves of subsidies, the 15% credit is a subsidy too, albeit a lesser one, and I'll bet (sight unseen) that there will be ways to game it.



Disclosure: I'm in real estate. Professionally, I'll admit I want prices to continue to rise, all other things being equal.



Nonetheless, the amount of screaming out of various real estate organizations since this proposal first aired, you'd think it was the apocalypse or something. It's not. Investors may get hit, which I'd rather not happen, either, but they're not the ones the deduction is aimed at. The same goes for speculators holding the bag at the wrong time. I've seen a couple of accusations hurled at the Bush administration that this is largely a blow aimed at the heavily Democratic real estate industry, much as I also saw accusations leveled at the Clinton administration that they were taking shots at the heavily Republican financial planning industry. I think both sets of accusations are about equally valid. But from a real estate function, both agents and loan providers are going to continue to do just fine, and we're not the ones this piece of public policy is aimed at, either.



The thing I most want is a wealthier public. I'll admit that I don't see how changing this will make the public wealthier - if anything, somewhat the reverse - but if it can be shown, or designed such that the public becomes wealthier by it, then those in my profession and allied ones are the least of my concerns, because any time the home owning public gets wealthier, so do we.

Something really intelligent from government. The kind of thing that says, "Wow. Somebody actually thought about this!" Of course it's Condoleeza Rice we're talking about, so that explains a lot. Rice Says Intel Thwarted Attacks in Europe. Which is true, but it's really an article on prisoners held overseas, beyond reach of United States Courts, the friendliest place on the planet to enemies of civilization.



Given the continual attempts by various groups to get enemy combatants tried in our courts, is anybody with a basic grasp of realpolitik surprised that the obvious step (keeping prisoners beyond jurisdiction of our courts) is being taken? Is this not intelligent?



Now this is being fought in the battleground of public opinion on grounds of fear of torture. It may even be a justified fear. But information obtained by torture is notoriously unreliable, and if there is one nation in this world that I trust not to torture just for the hell of it, it is the United States. The only realistic value in torture would be if we were not only breaking them physically, spiritually, and mentally, but also making certain that said fact becomes known - indeed, that the results would be intentionally disseminated to the terrorist community and it's supporters. "Here is Abdul, formerly one of your top commanders. Watch him doing X to the Koran and licking it off, the pathetic scum." Since the terrorist community and its supporters, who understand our fussiness in such things perfectly well, have not passed this on to us, it hasn't reached them. If it hasn't reached them, it's either because our folks on this job are hopelessly incompetent (which they are not) or it's not happening.



So what's the real issue behind the torture issue? Very simple: If they are brought to the United States, their supporters in the ranks of our Chomsky brigades and other "America is Eeevil!" theoretical members of our society will attempt every trick in their repertoire to have them brought to civil trial. It is well within the bounds of possibility that they would succeed. Should they succeed, and the government would have to make a choice: Betray our informants in order to produce evidence, or fail to produce evidence. The result: Terrorist A, captured in accordance with the laws of war, walks free, and next week or next month blows up a busload of school children. We've had multiple instances of this with terrorists released from Guantanamo (it's about twenty minutes in).



Given this, the intelligent thing to do is keep them where the "useful idiot" US Court system cannot reach them. Where there is no right of habeas corpus. I can even see ways to let International Red Cross/Red Crescent know about and monitor them (living up to our obligations) without compromising the activity. Indeed, the fact that the Red Cross/Red Crescent knows is probably how it came out in the media.



Am I happy about this? Hell no! But I'm less happy about the fact that we're fighting a war, during which the options often come down to "These are all awful, but they are the only choices we have. Option Q is the least awful, so we'll do that." And I'm less happy still that these people we're holding want to blow us all to smithereens for the dreadful crime of not being in compliance with their brand of Islamic belief.



