February 2006 Archives

How Do You Think About Money?

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I am profoundly lucky in that I read "I Will Fear No Evil" in high school. Not an assignment, I just like to read, and Robert A. Heinlein has always been one of my favorite authors.

A very few pages into the book, he has one of his characters toss off two famtastically good pieces of advice in quick succession, viewed from the point of view of thirty years later and multiple licenses in financial planning. He has one character, a lawyer no less, deal effectively and beyond challenge with two financial problems in quick succession. The first had to do with a very ill old gentleman with a will of longstanding effect, who doesn't want the existing provisions upset, as often happens to people who die with a new will. This extremely wealthy man has decided he wants to leave his secretary a million dollars.

The solution? A single-pay policy of life insurance. Problem solved. But once he's out of the room, the secretary protests, saying she'd just waste the money, or even get in trouble with it. She wants it given to charity.

Solution? Write it so she got an income off of it every week - essentially turn the lump sum into an income generating asset, with the additional advantage of a donation to charity when she shuffles off the mortal coil. She tells the lawyer she would never have thought of that solution.

His answer? "That's because most people think of money as something to pay the rent. They don't think of money in terms of what it can do."

Okay, I always was a math geek, but this concept was something I understood immediately, and it made a huge difference in the way I thought about money forever afterwards. Money wasn't just something to buy stuff with. Money could do things. Money could make more money. Money was potential, potential that got bigger all on its own if you only let it.

Now from a much later viewpoint, I see the flaws in Mr. Heinlein's plan. If you don't want your estate plan messed with, a living trust beats a will on every point. Furthermore, the interest rate imputed in the return of the life insurance proceeds was only a simple compounding at less than four percent - I can almost certainly do that much above inflation if I invest reasonably. Nonetheless, Mr. Heinlein grasped some very powerful concepts very well, and he was able to show the application to a teenager of no particular qualification. This is better than the vast majority of supposedly more sophisticated writers of serious "litracha" can usually do, and he did in almost in passing - no preaching, no grandstanding, just one heck of an effective example, twice in the space of a hundred words or so that were completely aside of the main plot.

These days, I still love reading fiction where the writers show they really understand economics and finance. They're hard to find. I happened to be volunteering as an event coordinator at a con a couple years ago, and ended up assigned to a reading with an author who made a mistake so elementary it showed that he had done no research because it impacted a benefit that literally everyone gets - he just didn't know about it. It really was critical to the plot, and if he had made one phone call when writing the story, any professional he called would have corrected the error. I very tactfully (for me, anyway) informed him of this gap, and I recently ran across the story in print. He hadn't fixed the error. I'm not planning on buying any more of his stuff. Another highly hyped novel said that the author understood economics and finance. What the author understood was that illegal drugs were a highly profitable trade if there's no real possibility of getting caught. Well, duh. He blew it, otherwise, not even considering the constraints of the problem he had set up. Despite the fact that I really enjoyed most of his writing, I may not buy the sequel just because what he missed was so painfully obvious to me that it really destroyed the rest of the story. As long time friends have heard me say many times, "I'm willing to suspend disbelief, but not hang it by the neck until dead!" This stuff is more constant than even the laws of physics, unless you postulate that you're dealing with a non-human psychology, and even then they're still there. Don't even get me started on the stuff supposedly written for everyday, mundane situations.

Still, some do get it right. S.M. Stirling in his Island In the Sea of Time stories, and to a lesser extent in Conquistador. Poul Anderson must have gone back through merchant records in the early Age of Sail, or known someone who did, for some of his Polesotechnic League stories, because he more than once cites some of the same sort of brutally coldblooded logic that was present then. Many of his other stories bear this same kind of mark. I was pleasantly surprised about a year ago by a side plot in a stand-alone novel from Michael P. Kube-McDowell - although he always seems to do solid research.

Got some suggestions? I'd love to hear about more such authors, who manage to teach, or at least stay in touch with economic realities while they entertain. Those authors who do a good job of this perform a real public service, while those who ignore it so that they can tell their story unencumbered by mere facts often earn their work a ceremonial throwing - twice across the room.

Caveat Emptor.


Carnival of Personal Finance. Recommended: Insureblog, Ask Uncle Bill

Carnival of Debt Reduction

Carnival of the Capitalists. Recommended: Eidelblog, professor Bainbridge, Spooky Action

Carnival of Investing

RINO Sightings Recommended: Respectful Insolence, Decision '08, DANEgerus


I just got a search hit for "WHO PAYS BEST YIELD SPREAD OPTION ARM" (sic). Lasted zero seconds, as in obviously not what the scumbag was looking for. Had to be somebody who makes a habit of selling negative amortization loans, or wants to. Hey scumbag! Read this if you intend to be in business very much longer. The lawyers are going to have fun with you, and I'm going to enjoy reading about it.


Home Sales Data Shows Housing Boom Slowing. Except that they're comparing on a month to month basis, and January is always the slowest month for closings. Why? It takes about thirty days to get a sale closed and nobody wants to move the Christmas tree. Nowhere does it mention sales for last January as a comparison.

Don't get me wrong. I think we've got a bubble in a large part of the country, particularly high priced urban areas, and it's going to hurt a lot of people. I just hate seeing bad articles like this.


More interesting times: Taiwan's Chen scraps China unification body

Let's get real here. Left to their own devices, China could conquer Taiwan, albeit at such a cost as to make the conquest worthless except as a salve to pride, and would likely snuff out one of their best sources of external capital. I don't believe the communist leaders care about either the human cost to Taiwan or the economic costs to the rest of China. This is one of the huge disadvantages to totalitarian systems.

Chen, for his part, has stopped pretending that Taiwan is interested in reunification under the current circumstances. They aren't, in case you were unclear on the concept, and Taiwan has been a real democracy for about fifteen years now. They aren't interested in going back to a dictatorship; they had quite enough of that under the KMT. The idea of Taiwan reconquering China under the current circumstances is laughable. The only thing that the Taiwanese government can realistically hope to do is drive reform in China by making it a more open society, and that's the sort point that has the Communist mainland worried. Taiwan can't hope to conquer, but it can lead, and that has the communists scared.


The Birmingham News has published some old Civil Rights era photographs that they found in an closet. Story here. Photos here.

I haven't looked through all of them yet, although the one of half the audience of a council meeting hiding their faces speaks the most to me of those I've seen. Can't get it to display again, but this one is certainly powerful.


You can't make stuff like this up: Sen. Clinton Says Rove Obsesses About Her.

I really thought there were safe, common medications to deal with these sorts of problems.

In other news, this is priceless: Dear Hillary: Don't Run



HT to Personal Financial Advice for the link to this Money article on outer space.

The easy place to make money (after orbit, of course) is in the asteroids. G Harry Stine wrote about it in the Third Industrial Revolution. Until they are terraformed, Mars and Venus have nothing we cannot get elsewhere cheaper. The most important consideration is not distance, but how much energy - fuel - you have to expend to get there. The surfaces of the major planets are expensive, while the minor planets are much cheaper. Especially with robots or nanotech.


Unfortunately, I am only 20% evil - but it's a highly targeted 20 percent. How Evil Are You?


Iraq the Model has learned anew the fact that clerics will never turn their back on secular power, and says some other things that need saying.

I'm pretty sure the attack on Samarra was an Al-Qaeda act of desperation. They're certainly getting to the end of their strong of ideas. But certain parties (pun intended) didn't hesitate to take advantage of it.


Strategy Page has some input worth reading on the Dubai Ports World taking over of US Ports.

Wizbang has thoughts of their own. Basically, this is a PR failure, not a mistake in approving the sale.

Indepundit has more.


Tim Blair has an exercise in historical perspective.


Armies of Liberation notes the imminent nature of the presidential election in Yemen without candidates.

I think it's pathetic that the opposition is considering a boycott. If you don't play, you definitely can't win. Absolutely guarantee it. Whereas if you play but are cheated, there may be something you can do about it.


You Can't Make This Stuff Up Department (Chapter II) The William J. Clinton Foundation is seeking interns. It's promising them hands on experience.

HT to Michelle Malkin

I got a search result for how to get out of mortgage pre-payment penalties, although I've never really dealt with the issue.

Prepayment penalties on real estate loans are something some people, often with less than stellar credit, accept, either in order to either get their mortgage rate lowered or because they don't know any better, or because they didn't ask, were lied to, didn't stick to their guns, didn't protect themselves from unethical loan providers, or any of a dozen other reasons people end up with them. Standard prepayment penalties are six months interest on the outstanding balance, but many companies with "twenty percent" allowances only require eighty percent of that.

Prepayment penalties come in two major varieties, "hard" and "soft", with the vast majority being hard prepayment penalties. Hard means that if the prepayment happens for any reason, you will pay the prepayment penalty. Soft means that if the reason you pay early is because you actually sold the property, there will be no prepayment penalty due.

Prepayment penalties can be further sorted into "first dollar" and "twenty percent". Either can be in the contract for either a soft or hard prepay, but first dollar prepays are uncommon for soft prepayment penalties. If you have a "first dollar" prepayment penalty and you pay one extra dollar above your regular payment, you will be assessed the penalty. These are most common with Negative Amortization loans, and are somewhere between ten and twenty percent of all prepayment penalties, judging from my experience with the problems people bring to me. A so-called "twenty percent" penalty allows you to pay up to twenty percent of the loan balance in any given year without triggering a penalty.

Common terms for prepayment penalties are one, two, three, and five years, although I have seen ten. Since the median time between refinancings is less than two years, and ninety-five percent of everyone has refinanced or sold within five years, it's very much like a hidden fee to the bank in most cases, one that will not apprear on your loan costs summary of the HUD 1, and yet since most people who accept them end up paying them, I would certainly advocate a dollar value being mandatory if there is a prepayment penalty associated with a loan. This is not to say that they are never beneficial or never necessary, but in a large majority of all cases they are simply the result of a loan provider who wants to make more money, who hides the prepayment penalty until it is too late to avoid. They want to raise your cost of going elsewhere so that you will keep the loan at least a minimum amount of time. No matter whether they are a broker or an actual lender, this means they make more money when they do or sell your loan. A lot more money. A two year prepayment penalty is worth about four points (four percent of loan amount), more or less, on the secondary market. Longer penalties are more.

Now, the answer to the question. I know of precisely four ways to get out of paying a prepayment penalty, and three of them are trivially easy to describe.

The first is not accepting a prepayment penalty in the first place. No matter how bad your credit is, you do have this option. Your interest rate will be higher, or they will charge you more for the loan, but you won't have a prepayment penalty. In general, my experience has been that the higher loan rate is worth not having a prepayment penalty. If your loan amount is $300,000 and your rate is 6 percent, your prepayment penalty will be about $9000. Nor is it, in general, deductible if you have to pay it. In this case, if you had to accept a rate one full percent higher to avoid a three year prepayment penalty, you'd be breaking even.

The second is equally trivial. Wait to sell or refinance until the prepayment penalty has expired. Let's say your loan amount is that same $300,000, and that you have a year and a half to go. In order to be worth refinancing, you would have to save two full percent on your new rate, and that's not counting anything you pay, costwise, to get the new loan.

The third way involves something not under the personal control of the borrower, in that it requires legal intervention for perceived legal wrongs done you, the borrower. It has happened in the past that courts have ordered prepayment penalties waived in such cases. It has also happened that companies have agreed to waive a prepayment penalty as part of a settlement. Both events, however, are quite rare, and require you to have gone through something bad enough to merit this. The one I'm personally familiar with involved the lender playing games with payments that were being made on time to the point where they actually marked the people as being in default. I got them to a lawyer specialist and did exactly what that lawyer told me to, when he told me to, and nothing else. They went through something worse than purgatory at the hands of this lender and ended up paying thousands of dollars in attorney's fees, which they didn't recover, but at least they kept their home. Getting out of a prepayment penalty this way is a cure that's worse than the disease.

The fourth and final way to avoid a prepayment penalty is to refinance with the same company. Most (although not all) lenders will agree to swap the old prepayment penalty for a new one if you do your refinance with them. This does not mean that if you've got eighteen months to go on a three year prepayment penalty, you've got eighteen months under the new loan. This means you've got a whole new three year prepayment penalty. It's like putting a problem off for another day, allowing it to fester. Far superior in most cases to just wait until the penalty is gone, because in the vast majority of all these cases your balance under the replacement loan will be significantly higher, and thus, the amount at risk due to a prepayment penalty will be more.

There you have them. The four ways to avoid paying a prepayment penalty. None of them is exactly wonderful, I know. But consider that the borrower agrees to the penalty when they accept the loan. It's part of the terms, and they do have alternative loans without prepayment penalties. It's just that most people jump to conclusions that this is a loan they want as soon as they hear the payment, and, if they're more cautious than average, the interest rate. Which is why you should be one of those who asks every potential loan provider about them, before you are stuck with one. An ounce of prevention is worth many pounds of cure.

Caveat Emptor.

UPDATE: I get all sorts of questions about other ways to avoid pre-payment penalties. These range from good, such as "What if my spouse dies?" to understandable, such as "What if my employer transfers me?" to the ridiculous: "What if my cat has kittens?" What they have in common is that in none of those cases will the prepayment penalty be waived. Bottom line: Accepting a pre-payment penalty is a risk you decided to accept, and without the pre-payment penalty, you would not have gotten as good a rate. You can always contact the lender and ask if they'll waive it under the circumstances, but the answer is going to be "no", and for the same reason that your auto insurance company won't pay the repair bill if you crash after your policy expires. You decided to assume the risk of pre-payment yourself, and you've been putting money in your pocket because of it. When that bill comes due, don't expect someone else to pay it for you when you have been putting money in your pocket because you said you would pay it if it happened. As I said above, an ounce of prevention is worth many pounds of cure.

Yes, I've always kind of liked Paul Simon. But this post was inspired by something I ran across from FATCO. And just to make certain you know, it's fifty ways to lose your money if you don't have title insurance.

You don't want problems from prior ownerships to interfere with your rights to your property. And you don't want to pay the potentially ruinous cost of defending your property rights in court.

A title insurance policy is your best protection against potential title defects, which can remain hidden despite the most thorough search of public records and the most careful escrow or closing.

For a one-time premium, a title company agrees to reimburse you for loss due to defects existing prior to the issue date of your policy, up to the policy amount. And, should it be needed, the policy also provides for the cost of legal defense of your title. The standard coverage policy protects you against such potential defects as:

Now, I'm going to star the ones I've got personal experience dealing with.

*Forged deeds, mortgages, satisfactions or releases.

*Deed by person who is insane or mentally incompetent.

Deed by minor (may be disavowed).

*Deed from corporation, unauthorized under corporate bylaws or given under falsified corporate resolution.

*Deed from partnership, unauthorized under partnership


*Deed from purported trustee, unauthorized under trust agreement.

Deed to or from a "corporation" before incorporation, or after loss of corporate charter.

*Deed from a legal non-entity (styled, for example, as a church, charity or club).

*Deed by person in a foreign country, vulnerable to challenge as incompetent, unauthorized or defective under foreign laws.

*Claims resulting from use of "alias" or fictitious namestyle by a predecessor in title.

*Deed challenged as being given under fraud, undue influence or duress.

*Deed following non-judicial foreclosure, where required procedure was not followed.

*Deed affecting land in judicial proceedings (bankruptcy,

receivership, probate, conservatorship, dissolution of

marriage), unauthorized by court.

*Deed following judicial proceedings, subject to appeal or

further court order.

Deed following judicial proceedings, where all necessary

parties were not joined.

Lack of jurisdiction over persons or property in judicial


*Deed signed by mistake (grantor did not know what was


*Deed executed under falsified power of attorney.

*Deed executed under expired power or attorney (death, disability or insanity of principal).

Deed apparently valid, but actually delivered after death of

grantor or grantee, or without consent of grantor.

*Deed affecting property purported to be separate property of grantor, which is in fact community or jointly-owned


Undisclosed divorce of one who conveys as sole heir of a

deceased former spouse.

*Deed affecting property of deceased person, not joining all


Deed following administration of estate of missing person,

who later re-appears.

Conveyance by heir or survivor of a joint estate, who

murdered the decedent.

Conveyances and proceedings affecting rights of service-member protected by the Soldiers and Sailors Civil Relief Act.

Conveyance void as in violation of public policy (payment of gambling debt, payment for contract to commit crime, or conveyance made in restraint of trade).

*Deed to land including "wetlands" subject to public trust

(vesting title in government to protect public interest in navigation, commerce, fishing and recreation).

Deed from government entity, vulnerable to challenge as unauthorized or unlawful.

*Ineffective release of prior satisfied mortgage due to acquisition of note by bona fide purchaser (without notice of satisfaction).

*Ineffective release of prior satisfied mortgage due to bankruptcy of creditor prior to recording of release (avoiding powers in bankruptcy).

*Ineffective release of prior mortgage of lien, as fraudulently obtained by predecessor in title.

*Disputed release of prior mortgage or lien, as given under mistake or misunderstanding.

Ineffective subordination agreement, causing junior interest to be reinstated to priority.

*Deed recorded, but not properly indexed so as to be locatable in the land records.

*Undisclosed but recorded federal or state tax lien.

*Undisclosed but recorded judgment or spousal/child support lien.

*Undisclosed but recorded prior mortgage.

*Undisclosed but recorded notice of pending lawsuit affecting land.

Undisclosed but recorded environmental lien.

*Undisclosed but recorded option, or right of first refusal, to purchase property.

*Undisclosed but recorded covenants or restrictions, with (or without) rights of reverter.

*Undisclosed but recorded easements (for access, utilities, drainage, airspace, views) benefiting neighboring land.

*Undisclosed but recorded boundary, party wall or setback agreements.

*Errors in tax records (mailing tax bill to wrong party resulting in tax sale, or crediting payment to wrong property).

Erroneous release of tax or assessment liens, which are later reinstated to the tax rolls.

*Erroneous reports furnished by tax officials (not binding local government).

Special assessments which become liens upon passage of a law or ordinance, but before recorded notice or commencement of improvements for which assessment is made.

Adverse claim of vendor's lien.

Adverse claim of equitable lien.

Ambiguous covenants or restrictions in ancient documents.

Misinterpretation of wills, deeds and other instruments.

Discovery of will of supposed intestate individual, after probate.

Discovery of later will after probate of first will.

*Erroneous or inadequate legal descriptions.

*Deed to land without a right of access to a public street or road.

Deed to land with legal access subject to undisclosed but recorded conditions or restrictions.

Right of access wiped out by foreclosure on neighboring land.

Patent defects in recorded instruments (for example, failure to attach notarial acknowledgment or a legal description).

Defective acknowledgment due to lack of authority of notary (acknowledgment taken before commission or after expiration of commission).

Forged notarization or witness acknowledgment.

*Deed not properly recorded (wrong county, missing pages or other contents, or without required payment).

Deed from grantor who is claimed to have acquired title through fraud upon creditors of a prior owner.

The ones below this require extended coverage from a title company

Deed to a purchaser from one who has previously sold or leased the same land to a third party under an unrecorded contract, where the third party is in possession of the premises.

Claimed prescriptive rights, not of record and not disclosed by survey.

*Physical location of easement (underground pipe or sewer line) which does not conform with easement of record.

*Deed to land with improvements encroaching upon land of another.

*Incorrect survey (misstating location, dimensions, area, easements or improvements upon land).

"Mechanics' lien" claims (securing payment of contractors and material suppliers for improvements) which may attach without recorded notice.

Federal estate or state inheritance tax liens (may attach without recorded notice).

Pre-existing violation of subdivision mapping laws.

*Pre-existing violation of zoning ordinances.

*Pre-existing violation of conditions, covenants and restrictions affecting the land.

Post-policy forgery against the insured interest.

*Forced removal of residential improvements due to lack of an appropriate building permit (subject to deductible).

Post-policy construction of improvements by a neighbor onto insured land.

Damage to residential structures from use of the surface of insured land for extraction or development of minerals.

Many people talk themselves out of title insurance, claiming it won't happen to them. They think they've just saved hundreds to a couple of thousand dollars. And they have, if none of the above things (as well as others) happens. But the reason you carry insurance to insure yourself against losses that you cannot afford. If you lose that bet, you've potentially lost the entire property, and many times this is precisely what happens. Mr. Jones owned the property for many years before he died, and his estate sold to Mr. Smith who lived in it for fifteen years and then sold it to you. But Mr. Jones had a quickie marriage before he went off to World War II, forgotten but never legally dealt with. That woman's son finds the marriage certificate and checks to see if Mr. Jones left any property. Guess what he finds. Guess who may really own "your" property?

If I have a property, I'll pay a second time to make certain there's a policy of title insurance covering me. This stuff happens.

Caveat Emptor.


Cool! Jurassic beaver


Interesting times in the Phillipines: Philippines President Declares Emergency

You've gotta wonder where they'd be if they had just applied for statehood instead of independence.


Not certain if this is good or bad. Arab firm to delay U.S. port takeover

It buys more time to allow emotions to cool down, but it could be a fig leaf for DPW withdrawing. On the other hand, the article does state that the shareholders of the british company it's buying "will be paid".

If there is a reason beyond fear to deny them the contract, I want to hear about it. Failing such a reason, however, I think we need to allow them to proceed, as I said in this article

Don Surber has more.

