June 2006 Archives

Kelo: One Year Later

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A little over one year ago, the Supreme Court handed down the decision in Kelo, which held that the city of New London could condemn land to sell it to private developers in order to increase the tax base.

At the time, it generated huge amounts of outrage - the formation of Life Liberty Property, a group of about 100 websites being only one manifestation. Bills found their ways into various state legislatures whose stated purpose was stopping eminent domain abuse. A couple have passed, one or two have been rejected, most languished. Nor are any of the ones that have passed aimed at the root causes of eminent domain abuse.

Let's take a step back and look at the situation, which will tell us what the real problem is. Suppose there was no right of eminent domain? I realize such a question is rhetorical at best; for all the abuse and potential for abuse, eminent domain is an occasionally necessary power of the state. But let us consider, for a moment, what the situation would have been if there was no right of eminent domain.

Well, they New London Development Corporation or the developer they represent would have had two options. Either do without Suzette Kelo's property, or offer her a price so good she takes it. The price to change her mind might have been one million dollars, or it might have been ten million. Pretty much everybody has a price at which they will willingly sell.

Such an option would be extremely expensive, as is the other option, of doing without that particular property. Not only do they have to redesign everything, but now Suzette Kelo may have the grounds for a lawsuit. That factory wasn't there when she bought her property, and now it's making all kinds of noise at all hours of the night, generating excessive traffic, etcetera, etcetera, etcetera. It could very well be that the development hampers her enjoyment of her property, I'm pretty certain it would hamper enjoyment of mine in similar circumstances. Keep in mind that it's our tax dollars at work and at risk here.

The central issue, therefore, is money, our private property, not liberty. There is certainly a component of liberty in that we would love to be free not to sell so we could extort huge prices for a property that government or developer basically has to have. Furthermore, there is a little bit of pure greedy unfettered capitalist in the back of my mind asking why being able to extort the state is a bad thing? Cha-ching! But there we go, back to money.

In fact, the central issue of eminent domain is that the condemning agency does not want to offer an appropriate price that compensates the owner not merely for the expense of acquiring a comparable property, but the effort and expense of moving. Unless the property is already on the market, moving is not something the owner wants to do. It isn't cheap to move, and it isn't easy, never mind that if they're running a business there are all kinds of issues involved to make certain you don't lose clients when you move. Therefore, in order to motivate someone who wasn't planning on moving, a price above the market is appropriate.

Furthermore, the fact that condemnation is involuntary merits some compensation on its own. If you do not want to sell (for whatever reason) but are being legally forced to sell, the state should compensate you for the fact that your investment has been aborted.

Now, by way of contrast, real estate is expensive. Expensive enouth that any money the state and developers spend trying to play games with your evaluation will likely be money well spent. A while ago I wrote about a man whose family homestead - 105 acres that had been in his family over a century - was condemned for a new port terminal building in Houston. Initially, he got $1.9 million, reduced on the condemning agency's appear to one dollar. By contrast, for the new port down in Baja California, they are paying around $10 per square foot, and that's not in an urban area. At $10 per square foot, 105 acres would be $45 million dollars plus, and I suspect suburban property in the United States is far more expensive. Especially if it's got a commercial zoning.

Even for residential lots, the games are worth playing for the developer. Appraisals are highly subjective, and they can not only afford the appraisal, they can afford top notch legal help, and if they spend $20,000 but deflate the price $100,000, they come out well ahead. This is the sort of math they do, Their responsibility is to the taxpayers and shareholders, not the current owner of a property they want.

This is why I believe that the condemning agency should pay the legal fees and evaluation fees incurred by the victim of a condemnation suit. This can get to be some real money, money that not everyone has lying around, not to mention the fact that if the idea is to resist the suit, it doesn't seem important to conduct an evaluation. The victim of the suit didn't ask for their land to be condemned; if they had I strongly suspect they would be willing to sell.

Indeed, the point of this is to make it worthwhile for the condemning agency (or developer) to offer a good price for a voluntary sale. If they're paying legal and evaluation expenses for both sides, not to mention employee time tracking and coordinating and documenting the necessity, and because of this, the suit's victim can stop them from getting the property on the cheap, it becomes the most cost effective thing to do to offer a price where the owner will want to sell - voluntarily - in the first place.

Well, sometimes. Okay, most of the time. But not always.

Foreclosures: Bargain hunters beware!

Myth no. 1: A big spike in foreclosures is right around the corner...

...That's because in most of the country, anyone who has owned a home for even a year or two is likely sitting on enough equity to sell or refinance if the loan payments become unaffordable.

Used to be true. Not so much any more. When prices are going up 20% per year, this is true. When prices have slid about 10 percent since last year locally, anybody who bought for peak or near peak prices is in trouble, not to mention the folks in negative amortization loans that got into a situation where they can't afford the real payment, and now they owe thousands of dollars more than they paid. Nonetheless (as the article mentions) the banks want the loan repaid. They don't want to own the house. A "hard money" lender will foreclose fast and hard, but a regulated lender wants the loan repaid, and they'll pretty much take a loss anytime they foreclose, and it's always bad business, because it's always someone who won't use that bank, and who tells all their friends and family. The bank isn't going to have a representative there to tell their side of the story, so no matter how justified they were in foreclosing, it's bad for business. They will put it off as long as they possibly can.