And to those who want it otherwise, the reason it has come to this is very simply that those leading this country are not certain that the courts will not pre-empt what has always been (by both international treaty and long practice) a purely military exercise. The US courts have been besieged by those who would ally themselves with these people who are soldiers or officers of those who have sworn to be our enemies. It is only a matter of time until some judge with an axe to grind gives in and orders a trial, with all of the enemies propaganda making all the hay they can over this issue, and the very real possibility that the government cannot convict according to US criminal rules. Well, that was never intended - not by our founders, not by international treaty and practice, not by anybody rational - to be the venue that those accused of being enemy soldiers needed to face. But by attempting to make it so, those who are attempting it are motivating those in charge of prosecuting this war to keep these people beyond the reach of US Courts. That the President is doing so is not only intelligent, but correct. This is not a matter for our criminal courts, and the anytime our courts ordered one of these people released, and said detainee then proceded, as many who have been released from Guantanamo have done, to strike again - particularly civilian targets - those truly would be deaths that could be laid at the President's feet. He has acted wisely, intelligently, and correctly to prevent this from happening.

Carnival of Insanities is up (over at Dr. Sanity's, of course!). Recommended: Miserable Donuts, Corante



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Big Lizards has some things to say about whose information he believes in Iraq. Certainly one narrative holds more cohesion and more consistency over time.



Neo-neocon has two posts up in a series: Part One and Part II, concerning the forseen as opposed to actual difficulty of the war in Iraq. I believe that what we were told ahead of time corresponds much more closely to what actually happened in 99 percent of all historic incidences (for instance, what the Japanese troops were told in the beginning stages of World War II and what the Russian troops were told upon the commencement of their invasion of Finland, what the German people were told about World War II by Hitler, what the British people were told by Chamberlain and his predecessors...) So it wasn't perfect. At the very least, it was an honest analysis which has been borne out to a large extent by events. If, in the immediate aftermath of the initial phase, it appeared horrendously pessimistic, it wasn't, and remains largely correct.



While I'm on the subject, Mark Steyn has a column about the contrast in media treatment of Joe Lieberman and John Murtha, and about real world consequences.



National Review Online has a column about what the President has been saying recently and the reception it has gotten.



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Victor Davis Hanson has a wonderful article up regarding race relations, and excuses versus facts, and the real motivations of those making accusations in this area.



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HT to LGF for The Big Black Book Of Horrors, concerning the atrocities committed by Saddam Hussein's Ba'athist regime. Please go read it if you haven't already, to learn exactly what it is we were and are fighting there.



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Via Instapundit, an excellent article concerning male learning modes and how our industrial education system is failing boys (statistically) much more horribly than it has ever failed girls.



Hmm. The times they are a changin'. Email bright and early this morning. Another bank is discontinuing two somewhat questionable loan products (Stated Income, Stated Asset and forty year fixed).



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Amazing beliefs over at Angry Albertan



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Left Brain Female has an excellent fisking of an alarmist (Okay, defeatist) AP article on Bulgaria and Ukraine, withdrawing their troops from Iraq precisely when scheduled.



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I get a fair proportion of my traffic right here in San Diego. Daily Kos supports Steve Young in the 48th district to replace Cunningham. If one quick look at his campaign website doesn't convince you to vote for his opponents, you may be beyond help.



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Armies of Liberation has another update on Yemen. The regime has a response to the opposition parties' calls to change to a Parliamentary government: label them conspirators.



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Victor Davis Hanson has a wonderful article up on the political situation and Iraq.



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Volokh Conspiracy has an excellent article on why the legacy media is truly doomed.



It seems I can't hardly turn around in the investment world without a paean to Jack Bogle, who preaches the advantage of the index fund.



Mr. Bogle's reasoning goes something like this: Looking at the world of mutual funds, relatively few funds beat the S&P 500 Index, so why not just buy the whole S&P Index?



This is nothing short of the most successful sales pitch based upon a straw man argument in history.



Index funds are huge. Mr. Bogle's own original fund is the largest mutual fund, and both of the two largest mutual fund families base their pitches (in large part) upon their large number of Index Funds based upon various indices. That's how successful the pitch has been.



What Mr. Bogle doesn't tell you is that Index funds aren't the Index either.



There's a bit of Red Herring in the argument also. Index Funds aren't some ideal investment package that doesn't have expenses. They may be low (21 basis points per share for the biggest the last time I looked), but they are there. So in an ideal universe, they lose to the index by this amount. Plus they do have the same need managed funds have to hold some cash. Since the market goes up about 72 percent of the time (over the course of historical years), and they lose an amount of gain or loss proportional to their cash holdings, over time they lose more than they gain on this. By comparison, the measurement made of managed funds is after all such ineffieciencies.



In other words, the Index Fund sales pitch reduces to "Most of these other finds don't beat this measurement. Come to us where you're guaranteed to fall short!" The thrust of their sales pitch is holding themselves out to a a perfect idealization, which in fact they are not.