So does Dean at Dean's World, and although Mary Madigan disagrees, the accusations are too general to carry any weight with me. Am I immune to deception? No. Do I want to see actual specific evidence of DPW terrorist affiliations before I reject them? Yes.

Big Lizards has more logic.


Here we go again with speculation driving the price up: Oil Prices Jump $2 After Saudi Explosion


Mixed Emotions Department: Mayor suspended in Nazi jibe row. On one side of the fence, this is "Red Ken" we're talking about, one of Saddam Hussein's chief apologists and general hater of western democracy. On the other side, this is a freedom of speech issue and even though Britain doesn't have a First Amendment like we do, it's always a Bad Thing when the ability to communicate your observations is compromised. So I'm mostly unhappy.

LATER: Done With Mirrors has an actual transcript of the incident. Yes, Red Ken was gratuitously verbally abusing a journalist ("and this is a Bad Thing how?"), but said journalist needs to Grow Up.


Restless Mania notes that President Bush has called for doubling NATOs troops in Darfur. That's good news!


Below the Beltway notes that the state of Texas is now requiring a lawyer endorsement for their hunting licenses.


This bothers me. This really bothers me. Ogre finds a reference to a California government employee who was fired for being Christian. Reading the article, okay, I can see if she was pestering her coworkers, but the usual tack for that is counseling and then a warning letter. Mayhaps she was probationary. Somehow I can't see them firing a jewish or muslim probationer for the same offense.


If you read Iraq the Model, you know that Zarqawi may have finally found a winning strategy, although the curfew appears to have quieted things down.


HT to LGF for a link to a Ben Stein column about losing the war on terror.


Volokh Conspiracy wonders if Pell Grants are unconstitutional, and also, how they could be used to leverage against the religious beliefs of private colleges.

RULE: (and warning to censors, especially leftists everywhere) If you allow a power to be used to silence your opponents, it will one day be used against you.


Finally, Victor Davis Hanson has a column worth reading about the situation in Iraq and what it takes to win.

Hillary Clinton Runs Hard Left

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I know that this is non-news, but look at the tone of the article: Sen. Clinton Turns to Veteran Fundraisers

The tag-team money appeal began Wednesday when potential Clinton donors received an e-mail from Begala warning that "Election Day is eight months away, but the Republican attack machine is going after Hillary Clinton big-time."


"You and I know what that means _ financial support from a Bush political-financial complex that leaves no special interest lobbyist behind _ and it means pushing millions of dollars into an anti-Hillary campaign," Begala wrote.

The evidence?

Begala noted that Spencer _ identified only as "her GOP opponent" _ met at the White House with aides to President Bush's political guru, Karl Rove.


In fact, Winthrop had said after the meeting that Spencer had received no promises of financial help. And as of the end of the year, Clinton had $17 million in the bank while Spencer had just $243,000.

So let me get this straight. The Republican Senate candidate in a high profile race meets with the White House Deputy Chief of Staff slash political advisor, and this is somehow evidence for a conspiracy? I suppose Mr. Bill never helped Democratic senate candidates?

Other stuff in the article to further un-endear Hillary to me, pouring gasoline on a fire:

"To give the devils their due, the Republicans know how to confuse the issues, distort the past, and disguise the kind of future they want," Carville added. "A future where presidents are way above the law and the people, where the middle class is squeezed while the rich are comforted and where Americans who need a helping hand get the back of the hand instead."


"Anyone watching the colossal incompetence of the GOP _ from botching up the Medicare drug bill to fouling up the response to Katrina _ might think these guys couldn't organize a one-car parade," Begala wrote. "But there's one thing they excel at: the politics of personal destruction."

Like, say, gratuitous personal attacks on people you're not running against?

"The Republican national chairman Ken Mehlman calls her `angry,' Laura Bush says Hillary is `out of bounds," and now her latest opponent makes outrageous charges that she `aids and abets our enemies,'" Begala added.

Well, duh. Nor is she running against George W. Bush, even when she does try for the presidency. The kind of opposition she has been to the current administration's war effort always aids and abets the enemies. For an indication as to whether it is, nonetheless, justified or at least justifiable, we need to ask the question: "What does her criticism gain the country?" For a graphical picture of the answer, go skin a zero. In other words, it's blatant political pandering. I do not know and I do not care whether that's what she really thinks. By engaging in these kind of tactics, she shows herself unfit for higher office.

I think she needs to be the recipient of a national ceremony like Worf had in that one Star Trek episode where everybody pointedly turns their back and walks away. How come a family man who believes and backs the same issues and stands as the majority of the voters is "out of the mainstream" but this "anything, no matter how outrageous, for a few more votes" is not? As Inigo Montoya famously observed: "You keep using this word. I do not think it means what you think it means."

Unless, of course, this is some new definition of the word mainstream with which I was previously unacquainted.

It is obvious that she's already running for the presidency, not New York State Senator. Especially given the lopsided dollar ratio between the candidates, New Yorkers would be justified in voting against her on that basis alone. On the other hand, I don't like her, and I don't like her priorities (which from observed evidence appear to be "Whats good for Clinton is good for America"), but I don't think she's been a particularly bad senator, and we always need the political opposition to have a good loud voice (Would that she used it to more constructive ends). On the other hand, if she's elected President, I shudder at the consequences.

In World War II, the war effort took a much larger share of GDP and of the federal budget than the war on terror does today. Furthermore, we has 12 million men in uniform out of a population of 160 million, and we lost 300,000 dead and about the same number of permanently disabled to some degree. Equivalent numbers today would be 23 million in uniform, nearly 600,000 dead, and the same number again permanently disabled. Nonetheless, World War II saw no serious domestic opposition despite the much higher costs, in lives and percentage of GDP. 9/11 cost more lives and more money, even considering the proportionality of it all, than Pearl Harbor. Furthermore, the vast majority of Pearl Harbor's costs and casualties were military - legitimate targets of war, however underhanded the Japanese tactics. The vast majority of the casualties on 9/11 were civilians not involved in any fashion with the United States government or the military in any fashion, not even producers of war material.

Why then, are we seeing so much opposition to the war when it suddenly became obvious we were in one? Sixty years ago the isolationist opposition practically vanished with Pearl Harbor. Why didn't the modern pacifist go the same way?

A certain number of them did, of course. There are a large number of former pacifists who became pro-war, or at least resigned to war, when the fact that we were in one became undeniable. But larger numbers did not. Why?

The answer lies in several segments. No single answer explains the entire difference. Indeed, I can trace a minimum of three factors, at least one of which has not yet been dealt with in the public forum.

The first, most obvious difference lies in the public environment. Patriotism was a subject the vast majority of the country took very seriously. The best interests of the United States as a nation were a part of our national consciousness, and deservedly so. We knew that we were forty percent of the world's industrial output. We could see how screwed up Europe was in the time between the wars, and as for the poor benighted savages in the rest of the globe, well the less said about them, the better. Viewed through the lens of accomplishment, and widespread practice, the United States was (and is) obviously a better nation than could be found anywhere else on the planet, and if the communists in Russia and their supporters and apologists elsewhere wanted to show us their system was better, they had the opportunity of being in power in the Soviet Union. They should get cracking and prove it.

Do not make the mistake of believing there were no anti-war forces in the United States prior to World War II. Many elements of our society did their best to keep us out of the war. Our domestic communist party, until Germany invaded Russia, was decidedly isolationist and wielded influence out of all proportion to their numbers. Just about every woman's group going was also isolationist right up to Pearl Harbor. They had seen the cost of entangling ourselves in a european war in 1917 and 1918, and it was frightfully high, with few observable benefits from having won. This had been kept fresh with the application of various interventions in Central America in the 1930s, supposedly in defense of american interests but with significant casualty lists and little observable benefit to the United States. This was not something that, in their viewpoint, was worth anything like the cost we had paid, and the domestic opposition to war did all that they could to keep the United States out of the war. Jewish refugees attempting to escape Germany and the rest of the european continent were turned back at US ports. Given the cultural environment of the time, part of this was anti-semitism, part anti-immigrant sentiment left over from the twenties when the United States first began restricting immigration, but the greater part was a desire not to offend Germany, and furnish a causus belli by sheltering people that Germany had declared their enemies.

A certain amount of the reason why the anti-war opposition disappeared after Pearl Harbor was blind patriotism. "My country, right or wrong." There are obvious inherent moral and ethical difficulties with this viewpoint, but nonetheless a strong case can be made that it is necessary for the long term survival of any nation. Better our nation be freely ruled by its own citizens and therefore able to change any evil practices that do exist, than have outside ways imposed upon it and be unable to change. A certain amount was that, with the bombing of Pearl Harbor, the war had become an obvious fact and further debate was pointless and irrational. Finally, the desertion of the pacifist cause by the rest of the opposition can be traced to simple political calculation - to continue to oppose the war in those circumstances would have been political suicide to no good purpose. This applies to a certain extent today, mind you, but there are mitigating factors that there were not then.

Sixty years later, things are no longer so clear cut. There is a larger constituency for "peace at any price" than there is for "my country, right or wrong." How this happened is a long essay in and of itself, but it definitely has happened. I could trace the origins of the anti-war movement of the sixties, that continues today, from the communists and isolationists of the thirties through fifties, but that would digress too far. Suffice to say that no matter how imminent, real, and dangerous the threat, there is a strong constituency in this country for peace at any price. Many of the journalists and media personalities that have continuing national prominence have made all too plain that they are part of that constituency. In my mind that removes their opinion from serious consideration. If they begin their cognitive processes of the questions, "Is this war necessary? Is it justified? Is it worth the price?" from an answer of "No," and then proceed to figure out how to justify or rationalize that answer, what emerges is not likely to be either a rational or sane argument. If they start out the thought process even further along this spectrum, with the question, "Who is the US doing an Evil Deed to (and how can I prove it and get a Pulitzer)?" that tells me that their thought process is not where it needs to be in order to have serious input into the decision.

This manifests in many ways. Nobody even considered whether German or Japanese captives from World War II should be released prior to the end of hostilities. Nor Koreans and Chinese from the Korean War, or Indochinese prisoners held during that war. Today, we have legal terrorists testing the attorneys of our justice department, jurisdiction shopping, and continually looking for one chink in the legal armor that declares our prisoners of war to be enemy combatants. Actually, it exists. Few, if any, of our prisoners were captured in a uniform of any kind. Under long-standing international and domestic law, this justifies military tribunals for them as spies and saboteurs, with firing squads for those found guilty, and the rest held anyway as enemy combatants. I am not certain we are correct to do what we are doing in holding them indefinitely as opposed to tribunals and firing squads, nonetheless it remains the merciful, correct thing - the American thing - to do. Nonetheless, with the legal climate in this country, it is difficult not to have sympathy for the Bush administration's policy of keeping them out of reach of American civilian courts. Nobody defended the Rosenbergs at the time as justified, misguided, or even mentally whacked, the controversy was that many high profile people defended them as innocent (they weren't innocent, as has been confirmed by Soviet documents. Indeed, they helped the Soviet Union obtain United States nuclear weapon secrets. Under less fortunate circumstances, the toll of lives they cost this country would have been in the dozens of millions).

There was a time when the obvious good of the country trumped politics. In 1944, Thomas Dewey declined to criticize Roosevelt's conduct of the war, despite many, many possible targets. He knew the nature of the fog of war, and knew the Allied officers were doing their best but setbacks and mistakes happened. He also knew the likelihood that such criticism would extend the war, cause more casualties, and possibly even lose it. Our understanding of what wins and loses wars has matured considerably since then, but at the time it was far from certain that the war was won. All we knew for certain was that it was going our way, by and large. Indeed, General Patton said, more than a month after the 1944 election, in response to the German offensive in the Battle of The Bulge, that he realized we could still lose the war. In light of this information, when the press asked Mr. Dewey why he hadn't criticized Mr. Roosevelt's handling of the way, and he said he'd rather lose the election and win the war than reverse. Mr. Dewey was entitled to criticize, he wisely refrained. Would that modern day political opposition was so civic-minded. In 1943, Eisenhower famously revealed to a roomful of war correspondents that Sicily was the next target in order to stop the speculation in the press that was giving the Germans ideas. Realizing the consequences in American dead, not one of them breathed a word. Would that the modern day press had as much sense. However, unlike the war correspondents of old, few modern journalists have any personal experience with the military. Many hold the members of the military in contempt.

Once upon a time, Democrats and Republicans did not think of each other as evil. Political opposition, yes. Disagreed on many things, yes. But they did not have hatred, or if they did, they did not let it blind them. The legendary congressional leaders of thirty years ago and more could not have gotten as much work done as they did, could not have made the compromises necessary if there was not some level of trust, and definitely could not have reached out across the isle for support against their own recalcitrant members, as was necessary to pass the Civil Rights Act, the Voting Rights Act, and others. Indeed, Republican support for those was much more solid than Democratic.

This began changing in the later seventies, and became noticeably stronger when Ronald Reagan captured the Presidency. Why? Those in power at the time were largely on the left of the political spectrum, and they had sponsored all of the programs that they feared Reagan wanted to dismantle: Medicare, Medicaid, Welfare, public housing, etcetera, as well as many of them having a deep-seated antipathy to the military, which Reagan wanted to revitalize.

Prior to World War II, the federal government was much smaller than it became in the 1960s and later. Department of Commerce was mainly diplomatic and customs. Veterans Affairs was a small agency. Interior was National Parks and mineral leaseholds. Even the great public works of the 30s were temporary measures to put men to work, swiftly abandoned in World War II. When war was declared, WPA was a dead letter overnight. Social Security was microscopic. Neither Health and Human Services nor Education existed, and even their predecessor, Health, Education and Welfare, didn't exist yet. Nor did Housing and Urban Development. The full cabinet was eight secretaries. The federal government just didn't do that much at the time. The average citizen was far more involved in the state government. Finally, what non-war related spending there was was curtailed for the duration of World War II.

This really changed dramatically with Lyndon Johnson's Great Society programs of the 1960s. Housing and Urban Development, expansion of Social Security and welfare, and many other things we take for granted today were begun then. And I'm not speaking against those programs, which were a response to the social pressures of the time.

What I am going to point out is that these programs all have natural constituences. These constituencies fear losing these programs. They regard the program as right and necessary, and any move to abandon, diminish, or roll back increases as contrary to the good of those people. In other words, evil actions.

As a byproduct of the politics of the time, these constituencies have all historically been Democratic voters. Institutional memory goes on when nobody remembers why. Environmentalists, to name one example, have certainly gotten more real mileage out of Republican presidents than Democratic ones, and yet they remain die-hard Democratic supporters.

Nonetheless, with the rise of Ronald Reagan, who campaigned for President on the platform that the government was too big and did too many things that it really shouldn't, galvanized these people into believing that Reagan, and the republicans who supported him, were evil. They were afraid he (and they) were going to slow the natural increase in these programs, something that they believed no compassionate human being could do. Hence, the belief that those who would do so are evil.

The current War on Terror has thus far not had to compete for resources with all of the non-military federal spending that goes on. Nonetheless, those who are part of those spending programs natural constituencies realize that there should be a competition for resources; the federal treasury is not infinite. Furthermore, if the War on Terror continues very much longer, we are going to have to have serious debates about our national spending priorities. The federal government cannot continue to spend like lottery winners indefinitely; every dollar it takes means that that dollar did not go towards growing the economy. The fact that we have not had this debate yet is one of my major complaints against the Bush Administration and the current congress.

The fact is that the Great Society programs have continued to grow despite the best efforts of fiscal conservatives these past thirty years. The most that has even been proposed is a lower rate of increase, and yet the constituencies that exist for these programs treat this as if our leadership intends to have those served by the programs report to the ovens for incineration. And it is this group, I submit, that is the hard core of resistance to the War on Terror.

I certainly can understand why this is. They have spent so long defending these programs tooth and nail that they have become sensitized to any threat, whether real or imaginary, to these programs existence. The fact of the War on Terror, and the attendant need for resources to fight it, is certainly a real threat, and the program constituents do not want to have a debate as to which is higher in priority, because they know it's a debate they are likely to lose. Afghanistan was undeniable on any level connected with reality, but Iraq is not only a tougher nut to crack, it is also consuming far more in resources. Since it's not like Al Qaeda is ever going to surrender to the United States on board the battleship Missouri, they want to just declare victory now and go home, to forestall the debate on resources.

This is dangerous self-delusion, but denial has always been one of the strongest of all psychological barricades. So long as they can persuade themselves that it's about the evil Republikkkans out to steal Iraqi petroleum as a favor to American Big Oil fatcats and perform payback for Saddam Hussein wriggling off the hook during the Gulf War, they can continue their opposition with a clean conscience. To them, it really is about domestic politics and not foreign assaults on the United States. Insulating themselves from evidence to the contrary is further manifestation of this phenomenon. This is part of the reason why every conversation with them begins with debunking claims that have been dealt with so many times on so many levels that they no longer rise to the level of pathetic. But since many members of these constituency are important in controlling mass media markets, there is no national level sense of the fact that we have dealt with those arguments, as the conversation has been blocked from happening on a national mass media scale.

what happen when 401K leave blank on beneficiary

Nothing unless you die, and it's not covered in your will or other documents. Then the state's intestate code takes effect. Each state has a law for how the estates of those who die intestate will be divvied up. These laws were typically made generations ago, and the societal assumptions that they make are no longer valid. Furthermore, by failing to name a beneficiary, you are passing up on the chance to avoid probate, the legal process by which your estate is gotten to your heirs. Everybody has a probate, and fees are levied on the basis of the value of the assets that are in probate. For many assets, such as bank accounts and investment accounts, avoiding probate is as easy as naming someone a beneficiary, and any accounts where you have names someone a beneficiary go to them immediately upon proof of your death, outside of probate.

This is important because your heirs do not have access to those assets until probate is settled. This is a minimum of nine months, and in large complex cases can be a couple of decades. Probate fees are about seven percent per year, and until probate is settled, they might get to live in the house you left - but they can't sell the house if they need to move, or if, for instance, all of your assets are tied up in probate and they can't make the payments on the loan.

Most people do not understand the naming of beneficiaries, and never give it a second thought. Many times this translates to the first spouse still being the beneficiary of a policy of life insurance, when you divorced without children fifteen years ago, and now your second spouse has two young children to bring up without you, and without your life insurance proceeds. Even if the first spouse is generous enough to disclaim the money, since you obviously did not name your second spouse as a beneficiary, the money now has to go through probate.

Contingent beneficiaries are also important. Primary beneficiaries sometimes predecease you, or perish in the same accident. One common (and often worthwhile) tactic is to name spouses as primary beneficiaries, children as contingent beneficiaries. Many accounts allow the naming of secondary contingent beneficiaries as well. One approach is to name them individually, another to name them as a class ("all natural and adopted children of John and Jane Smith"), and two ways of accounting for their as yet unknown numbers of people who may be born later, "per stirpes" which is by branch, and "per capita" which is by head.

Every time you have a major life event, such as marriage, divorce, birth of a child, or the death of someone who is one of your beneficiaries, you should make a habit of going through all of your accounts and making certain the beneficiary designations are up to date with the new developments. Of course, if you have trusts and the like, this is also an ongoing requirement for them, and trusts are even better for avoiding unnecessary estate complications.

Caveat Emptor

Carnival of The Vanities Recommended: Mensa Barbie (good works in Iraq)


Cool! Pluto May Have Rings


What he said: Wizbang lays the smackdown on Sharia law.


"No Arabs Need Apply" Looks like Vodkapundit agrees with me that the UAE company set to run the port of New York should be scrutinized, but not barred from the job unless we can find evidence.

Dr. Sanity is looking for the upside.

Daniel Drezner has an evenhanded article on the pros and cons, and comes out pro.

Okay, my first response was "What are they thinking to even consider it?" However, my later, considered response is that this is what America is all about. Yes, the UAE company needs to be scrutinized. Yes, their handling needs to be watched. But if they can satisfy our inspectors as to their diligence, the transaction needs to go forward. I'm as nervous as anyone about some freighter carrying a nuke into the harbor. On the other hand, preventing that is not the port concessionaire's charge, nor are they capable of preventing it.


Q and O has a good article on the possibility of Mr. "I invented the internet" Gore running again. All I can say is that if algore captures the Donkey nomination, I hope the Elephant Candidate is not only sane, but is really good at keeping a straight face.


neo-neocon has some information about modern day indoctrination that you'll think has got to be a hoax. Until you dig a little, including this article she links that has got to be a modern day children's equivalent of The Protocols of The Elders of Zion, or indoctrination straight out of Brave New World.


Jihad Watch has a completely fair and rational examination of a teachable moment with regards to freedom of speech. Works for me. If I was a teacher, I'd probably do it.


HT to Jawa Report for a pointer to an INDC Journal about the conditions this war is being waged under.


Big Lizards covers one unelected judge making himself a "majority of one", despite the higher courts, despite a lawfully imposed punishment, despite the will of the voters.


Armies of Liberation has more coverage of Yemen's Get Out Of Jail Free Week.


Captain's Quarters has some worthwhile reporting on the efforts to get the bureaucrats at the Department of State to pull in the direction indicated by the elected President.

These bureaucrats are Americans and entitled to their opinions. They are not the elected policymakers of the American people. If they find the current policy of the administration to be one they cannot accept and promulgate the way they are paid to, they should do what anyone else does in that situation and resign (or retire, if they are eligible). If their expertise is really all that, the publishers of the New York Times would likely be willing to pay them to write about it in multiple forums.