It can take a couple of years after payments start being a problem before the lender decides to cut their losses and foreclose. Sometimes the individuals concerned go to heroic lengths to stay out of foreclosure, drawing out all their savings, even their retirements to meet the payment. They are usually ill-advised to do so; nonetheless I understand the emotional attachment that occurs. The peak for foreclosure is usually somewhere around the fourth year of the loan. Foreclosures are up now, locally, but look for them to start going up further at the end of 2007, as the option ARMs really took off in 2004.

Myth no. 2: Foreclosed houses sell for far less than their market value.

In a study of foreclosure sale prices in more than 600 counties nationwide in 2005, Christopher Cagan of data provider First American Real Estate Solutions found that, on average, foreclosed properties sold for about 15 percent less than comparable homes in the area that were not distressed. But in states where real estate prices have risen the most, including Arizona, California and Virginia, foreclosed properties sold for within 5 percent of full market value.

This is true. Furthermore, many foreclosure homes have maintenance and repair issues. If I can save my several tens of thousand dollars of equity by fixing the property up a little bit and cutting the price a little in order to sell it before foreclosure, I'll do it. On the other hand, if I bought it for $500,000 with a 5% down payment on a negative amortization loan, and now it's only worth $420,000, my investment is long gone, and any work I do and any money I spend is helping nobody but the bank. Some people may strip the copper out of the walls for scrap (I've seen what one such person left behind). Some people may even take a sledgehammer and break things in one last act of spite.

In highly appreciated areas, the auction is usually the worst time to buy. Get them from the owners before the lenders pile on all the default and foreclosure fees, while there is still something to save for the owner, equity-wise. Get them from the lenders as REOs after they fail to sell at auction. Depending upon who forecloses, that can wipe out entire trust deeds. For instance, if there's a first and a second on the property, and the first forecloses, that second is gone. Dust. History. Worthless paper with unimportant markings, basically good for fire starter. If it originally sold for $500,000, and there's a $400,000 first and a $75,000 second, but the property is only worth $420,000 now, that second holder is crazy if they show up to the auction to defend it, especially since the holder of the first has added thousands of dollars in fees, every penny of which gets paid before the second gets a penny. The second is unlikely to get a penny, and bidding on it is throwing good money after bad. It's a waste of an employee's time, if nothing else. For buyers at auction, there's a key phrase to remember: cash or the equivalent. You don't win the auction and then arrange financing; you have to have that first. This doesn't apply to sales before and after the auction. Nor does California's ninety percent rule.

Now, you are not (if you're smart) buying at auction sight unseen. You can usually make an appointment to see the property in the days before the auction. You should also look at other properties in the area. Know the market before you bid. Know what you intend to do with the property, know how much it's going to cost. Depending upon the law where you are, there may be a building inspection required, or perhaps you can take an inspector with you. This costs money, so you may want to preview once before you haul the inspector out there. Do your homework before you toss your money into the ring. That's what the people who make money at foreclosure auctions do. It's practically a full time job if you want to do well, and if you're not doing it all the time, a good agent is a lifesaver. Every situation is different, and it takes a certain amount of experience to know the best way to approach buying a given distressed property. You're competing with people who do this full time for a living. Ask yourself questions like "Why should I be willing to pay more for this property than Joe, who's been doing this for twenty years?" Auctions get crazy and emotional. If you have someone there to help take the emotion out of it, you are less likely to waste large sums of money. If you have someone there to help point out the pitfalls, you've probably just saved yourself every penny of their commission and thousands of dollars more besides. So long as they do what they say they will, of course.

Caveat Emptor.


I got a search hit for that and, amazingly enough after 150+ articles, I've never dealt with this subject head on. So here goes.

One point, either discount or origination, is one percent of the final loan amount. After all of the loan amounts and fees and what have you are added, for a loan with one point, multiply the amount by 100 and divide by 99, and that will be your final loan amount. For a loan with two points, multiply by 100 and divide by 98. The general formula is multiply by 100 and divide by (100-n) where n is the total number of points.

Points come in two basic sorts, discount and origination. Origination is a fee your loan provider charges for getting the loan done. Some brokers quote in dollars, most quote in points because it sounds cheaper than an explicit dollar cost. Most brokers out there charge one point of origination. To contrast this, direct lenders do not have to disclose how much they are going to make on the secondary loan market. And many direct lenders still charge origination. Judging the loan by how much the provider makes (or tells you they make) is a good way to end up with a bad loan. My point is that it's the rate, type of loan, and net cost to you that are important, not how much the guy is getting paid for doing your loan. Remember two things here, and they will save you. First, loans are always done by a tradeoff between rate and cost. For the same type of loan, the more points you pay the lower your rate will be, and vice versa. Second, remember to ask about "What would it be without a prepayment penalty?" It's a good way to catch people who are trying to slide one over on you, and the lenders pay a lot more for loans with a penalty, and the lenders make a lot more on them when they sell them to Wall Street, so they often do them on what looks like a much thinner margin until you ask the question "What would it be without the prepayment penalty?" Remember it.