There are other reasons to avoid Index Funds. The most famous, best known and largest are all built upon the S&P 500 Index. This is a market capitalization based Index. The Fund buys into these companies based upon market capitalization. It should be no surprise to anyone that this means that whatever the largest company in S&P is, it will be several times the size of number 500, so the funds investment in them will be correspondingly weighted, while having zero investment in number 501. This means (because Index funds are such a large portion of the overall market) that Index Funds cause demand for those companies which are a member of this universe to have larger demand than they otherwise would, therefore artificially inflating the share price of those companies somewhat.



Now, one of the reasons people gravitate towards mutual funds is instant diversification of investment. You put in your $1000, and because it's is in turn invested as a part of a much larger investment pool, you have much more diversification than you would otherwise be able to purchase with that same investment were you to purchase stocks directly. One of the reasons I worked almost exclusively with mutual funds (and mutual fund-like) when I was in the business is that if you want to build a diversified direct stock portfolio in an efficient manner (buying whole, as opposed to odd share lots), it takes about $100,000. This is more than most folks are willing or able to invest in a single shot.



But one of the open secrets of the mutual fund industry is that many, if not most, funds are over-diversified. Their holdings are so diluted that when they pick a winner, their shareholders see comparatively little benefit because they've made too many bets. When you bet 100% of your money and the stock doubles, you get 100%. When you bet 1/500th of your money and the stock doubles, you get 0.2%. This dilution effect is directly proportionate to the number of investments (bets) they have made, while the benefits of diversification are only proportionate to the square root of the number of investment holdings they have. In other words, the fund with 400 holdings is sixteen times more dilute than the fund with 25, but only four times as protected by diversification. One of my favorite fund families, in which I myself continue to invest for other reasons which outweigh this, had 432 holdings in its growth fund the last time I got a report. That is way too many. Mathematical models have determined that the optimal number of holdings for a fund is in the range of twenty to thirty, getting good protection of diversification while not suffering from over-dilution of good investments. I am becoming, more and more, a fan of "focus" model funds, where the investment managers are forced to be choosy by limiting the overall number of investments to a certain number of securities.



Index funds typically have way too many funds to qualify for this. Of all the major indices, only the Dow Jones ones have a small enough base to be considered as having a near optimal number of components. I just don't hear about people wanting to invest in those. 20 Transportation? 15 Utilities? They're derided as sector investments, and not good ones. 30 Industrials still seems to have some cachet, but by comparison with S&P 500 or even the Russell Indices (1000, 2000, and 3000), the amount invested in Dow Industrials is microscopic. Perhaps because it's not a "true" index, but is selected by the publishers of the Wall Street Journal, theoretically for the components representation of the entire market.



Index funds are not without their benefits, of which their mindless vanilla nature is probably the greatest. If you want an investment you can just make and not watch and not worry about unless the entire asset class tanks, Index funds are fine (S&P is large cap blend). For market-timers, index funds are unmatched, particularly since their cost of putting the investment in and taking it out tends to be low. But I am not a mindless vanilla investor, and for one step up the mental chain, index funds can be beaten by periodic investment class reallocation. Furthermore, I am an investor, not a market-timer. So any time somebody's recommendations for investing include index funds, I'll pass them by.



Caveat Emptor.

Carnival of the Vanities is up! Recommended: Coyote Blog



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Rowdy teens beware: the Mosquito is coming. This is the first time I've ever been glad that hearing deteriorates with age. The man then exploits this as a vulnerability ala Isaac Asimov's story "Search by the Foundation." Cool!



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If this guy is telling the truth, it's the last nail in the coffin of "Bush lied."



HT Wizbang



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I don't usually send Christmas Cards, but I'm considering joining this campaign to Sent a Christmas Card to the ACLU



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Folks may want to stop back by tomorrow for fireworks. I have a post on Index funds set to go (at 7 AM/10AM Eastern, like all my other weekday financial posts) that's sure to raise some hackles amongst their True Believers.

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Essay Requests

Yes, I do topic requests and questions!

If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!

Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
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About this Archive

This page is an archive of entries from December 2005 listed from newest to oldest.

November 2005 is the previous archive.

January 2006 is the next archive.

Find recent content on the main index or look in the archives to find all content.

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