Victor Davis Hanson has some much needed perspective on peace movements.

Carnival of Investing. Recommended: Scatterbox,

Carnival of Personal Finance. Recommended: Insureblog, Entrepreneur's Journey

Carnival of Debt Reduction

Carnival of the Capitalists Recommended: Bargaineering, Liberal Wrong, Financial Methods, Small Business Trends


Bin Laden Vows Never to Be Captured Alive

Since Yahoo links often change, here's another: Bin Laden Vows Never to Be Captured Alive.

Is it just me, or does this seem to be "posing for the troops" to anyone else? If martyrdom were what he wanted, he could have found it by now.


Too Funny Not to Link Department: Cheney's Got A Gun.

Lyrics here

Audio here

Video here


I do apologize for not having more. I'm kind of focusing on the sister site until it's fully functional

Mortgages and RAMs in Later Life

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"Should People in their sixties take out a mortgage?"

The short answer is "Not if you don't have to." Now if I suddenly vanish, the explanation will be that the loan industry put a contract out on me.

Success in loans, and sales in general, is often attributable to selling people stuff they don't need. If you don't sell something, you don't eat. Getting people to call or stop by is expensive. The traditional idea of sales is that you have to make a sale at every opportunity, whether it really makes sense for the client or not.

The various tricks of selling a mortgage to retired folks is a case in point. "It's a cushion," "It's there in case you need it," and all sorts of other stuff to that effect. Combine this with the "If you wait until you need it, you won't qualify!" and most folks who don't know any better will cave in and apply.

This is exacerbated by the fact that most people seem to want to stay in the same home they raised their family in. This is very understandable, emotionally, and often the worst thing you can do financially.

Let's consider the typical three or four bedroom house with a yard, and the retired couple. It becomes more and more difficult, physically, for them to do the required routine cleaning, and even more difficult to do the maintenance and repairs that any home needs from time to time. Sometimes the kids are close enough and willing to help, sometimes they aren't. If their finances are tight in the first place, they get tighter and tighter over time.

Into this environment comes the guy with a Reverse Annuity Mortgage (RAM) to sell. This is a special kind of mortgage, with a special protection for the homeowner (here in California, and in many other states as well) that they cannot foreclose in your lifetime. You cannot be forced out. Well, what if you're sixty-five and live to 100, as a far larger proportion of today's 65 year olds will? That's thirty-five years they are locking this money up for, and there is always the possibility that by the time they consider the cost of selling, etcetera, there will be no equity.

Lending is a risk based business, and that kind of lending carries its own risks. Who pays for the risk to the lender? You do. Especially as opposed to the typical loan where half have refinanced in two years and ninety-five percent in five, this is a long term loan they are being exposed to. Yes, the recipient could get cancer and die in a few years, but they could well survive that. The lender has no way of knowing what the interest rate environment for the money will be in a few years. So either the rate the clients get is variable, or the clients pay a higher rate to have a fixed interest rate.

Once you start taking money out of the RAM, it starts earning interest. Since in the most common forms you are typically not making payments, it accrues interest. If you are making payments, it makes your cash flow even tighter, and you need to take more money. In either case, your balance is increasing, faster and faster with time, until you hit the limit, at which point you can no longer get additional money. This often happens surprisingly quickly, as you have the power of compound interest working against you. This all but guarantees that the family will have to sell the home, often for less than they could have gotten had they the luxury of a longer sale time. Furthermore, if keeping the home in the family is something you would like, a Reverse Annuity Mortgage is almost certain to torpedo the hope.

Contrast this with the swap down option. Suppose instead that adult children buy a small place suited to the parents needs such as a condominium, and the parents live there, while they live in the parents home. This minimizes cleaning, upkeep, and maintenance that the parents need done.

If this won't work, another option is selling the home and buying something smaller. Remember, a RAM will almost certainly cause the family to lose the home anyway. You get more mileage out of cashing in the equity by selling, and investing the equity, than you will from borrowing against the equity. Instead of working against you, compound interest is on your side. Most states have laws preserving property tax basis if that's something that is advantageous.

Let's say that with a $500,000 home, moving down to a $200,000 condo. Net of costs, you net at least $250,000 to invest, and let's say you do so at 7 percent, well below a well invested portfolio. This gets you $17500 per year, or about $1460 per month, indefinitely, and you keep both the condo and the $250,000. Contrast this with taking the $1460 per month out of your equity. Even if you can find a RAM at the same 7 percent, the entire equity is gone out of your home in a little over fifteen years, and that's without including initial loan charges.

Nobody can make you do this, and there are many reasons why you might not want to. But looking at it from a strictly financial viewpoint, it's hard to find the justification for a Reverse Annuity Mortgage.

As a resource, here's the AARP page on reverse mortgages, and here's another page with some good general information.

Caveat Emptor

This sentence is a textbook illustration of the most effective way to lie. Tell the truth, but not all of it. Not that I'm trying to coach habitual liars, but I am going to deconstruct this astoundingly dishonest claim that I keep encountering. It's mostly used by less ethical loan officers trying to persuade someone not to shop around.

At the bottom-most level, all mortgage money does come from basically the same place. It's all investors looking for a return on their money in a historically well secured market where they are somewhat protected from taking a loss.

What happens to it after that, and whose hands it goes through, matters a lot. Just like saying all water comes from the ocean doesn't mean it's all drinkable, just because all mortgage money comes from investors doesn't mean it's all equal. The lender and loan officer make a huge difference.

Consumers cannot, in broad, go directly to mortgage investors and request a loan. Most of the investors wouldn't know how to do loans if it bit them. They don't have the actuaries, the underwriters, the tools, and the networks to get the best value for their money. That's where the lenders come in.

I'm not going to get into all the details of CMOs and MBSes- Collateralized Mortgage Obligations and Mortgage Backed Securities - how they are sold, how to price them, yada yada yada. It's something I am not involved in, and I don't really need to know as much as I do. Even when I was financial planner, the nuts and bolts just aren't that important to most investment portfolios. Two important things to note: The higher the interest rate, the better the price the lender will get from the investors, and the lower the rate, the lower the price. The higher the default and loss rates is expected to be, the lower the price, and the lower the default and loss rates are expected to be, the higher the price. Default and loss rates translate to "How tough are the underwriting standards?" Low interest rates at a lender usually means very tough underwriting, and fewer people qualify. High interest rates means relatively easy underwriting, and more people qualify.

What you really going on here is that the banks - the lenders - are the middlemen putting investors and consumers together. For this, they get paid. They get paid enough to pay for all those fancy offices and the executives' salaries and everything else the bank might have. Mortgage lending is big business. Lest it sound like I'm saying the fact they get paid is a bad thing, it's not. It makes the market far more efficient, as most individual investors can't afford an entire mortgage all at once, and individual borrowers would have a daunting problem in finding investors willing to lend money at a decent rate in their situation.

Each individual lender tries to hit a certain market segment. It works like branding in the consumer world, in that there are clients they are aiming at, and ones who are incidental to their business. Lending is a risk-based business, and the higher the risk to the lender, the higher the rate. What will happen the vast majority of the time with the vast majority of lenders is that they will sell the loans, whether or not they retain servicing rights. In other words, just because you have a loan with bank A doesn't mean they'll keep it. It is very rare for a lender to keep the loan. Even if they retain servicing (for which they get paid - and they're not even risking any money!), so that you keep sending that lender your payment, they don't hold the actual loan. Some lenders are interested in A paper, whether conforming with Fannie Mae and Freddie Mac, or nonconforming but to essentially the same standards. These loans are fairly uniform and highly commoditized, but lenders put their own stamps on them. One bank might have incredibly tight standards, but offer lower rates. They will have a record of fewer defaults, practically zero losses, and get a better price on their loan packages in the bond market. Another bank might be somewhat looser in their standards, and so not do as well on selling the loans, and they will charge a higher price, in the form of interest rate, in order to compensate.

This phenomenon expands out progressively farther in the A minus, Alt A, and subprime lending worlds. A paper has noticeable differences between lenders, while subprime's targets vary from the not quite A paper to those who specialize in the ugly loans to people with 501 credit scores, and even some lenders that will accept a borrower with only one FICO score at the 500 level. Almost all of them have their own niche, or niches, that they will underwrite to, trying for a mix of rates to borrower and underwriting standards for approval that results in fewer of their loans defaulting, and thus the ability to command a premium price in the bond market over and above what mostly equivalent lenders will give.

Below subprime is hard money. It's called hard money because before they fund your loan, they are recruiting individual lenders and syndicates who will hold your loan for as long as you have it. This is why hard money is typically multiple points up front, interest rates of thirteen percent and up, and three year hard prepayment penalties, as well as only going to about sixty-five or seventy percent of the property value at most. Without the lenders, every loan would be hard money.

No lender has the capability of running programs that are good fits for everyone. Some of them have a few dozen, some have only ten or twelve. This sounds like a lot, but it isn't. Every single loan type is a different program. Just to cover the most standard loan types for their market is usually between twenty and thirty. I can point to lenders with twenty-five or more different Option ARM programs.

This is where brokers come in. There's an old saying about how "If the only tool you have is a hammer, pretty soon all the problems start looking like nails." You walk into a direct lender's office, and they has a couple dozen programs focused on one segment of the market. You're not an ideal fit for any of their loan programs, but so long as you can qualify for any of them, they are going to keep your business rather than refer you to someone else. They're hammering nails, never mind that your problem is a threaded bolt. They get you pounded into the board. Yes, you get a loan, but you could qualify for a better one if you wandered into a different lender's office.

Brokers have lenders wandering into their offices. Lenders who will give the brokers better deals than they give their own loan officers, because they're not paying for the broker's expenses, and the broker knows better than to be a captive audience. The fact is that brokers are usually capable of getting a deal that's enough better that they can pay their expenses and salaries, still have profit left over, and nonetheless offer the client a deal enough better than the lender's own branches as to be worth the trip. Brokers also shop multiple lenders, looking for a better fit. If you're a top of the line A paper borrower, someone that any major bank has a good program for, the broker can still get you a better loan, but maybe only by an eighth to a quarter of a point. On a $300,000 loan, that's $375 to $750 in cost at the same rate for the exact same loan. If you're in a marginal A paper situation, the difference made is liable to be that you qualify A paper with a broker who knows where to shop, where you'd likely have to go subprime, with inferior options and a prepayment penalty, by walking into a bank office. You get into subprime situations, and I have seen pricing spreads of two and a half percent on the interest rate between the best lender for a given loan, and the rest of the pack. You can physically go to twenty or fifty different banks, fill out an application and furnish paperwork in each - or you can go to a broker.

The point is that no lender is both offering low rates and loose underwriting. As everything else having to do with money, it's always a trade off. The lenders charge higher interest rates, they get a better price for their loans. The lenders underwrite to tougher standards so they will have fewer defaults, and practically zero losses, they get a better price for their loans. The lenders need a certain margin to keep their owners happy, and a certain margin to keep investors happy, and neither one of those in the business of giving away money for less than it is worth.

The ideal thing for a given borrower is not an easy loan. Unless you're so high up on the ladder of borrowers (credit score, equity in the property, lots of documented income) that you'll qualify for anything easily. The ideal loan, where you get the best tradeoff of rate and cost, is to find the loan where you just barely scrape through the underwriting process. With average loan amounts in California being about $400,000 now, chances are that any extra time and effort you spend will be handsomely rewarded when you compute the hourly costs and payoffs.

So you see the partial truth of the title statement, and the utter falsehood. All mortgage money pretty much does start out in the same place. Nonetheless, what happens to it after that, before it gets to the consumer, renders the statement "All mortgage money comes from the same place" incredibly dishonest.

Caveat Emptor


Eidelblog has a good article on the "windfall" for oil companies, and how it is a good thing, despite the NY Times characterizing it as a corporate giveaway.


Belmont Club has a wonderful account of the century ago Moro guerrilla war in the Phillipines. It makes several points worth making, the most important of them being at the end. Some readers may consider it long, but it is worthwhile.


My local tree killers had a good article today about Congressman Pombo, trying to bring environmental legislation out of the 1970s mindset. While I consider myself an environmentalist, I have always believed that extremist environmental legislation is not only a Bad Idea, but mostly unconstitutional as well. Species have been arising and going extinct for hundreds of millions of years. To take the tack that we have to stop the earth's biological clock completely is irrational, and as far as I can understand the relevant issues, bad science. We do need a certain amount of unbroken open space, for any number of reasons, and we probably need more than we've got in many urban locations. But many of the things that property owners have to do to appease the environmental neo-nazis are beyond rationality.


The local rag also has some good information about immigration loopholes that get exploited because employers have no requirement to verify documents.


Captain's Quarters says it very well when he says that the press corps will have earned the right to criticize the newshandling of others when they actually run all of the news, like they keep saying their job is, rather than self-censoring because they are afraid that, for instance, some islamic crazies may target them. They bait the White House because they know it is safe - their press pass won't even be suspended. But the logic they use to bait the White House goes by the boards as soon as there are possible consequences to them.


Victor Davis Hanson has two worthwhile columns in Why No Nukes For Iran? and A European Awakening Against Islamic Fascism?


Volokh Conspiracy went back and dug out an old Dr. Seuss political cartoon from before he made it big in children's books. The one he showed, from August of 1941, is still relevant in a different way today.


Via Instapundit comes the story of a wounded soldier and widow of an american soldier won a 102 million verdict from an Al Qaeda financier.

Facetious snark: Don't you just love it when one enemy of civilization attacks another?


Tomorrow is the President's Day Holiday here in San Diego schools. You'd think that with all the stuff about Dr. Martin Luther King and Rosa Parks that the school went over with the Kindergarten class, of which my daughter is one, they could at least have familiarized her with exactly who George Washington and Abraham Lincoln were. No such luck. My wife and I got a completely blank stare when we asked her what the school has taught about the two most important Americans ever. We did our best to remedy the situation on a kindergarten level, but the level of resistance is high, as if to say, "If it's so important, why didn't the school teach it?" I have a parent conference Tuesday; I think I'm going to ask a few pointed questions.

Strata-Sphere has a good bit of rationality on the UAE company that's buying the british company with the port contracts, and some excellent background on his reasons. I have to admit it makes me nervous, and given the facts of the situatio, there should be additional monitoring of their performance. But if we cannot show a link between them and terrorists, we are obligated to allow them to try. To do otherwise is to betray what makes us americans.


ROFASix has an article on how the assault on Iwo Jima was a mistake and perspective on the differences between then and now. I'm intermittently working on a long article on a similar subject. His is worth reading.


Professor Bainbridge misses Newt Gingrich. Agreed that he's a bomb thrower. Agreed that he runs off at the mouth disturbingly often. Agreed that he can't always articulate himself clearly, and he has shown clear contempt when it wasn't warranted disturbingly often. He "gets it" on where to stand on the issues right way more often than most major political figures.


Atlas Shrugs has an account of how the Russians moved Iraqi weapons to Syria.

More later if I get a chance!

What Drives Loan Rates?

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Supply and Demand.

Now that I've given the short answer, it's time to explain the macro factors behind interest rate variations. But I'm going to keep referring to those first three words. It is a tradeoff between the supply of money and demand for it.

The most obvious thing influencing loan rates is inflation. This is a general environmental factor. If the inflation rate is higher, then other factors being equal, there will be fewer people willing to lend at a given rate, and more people willing to borrow. Who wouldn't want to borrow money if the money you have to pay back is actually worth less than they money you borrowed? All loans are priced such that a given inflation is part of the background assumptions of making it. If inflation is 4 percent, someone lending money at seven is making an effective 3 percent. If inflation is ten percent, they are losing that selfsame three percent. Which scenario would you prefer to loan money in? Which scenario would you prefer to borrow money in?

On the other hand, when inflation is high, loan rates usually rise to compensate. When the prime rate is twenty-one percent, that means that a business borrower has to make a minimum of twenty-one percent on the money just to break even. That's if they're a prime customer. Making twenty one percent is tough. The reason you borrowed ("rented") the money was because you have a use for it to make money. There's a lot fewer opportunities that make enough over twenty-one percent to make them worthwhile, than there are opportunities making enough over seven. This is one reason why inflation is a Bad Thing.

What alternatives exist is a major factor on the supply side, as well. If you absolutely must invest your money in US Government securities, that's where you're going to invest, and since you're increasing the supply of money to the treasury, the price is less. Supply and Demand. This is one of the many reasons why Congress' handling of the trust fund is a national disgrace. If they were private trustees, they would be help liable for not investing it where the best returns are. If, however, you think that stocks are looking more attractive now, that means that the supply of money for loans will shrink by whatever dollars you move out, and the rates will rise. The effect for any one person is small, but there are a lot of people in the market. In aggregate, it's many trillions of dollars. Supply and demand.

Savings rates means a lot, also. When there is a lot of new money coming available in the borrowers market that money is going to be cheaper to borrow, in the form of lower interest rates. This is partially why rates went down throughout 2002, and stayed down into 2003, and 2004. People who had been burned in stocks wanted nice "safe" mortgage bonds. When there is comparatively little new money coming into the market, the only source becomes old loans being paid off. Negative savings or negative investments in the bond market means that what money is coming off older loans is at least partially being used to fund the withdrawals. Competition for money gets fierce, and price - by which I mean interest rate - rises. Supply and Demand.

Competition for money is also a part of the demand side. When the government needs to borrow a lot, for instance, that increases the competition. Even on the scale of our capital markets, whether the government is breaking even or needs to borrow the odd $100 billion has a real and noticeable effect When they need to borrow $400 billion, you can bet it'll raise the cost of money. The government doesn't care, and the bureaucrats running the treasury have been told to get this money. They will do their jobs and get the money, whether it costs 4 percent, 14, or 24. Every time competition from the government drives up rates, a certain number of borrowers whose profit margin on the loan was likely to be marginal will drop out of the auction. But government spending rarely grows the tax base. It's those corporations and small businesses investing in future opportunities that grow the tax base, and they are the ones dropping out of the auctions as money gets more expensive. This is why government deficits are a Bad Thing. Supply and Demand.

The desirability of the alternatives is another factor on the demand side, as well. There's more than one way to make money for most. If it become prohibitively expensive to borrow (bonds), sell part ownership instead (stock). There is a point at which even the most die-hard sole proprietor needs the money, and just can't afford it as opposed to selling some stock to new investors. This can dilute earnings, and cause you to lose control of the company (there were multiple reasons why the high inflation period of the seventies and eighties was followed by the era of the corporate raider, but that's one part), but better to dilute your share of the pool by ten percent while increasing the size of the pool by fifteen. That is a net win, while borrowing the money at twenty-something percent is likely not.

Now, let us consider the money supply here in this country, and thence the state of likely interest rates. We have increased government borrowing. We have the social security trust putting decreasing amounts of money into the government. We have a national savings rate that's negative (and it is the overall rate, not just working adults that we're concerned with, here). More and more people are becoming comfortable with foreign investment. And mortgage bonds are looking jittery right now, with foreclosures up. Supply and Demand, remember?

Therefore, in my judgement, we are likely to see continued raises in the interest rate for some time. If you're on a short term loan that is likely to adjust in the next couple of years, the time to refinance is now, unless you're planning to sell before it adjusts. And if you had asked me a year ago if I'd ever be recommending thirty year fixed rate loans, I would have said, "Not likely". I'm recommending them now. When it's the same rate or higher to get a 5/1 ARM, there is no reason not to choose a thirty year fixed rate loan instead.

(If, on the other hand, you have a long term fixed rate loan, stay put. Once you've actually got the loan funded, they can't just draw the money back unless you do something like fraud or default. Even if you go upside down on your loan for a while, if you're already in a fixed rate loan, that's okay. The market price of the home only matters at loan time and at sales time. If you don't need a loan and you don't plan on selling, why should you care? Note to the young: home prices will rise again.)

Caveat Emptor


Environmental Republican has a good article and the correct response to Massachusetts ordering Wal-Mart to carry the morning after pill. You know, if a merchant decides not to carry something, decides to preclude the possibility that they will make money on an item, that usually means there's something about that item which is unattractive to the merchant.

I think that Wal-Mart's appropriate response should be to carry the darn thing - for five times the price of any other drugstore.


AnarchAngel has a good article on the Cheney hunting accident.


Elvis sighted, apprehended and arrested?

When the "Cold Fusion" thing was exposed as bad science over a decade ago, scientist started calling the occasional experiment when energy was apparently generated "Elvis sightings"

Now it appears as if someone actually has gotten cold fusion to work. Tabletop nuclear fusion device developed.

HT Forward Biased.


Ogre has a long article about the ACLU targeting the Boy Scouts (and why they leave the Girl Scouts out, who share the same property, I wonder? Could it be issues of political correctness?).

I have followed the case against the Boy Scouts in Balboa Park. As a youngster, I was a scout and used those facilities. It has become painfully obvious to me that this is a crusade against the Boy Scouts. Yes, I mean that in all senses of the term. The people involved are utterly unwilling and unable to make reasonable accomodations. The various governmental entities are free to encourage voluntary associations to perform actions which are beneficial to society at large. If those organizations are guilty of excluding those who are in opposition, or those who do not or cannot abide by membership requirements from their organization, they should be permitted to do so.

Homosexuals have been on a rampage against the Boy Scouts ever since the national organization ruled out accepting homosexuals as scout leaders. Consider what would happen were a scouting leader to be guilty of the same breaches as any number of Catholic Priests? Priests are supposedly screened thoroughly, scout leaders become scout leaders by volunteering. This is a reasonable concern. Think it isn't? Tell that to any number of catholic dioceses around the globe. Like it or not, that's evidence. I know several fine men whom I would trust in that situation despite their being homosexual or bisexual. But how many men's good deeds would it take to counterbalance one man's evil one?

The Boy Scouts have determined they do not wish to undertake that risk. That is their right - their duty - to make such determinations in the best interests of the organization as a whole. I disagree with it. My wife disagrees with it. We concede it is their prerogative. Anybody who doesn't have their head super-glued inside their posterior realizes the good scouting does for the community. Having to defend against these suits does nothing to augment that.

Atheists are a weirder case. The actual scouting code does not mention religious requirement. It says "Reverent". The Oath says "For god and my country", but scouting has religious awards for just about every religion under the sun. I spent six years in scouting, and I don't remember any group prayers being said (perhaps in the religiously based troops, affiliated with a particular church or temple, it's different. Of course, back then, they were allowed to meet in schools). They did organize a yearly trip to church, but members were free not to attend (I skipped more than once, and I was a leader).


Mark Steyn has a wonderful column on demographics.


Jawa Report has a factual takedown of the "200,000 is a huge number" idea that the ACLU is trying to pawn off.

In very much the same vein, NRO discusses the search for these moderate muslims they keep telling us are the majority of the religion.


Iraq the Model has some reporting on the jockeying to form a government. I'm not certain I know the players without a program, but it looks like normal political jockeying in a democracy to me.


Jane from Armies of Liberation has a guest post over at Politburo Diktat regarding the great escape of 23 Yemeni members of al Qaeda, including some charged with the Cole bombing. If you have any willingness to learn of the subject at all, I suggest you go read it.


Sauce for the Gander department: HT to LGF for a link to a MEMRI article noting that now that Iran is developing nukes, the clerics are now saying that sharia does not forbid the use of nukes.

In other words, "When they nuke us, it's satanic. When we nuke them, that is permitted"


Victor Davis Hanson has an article about the effects of sexual harrassment law that should be required reading.

Those who have seen the sexual harrassment police in action know that the IRS nazis are rank amateurs by comparison.

One of the occasional questions I get from people has to do with why the housing bubble got so big (or if you're one of those still in denial about it, how prices jumped so far so fast).

This has to do with several factors. Legislation made real estate investments more attractive. Interest rates got low, and nontraditional loans proliferated. People took their money out of the stock market, and wanted to invest it somewhere. The feeling that the housing market could never go anywhere but up. And I will address all of these issues in the coming paragraphs, but the largest factor is and was psychological. People were simultaneously scared that if they didn't buy now, they would be locked out of the American dream, and avaricious in anticipation of buying and flipping properties for multiple tens of thousands of dollars profit.

The first enabling factor happened in 1996. President Clinton sponsored legislation giving huge tax exemptions to the sale of personal residences. There were and are good arguments for doing so, nonetheless it had the effect of making real estate a more attractive investment. When a married couple can make up to $500,000 tax free over their basis every two years, that's a major incentive to start moving into a new house every two years in order to fix it up, or at least hope for a gain in fast growing areas. By itself, this was a minor factor initially, but by making real estate such an attractive investment (literally the best there is, considered in a vacuum), it started the bubble off. Since it hasn't been repealed yet and may never be, the value increase from this aren't really a bubble component, but the value increase for what was a one time systemic shift whetted appetites, even while the dot com boom (itself a fear and greed phenomenon) was going on.

The second enabling factor was that interest rates got low. This meant prices had the leeway to rise, as most people buy homes (and other property) based mostly upon the payment. When 30 year fixed rate loans go to 5 percent, the same payments buys a lot more house than it does at 7.5 percent. If you could have afforded a loan for $100,000 at 7.5 percent, you can afford a $130,000 loan at 5 percent. Instead of a $300,000 loan, you can afford $390,000 for the same payment. $500,000 becomes $650,000. Even though rates haven't been quite rock bottom for almost two years now, this helped start the phenomenon.

The third enabling factor was that people had gotten burned in the stock market as the dot com boom deflated, and the real estate market was doing well. With both sides of "fear and greed" working the equation, this amounted to quite a bit of incentive to chase returns in the real estate market. "I just took a bath in tech stocks, but look at how the real estate market is going!" This is known as chasing last year's returns, but large numbers of people do it. Consequently, quite a bit of personal wealth was dumped into the real estate market. This had negative consequences on the stock market, exacerbating that decline, and for the real estate market, dumping a couple trillion dollars into the demand side of the equation didn't exactly hurt real estate prices. Supply and demand are always working. The important trick is to separate fear and greed, which are real but have mostly short term effects, from real long term changes to the market.

Members of my professions, meanwhile, did absolutely nothing to slow the madness. Indeed, they added as much fuel to the fire as they could. As I have said elsewhere, buying a home really is a fantastic investment, all things being equal. It literally clobbers renting and investing over the long term, with those last four words being the critical part. There are limits, and most agents and loan officers went over them and three states beyond. Anybody who takes any real estate agent's unsupported word for investments and sustainability probably needs a guardian. Reality check: Here's a person who makes thousands of dollars if they tell you you can do something, and nothing if they tell you you can't, and has very little responsibility in the law for telling you lies. They're not financial advisers, after all. What do you think the average person will tell you in this position? (And before anybody sends me email or comments about the "superior ethics of Realtors®" they were just as bad statistically and worse morally, because they were holding themselves out as ethically superior, thus using the propaganda to allay legitimate concerns. I'll believe Realtors® offer some ethical advantage when I start seeing the Boards of Realtors® imposing some real disciplinary measures upon significant numbers of scumbags that the state regulators don't. Aside from advertising to build brand awareness, I haven't seen anything that the Boards of Realtors® contribute to the ethics of real estate practice.)

So there we are, with four factors doing everything they can to drive values up. This goes on for a little while, and now psychology starts becoming a real factor. "They're not making any more land!" making a scarcity argument. "Real Estate always goes up over the long term!", making a safety argument, and ignoring any number of past bubbles and downturns. Heck, I remember four previous ones in southern California! "You can always sell for a profit!", ignoring transaction costs, which are significant, and flat out misrepresenting liquidity. Real Estate can beat anything else, investment-wise, but it is certainly the least liquid class of investment that comes to my mind, as well as being sensitive to many factors beyond your control.

Couple this with a couple of years worth of twenty percent returns, and the feeding frenzy really kicks in. There starts being a real fear factor - people get afraid that if they do not buy now, they are never going to be able to afford a home. When prices rise by 50 percent in two years and wages rise by six, who can really blame them? Most people do not have the economic background to sit back and consider who buys houses, and what controls housing prices. So the mentality of "buy now or rent forever!" took hold, further exacerbating the rise. People were willing to do literally anything they could to qualify for a home, lest they be unable to qualify forever. And with the thinking detailed in previous paragraphs, they were told that "Even if you have to sell in a year, you'll still come away with a huge profit!" Yes, that's greed again, rearing its ugly head.

Into this situation stepped the lending community, particularly the sub-prime lending community. Starting about 1997, more and more lenders started being willing to loan 100 percent of the value of the home. "Hey, why risk your own money when the bank will lend theirs?" This drove market leverage to never before seen heights. Furthermore, in an effort to sustain volume, lenders started a trend of competing ever harder for the most marginal case. Stated Income, Interest Only, and short term hybrid ARMs proliferated (The most common sub-prime loan is only fixed for two years). Finally, lenders started pushing the Negative Amortization loans, for those borrowers who couldn't really make even the payments required on the short term interest only alternatives.

Lest anyone think otherwise, the community of real estate agents was fully on board with this. Always higher, and fast increasing, prices meant they made more money in commissions from selling the same number of homes, and the apparent virtues of real estate as an investment of the moment kept seducing those who did not know any better. Those few voices of sanity were drowned out, and many left the business. There just aren't that many people who really qualify to buy homes these days based upon the tradition metrics, even relaxed as they have become, and if you won't put them into something they can't afford, somebody else will. Furthermore, during this period, more and more real estate agents were starting to do their own loans, further isolating any voices of sanity in the loan community. Speak the truth that a client probably cannot afford a loan once, and the real estate agent will never bring you another client again, and will try everything they can to pry any clients they might have away from you. After all, you cost them a commission once. Interest only, and negative amortization loans further proliferate, as agents try to persuade prospective clients that they "really can afford those payments." Forty year loans start making a comeback, where they were all but extinct. Sub-prime underwriting standards are loosened until they ignore what happens when these hybrids adjust (or Option ARMs recast) and concern themselves only with the minimum starting payment. A larger and larger portion of purchasers is forced into the sub-prime market if they want to qualify. And still property values rose.

Or, more correctly, prices rose. The actual property value certainly wasn't growing that fast, only the common perception of value, aka price. People were getting away with these terrible loans, complete with prepayment penalties, because even though they weren't able to make their payments in many cases, prices were still increasing fast enough such that even if they sold relatively cheap, in order to unload the property in a hurry, and paid a prepayment penalty, they were still coming away with money, further aiding the illusion that there was no way not to make money. When workers are making more money buying a house and holding it for two years then selling than they are at their jobs, that's an incentive to keep doing it. That's an incentive for more and more people to get in on the act. And the feeding frenzy builds. Fear and Greed. When someone holds a house for two years and sells for a huge profit despite the fact that they did nothing to enhance the home's value, that has the appearance of easy money. When people start buying with the intention of short term flipping without doing any work (We call this "Hoping for a bigger fool"), and when they'd call to see if I knew of any such properties and hang up when I'd start telling them about properties that really were good investments but needed work, I knew the end was coming very soon.

The first group to holler "enough!" was not the lower income folks who were getting priced out of stuff even at the lowest end of the market. It might be what you'd expect, but it wasn't the case. My theory is that those people simply don't know any better, and didn't think they could afford to wait. It was the better paid, more economically savvy buyer at the higher end who first called "Bull****!" At least here locally, higher end McMansions and such were the first to start sitting on the market. These prospective buyers made plenty of money, and knew they weren't on the verge of being priced out completely. If they were right, they'd buy a better property when things fell apart. If they were wrong, such is life, and they could still afford something. Meantime, they were going to rent.

Lessons here: Always separate psychological factors from real market shifts. The general rule is that once they find something that appears to be working right now, the crowd always overreacts. Many times you will make more money in the long term by bucking the obvious trend, particularly if that trend is Fear and Greed driven.

If you are in an untenable position with your loan right now, whether because it's negative Amortization or interest only or just about to start adjusting: Either sell now for what you can get, refinance into something fixed for at least five years right now, or be resign yourself to disaster. With the yield curve inverted right now, there is practically no spread between the five year ARM and the thirty year fixed rate loan. Even someone who is as huge a fan of the 5/1 ARM as I am has to admit that, at the moment, the thirty year fixed rate loan is looking very attractive by comparison. When you get a much better guarantee of the rate not changing, for the same price, and the the loans are otherwise identical, what's not to like? As I've said before, you can survive and prosper when you're upside down on your home, as long as you have the right loan for it.

If you can make the real payments on such a loan, I would do it now while appraisers still have the ability to appraise your property for near peak values. If you lose the ability to appraise for near peak values, then you may well be a member of that rather large group in many parts of the country where the market will no longer bear a price greater than the loans on your property. When you owe more on the property than the market appraisal, then for all practical purposes you are stuck in your current loan. If it adjusts, amortizes, or recasts, you're suddenly going to be making much larger payments. If you qualified under one of the less sustainable programs I noted earlier, when this happens you are going to be in a world of hurt, and probably unable to refinance. Most common result: Losing the home, credit ruined for years, and a 1099 from the lender that says "we lost money on you!", for which the IRS will demand taxes. If your loan is going to start asking for higher payments soon, and you can not refinance, or cannot afford to refinance, it's time to sell, right now.

Caveat Emptor (and Vendor)


Carnival of Liberty. Recommended: oxford University Press Blog, Combs Spouts Off


I've had a chance to fool with zillow.com a bit now. More than once person I've read in the last few days was disturbed by how much they knew about their personal residence. What I can observe is that it appears to be based upon public sale records which anybody can look up, either at the county recorder's office or through the title company of your choice. The Multiple Listing Service has all of this information, and more. Furthermore, zillow does seem to consistently overvalue properties where I have access to better or confirmatory data, here in San Diego County. Since I don't have MLS access outside of that and my other sources are substantially less informative, I'm hesitant to regard anything outside San Diego County as being confirmed. Nonetheless, for those homes within those confines, when it's telling me that houses are worth more money than than they have priced at for several months still unsold, as it did for literally every overpriced home I checked, something is wrong, and my money is on the GIGO factor being wrong, not the market.


I just got spammed - by a spammeister soliciting my business. I'm not going to respond, but here is the text of the email, which came under the title "mailing Dedicated Server". I think it's someone who wants me to pay them to send spam, but I thought I'd share this little factoid and let my readers decide for themselves what this person is up to. If there's a governmental agency that would be happy to have this information, let me know.

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Last Amazon talks about extending NATO membership to Israel. I do think it's a good idea, but of late NATO has become more irrelevant. The europeans need it more than they ever have, but they don't realize that they need it, and therefore such membership would be largely symbolic. I also think that France and other NATO members with large Islamic populations would do everything they could to prevent it. Israel and NATO is a good fit, but I just can't see France, Germany, and Italy mustering the intestinal fortitude. It would likely be the death blow for the original NATO (although I thing the eastern european members would stick).


Looks like State of Flux has figured out what "peoples of the Book" means. Basically, Christians, Jews, and Zoroastrians. An argument can be made based upon requirements set down in the Koran for most other major religions, but those are the only religions explicitly named, and the only ones generally recognized. A good muslim is required to treat honorably with peoples of the book, but this requirement seems to be more honored in the breach.


Looks like AARP has come out in favor of investing the social security trust fund - but in GNMA securities, and by the government, not by individuals controlling their own investments.

Are they trying to sink social security? Yes, GNMA usually pays more than treasuries, and that gets it out of Congress' direct control. On the other hand, think supply and demand. When the supply of money for something rises, the price, aka interest rate, falls. Because it's earmarked, the rates drop, probably ending up below the price of treasuries. Mortgage providers everywhere rejoice. Treasury prices rise, as there's less money there, so Treasury investors rejoice.

And of course, the people who are forced to contribute these taxes have no control over them. Has anybody considered that the AARP has got to know how badly off social security is, as evidenced by their die-hard resistance to allowing younger folks to control some of the money that is being extorted from them?


Q and O makes an excellent point about the monopolistic public education system in the US. Yes, it's been made thousands of times before. It needs to be made again and again and again, until it changes.

As I reported Monday, US News and World Report had an excellent profile of one company that is working.


neo-neocon has a very good article about the nature of propaganda. Just because it's rah-rah doesn't mean it's wrong or incorrect.

And Robert Frost is still spot on in his definition of a liberal. Now, as then, it was an observation on the meta level.

The Biggest Risk

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If you've been around the financial planning business any length of time, you've likely run into the saying "The biggest risk is not taking one."

It is endemic to all financial instruments, indeed, all investments, that return is the reward for risk. It is axiomatic that the entity that takes risks gets the rewards.

Generic stock market returns are between ten and thirteen percent per year, depending upon who you ask and how you frame the question. Contrast this with the five or six percent that insurance companies will guarantee. You invest, you get five to six percent guaranteed. They use your money, they get the difference.

If you invest $100 per month at 5.5% from the time you are 25 until the time you are 65, the insurance company has guaranteed you about $174,000. If you annuitize that in a fixed annuity on a "Life with ten years certain" basis, you'd get somewhere between $1000 and $1100 per month if you're male. Ladies and gentlemen, that won't buy very much now, much less forty years from now with average inflation. Matter of fact, it's only about a 1.67 times overall return net of inflation.

Now $100 per month is a lot less than people should be investing for their own future, but it's indicative of the problem. Even if you contributed $1000 per month, which is more than most people can commit, between however many tax-deferred investments it takes, it's $1.74 Million, which goes to a payout of $10,000 or so per month if you annuitize at 65. Sounds like a lot of money today, right? But you're spending those dollars all in an environment where, at 3.5 percent inflation, $10,000 per month is about the equivalent of our $2500 per month now - and every year that passes in retirement, your money buys less.

Suppose, instead, you were to invest $500 per month - half what you had to come up with in the previous example - and invested it in the broader market, earning a 9 percent return, well below historical average market returns, and then in the final year you lost forty percent of your money due to a market crash? Think you'd be better off, or worse?

Slightly worse off, in raw numbers. $1.40 million ($2.34 million before the crash). For half the effort to save. This despite a major investing disaster at the worst possible time. But then let's say you manage to retain your intestinal fortitude, and instead of annuitizing on a fixed basis, you simply withdraw the same $10,000 per month we had in the previous example, while leaving it invested and generally earning 9%. Your money keeps increasing, and if you live to age 95, you leave 2.23 million dollars to your heirs, a sum that, if not so great as it sounds, will still buy a decent house in most areas of the country sixty years from now under our assumptions.

Now let's say that you want to live the same lifestyle, equal to $2500 per month now, that you have at retirement, so your monthly withdrawals increase by 3.5 percent per year. You didn't even have this option in the fixed rate examples. Your money lasts 19 years 3 months (plus a few thousand left over). Once again, for half the effort to save.

This is not wild risk taking. This is simply doing exactly what the insurance companies are doing, and assuming the investment risk yourself. Do not think for a minute that banks and insurance companies are insulated from failure if the market conditions go sour enough. They aren't getting the money to pay you from some kind of transdimensional vortex. If their investment results are bad enough so that they can't pay you, they won't. Government bailouts are also limited, and the government's guarantee programs are likely to undergo severe modification in the next forty years, as they deal with problems such as social security and medicare payouts that are much larger than what their pay ins will be. States, which generally stand behind insurance company guarantees, will not likely be in a stronger position than the federal government. Not to mention the kind of impact this sort of financial crisis will have upon government budgets.

Speaking of the banks, let us consider a hypothetical four percent CD, on a "taxed as you go" rather than tax deferred basis. Assume 28 percent federal tax rate, and 7 percent state and local. $1000 per month invested, every month for 40 years. How much does it turn into?

$842,800. As opposed to $1,044,600 just to break even with inflation at 3.5 percent per year and being able to buy the same stuff. I'd snark that you might as well bury it in a mattress, but in point of fact, that would only get you $480,000.

The point I'm trying to make here is that the so-called traditional "conservative" investments are anything but. If you aren't putting your money into investments where there is some market risk, then the only guarantee you have is the guarantee that it won't succeed, the guarantee that you will be living in poverty.

So in financial planning, the biggest risk is in not accepting some.

Caveat Emptor.

We live in (A California city). In a 2 bedroom 1 bath home on approximately a 20,000 Sq. ft. lot. It is easily worth 500K to 600K with a current mortgage of $116,000. The mortgage/Title is in the name of my father and his wife 90% and myself and my wife with a 10% interest.

My father who is 75 and retired wants to take out about $80,000 cash which would create a new loan of approximately $200,000. He currently has a very small income from investments and lives in a paid off home in (out of state).

He would like to gift this (California) home to us and we would like that also.

Based on your expertise what is the best way to transfer the property to my wife and I and at the same time obtain a cash out stated income loan. How will a lender expect this to be handled? Do we all qualify together and the lender then allows my father to transfer/gift title at the close of escrow?

I realize that whatever lender wants to make the loan they will want to have my wife and I qualified to be on title. Since we have a 10% interest I would assume that we could all be asked to show assets and income. This might be complicated. I am a realtor but I haven't made much money in the last two years because I've worked on a business startup currently breaking even with no income.

My wife has a terrific long term (16 yr) job with a law firm. Gross income $85,000. All of our expenses are very low and the last time I looked our credit was a 785 FICO score. When I do the front end ratio 28 with only my wife's income it appears to be no problem at all. When I do the backend it's a little more snug but definitely doable. I've racked up some credit card debt funding the startup business. I can pay it off but I would like to retain working capital handy for my business.

I believe a stated income loan would be the best way to go.

Here are the assets and documentation I would be willing to show, and the lenders exposure to the property.

1. We would have approx. a 36% LTV at the end of the transaction. 300k+ equity
2. Assets in a 401K of $200,000 +
3. Approx. $30,000 in savings accounts
4. Approx. $40,000 in negotiable stocks
5. I will of course provide credit reports.
6. Employment documentation for my wife only.

I believe my father and his wife have approximately $200,000 in mutual funds plus social security and she has a part time job doing a water district's billing.

This one is fairly complex on the surface. Issues that I see right off:

-family transfer
-documenting current interest
-structure of transaction
-Will your father be selling you some of his interest as part of this transaction?
-likely the cash out quitclaim issue
-Who is going to be primarily or completely responsible for new loan
-verification of rent/mortgage.

You say that you are already on title of record, and that the desired end state is to have you and your wife owning the property outright.

The best way to structure this is probably as an actual sale
transaction. Your father selling you and your wife a larger interest. Because this is a family transfer, you still would likely qualify to continue having it taxed based upon original acquisition price, but that needs to be checked, either through the county or your title insurance company for the transaction. You also need to scrutinize the current owner's policy of title insurance to see if it will continue coverage. There have been changes in the industry since the property was bought. If it doesn't, you're going to want to buy a new policy.

Now there is a standard policy with every lender I've ever done business with. If someone is brought onto title via quitclaim, you can't get cash out for six months after that date. This prevents several sorts of fraud. I am going to presume that you've been on title longer than six months.

Now, there are three ways that suggest themselves to structure this transaction. Each have their potential advantages and disadvantages. First though, we need to take a look at another issue.

In all real estate transactions, and for all loans, the method of evaluating the property is the so-called LCM, or "Lesser of Cost or Market," method. Market is what similar properties around yours have sold for within the past twelve months, and that is what it is, and is computed by the appraiser.

Cost is the purchase price. In refinances, there is usually no purchase to consider, because the value has changed since purchase. In purchases, there usually is.

Whichever of these two numbers is less determines the value of the property, as far as the lender is concerned. It doesn't matter if similar properties are selling for four million dollars - if you buy yours for one hundred thousand dollars, the lender will loan as if the value was $100,000. It can't be any higher than that, because the seller willingly sold to you for that amount. If the property was worth more, they would have required you to pay more.

For family transfers (and indeed, any related party) this presumption goes out the window. Parents do all kinds of stuff for their kids that they wouldn't do for anyone else, and vice versa. Lenders still won't loan money based upon a number above nominal purchase cost, however.

Furthermore, there have been a sufficient number of scams over the years that they will take additional measures to protect themselves. The presumption of willing buyer and willing seller is violated on both ends of these transactions, and many times it has been A selling the property to B for an overinflated price for the purpose of getting a loan and departing at midnight, leaving the lender holding the bag. Remember, I told you in my very first article here, is that because the dollar values are so large on real estate transactions, every single one is heavily scrutinized for fraud. There's a reason for that. These additional measures differ from lender to lender, and some lenders will not undertake related party transactions at all. When I'm getting loan quotes from lenders, if it's a related party transaction, then words to that effect are the first words out of my mouth. It saves a lot of time and effort.

Now, I mentioned there being three ways I can see that make sense to approach the transaction?

The first is a full price sale with upfront gift of equity. You buy the property for $600,000. They sell it to you for $600,000, but give you $340,000 in equity in addition to the $60,000 you already own. You get a loan for $200,000 (actually a bit more to pay for costs), the old loan gets paid off, your father gets his $80,000. This has the advantage of being a true picture of what's going on. The problems are that to the lender, this screams fraud. They're not likely to be too worried that its for below market value, but $340,000 is a lot of money. They are going to want to see evidence that there's not some loan going on under the table between you and your father, because that would affect whether or not you qualified for their loan. Furthermore, estate tax isn't completely dead yet and could be ressurrected even if it does die, and this would have significant estate tax implications.

The second is full sale price with subsequent gifts of equity. Sell it for full price, from you and your wife as ten percent and your father and his wife as ninety, to you and your wife as twenty-five percent and your father and his wife as seventy-five. They can then give you a gift of forty thousand of equity each year. You can even combine this with the initial sale, making your interest thirty percent, which might make the loan easier. In this case, you are all four probably going to be on the new loan to get the best rates, as $200,000 is about thirty-three percent of $600,000 - a larger amount than the equity you and your wife currently have under this scenario. There is a further major difficulty with this lies in the possibility that the complete equity may not be gifted in your father's lifetime.

The third way is to sell the full property at a reduced sale price. Approximately $300,000 would probably be sufficient. Everything here is like the full price sale, but they're only giving you about $40,000 in equity upfront - which is within the IRS single year limits. The bank has less difficulty believing that (although they're still going to want a letter stating that it is a gift!). The downside is still that family transfer thing, and the fact that if you wanted to refinance within a year there would be appreciation issues on whether or not the bank would believe you.

All three ways have their bumps and walls which you very well might run into. Each lender has their own anti-fraud measures, and sometimes these run afowl of the best ways to structure it

Now, as to the loan itself, I have good news and bad news. I'm going to start with the bad. Verification of Rent/Mortgage is going to rear its ugly head no matter what you do. The bank is going to want to see some kind of evidence that you and your wife have been making rent or mortgage payments every month, and from all that I can see in the email, there's no evidence to support this. The only person who appears to be in a position to verify that is your dad - unless you've been writing the checks for the mortgage and can prove it. The lenders may or may not accept your father's word for it, and they are going to want evidence. If you're actually on the current mortgage, this would be extremely helpful.

The good news is that with an income of $85,000 per year which your wife alone makes and you should be able to document, you have a monthly income of about $7083. This means that the back end you'd qualify for on A paper, thirty year fixed rate basis, is about $3180 (about $2690 if we're talking about an A paper ARM). Picking a random A paper lender, I get about 6.25 percent rate thirty years fixed full documentation, which translates to a monthly principal and interest payment of a little less than $1232. With the yield curve inverted right now, the five year ARM is about the same rate, meaning there's no reason to do that instead.

Take $1232. Add $600 per month, which is about the worst case scenario for property taxes that I see (as I said earlier, you can probably preserve the current tax basis). Add another $150 per month for homeowner's insurance, which is a high estimate for most urban locales. This is still less than $2000 per month, leaving you almost $1200 of other allowable payments before you would not qualify full documentation. You can probably do stated income if you want, but that'd be giving the bank money that you don't need to.

Because of the multiple concerns, of which the most important are family transfer and verification of mortgage/rent, there are many reasons why the best way to approach this might change, but when you separate it all out, it certainly looks doable.

Caveat Emptor (and Vendor)



RINO Sightings. Recommended: Strata Sphere

Carnival of Investing. Recommended: Daily Dose of Optimism

Carnival of Debt Reduction

Carnival of Personal Finance

Carnival of the Capitalists. Recommended: Financial Methods, Scrivener


Rebel says Nepal's king faces exile or execution

No future in Nepal for king — rebel leader

Just a few days old: Stalemate, One Year After King's Coup

some older articles:


King Gyanendra's Promises Are Waning Fast

Exclusive: Rebel leader on Nepal's 'last war'

Nepal rebels rule out peace talks

Written a couple months before the the King took power In Nepal, it's the king to move

I'm not impreseed by the Nepalese King in this article: Interview with King Gyanendra

On the other hand, between this article and the others, I'm even less impressed by the rebels.

This article appears to have some good analysis: NEPAL: It is time, the political parties unite for the common cause of democracy

It seems like the situation is vaguely analogous to Iran in 1978-79. The Shah was no enlightened democrat, but the other choice was far worse. I had some Iranian acquaintances at the time, and I remember conversations to the effect of me telling them to think about what they were going to replace the Shah with, first, and them telling me that they would worry about that later, after the Shah was gone. Well, Khomeini had made preparations to make certain that he was what replaced the Shah, catching the real pro democracy faction off balance, and the rest is history. I'd hate to see the same thing happen to Nepal, which doesn't have the mineral wealth of Iran to fall back upon.


Update 1: Gore Decries Treatment of Arabs Post 9-11

Can you imagine if this clown had been president on 9/11? Along about now he'd be telling the nation, "Yes, I know that we've lost somewhere between 12 and 20 million dead to the terrorists. But we can't presume they're guilty until they're convicted in a court of law, and we can't gather any evidence domestically until they actually act, which, if you'll pardon my saying so, tends to destroy the evidence and render prosecution moot. It doesn't matter if someone is a donor to Al Qaeda, they're still a mostly legal resident and we have to respect their human rights. Meanwhile my administration's priority is still compliance with Kyoto."

I know it's ex post facto, but the results of that election and the fact of 9/11 have been entered into my ledger as evidence that there may be a benevolent guiding intelligence to the universe.

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

Michelle Malkin has more take down of His Idiocy, and a round up.


Prairie Home Companion Film not political 'on purpose'. Let's see: you were blissfully unaware that the subject of the film is one of the Donkey's more dedicated partisans, and so the whole thing came as quite a suprise to you?

Go sell that one to someone else, Mr. Altman. I'm not buying.


Resistance is Futile has a good post covering The University of Oregon using public funds to aid illegal aliens. I can't even use the term "undocumented workers" since they're aiding them to get those documents in a way that games the system and appears to be contrary to law.


Dr Sanity covers the Donkeys playing partisan politics with national security. If there's anybody who thinks it's evil for the Elephants to run the national security issue at them until they shape up, those people must be hardcore Donkey partisans. We need at least two credible parties capable of handling the government without leading us to disaster. The Donkeys are determined not to be one of them. If this doesn't change, we need a new opposition party, lest the result be disaster when the Donkeys are eventually elected.

(I would be very happy if the Donkeys grew some credibility on national security, because it's a trump issue with voters. Once we have two parties where it's not actively suicidal to vote for either, that will make for real debate on other platform differences)


Dean's World has the scoop of ADA distortion. I think the ADA was a beautiful thought, wrongly executed, and I run across abuses of it about once per week. It may not be politically correct to stand up and say so, but it's long part time to fix ADA abuses.


Victor Davis Hanson has an article worth reading on much the same subject as my article on The Basis of War.


I would have read this anyway, as I subscribe to US News Dead Tree edition, but HT to Michael Barone for talking about it and giving me a link to the US NEWS article on the KIPP program.

Here's a link to the KIPP website

Now, as the father of two young daughters who is willing to make whatever commitment is necessary to get them an education (I put several hours in per week leading the elder through kindergarten schoolwork), I am interested. I am more than interested. I've only been dealing with the education cartel a few months, and already I am frustrated beyond belief at how little they accomplish with the time and resources they are given.


It's a good day when you read Michelle Malkin's report that Batman's next task is whuppin' on Al-Qaeda, and your once every few weeks look at Eject! Eject! Eject! yields very good news on his next project.


Volokh Conspiracy has a heck of an article about the First Amendment and it's interaction with international law, and some justices who suprisingly lined up on opposite sides from what you might expect.


The National Zoo's Panda Cub in the east coast snowstorm.

HT Hugh Hewitt


Today marks ten years since my wife and I had our first date. Males everywhere, you may be envious. On top of being married to a wonderful woman who has her head on straight as well as being the most beautiful woman in the world, this means I get to do stuff on the 13th, and since two days in a row would be excessive, I get a pass on the actual Valentine's day thing, while everyone else is fighting for dinner reservations (We're taking ourselves and the girls to the restaurant where we had our first date). I've had my share of bad luck, but romantically I did the equivalent of hitting a multi-state lottery jackpot.

Armies of Liberation has a post up about the Yemeni government libelling two journalists, tarring them with guilt by false association. She's asked any foreigners (non-Yemenis) reading it to please make comments. I believe this is worthy of supporting.


Carmival of Insanities. Recommended: Broken News, Winds of Change, Peace Moonbeam Chronicles


My second pr0n request hit. I was result #42 (Hitchhikers' Guide fans rejoice!) for the phrase, "naughty picture search engines" on ask.com. Went to my main page, where 1) I have a link to the Axis of Naughty, a group that is the opposite of the Alliance of Free Blogs. 2) I have recently made a pledge that I will perform a search engine hunt for anyone in a country where the search engines are compromised, and 3) I occasionally post links to pictures, but at least thus far none of them has been worse than PG.

Somehow, I don't think that's what the searcher was looking for.

BWAHAHAHAHA!. Actually, that's worth two evil laughs. BWAHAHAHAHA!.


Politburo Diktat has a nice exercise in perspective on the situation in Iraq.


Buzz Machine has a nice acticle about the asymmetrical nature of press tolerance: How they can dish it out and expect everyone to act as if they've done you a favor, but can't take it.


Belmont Club discusses negotiations with Iran over nuclear weapons from a point similar to my own. Why should the Iranians negotiate? They are quite certain europe has neither the wherewithal nor the will to do anything about the mullah's intentions.


Asymmetrical Information has a good article on the economy, and the deficit. With the exception that supply and demand apply to everything, including the supply and demand of money, I largely agree. When the government sucks up money by running a deficit, it drives the price (interest rate) up.

Government demand for money is relatively inelastic; the bureaucrats have been told to spend this money, and it's not like it's really theirs. It's not their worry what they have to pay for it. But corporate and individual demand for money is more elastic. Result, when government borrows, there will be fewer real investments made in future productivity.


Out of time!

No, I'm not turning into a country western singer. Just got a search for "no closing costs no points loan cheapest rates loan". The visit (to this article) lasted less than a full second. The obvious implication was that it wasn't what that person was looking for.

As I have said before on many occasions, cheapest rates or lowest rates do not go with no points or no closing costs loans. Period. One of these things does not go with the others. Rate and total cost of the loan are always a tradeoff.

This is not to say that one loan with no closing costs may not be cheaper than another loan with no closing costs. The point is that there will be lower rates available with some closing costs, progressively more as you get higher closing costs. Then if you start paying points, there will be still lower rates available. There is a reason why they are paying all of your closing costs - you're choosing a loan with a higher rate than you otherwise could have gotten.

No cost loans can be and often are the smart thing to do. Because they are the only loans where there are no costs to recover, they are the only loan that can possibly put you ahead from day one. Consider the zero cost loan as a baseline, and compute what lower rates will cost you in closing costs. Consider: If the zero cost loan is 6.75 percent at $270,000, your new balance should be $270,000. If you can get 6.5 at par with closing costs of $3500, your new balance is $273,500. Your monthly interest in the first instance is $1518.75 to start. Your interest charges in the second case are 1481.46. The lower rate cost you $3500, but saves you 37.29 per month. Divide the cost by the savings, and you break even in the ninety-fourth month - not quite eight years. So in this example, if you think you're likely to refinance or sell within eight years, you'll be ahead with the zero cost loan.

If the loan has a fixed period of less than the breakeven time, you also know that the costs are not a good investment. If this loan were only fixed for five or seven years, well even if you decide to hang onto the loan after it adjusts, the rates go to precisely the same rate after adjustment. If you haven't broken even by then, you never will.

So whereas a true zero cost is often the best and smartest way to go, it will never be the lowest rate available.

Caveat Emptor.

I saw your article on on Searchlight Crusade about exclusive buyers agents and I have a couple follow up questions pertaining to my own situation that I am hoping you could shed some light on.

I don't have any buyers agent (currently). However I have spotted 2 houses in an area that I think I would like to make an offer on. Both of these houses are listed by real estate agents. I am obviously eager to save as much money as I can and think it would be great to try and save on the agent undefined if at all possible (I have bought FSBO before, so I am familiar with the process and I don't see much value add with an agent since I have already found the properties).

However I just don't get it - if I make an offer on the property by working with the sellers agent then the sellers agent gets both commissions? Is there a way to just take the buyers agent commission off the sales price? If there isn't then I guess there is no reason not
to go and find a buyers agent to assist me? Seems like a waste of money.

I have found an buyers agent that who said he will give me 50% of the commission if I sign an exclusive buyers agent contract with him however I am worried that my hands are tied if I don't end up purchasing one of these properties I have already identified (ie I could end up paying 1/2 his typical commission if I found a FSBO).

Any insight you could provide would be of great help - I love reading your stuff.


The first thing I need to clear up here is the nature of listing agreements. The standard listing contract form gives the listing agent the full commission for both buying and selling, and if someone other than them represents the buyer, then they agree to pay the buyer's agent a portion of that. If there is no buyer's agent, they keep it. Since you have to make your offer through the listing agent, the listing agent is get that commission, and that is as it should be. Note that I feel it is stupid to act as agent for both parties in the same transaction because seller's interests and buyer's interests are often at impasse, and when you're acting as agent for both sides, there are many potential issues which, if they happen, are lawsuit material one way or the other no matter what the agent does. If I find a buyer for my own listing, I'll find another agent I trust to do a good job, and that way there is no conflict of interest. But greed is a powerful motivator, as you yourself are illustrating. The fact is that if the listing agent wants the full commission, they will probably end up with it, and justifiably so, as they found the owner a buyer, didn't they? That's what the contract says the seller's commission is for. You saw their sign, you saw the house they listed, you made an offer through them, the house got sold through their efforts. According to the terms of the listing contract, they found you, whether you realized it before now or not. The buyer's agent commission is for an agent who has a buyer who sells them that property, as opposed to the one down the street.

Many agents make side agreements to rebate part of their commission in certain circumstances. But that potential rebate contract in this case is with the seller, not you, and is none of your business. Unless the agent has a release to discuss it with you in writing, they are violating confidentiality to do so. The seller may sell to you cheaper because of such a clause, but they are under no obligation to do so.

Now before you dismiss this with, "That's Stupid!" or something worse, because it appears that things are stacked to cost you money, consider that this has evolved over many years as the best and cheapest way to preserve everybody's best interests. Without these forms, there would be a lot more lawsuits filed over commissions, with the side effect that the lawyers get rich, and the money ends up getting paid anyway on top of that. The listing agent commission is partially a hold over from the old single listing days of half a century ago. Over time, the buyer's agent commission evolved as a way to open the system up, so that homes sold faster and those agents and offices without a large, pre-built client base could break into the business. But it's still intentionally structured that way as a way to motivate that listing agent to advertise the property far and wide and especially in all of the most effective venues. It costs money for that sign in the yard. It costs money for MLS access. It costs money for advertisements in the paper. It costs money for all the trappings that enabled someone to go find that agent and list the property in the first place. It costs that agent money just to stay in business whether they have any clients or not. It costs the agent money for the advertising to attract clients in the first place. And chances are, if they hadn't spent that money, you wouldn't have found that property, and the owner wouldn't have sold it. People think agents are making money hand over fist, when the reality is that unless they're putting in the long hours and hard work to make multiple transactions happen every month, they're just barely scraping by. Most of the successful agents I know put in sixty hours or more per week, and if they are putting in less than forty, I'll bet money on no other data that they'll be out of business in a year. This is not a cheap business to be in, or an easy one.

Put yourself in the shoes of a seller. You have a property, but you want cash. Real estate is not liquid, a property interchangeable with billions of other shares in planet earth that you can call a broker and sell over the phone because there's a ready market for shares in planet earth which are all interchangeable. Each and every property is unique. This means it is bought and sold on the basis of those unique individual characteristics. You want results, you want your property sold, and it costs money and it takes work to make buyers want to buy your property.

Sometimes the agent gets lucky, and it sells quick. Sometimes the agent works hard - and they really do work - for months with no offers despite all of it. We're coming off of a market where a monkey could have sold a residential property within a week for more than the asking price, and entering a difficult period. This requires an adjustment in thinking if you're going to do well. Average total commission paid is up locally in the last few months, from five to six percent. Particularly in a rough market, if the seller tries to sell it themselves, it will statistically take longer, and they will statistically net less money from the sale, not to mention what they spent on the property in the meantime. Some few get lucky. People win lotteries and casino jackpots, too. Betting that you'll be one of them is a sucker's game. Any number of studies and statistics show this fact, and many brokers make a good living buying FSBOs to then resell for a hefty profit. My supervisory broker, for instance. We've sold four properties he bought from FSBOs in the past month, all for a substantial profit, even in this market. Sellers tried to think like you do, and it cost them over $150,000 net of commissions, and these were all fairly quick sales. Had we tried harder to get maximum value for his money, we could likely have gotten more, but he's not complaining.

Now, with that said, let's look at your current situation. I've already covered the fact that the listing agent is entitled to that commission. Now let's put you on the other side of the table from a guy whose responsibility it is to get the best possible price for the property, and his commission depends upon how good a job he does. He does this constantly, for a living. He's set up with information to ensure that he gets the highest price. It's cost effective for him, in a way that it isn't if you aren't doing it constantly. Betting that you're better at his profession than he is would be like him betting he's better at your profession than you are. My money is on "you end up paying more than you have to."

Here's a dead giveaway that an agent's job is trickier than you think it is: That you're even talking about an exclusive buyer's agent contract in this situation. So long as you already have the property in mind, there is very little risk and only a minimum amount of work for him in the situation. He's not going to have to drive you around to four million properties over the next twelve months to maybe find one you want. This is a buyer's agent's dream situation - cut straight to the bargaining, no preliminary work. If this one falls through, he can either look for more or blow you off, depending upon what he has time for. Offer him a general non-exclusive buyer's agent agreement with a fifty percent rebate if you find the property yourself, as you did in this situation. This motivates him to do his best bargaining and looking out for your interests without sabotaging the transaction. If this one falls apart, he's still got motivation to find you something on your terms, and you're not bound to him unless he introduces you to the property or you use him for negotiations, etcetera. You get a negotiator who knows your market and should know most of the tricks and is working on your behalf, and if this one falls through you have someone who's motivated to find your something with better tools and more relevant skills at his disposal than you have. He gets a commission which, if smaller, is also easier and walked its own self in the door rather than him having to go out and spend time and money to drag it in. Everybody wins. If he won't do it, find someone else in your area who will.

(Before anybody asks, I don't propose client contracts that I wouldn't accept)

Caveat Emptor.


Carnival of the Vanities is up.


Social Security Choice writes some more about a great article he found at Students for Saving Social Security.

The train wreck is coming, and for anybody sixty and below (at least), you can expect it to happen in your lifetime. For those of use who are above thirty now, probably when there is not time or opportunity to do anything about it as an individual then, and after you have put a major portion of your income for your entire working life into it. The question is are we going to do what we can now to mitigate it, or are we going to wait until we as a nation have bankrupted ourselves on benefits we cannot afford to pay. Because the nation cannot afford these benefits, and if we wait until the train wreck happens, the social and economic consequences will be catastrophic. Those obstructing social security reform are laying the seeds for their own political destruction.


Here's an article that talks about something really smart. Something equivalent to this should be the first item on the agenda of every school and every organization in the world. Its title? Smart People Ask Questions


Financial Rounds has another severely helpful item: List of top tax scams. And here's the original article at the IRS website


Entrepreneurial Mind has some information of importance to anyone thinking about starting a business, as I am next week: The cost of compliance.


There's a new housing resource that may be helpful. Zillow.com. I haven't had a chance to check it out yet, other than a quick glance at their front page, but it might be worthwhile.


Hezbollah leader in Lebanon says Bush and Rice should 'shut up' about prophet drawings

Dear Islamic World: Now you have a window upon a pale shadow to that which you have been subjecting the Christians and other non-believers, and especially the Jews.

If it's wrong or unacceptable for them to do it to you, it is equally wrong and unacceptable for you to do it to them. You earn respect by giving it. You earn peace by being peaceful. You earn acceptance of your differences by being accepting of others. Guess what? Your accounts in all three areas are significantly overdrawn.

If the Muslims started apologizing en masse for the much stronger slurs that have regularly appeared in their news media for longer than I have been alive, and stop putting them in, then and only then will they have any kind of standing to request an apology. Until then, they should learn to take what they dish out. And thus far, it's a bare shadow of what they dish out.

Captain's Quarters has more perspective.

Michelle Malkin has the roundup of how the Muslims faked up more offensive cartoons to "stir the pot".

Congratulations to Armies of Liberation! Published in Middle East Times. She disagrees with me, but that's cool.

Belmont Club covers, among other things, the admission of Danish imams that they were intentionally inflating the offense by including extra, more offensive in context, images amongst those that were actually printed.

Tim Blair has more.

Pigilito Says covers a journalist with a compare and contrast on American response to insults versus Islamic response. Not so much praising us as damning the Islamic response, I'm afraid.

On the other hand, INDC Journal covers some very reasonable responses from the Islamic world.

It is worth noting in defense of Islam that there are roughly one billion Muslims in the world. It'd be amazing if there weren't several million fruitcakes among them. Certainly there are that many in any other group of a billion. But the way in which they express their insanity is particularly disturbing. When this movie and this movie came out there was certainly controversy, calls for censorship and protests, especially in the latter case. Nobody was calling for beheadings.


This is bad. Fiery plane collision kills 3; debris falls on homes, park. This is all the specific information I have, but I used to work at Gillespie Field; once the aircraft turn left crosswind they are out of sight of the tower behind a ridge within half a mile. The story said both had just departed Gillespie, and it's good sense as well as routine to tell the pilot of departing planes what the one in front of them is doing. Pilots are responsible for vigilance under VFR rules, and under those rules, once a pilot reports another one in sight, the controller's responsibilities are fulfilled. My guess, especially given the presence of a student pilot, is pilot error, but until I talk with some witnesses, that is only a guess.


Michael Barone makes a point about government research and procurement, and how the Air Force is dealing with the problem (by buying GPS equipment from Radio Shark, among other things). He points to the fact that government funded basic research is now 30 percent of basic research as opposed to 60 at it's peak.

This is a good thing. The difficulty is that the government is never spending it's own money. The dollars to fund a five year study of basketweaving in Atlantis does not come out of the pocket of the bureaucrat granting it. If it did, said bureaucrat would be much less sanguine about granting it. Instead, the more money the bureaucrats spend, the more they are rewarded, as government measures these things, with suborinates and promotions and raises and larger budgets in the future. Contrast that with a corporate manager, where if a million dollars of the company's money is spent, that manager had better be able (in general) to show a million dollars worth of results for the company. And those who are spending money that is actually theirs, earned with the sweat of their brow, are more careful still. Many of those requesting, even demanding, government funding are themselves multi-millionaires. Why don't they put some skin in the game themselves?


Armies of Liberation reports on the Yemeni military raping Somali refugees.

Now that's about as pathetic an excuse for humanity as you can get.


HT to Dean's World for noting that the US and eropeans are getting together openly and officially to promote democracy in Iran


Protein Wisdom has a good article about the resolution of the domestic monitoring on foreign calls, and one final danger. I agree that I'd rather have the President running the program with consent from a judge, than an appointed judge who has to keep no one happy.


HT to Jawa Report for An Interview with Kate O'Beirne


Last but certainly not least, Truth Laid Bare has some porkbusters news worth reading. I've sent to Filner, Boxer, and Feinstein, for all the good it'll do. Not that any of them is particularly egregious on pork, but they're not exactly the sharpest watchdogs when it comes to the taxpayer's money.

A reader named Terri at Educating the Wheelers sent me an email giving me a heads up on the antics of the state of Illinois. here is the link. Here is the original article at blackprof. The link to the original source is broken, but here is the Illinois Department of Financial and Professional Regulation, here is the full text of HB4050, the new law, here is a synopsis, among other things, and here are enforcement regulations.

Critical sections:

Based on information submitted to the Department by the originator, requires the Department to make a determination as to whether credit counseling is recommended to the borrower. Requires the Department to notify each borrower for which it recommends counseling of all HUD-certified counseling agencies located within the State and direct the borrower to interview with a counselor associated with one of those agencies. Requires the borrower to select an agency from the notice and to interview with a counselor associated with that agency within 10 days after receipt of the notice. Prohibits the borrower from waiving the recommended credit counseling. Requires the title insurance company or closing agent to record simultaneously with the mortgage a certificate of its compliance with database reporting requirements and, if it fails to do so, provides that the mortgage is not recordable


Changes the definition of "pilot program area" to all areas designated by the Department of Financial and Professional Regulation because of high foreclosure rates due to predatory lending practices. Deletes a requirement that a broker or originator provide each borrower with a notice disclosing the names of at least 3 lenders and comparing the rates and terms of those lenders (emphasis mine). Provides that nothing in the predatory lending database provisions is intended to prevent a borrower from making his or her own decision as to whether to proceed with a transaction.

blackprof's take:

Nevertheless, Tuesday was a key moment in African-American History. On Tuesday, in addition to Mrs. King's passing and Justice Alito's elevation, the State of Illinois enacted a law that requires all mortgage applications within nine Chicago zip codes to undergo a process of review by the state's Department of Financial and Professional Regulation. The department's review process determines whether mortgage applicants in these neighborhoods must undergo compulsory credit counseling. If they must, then the mortgage lender must pay the cost of the counseling.

Anyone familiar with Chicago geography and demography knows these nine zip codes. They are all neighborhoods on the South and Southwest side of Chicago. They are predominantly African-American neighborhoods. These neighborhoods are some of the most impoverished in the City of Chicago, and indeed, the nation. On Tuesday, they suddenly became much poorer.

Although the legislators responsible for the new law were motivated by good intentions, they failed to consider the inevitable consequences of their bill. They wanted to protect poor homeowners in certain neighborhoods from high interest rates and predatory lending practices. The new law, however, necessarily increases the costs, time and uncertainty associated with mortgage applications in these black neighborhoods. The cost of credit counseling will be born by and charged to mortgage applicants. This, in turn, will necessarily decrease the price that new home-buyers can afford to pay for homes in these neighborhoods. If they can choose to buy in other neighborhoods, where housing money is more affordable, they, on the margin, will. Furthermore, recent studies of credit counseling programs suggest that these programs have little effect on borrower behavior. The end result is that homeowners in these poor black neighborhoods suddenly have less equity in their homes than they had on Monday.

Legislation like this is often motivated by an unspoken belief that poor black people are incapable of making important decisions for themselves. We see this belief reflected in the protection of failed public schools, and now with respect to personal finances. But the very people for whom such a law was enacted were responsible and wise enough to save to make the down payments necessary to buy these homes in the first place. Suddenly, these same people must have their choices reviewed and second-guessed by state bureaucrats who have no stake in the outcome, or accountability for incorrect or unresponsive decisions. It is hard to imagine the fate of a similar but broader law imposing credit counseling upon all Illinois residents, including white professionals residing in the Chicago suburbs of Evanston, Winnetka, or Kennilworth. Would there have been enough votes in Springfield to impose these "benefits" on everyone, rather than just the residents of the Southwest side of Chicago?

I'm just a nuts and bolts guy. I see some issues here:

First, by increasing the cost of doing business in the relevant zip codes, the law is increasing the lender's cost of doing business. It is not plain how the lenders will pass this on to the consumers, but pass it on they will. This has the effect of making loans more expensive. I can see two methods: either requiring everyone on the state of illinois to pay more, or requiring only those owners actually within the area to pay it. If they require only those within the area to pay, an excellent case can be made that higher loan costs makes for functional redlining, and the federal courts can intervene, and almost certainly will, possibly invalidating the law. If they require that everyone pay the extra costs, this functionally raises the cost of doing business everywhere in Illinois. This will also make it harder to qualify for loans in the requisite areas, as lenders will have incentive to throw roadblocks in the way of potential clients from those areas. Due to redlining regulations, I'm not certain how far that lenders will go, but it certainly won't make loans easier to get or cheaper.

Second issue: no matter the intent, no matter who pays, this will cause loans to take longer and cost more, in addition to previously discussed costs of the program. For previous work as to why, see my essay on Mortgage Loan Rate Locks. The point, however, is that the State of Illinois is going to take some unknown period of time to consider the case. Then the client is potentially going to have to go to a credit counselor, who is going to have to get paid before providing the necessary legal blessing to the transaction. Furthermore, if the credit counselor wants more work at the expense of delaying the transaction, they can apparently make it happen by my reading of the law. All rate locks are for a specified period of time. Given this, there are three alternatives. One, float the rate (don't lock) and hope that rates don't rise. Second, lock for a longer period, which costs more. Third, pay an extension. Since the outcome when you don't lock for long enough or don't pay extensions is pretty much universally "worst case pricing" (i.e. the worse of rates when you locked or current rates), this means significantly higher loan costs, loan rate, or (most likely) both.

Third, as I said before, since this is going to motivate lenders to not want to do business there, and makes it harder to get loans in the effected areas, and quite likely increase the rates and costs of loans in the area as a consequence. This directly restricts how much of a house, price-wise, people in the area can qualify for, which in turn will have the net effect of decreasing sales prices in the area, further hurting current residents.

There are probably further detrimental aspects to new requirements, but the Illinois legislature deleted an existing requirement that, while apparently weak and subject to abuse in that a prospective loan provider was free to provide a prospective client with information only on loans that are worse than the first proposal, at the very least gave the client some further information as to alternative loans.

In short, the actions of the Illinois Legislature in this instance could, according to my understanding, basically be taken from a manual on "How To Hurt Poor People Even More".

Caveat Emptor (and Caveat Voter).


Carnival of the Capitalists. Recommended: Political Calculations

Carnival of Liberty.


Weird search engine hits: "2005/2006 classified site for individuals that wants to sell cat parts"

Sent them to This page. They must have been a fairly determined (or frustrated!) searcher, as it was the eighth page of results.


Cartoons published in Denmark, France, Germany, Netherlands.

Cartoon Protesters Direct Anger at U.S.

The U.S. base was targeted because the United States "is the leader of Europe and the leading infidel in the world," said Sher Mohammed, a 40-year-old farmer who suffered a gunshot wound while taking part in the demonstration in the city of Qalat.

On the other hand, a small hopeful sign:

In Baghdad, Iraq's top Shiite political leader criticized attacks on foreign embassies by Muslims.

"We value and appreciate peaceful Islamic protests," said Abdul Aziz al-Hakim. "But we are against the idea of attacking embassies and other official sites."

In related news: Rice says Iran, Syria stoke Muslim cartoon anger.


Tinkerty Tonk notes that there may be WMD in Iraq after all. As I've said, given as much time as the Iraqis had to hide them, the miracle would be finding significant stockpiles.

She also notes an article in the Washington Post wondering if the information about Iranian nukes is a plant. I must admit it's possible, but the article does appear to me to be wishful thinking on behalf of the anti-administration Washington Post.


Pigilito Says has a handy dandy tongue in cheek quick look at joining the Religion of Pieces™


Armies of Liberation notes that the Yemeni government has shut down a newspaper, falsely accusing them of having run the Danish cartoons.

She also has more on the lack of fall out from 23 Al-Qaeda escaping.


Donkey headquarters is going to look like the aftermath of shooting Scanners.

Balloon Juice


Big Lizards explains the meta of why the Donkey's are in such trouble, and they are likely to lose more seats this year if nothing changes.


Victor Davis Hanson has some historical perspective that more people could use.

(With apologies to the late great DeForrest Kelley)

Just got off the phone with an agent I know who had an interesting experience today. One of this agent's listings called. Actually his significant other did, because the guy fell down in pain. Still somewhat conscious, but in lots of pain.

Now, if I were in a situation like that, my real estate agent would not be high on the list of people I would call. And in Agent X's defense, the first thing he said was, "Call 911!"

"I don't want to do that because it'll cost $800!"

Okay, first guess goes to stroke - as in brain damage. Call 911: You're more likely to live. Call your real estate agent: You'll be dead, but your corpse will be $800 richer. Or in the case of a stroke: You may live through it, but your vegetable will be $800 richer, thereby requiring all kinds of expensive care.

Not wanting to offend a client, Agent X told me he quickly relented, drove down, bundled the client in his car, and took him to Emergency. Guess what the diagnosis was? Heart Attack. The Universe only knows what would have happened had he been further away or if it was rush hour.

Of course I told this around the office, names filed off to protect the insane. It's making its way around the real estate community. I've already had another person call and ask, "Did you hear about..." Now it's here, where everybody can laugh. This is too good not to pass on.

(And no, there's no violation of confidentiality here)

Just goes to show: You can pay one way now, or pay another way later.

Live Fast. Die Cheap. Leave a stupid looking corpse.

Caveat Emptor.

Found an annuity article in the local paper with an error so glaring that I had to debunk it. Here's the article:Income for Life

And here's the critical error, conveniently in the first two paragraphs:

Interested in annuities? The type known as an immediate annuity may pique the interest of some investors. But the first step is to clearly distinguish between an immediate annuity and a variable annuity.

Both are insurance products. A variable annuity is used to invest for a future need, such as financing retirement, and the benefit comes after years of compounding. An immediate annuity converts a chunk of cash into a monthly income guaranteed for life, with the payments starting right away.

BUZZ! Thank you for playing, and be sure to pick up our wonderful parting gifts. Of course you won't be any good at the home game, either.

When considering annuities there are two main categorical choices you need to make, and they are completely independent of one another, as five minutes of research would have told this person.

They two main categorical splits of annuities are immediate versus deferred, and fixed versus variable. Whatever your choice on one axis, it has nothing to do with your choice on the other axis. I can name annuity products in each category of immediate fixed, immediate variable, deferred fixed, and deferred variable.

The immediate versus deferred choice has to do with whether or you start getting monthly (or yearly) checks immediately or at some point in the future. Actually, this is a less bifurcated choice than it appears on the surface, because the difference between deferred annuities and immediate annuities is that you don't have to annuitize a deferred annuity today when you buy it - but you can annuitize it tomorrow, or you might wait fifty years or more. Annuities in general are designed to convert a fixed sum of cash into a stream of income, whether right away (immediate), or after they have received tax deferred income for some period of time, which can be days or decades (deferred).

The fixed versus variable choice has to do with where the money is invested. In fixed annuities, the money is invested in the general account of the insurance company carrying the annuity. In variable annuities, the money is invested in subaccounts that work very much like Mutual funds. I go into moderate depth of explanation of pros and cons in this article on Annuities, Fixed and Variable.

"Well, how do you annuitize a variable annuity?" you ask. You've got all of the same payoff options as a fixed annuity, of which "life with period certain" is the most common, and the most common of those are life with ten years certain, which makes payments at least ten years or however long you live, whichever is longer, life with twenty years certain (as before, except the minimum period is twenty years) and joint life with twenty-five years certain, which pays as long as either member of a couple is alive, or a minimum of twenty five years. The account balance is still invested in the subaccounts, although there is less than complete control over the full balance. Then they make use of what is called an "assumed rate of return" of which 4.5 percent is probably the most common.

"That's a rotten rate!" I hear you cry, and correct you are. Nonetheless, it not only is very little below the guaranteed return of the fixed account of the company, which varies from about five to about six percent depending upon company, recent market experience, and other factors, but it is intentionally lower than the rate of return you will most likely earn.

This means you're likely to start off with a lower payoff from the same amount of money in a variable annuity than in a fixed annuity, but the cute thing is that this is typically a minimum guaranteed payout for then and forevermore (or at least until the end of your payout period), guaranteed by the insurance company. When your actual rate of return exceeds your assumed rate of return, your payout goes up. It can subsequently go down as well if you have adverse investment results as will happen, but over time the stock and bond market have a lot more eight and twelve and twenty percent years than they do zero percent or minus five percent years. The average over time is somewhere between about ten and thirteen percent, depending upon who you ask and how you frame the question and when you ask it. So given the gap between an assumed rate of return of 4.5 percent, and actual rates of return that average somewhere about ten percent, what usually happens?

If you guessed that over time, your periodic payout tends to increase at a more than the rate of inflation, then DING! DING! DING! DING!, you win the grand prize - knowledge of how the system really works, and how you can manipulate it to your advantage. Which answers these paragraphs below from the article, wherein the author makes another error that could also have been avoided by that same five minutes of research:

Keep in mind, though, that if you live for decades, the fixed monthly income may lose buying power due to inflation. A few insurers offer products that raise payments to keep up with inflation, but they start out paying much less. A $100,000 premium might get a 65-year-old man only $464 a month, about 30 percent less than with a fixed-payment annuity.

Also, this may not be the best time to get an immediate annuity, even if one would make sense for you eventually. Interest rates are relatively low these days, keeping these products' returns low. In 1999, when rates were higher, the 65-year-old man could get a return of around 8.6 percent.

As you've just seen, payoffs for variable annuities can and do increase over time, even after annuitization. The downside is that only the original minimum payoff is guaranteed, but most folks have better experiences over time.

Now the article does have some good information in other particulars. Women receive lower payouts than men of the same age because they tend to live longer. The older you are when you annuitize, the higher the payout per month (although this can be a trivial difference if you're choosing a long period certain).

However, I cannot finish this article without mentioning the worst abuse of the public trust. The last line of the article recommends a website that I just refuse to link, among several other reasons, because they are apparently trying to sell fixed annuities only. Why? Because they are more profitable for the company and therefore pay a higher commission. I tried seven different scenarios looking for one variable annuity quote, and despite the fact that several of their listed companies offer variable annuities, got not one quote based upon a variable annuity. Variable annuities also have somewhat smaller and shorter withdrawal penalties and periods that said penalties are in effect (I should mention that most annuities will waive any withdrawal penalty if you actually annuitize). But an idiot could and should have spotted the fact that it's a commercial website looking to sell annuities rather than looking to provide information to the consumer (there isn't an online Frequently Asked Questions or any education on what an annuity is and is not, instead, you are told to call a toll free number that shills for a sales appointment), and from what I can tell, the author did all of the minimal research he did at this one website shilling for the fixed annuity industry. He would have done better to check with a few people with actual experience in both fixed and variable annuities.

In short, whereas I cannot prove that anyone was paid by the companies involved to write or print this article, in my opinion it should have been labeled an advertisement for fixed annuities.

And people trust these writers for financial advice?


Carnival of Investing. Recommended: Old Niu's Blog (I do not agree with the forward forecasting 100%, but it's worth reading for the way he treats some concepts in accordance with the Law of Large Numbers), Daily Dose of Optimism (a compare/contrast of Japanese corporate culture and structure with our own).

Carnival of Personal Finance. Recommended: Financial Reference, Conservative Cat for a nice detailed article about "hot stock tips" emails. I think I remember getting the same one; I forwarded it to enforcement@sec.gov.

Carnival of Debt Reduction

RINO Sightings


Not a good sign: Iran Tells Nuke Agency to Remove Cameras


Wizbang has a nice article on bioethics and the current administration's track record.


Q and O wants to form a libertarian group than can cooperate and form coalitions. I wish him luck. Help him if you can. I've tried hard enough without any notable success for at least twenty years.


Mudville Gazette debunks the latest left wing craziness about our soldiers: That the women are so scared of going to the latrine that they are not drinking water and therefore dying of dehydration. What he says makes sense in light of what I remember from Boy Scouts. It also makes sense in light of realpolitik. He closes with "I propose the following theory: Regardless of the number of individuals in the group, the combined IQ of people who believe this story will never exceed 10." I'm with him.


Dr. Sanity has a wonderful article about guilt cultures versus shame cultures.

I've seen a fair number of questions on impound accounts in the last several months. An impound account, also known by the confusing term escrow account because the lender is holding it in escrow, is money that you give the lender in order to pay the property taxes and homeowner's insurance on the property.

The first thing to note and emphasize is that money going into an impound account is not a cost of doing the loan. It is your money. You own it. It will be used solely to pay your property taxes and insurance. At the conclusion of the loan, whether you paid it off with cash or refinanced or or sold the property, you get this money back. The lender is required to send you the check within sixty days of loan payoff.

An impound account is meant to address any lender's two largest worries in regards to a loan: Uninsured destruction of the property or losing the property to an unpaid property tax lien.

The problem with an uninsured destruction should be obvious. The structure is destroyed or heavily damaged and no money exists to rebuild. The borrower doesn't have it and the bank isn't going to throw good money after bad. Here in California, the average property is worth maybe $500,000 or so, but without the home sitting on it, the property may only be worth fifty to a hundred thousand. Within ten miles of my office sit hundreds, probably thousands, of new homes that sold for $700,00 and up even though they sit on a lot that's less than 5000 square feet (0.115 Acres). Many condominiums are over $400,000. Given the location, a 5000 square foot lot may be $200,000, but it's not $500,000, and the lender will take a loss even on the $200,000 because they're not in the business of real estate. They loan $500,000, it burns down without insurance, they lose $350,000. People also lose their jobs over this.

Property tax liens are a major issue as well. They automatically take priority over everything else, and the rules about what the condemning governmental entity has to do are much looser than they are for the bank. They will usually do quite a bit over the minimum, but they will sell the property most of the time, no matter how minimal the best bid. Minimum auction amounts, etcetera go out the window. Many times this situation can require the lender to step in and pay the property taxes, intending to turn around and sell the property themselves merely to take a smaller loss.

A lender wants you to pay property taxes and homeowner's insurance, and they want to know you've paid them. They encourage this via the method of impound accounts. The theory is simple. Every month you pay the lender, in addition to your actual loan payment, an amount equal to your pro-rated property taxes and homeowner's insurance, and they will pay these when they are due.

No lender is perfect about these, and some are less so than others. A large percentage of the biggest and worst messes I have ever dealt with came about as the result of the lender somehow messing up the inpound account. Others have arisen because even though the lender acted within the law, the client got angry about something. Sometimes it's for a good reason, sometimes it's not.

Because lenders want you to have them, however, they are ubiquitous, and every lender I know of charges extra on your loan if you do not want to do an impound account. Usually this amount is about one quarter of a discount point. On a $500,000 loan, this amounts to a charge of over $1250 just to not have any impounds.

On the other hand, in places where property values are high, you can have to come up with $5000 or more at loan time just to adequately fund an impound account. Here's a computation of how much you need to fund it works. The lender will divide the annual property taxes and homeowner's insurance by twelve. This will be the monthly payment. The lender is legally able to hold up to two months over the amount required to make the payments, and they want this reeve. So they will look at the projected payments for the next year and figure out how many months they need up front to always have two months worth in reserve. I'm writing this on February 3, and California taxes were due on the first even though they are not past due until April 10th. But the lender uses February first to calculate even though they won't actually make the payment until early April (they earn interest on the money, whether or not they pay any. Some states require that interest be paid, but it is typically something small and worthless like two percent).

February first is usually when the lenders here in California figure will be the low point of the account for the whole year. But if you closed on a loan today, February 3rd, you wouldn't make your first payment on that loan until April first, and of course, they cannot count on you making your February payment right on the first. So they are going to figure that you will make payments on the first of every month April through January, ten months, before they have to pay your property taxes. Since they have to pay twelve months, and they get to keep two in reserve, that's fourteen months of payments they want to have on February first. Fourteen minus ten is four months that you will have to come up with in advance, or have rolled into the cost of your loan. On a $500k property, that's about $2000 for property taxes even in a basic tax zone, and if your insurance is $1200 per year, you'll have to come up with another $400 for that. $2400 into the impound account.

It gets better. Because the property taxes are due within two months of your purchase, you're going to have to come up with your pro-rated share right up front as well as paying for an entire year of insurance. Since California requires six months property taxes at a time, that adds almost another five months taxes and twelve months insurance up front. Total cost of this in the example given: $3700. Actually, this is due whether you have an impound account or not. Total you need just for property taxes and homeowner's insurance: $5900.

It can be worse. Suppose you were closing on a refinance in October. You originally bought in February. You are only going to make two payments (December and January)before the insurance is due, so your impound total for the insurance alone $1000 for insurance. You are going to have to come up with $3000 to pay the first half of your property taxes, plus because you only have two payments before the second half is due, another $3000, or six months payments for that. Total due, $7000.

There are really only two methods for coming up with the money for an impound account: Bring in the cash from somewhere else, or have the lender loan it to you, adding it to your loan balance. Except in rare circumstances where you are refinancing the same property with the same lender (and usually not even then), existing impound accounts cannot be used to "seed" the new account. This is because it's your money, held in trust. The rules for these accounts are rigid, and I'm not certain I understand well the rules about whether a bank even has the option of rolling one impound account into another.

This typically means that you have to come up with a good chunk of change out of your pocket for a short period, or add the additional amount into your loan, where you'll be paying for it as long as you have a loan on the property. Every situation is different, but most often I prefer to either come up with the money myself or not have an impound account. The extra charges may be sunk as opposed to refundable, but I'm not paying interest for thirty years on thousands of dollars.

Furthermore, if you are adding the money to create the new impound account to your loan balance, since it's going in before the computation of points, it can add another $50 to $100 to your costs of the loan per point you're paying. Minor in and of itself, but adding insult to injury if the loan has points involved. More to the point is that adding impound creation it to your loan balance means there may be a couple years before your balance gets as low as it was before the refinance, just from this. Indeed, the fact that it raises your loan balance is the worst thing about the impound account issue. On the other hand, unless you have a "first dollar" prepayment penalty, what you can do is turn around and put the check for the previous impound account when it arrives into paying down the new loan. It typically won't bring you even, and it won't reduce your contractual payments on the new loan (although that is usually a good thing), but it will ameliorate the damage to your loan balance.

Initial loan closing is not your only opportunity to start an impound account if you want one. If you don't have one to start with, the lenders will be very happy to let you start one later. I've literally never heard of a lender saying anything but "YES!" (usually with a pump of the fist) to a request for an impound account. Why? Because now they know that your taxes and insurance will be paid, and get to use your money, and after you paid a fee for no impounds. Oh, happy banker!

If you want to cancel an impound account, expecially within a year of whenever the loan was funded, you can expect to pay the "no impounds" fee, possibly prorated, but usually just the whole thing. Roll thousands of dollars into your loan balance where you'll be paying interest on it and then pay a lender's charge for no impounds? Ouch!

Can you force the bank not to do any of this? Not really. They don't have to lend you money. Yes, they are in the business of lending money, but if they don't loan it to you, they'll find other uses for it. Somebody else is always willing to accept the bank's terms. You try to violate guidelines that lenders have established in order to lend you the money, and you'll be told, "Sorry but you don't qualify." The golden rule of loans is that those with the money make the rules.

Furthermore, those lenders who didn't require this would be at a competitive disadvantage as regards rates, because their loan portfolio would be a significantly riskier one, and they would have to increase their rates to compensate for this. You could qualify for a better rate or lower closing costs somewhere else. Better to not argue. Assuming that I already have an impound account, all the extra I lose is a maximum of sixty days interest. Two months interest on $5000, even at ten percent, is $83. That's a lot cheaper than either of any of the alternatives.

Caveat Emptor


The Prerequisites of Investing

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It shouldn't surprise anyone that there are things you should do before you make your first investment. The SEC, NASD and all of the various other financial planning organizations all explicitly list three things that should be in place in most cases prior to making your first investment in anything.

The first of these is an operating reserve. This is a fund of ready cash outside of any investment account, that you can use for emergencies. The minimum is three months of your normal expenditures, but six months is better. People lose jobs, have accidents, have health problems, things come up - you get the idea. Unless your job is rock steady, your cash flow predictable, and you can live on less than fifty percent of your take home pay, you really want to have living expenses for six months saved up, and for some self employed situations where your cash flow is uneven (like say, financial planner or real estate), twelve months is better. Having this much cash on hand gives you a certain security, and you likely won't have to cash in your investment for some minor emergency.

The second of these is a life insurance policy. This isn't from any deep-seated desire to sell you a life insurance policy. Investment professionals have only been getting insurance licenses since about 1980, and this recommendation is far older than that. Almost everyone is going to need a life insurance policy at some point in their life, and it is cheaper and more effective to purchase while you are young. and especially before health problems are likely to develop. As I've found out, sometimes things happen to you that prevent you from obtaining life insurance (as in no company will issue you a policy, or will only do so on prohibitive terms), and if you want a family eventually, it is wise to take care of this now. Furthermore, certain life insurance policies are among the very best investments you can make, and more effective the sooner you start them. This is not to say that life insurance is for everyone. I have a client who's older, has no dependents and never will, has plenty of assets to cover final expenses, and those assets are titled so that they will pass immediately and correctly to his heirs. A life insurance policy would still be of benefit if he had certain goals, but he doesn't. So we've decided it's not for him.

The third of these is estate planning. This is actually in the requirements as a will, but there are other elements such as durable power of attorney for health care, living trusts, and so on. These do cost a certain amount of money, but it's money well spent. If something happens to you without doing this planning, every state in the US has a different law as to what happens to your assets, your minor children, your pets, etcetera. These are all cookie cutter approaches, and that cookie cutter was likely enacted a long time ago, to where the societal assumptions that the legislature made at that time are no longer valid for any large proportion of the population. The majority of your assets should not be transferred by a will, anyway - wills can be and are challenged successfully every day. Trusts are far better.

If the person you work with is any kind of financial planner, they should add two additional concerns to the list. They are disability income insurance and long term care insurance. The need for both goes away as you become more affluent. Remember, that insurance companies exist to make a profit and if you can afford the risk of losing what they insure, you shouldn't buy a policy. So if you've got a couple million somewhere, and if you never made another penny you would be comfortable, there is no need for disability insurance. The same applies to Long Term Care, albeit probably requiring more affluence. Average base per diem cost in California is $180, with another $60 or so in supplemental charges. So when you can afford $240 per day (between $85,000 and $90,000 per year) for a period of several years in addition to what ever else you may need for your family to live, you are not a good candidate for long term care insurance. On the other hand, long term care facility prices keep rising, and as medical capabilities for keeping you alive get better, you can expect to spend longer in such a facility.

(For all the money and research we throw at prolonging lives, you'd think we could spend more on making it a robust life, or allocate more of what we already spend towards that end. More and more, we are statistically tending towards living longer in an increasingly frail, helpless and joyless condition. As long as people are enjoying life, more power to them. When it becomes a miserable painful existence, as I have seen too much of, I just don't see the point. When I see what so many people put themselves or their loved ones through, I'm making certain I'll always have a "check out" option under my own control, and if I don't have control to exercise, my wife and I are agreed that neither one of us wants to hang around).

Caveat Emptor

Just got a search where the search was "negative ARM loan explained in Spanish" Interestingly enough, the question itself was in english. Well, I'm certain somebody has articles in spanish, but my spanish is weak enough that I do not trust myself to translate. On the other hand, I'm going to post a Useful Tip for those who don't know. Alta Vista has a free service called Babel Fish (From the original Hitchhiker's Guide radio program. Early internet had a very high concentration of science fiction geeks like me) that will translate a web page (cut and paste the URL) or up to 150 words ad hoc at a time. Actually, it used to be unlimited but I see why they've cut down. They're pretty good but they do have their breakdowns, so be wary of "My hovercraft is full of eels," or "My uncle is sick but the highway is green," type stuff. One of the things about the old listservs was that pretty soon everyone learned a lot of tricks and resources, and I thought I'd pass this one on. I also added it to the "Other Resources" roll to the right. If you have any to pass on to me, I'd love to get them.


Digger's Realm has an article on the Mexican military covering drug smugglers, opening fire on US law enforcement, and personally threatening them and their families.

Black Jack Pershing, call your office.

This needs to get dealt with. Have Condi summon their ambassador and say "We want those responsible caught, tried, and punished. You have two weeks to make the arrests. If your military attempts to frustrate our border guardians again in any way shape or form, it will be treated as an act of war. Frankly, Mr. Ambassador, we both know to the last centavo how corrupt your government is at all levels and what a favor we would be doing the Mexican people by adding 31 new states to our union. The people of Mexico are worthy of better, and if they didn't have such a shortsighted group of kleptocrats leading them, they would be a world economic power in the same league as the United States. Thus far, it has not been our responsibility or worth our trouble to deal with the problem, but on top of everything else we have to deal with because of your incompetence for the last ten generations, this is too much. Our patience is at an end. Either start acting like a responsible democratic government, or face the consequences, and nobody with a Mexican government job from dogcatcher on up will ever be allowed to work in a government job again. That is all. Dismissed."

Discuss. I thought Vicente Fox and PAN might be the start of real change for Mexico, but it has become more obvious to me since that PRI, PRD, and PAN are all the same stuff from nearly identical outhouses.


HT to Argghhh! for a pointer to a beautiful column Farewell to the Fallen.


Armies of Liberation has the scoop on 23 Al Qaeda members who just happened to escape as the trial for the Cole bombers begins.


Inside Larry's Head has some arabic cartoons about jews that put the lie to any need for concerns as to their religious sensitivities.

Compared to these, the infamous danish cartoons are a paean to sensitivity. So mild as to not be worth mentioning

So what's it like having the illusion of the shoe on the other foot? I can only observe that everyone else has already demonstrated at least a million times more sensitivity towards Muslims as they have towards other religions. Your religion and your faith have got to be laughably weak and childish not to be able to handle it.


Family in town for the weekend so if I don't post any more, you know why. There are articles waiting to go tomorrow morning and Monday.

I have never liked or favored the estate tax, and yet I am very much of two minds about actually abolishing it. I'm glad of the benefits to the individuals involved, and yet it is only one of the issues involved in planning for what happens to all of us eventually, and abolishing it removes the most obvious motivation for handling the rest.

The benefit of abolishing the estate tax is obvious: people don't get taxed, so their heirs get what they earned rather than the government. This is a good thing, and I favor it for that reason.

On the other hand, there were so many mechanisms varying from outright gifting to 529 accounts to life insurance to trusts, each of which except the first can be used to retain control and benefits of assets while avoiding estate tax liability, that estate tax is and always has been essentially voluntary. You have to just not plan in order to pay estate tax, and some of the mechanisms available actually increase your available estate over what would have been its original gross value otherwise. Since we know that death is something each of us is going to have to face, there can be no reason except stupidity for not undertaking to plan for it. Estate tax was a voluntarily paid tax on stupidity.

Furthermore, there are other estate and contingency planning options that people need to take care of, and fewer people are doing so as estate tax was one of the primary levers that moved people to do it. All of this planning is just as necessary as estate tax planning, and usually taken care of at the same time.

Here are just a few of the other issues:

Will: The will probably should not be used for financial purposes, but resolves other functions such as who gets custody of minor children. Please note that a will is not necessarily binding upon the states where your will is probated, and can be challenged. Many wills are challenged, a large portion of them successfully, and even if your estate wins the battle it will be diminished in the process.

Durable Power of Attorney for Health Care: if you can't make health care decisions, this tells who you delegate that power to. If there's a court case brought, it's going to be very short and abrupt. Case closed.

Trusts, revocable and irrevocable. I'm not certain it's possible to successfully challenge a well-constructed trust where the assets that are actually transferred to it are concerned. You didn't own them. The trust does, and the trust didn't die. The instructions live on, like a corporation. The named successor trustee also usually gets the ability to manage the trust's assets if you are alive but incapable. Assets in a trust can avoid not only estate tax, but probate as well. If you want to be certain of the disposition of what you leave, particularly in a speedy manner, this is probably the way to go. Many estates are not finished with probates for years, and until they are, your heirs don't get control of the assets. Nor are we certain that estate tax is going away forever. Probate is also expensive, time consuming, and lucrative for attorneys. Seven percent of probated assets seems to be about the minimum cost, and it can easily top thirty percent. I haven't investigated, but I suspect the trial lawyers would be solidly behind banishing estate tax for this reason.

Business operations: many small to medium sized businesses have no plan to keep them going in the event the owner-operator dies or becomes disabled. Certainly nobody else working there has the knowledge, the experience, and often the necessary licenses. If the business closes because the proprietor isn't there, it's worthless. If there's a plan of succession to keep it open and operating, however, you or your family can likely sell it as a going concern with consistent profit.

Retirement plans: If you have certain types of tax deferred retirement plans, they can be expensive to convert to assets in your heirs' possession, even without estate tax. Better to draw these down and keep other accounts available.

Life Insurance: There are going to be expenses when you go. These vary from taking care of the body you leave behind to probate to keeping your business running if you have one. The people doing these things want cash. Life insurance is usually the cheapest way to pay them. Your family is also likely to need something to replace your income in many cases. Life insurance is about the only choice.

One hopes you begin to get the idea. Consult an attorney and financial professional in your area to find out how it works, but all of this needs to be taken care of, or your family will wish you had.

Caveat Emptor.

Continued from Part 1: Preparation and Part 2: Process

This is about the long term consequences of the decision to buy or not to buy a home, and economic benefits analysis into whether you should want to buy. In order to answer the question of whether it's better to buy or rent and invest the difference, you need to compare the costs and benefits of owning to the costs and benefits of renting over a comparable time frame. If you know you're moving in three years or less, it can be hard to come out ahead, just due to transaction costs. On the other hand, if you've got the wherewithal to turn it into a rental property after any future move you already know you're going to make, that can make the owning calculation move decisively in favor of owning. Be advised, all the headaches of being a landlord are greatly magnified if you're not within easy commuting distance to keep an eye on the property yourself. Also, if you cannot achieve positive cash flow on a rental property, odds are good that you should sell it. This isn't a blanket recommendation, just a rule of thumb.

Now it happens that I've programmed a spreadsheet to answer the "buy or rent" question in a time dependent manner, which is the only way it really can be answered. I keep using a $300,000 home and $270,000 loan as my default assumptions here. I'm going to pull a few more assumptions out of my hat, but I'm going to do my best to make them reasonable assumptions. 6.25 first trust deed, 10% second for any loan amount over 80 percent of value. Five percent annual property appreciation (perhaps a tad low in the long term), 1.2% yearly property tax (darned close for most California properties), yearly tax increases of two percent (Prop 13's legal maximum in California), non-deductible homeowner's expenses of $200 per month, 4 percent inflation, $1500 in non-housing deductions on Schedule A, marginal tax rate of twenty-eight percent, and a return net of taxes on any alternative investment with the same money of ten percent. I also assume you're married (That makes a difference on how much your default deduction is).

Since state and local income taxes are different everywhere, I'm going to neglect those. They would functionally move the equation in favor of home ownership, but the effects are relatively minor in most cases. Furthermore, because investments are only worth your net proceeds after you actually sell them, I'm going to deduct seven percent of the theoretical market price of your home investment in any given year before I compare the net benefit of buying a home to renting and investing any money you didn't spend on buying. This is questionable to be sure, as most people will just spend at least a certain percentage, but I'm in the mood to be generous. You'll see why in a moment.

I'm also going to assume here, very unrealistically, that you never refinance, but that's actually a middle of the road assumption, as far as net benefit goes. The actual spreadsheet has works a couple of other assumptions, and refinancing every five years and making a minimum payment usually comes out better, while refinancing every five years and keeping a thirty year payoff goal usually comes out worse.

Here are the net results:

Year Value Rent Equity Net Benefit

1 $300,000.00 $1,500.00 30,000.00 -21,000.00

2 $315,000.00 $1,560.00 47,979.07 -12,556.04

3 $330,750.00 $1,622.40 66,906.50 -3,638.14

4 $347,287.50 $1,687.30 86,833.25 +5,776.42

5 $364,651.88 $1,754.79 107,813.09 15,711.05

6 $382,884.47 $1,824.98 129,902.79 26,189.84

7 $402,028.69 $1,897.98 153,162.25 37,237.49

8 $422,130.13 $1,973.90 177,654.70 48,879.30

9 $443,236.63 $2,052.85 203,446.90 61,141.06

10 $465,398.46 $2,134.97 230,609.35 74,049.01

11 $488,668.39 $2,220.37 259,216.47 87,629.77

12 $513,101.81 $2,309.18 289,346.90 101,910.18

13 $538,756.90 $2,401.55 321,083.67 116,917.22

14 $565,694.74 $2,497.61 354,514.53 132,677.85

15 $593,979.48 $2,597.51 389,732.17 149,218.82

16 $623,678.45 $2,701.42 426,834.57 166,566.51

17 $654,862.38 $2,809.47 465,925.28 184,746.65

18 $687,605.50 $2,921.85 507,113.76 203,784.11

19 $721,985.77 $3,038.72 550,515.76 223,936.96

20 $758,085.06 $3,160.27 596,253.68 245,391.54

21 $795,989.31 $3,286.68 644,456.99 268,228.87

22 $835,788.78 $3,418.15 695,262.65 292,534.88

23 $877,578.22 $3,554.88 748,815.58 318,400.79

24 $921,457.13 $3,697.07 805,269.15 345,923.37

25 $967,529.98 $3,844.96 864,785.74 375,205.33

26 $1,015,906.48 $3,998.75 927,537.24 406,355.67

27 $1,066,701.81 $4,158.70 993,705.71 439,490.05

28 $1,120,036.90 $4,325.05 1,063,483.99 474,731.24

29 $1,176,038.74 $4,498.05 1,137,076.39 512,209.54

30 $1,234,840.68 $4,677.98 1,214,699.45 552,063.23

Yes, after 30 years you are $552,000 better off from having bought a $300,000 home, as opposed to continuing to rent for that whole period. Not to mention that you own it free and clear for the cost of maintenance plus property taxes, as opposed to paying over $4600 per month rent.

This is a fascinating study in leverage. If, on the other hand, taxes start out at 2 percent and rise by 4 percent per year, the peak year in absolute terms is year 22, at $101,964 net benefit. On the other hand, I'm running rent increases at exactly the general rate of inflation and they almost always go up faster. Back to the first hand, resetting variables in the last set of suppositions to default and changing the appreciation rate to approximately like the long term average - 7 percent - while making a net return of 8.5 percent on investments bumps the net benefits of buying that home to $1,630,195.38. Five and a half times the original purchase price!

One more scenario: Restore to default values. Say you lose $30,000 of value, or ten percent of purchase price, in the first year. It does take longer to be ahead of the game - more than 6 years - and the net benefit after 30 years is "only" $437,223.05. For the mathematically challenged, this is still nearly one and a half times the original value of the property! Yes, the money will be worth less in thirty years. We all know about inflation. Would you turn me down if I offered to give you $437,000 in thirty years time?

I've been playing with this spreadsheet for weeks now. Under the basic assumptions I've listed above, it's kind of hard to be ahead of the game by buying a house instead of investing in the stock market after less than two years under any kind of reasonably average assumptions. On the other hand, it's very difficult not to be ahead after five to seven, and way ahead after ten.

After thirty years, most sets of even vaguely reasonable assumptions have you so far ahead by buying the home that if you didn't watch over my shoulder as I built the spreadsheet, a reasonable person would be sceptical. Heck, I knew which calculation the numbers favored, but I really never stopped to think how strongly they worked in favor of home ownership. It is difficult to come up with a reasonable set of assumptions and starting numbers where you aren't ahead by significantly more than the original purchase price of the home. Yes, we're all aware of the issues with inflation, and the ratio illustrated here, with a 4 percent rate of inflation, is a little more than three to one (which remembering the rule of 115, seems reasonable, so the first approximation check validates this). So what this means is that by purchasing a $300,000 house that you're going to live in for the rest of your life now, you're adding more than $100,000 in today's dollars to your net worth in thirty years. Actually, it's usually more. That safe, conservative, middle of the road $552,000 net result after thirty years from the first example converts to more than $177,000 in today's money! No flipping, no games, no wild schemes, no re-zoning jackpots and no wealthy benefactors to come along and pay you twice what it's worth. In fact, in this scenario you never talk to another real estate or loan person as long as you live, and you've still effectively "gifted" yourself with almost sixty percent of the property's purchase price immediately upon taking possession.

This should persuade most folks that they should want to buy a home, and that you don't want anyone else to. After all, the more poor schmoes there are, the better this will work for the rest of us. Actually, that last crack about poor schmoes isn't true, because the law of supply and demand is always in effect. But is shows how good for the overall economic health of the nation encouraging home ownership is.

Caveat Emptor.


Diminishing Returns has an excellent post on the state of the educational system.


Boxing Alcibiades has a worthwhile "finger in the tyrants eye" idea: Volunteer so anyone in a strongly censored country can email him a request for a Google search, and he'll put it up.

Works for me. Sign me up as an Anti-Censor (Reverse Censor? De-Censor? In-Censor?). If you live in a country where the search engines have been censored, send me an email requesting a search and I'll do it. Depending upon how many request I get, I may do multiple search engines. No pr0n requests please, and anything that a wife or supervisor might find objectionable on the search level will be my discretion and the availability of a time and place where I can execute without consequences. If anything that comes up that may be objectionable, appropriate warnings will be issued.


HT to Vodkapundit for sending me to twenty questions on Able Danger


Baby steps: Captain's Quarters has the goods on the first action congress has taken in 9 years to trim the growth of entitlement programs. $40 billion is over $100 saved for every man, woman and child in the country.

We need more and bigger, as Captain Ed tells us. But I'll take a baby step forward over drifting backwards every time.


La Shawn Barber has a very balanced post up on racial "intelligence" that's well worth reading. For the record, I disagree with her over the likely cause of racial disparities. I do believe that the gaps are there and are real, but are a phenomenon of cultural disparities, not anything innate. Mental acuity is at least partially a function of the effort put forth by and the amount of practice undertaken by a given individual. Some cultural groups within the country encourage this to different extents, some discourage it, also to different extents. It is no great stretch to imagine that if putting effort and education is everything to one group, and actively counter-image to another group, there will be differences in how well, in aggregate, the groups make use of the material. There will always be outstanding individuals in any group, just like there will always be lazy, hostile, and indifferent students. But if 90 percent of group A puts all of the effort into educational success that they can, whereas 90 percent of group B stigmatizes it, a reasonable person will expect differing outcomes from the two groups in aggregate, as measured by identical metrics.

Not to advocate this, but if we randomly assigned kids to parents upon checking out of the hospital, I believe any difference in results between the races would be gone in a generation. Because the same random percentage of babies born to group A parents would have group B parents raising them as of those born to group B parents. This is not a proposal, and in fact I find the idea revolting. It is simply an illustration of where I believe the problem lies. If you're going to tell me your "culture" is different and that you're proud of it and don't want to change, that's fine, but you lose the ability to complain about differences in levels of success brought on by those same cultural differences that you're so proud of.

Continued from Part 1: Preparation

I am considering buying a home, although I have not made up my mind on the subject. This is not due to indecision, but rather due to a lack of necessary information. There are many factors to be considered in my case, and in order for me to make an informed decision about buying, I need to solve for several variables involving cost.

My questions to you involve what steps I can take to solve those variables. Should I begin with a pre-qualification or loan approval? Will a lender invest time and resources in me when I have no specific property in mind, and I may ultimately decide to continue renting? Should I start by speaking with realtors in order to guage what is available in my price range? Will realtors invest time and resources in me when I have no loan arranged and I may ultimately decide to continue renting?

Also, what is the proper sequence of action for someone who is seeking to collect all the relevant information in order to make reasoned decisions about buying a home?

Well, as I said in Part I, a major question is whether you can trust real estate agents to answer the question honestly. Some will, most won't. If they tell you to buy, they make money. If they tell you to keep renting, they don't. Mind you, if you can afford to buy, the numbers are overwhelmingly in favor of that, as we'll see in Part 3. Nonetheless, one trusts that you see the potential for abuse.

Nobody should have a specific property in mind when they first approach an agent. Smart buyers won't make an offer without looking at a certain number of properties first. The only exception is if you're buying the old family home from your parents or something. You've agreed on the price, and the terms, and now you're going to pay an agent to make sure all the paperwork is done and filed correctly and the inspections are done and all of that sort of stuff. This is a smart thing to do, by the way, but most people in this kind of transaction seem determined to save money when a low percentage agent's fee or some flat fee would be an astoundingly good investment.

You needn't worry about whether lenders and agents will "invest time in you." Those who are unwilling to spend time on you in such circumstances should be avoided. Yes, I want my time to be spent on people who really want to buy and are capable of buying, which is why a basic pre-qualification is among the first things I usually do. I don't want to waste your time showing you stuff you can't, or shouldn't, afford any more than I want to waste my own. But there's a lot you can do to qualify yourself, so that you know how strongly you're inclined to buy, and approximately how expensive a property. This way, you know that the agent or lender isn't leading you down the primrose path with properties you cannot really afford. This is a severe problem right now, especially in expensive areas. I've said it before and I'll say it again. You need to know how much house you can really afford in a sustainable situation, and you have to make certain your agent knows and sticks within your budget. The one who shows you the five bedroom house, when you can really only afford the three bedroom condo, is not your friend. I'd fire such an agent the first time they showed you something you could not reasonably get for your known housing budget (which is one reason I recommend against Exclusive Buyer's Agent Agreements, and don't ask for them unless I'm giving them something beyond MLS listings for their exclusive commitment). The agent who shows you the three bedroom condo you really can afford when everybody else is showing you the five bedroom house you can't, is your friend, whether the "Oooohhh" factor is there or not, and even if the "Eeewww!" factor is there. Curb appeal is how sellers sucker buyers (and yes, when I'm a listing agent I'll help you with that in every way I can. It's the most important part of my job to help my client get the best deal they can. But right now I've got my buyer's agent hat on, and my job is to help buyers see the diamonds in the rough and not pay more than they're worth).

Once you've done your self-qualification, that's when I'd go find a real estate agent. I wouldn't worry about an actual lender's prequalification as long as you know what your credit score is. A good agent is going to do a pre-qualification anyway, and if they're a loan officer as well, they'll set you up there. An agent who doesn't do loans should be able to provide recommendations for someone to do the pre-qualification, and if they don't recommend the same loan provider for the loan as did the pre-qualification, I'd go back and check with the provider who did the pre-qualification anyway, as well as finding other prospective loan providers, not to mention pointedly not accepting the new recommendation for a loan provider. Despite the fact that I'm a loan officer who also does real estate, I'm not sure I'd trust a real estate agent with my only loan application. I came to being an actual real estate agent from being a loan officer for several years first - and then I went and learned how to do real estate. The average real estate agent who does loans never spent an apprenticeship doing loans, never learned the ins and outs, and has no clue whether they can deliver what they put on the Good Faith Estimate (Mortgage Loan Disclosure Statement in California). They just figure "It's the same license, so I can, and it's an easy way to earn a lot more money from the same clients!" They don't really know loans, they've just figured out that it's a way to make more money. Furthermore, there are too many shady personalities out there, and way too many real estate agents think they know how to do loans but don't. There are a fair number of crooks and incompetents and just plain gladhanders, who only care about whether they're getting a commission on this particular offer, out there, but most of what I do as a real estate agent can be plainly seen and understood by my clients. What a loan officer does is much less transparent to even the most sophisticated borrowers until it is too late to change to another provider. I've seen way too many people burned by only applying for a loan with one provider. I've only ever not been able to do one loan on the terms quoted and locked (and I did my darnedest to help the provider who could, where most loan providers in my shoes would have obstructed to the best of their ability, as I've also learned by bitter experience), but I've seen a lot of people who applied with the loan provider who talked a better deal but who couldn't deliver any loan at all, much less the one they talked about. Many times they have come back to me in desperation two days before escrow expires, or seven days after it was supposed to expire, and I can't always help them in time then. Always apply for a back up loan, especially if it's for a purchase.

Take any newspaper advertisements you see about rate, however, with great heaping cargo ships full of salt. I'll cover what's really available later on, but for now what you need to know is that loan companies advertise with teasers like negative Amortization Loans and short term ARMs and hybrid ARMs that takes five points to buy the rate and you still won't get it when it comes time to sign the final papers. The whole idea is to get you to call, so that they can sell you what they really do have. I don't think I've ever seen a real rate on a real loan that I would be willing to get for myself advertised anywhere, in any medium. Even the so-called "best rate" websites and newsletters are notorious for cheating. I've gone right down the line calling them and asking about loans that were supposedly the standards they were quoting to, and gotten not one answer that was within half a percent of the rate quoted on the website or in the newsletter. Nor were any of the websites or newsletters I've complained to (or my company complained to, when I worked for an internet lender that was signed up with them) interested in enforcing the rules. I don't know one single loan provider who advertises actual rates that they can actually deliver anywhere. Those few companies who are actually willing to do it have all quit advertising in disgust and gone to finding clients in other ways.

Continued in Part 3: Consequences


Carnival of Liberty. Recommended: Fearless Philosophy (I don't agree 100% but it's worth reading), The Sharpener, Eidelblog and again Eidelblog

Carnival of The Vanities. Recommended: Play One on TV


Q and O has the goods on Iran wanting to acquire missiles. If they don't carry nukes, they're kind of expensive for the damage they'll do. And the project name, as well. As McQ says, connect the dots. The picture that results is catastrophic.

LGF found an article noting that the UN has found plans for a nuclear weapon in the possession of the Iranians, as well as noting military involvement in the supposedly peaceful reactor program.


Social Security Choice reports on one thing the President got very right in the State of the Union address. If the government were a corporation, the SEC would have Congress in jail.


Greenspan raised the funds rate one last time on his last day. Talk about consistent to the last.

Federal Funds Rates are probably higher than they should be by 50-100 basis points. Bernanke is a banker, same as Greenspan, but I'm hoping his other background will help moderate his banker's instincts to keep inflation low at all costs. Greenspan created the last bump in the economy, and whereas that was probably a good thing, all things considered, it isn't an experience I'd care to repeat.


Captain's Quarters notes that Egypt has asked Hamas to recognize Israel, and has some good ideas on the consequences thereof.


Knew it was too good to be real department: LGF notes that France Soir has fired the editor who ran the Mohammed cartoons.


The Agitator has more in the case of Cory Maye, still in jail sentenced to death for defending himself in his home.

Dean's World has a nice piece on the Elephants' political playbook that includes the line "The Democratic Leadership Council argues that President George W. Bush made it clear in his State of the Union address last night that the Republican Party is going to run the national security play right at the Democratic Party until the latter proves capable of effectively defending it."

This got me to thinking. I'm definitely not accusing Karl Rove or George W. Bush of being a super patriot, but consider: The fact that the play works until the opposition is able to defeat it has the consequence that the opposition will either learn to defeat it or the opposition will become progressively weaker, until they point that they are no longer the main opposition.

Now the only way to defeat it is to either to prove that there is no threat, which is patently false and would be disastrous to the Donkeys if they actually succeeded in selling it to the electorate, or to grow some credibility on National Defense. It isn't tough to do. Johnson, Kennedy, Truman and FDR all had it. Even Carter had some national defense credibility initially. But the last time the Donkeys nominated a candidate with such credentials was 1976 (by 1980, Carter had lost his). I can't name a single Donkey A-lister I'd trust with the coastal defense of Wyoming, let alone a serious decision as to whether the use of military force abroad was in the best interests of the United States. All of them have far too obviously committed themselves to the "no" option. Well, that's better than painting yourself into the "yes" option, but the plain fact of the matter is that we're in a period of history where we must be willing to do so, and being seen to be willing ahead of time is as important as being willing. The Donkey A-listers are publicly, spectacularly unwilling.

They basically have a choice: continue to embrace the religiously pacifist wing of their party, or continue the slide into third party status. These people donate well and volunteer generously, but the stances they demand are not within the range of what the average voter is willing to tolerate. The choice before the Donkeys now boils down to whether it's more important to them to be able campaign well, or to actually win elections.

If the Libertarian Party style irrelevant defeat with a pure heart is what they're after, they should keep doing exactly what they are doing. If, on the other hand, they want to win elections, it's past time to change their approach. They don't have to start talking like General George S. Patton Jr, but they do need to put the religious pacifists firmly in their place with frank talk about sorts of situations where the use of military force is required.

The effect? Lose them some activists and a good chunk of change in donations, which would likely be more that replaced by folks who right now regard the Donkey national party's current attitude towards force as an invitation to a suicide pact. And the Religiously left wing is not likely to stop voting Donkey. What are they going to do? Vote Republican? This makes it a win-win-break even for the Donkeys.

Now consider the national implications of forcing this choice on the Donkeys. If the Elephants didn't force the issue, sooner or later the Donkeys would win. Maybe in 2006, maybe in 2096. When they did, we'd be stuck with an anti-war as the default "The nation voted for a platform that included it, so we must have wanted it." See Jimmy Carter's term for a weak preview.

But since the effect is to either force the Donkeys away from their current platform or continue to lose ground until they change their minds. If the Donkeys won't change their minds, some other party who will (most likely not the Libertarians) will take the place of the major opposition.

But if the Donkeys do change their minds, then whichever party is elected in the future will have made a deliberate choice to be credible in the defense of the United States, and willing, in principle, to use United States troops offensively abroad in specified circumstances. And that's an definite improvement from the situation I described two paragraphs ago.

I am considering buying a home, although I have not made up my mind on the subject. This is not due to indecision, but rather due to a lack of necessary information. There are many factors to be considered in my case, and in order for me to make an informed decision about buying, I need to solve for several variables involving cost.

My questions to you involve what steps I can take to solve those variables. Should I begin with a pre-qualification or loan approval? Will a lender invest time and resources in me when I have no specific property in mind, and I may ultimately decide to continue renting? Should I start by speaking with Realtors in order to gauge what is available in my price range? Will Realtors invest time and resources in me when I have no loan arranged and I may ultimately decide to continue renting?

Also, what is the proper sequence of action for someone who is seeking to collect all the relevant information in order to make reasoned decisions about buying a home?

Well, a major question is whether you can trust real estate agents to answer the question honestly. Some will, most won't. If they tell you to buy, they make money. If they tell you to keep renting, they don't. One trusts that you see the potential for abuse.

The question here of "Should I Buy A Home" really separates into two basic questions: "How much home do I qualify for?" and "Is there a better alternative, financially?" You can then decide if buying or renting is the better alternative for you.

Qualifying yourself to buy a home, or to use better phrasing, figuring out how much home you should buy, is easier than most folks think. You can look in the classifieds section or on any number of internet sites to find out what the asking prices for properties like ones you might want to buy are in that neighborhood.

The personal information needed is easily available. First, you need to know how much you make per month, as you make mortgage payments monthly. Next, how much your mandatory payments are. Third, about what your credit score is.

Most people know how much they make per month. "A paper" guidelines go between thirty-eight and forty-five percent of gross income for your total of all required monthly debt payments. Subprime lenders will go up to anywhere between fifty and sixty, with most limiting your debt to income ratio to fifty or fifty-five percent. I'd recommend staying within A paper guideline, but calculators are easy to use. So multiply your monthly income by thirty-eight percent, forty-five percent, fifty percent, and fifty five percent. This gives you a set of four numbers, which you may call anything, but I'm going to call A0, B0, C0, and D0. They correspond to what should by standard current loan guidlines be easy total debt service payments for most folks, moderate payments, difficult payments, and extreme payments.

Now most people have recurring debt of some sort. Credit card payments, car payments, furniture payments, etcetera. This does not include monthly bills that you are paying as you go. You know what your monthly obligations are. Whatever this number is, call it $X. Subtract $X from each of those four numbers above, so that you have the numbers that you really have available to spend on housing in each of these four scenarios. I'm going to call these numbers created by subtraction A1, B1, C1, and D1.

Now these numbers you have must cover all the recurring costs of owning a home. These include not only the principal and interest payments on the loan, but property taxes, homeowner's insurance, homeowner's association dues if applicable, Mello-Roos districts here in California, and anything else that may be applicable where you want to buy. Within the industry, the acronym most often used for this is the PITI payment, for Principal Interest Taxes Insurance, with the understanding that it includes anything else necessary as well. Association dues and Mello-Roos districts are a function of where you buy. Every condominium or coop is going to have Association dues or some equivalent. Mello-Roos districts are limited time property tax districts assessed to pay for things like municipal water and sewer service for new developments. Most newer developments here in California have them, and the equivalent districts are becoming more and more prevalent in newer developments elsewhere. Homeowner's Insurance is mandatory if you're going to have a loan - no lender is going to lend money on an uninsured property, but note that even the best homeowner's policy does not include flood or earthquake coverage, so if you're buying in an area where that is a consideration, the extra cost of a flood policy or earthquake policy is probably worth it. Condominium owners should have a master policy of homeowner's insurance paid for by their association dues, but it's still a good idea to have an individual policy for your unit, called an HO-6 policy here in California.

Property taxes are paid to city, county, state and possibly utility districts, but your county tax collector should be able to quote overall rates. There is no way to know how much they will be from here, but you can make an estimate, if nothing else by calling the county and asking. Note that they usually quote taxes in terms of a percentage tax value per year. Multiply assessed value by tax rate to get a per year tax bill, then divide by twelve to get a per month value. In California, there's a rule of thumb that property taxes per month are approximately one dollar per thousand dollars purchase price per month in most places (it will be more if there's been a bond issue approved or any number of other circumstances), so take the last three digits off the purchase price and that is usually close to your monthly tax liability. $250,000 purchase price? $250 per month. $500,000 purchase price? $500 per month.

By subtracting off all those figures, you get a range of monthly payments for the loan that you can actually afford. Call these A2, B2, C2, and D2. Armed with these and your credit score, you can figure out what kind of rate you might qualify for. Right now thirty year fixed rate A paper purchase money loans of no more than eighty percent of the value of the home can be had without points at something between 6.25 to 6.5 percent. Make allowances for a significantly higher rate for the last twenty percent if you don't have a down payment, and for the whole amount if your credit is below average, or if you cannot document income via w-2s or income reported to the IRS for the last couple of years. I've got an article here that might be helpful in gaging how much of a loan you'll qualify for. You can usually get significantly lower rates by being willing to accept a hybrid ARM (I've been doing it for fifteen years), but right now with the yield curve the way it is, the difference is marginal.

Knowing the payment you can afford, the interest rate, and the term of the loan, you can calculate how much of a loan you can afford. Knowing any three of principal, interest rate, payment, and term, a loan calculator can tell you the fourth. Do this with your four values, A2, B2, C2, D2, and you get four potential loan principal amounts, A3, B3, C3, and D3. These correspond to loan amounts where the payment should be easy, moderate, hard but doable, and a real stretch. To this, add any money you have available for a down payment, and subtract projected purchase costs (maybe $1000 plus 1 percent of home value). This gives you four values A4, B4, C4, and D4. These correspond to the purchase price of the homes you can afford under those four prospective loan amounts. You can then compare these amounts with what is available, and at what price, in those areas you might wish to buy.

Continued in Part 2: Process
Finished in Part 3: Consequences

Caveat Emptor


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