Discount points are an explicit charge in order to offer you a lower rate than you would otherwise have gotten. To use an example I ran across today, six point five percent with one point, seven percent without. On a four hundred thousand dollar loan, that's essentially four thousand dollars, either out of your pocket where you're not earning money on it, or added to your mortgage balance where you are making payments and paying interest.

Is it a good idea to pay discount points, or is it a better idea to pay the higher rate? That depends upon the loan type and how long you keep it. Let's say the loan is $396,000 without the point, $400,000 with, just to keep the math easy. Your monthly interest charge on the first loan is $2310, on the second it's $2166. On the other hand, you pay $361 principal on loan 2, only $324 on loan 1. Here's the bottom line, though: You've got to get that $4000 back before you sell or refinance. Just a straight line computation, that second loan saves you $181 the first month. $4000/$181 per month is about 22 months to break even (and it's a little faster than that, because loan 2 pays off more principal per month). On the other hand, even after you've theoretically "broken even" there is a period where if you sell or refinance, you will inexorably lose money because you're paying interest on a balance that's higher than it would have been.

But now let's run the actual numbers. If the above loan is a thirty year fixed and you keep it four years, you're well ahead. You've saved yourself $6944 in interest and your balance is only $2159 higher. $6944 - $2159 = $4785. Even if your next loan is at ten percent, you're only losing $215.90 per year. Especially when you consider that at a cost of money now versus later, you'll never make it up, because you can invest that $4785 you saved and it'll pay more interest than that.

On the other hand, let's say the rate was only fixed for two years. After that, it is a universal feature of hybrid ARMs that they all adjust to the same rate. You are theoretically ahead by $363, but because of your higher balance, even if the loan adjusts to five percent, you're losing $154 per year due to your higher balance, and there is nothing you can do about it. Play now, pay later.

There is no cut and dried answer about whether it's to your benefit to pay points. I tend not to do it, myself, because rates do vary a lot with time, and money sticks around in your balance. If I've got a zero or low cost loan and the rates drop half a percent, it's worthwhile to refinance for free. If I have a loan I paid a point for, I'm going to have to pay that same point again to see a benefit on refinancing, and as we've already discussed, if you don't keep the loan long enough, you've wasted your money. The median time between refinances is right about two years right now. I see no reason to pretend I'm any different from everyone else, but some folks do have a history of keeping loans a long time. You need to make your own choice to fit your own situation.

Caveat Emptor.


Carnival of Liberty Recommended: Liberty Papers (contrasting EU and US Constitutions)


Israel masses forces near Gaza

The only thing I have to say is "What took them so long?"

LATER: Israeli troops enter Gaza

Maybe the Paleosimians will get the message the Israel's patience is not unlimited.

Captain's Quarters has some good information on the happenings.


Hallelujah! I have no desire to infringe upon smoker's freedoms, so long as they don't infringe mine. Unfortunately for those smokers out there who are considerate, it only takes one "You can't stop me from smoking" nitwit to ruin the environment for everybody.

Unsurprisingly, to anyone who has followed this issue:

The report says the tobacco industry has sought to cover up scientific findings on environmental tobacco smoke.

"The industry has funded or carried out research that has been judged to be biased, supported scientists to generate letters to editors that criticized research publications, attempted to undermine the findings of key studies, assisted in establishing a scientific society with a journal, and attempted to sustain controversy even as the scientific community reached consensus," it said.


Iran says will not benefit from talks with US

I'm not certain that this is the official response from the regime in Tehran. Khameini does have the real power, but he is not the President. Official or not, though, it does not bode well.


I can hear the moonbats now: Rush Limbaugh under new investigation Arrested for having Viagra, evidently prescribed by a doctor but in someone else's name for privacy reasons.


Honor the Threat


The most rational thing I've seen on the New York Times blowing national security wide open. I'm very interested in the identities of the people who leaked to the Times. Isn't that covered by the public's right to know, which they seem to hold above all other principles? These officials need to be relieved, and they probably need to spend the rest of their lives in jail if not have that life artificially shortened. This is treason, treason that stands to cost us any number of lives you would care to name, treason willfully and intentionally committed. I can't really see charging the Times for treason. They have signed no loyalty oaths, they have pledged no secrecy, and it is their job to sell newspapers, not to protect the country. But the people who told the Times about it have no such excuse. Nor does this mean we can't all simply decide to ignore the Times - stop buying it, stop supporting it, stop linking it. Stop supporting treason.

Michael Barone asks "Why do they hate us?"


I've also added a Google Search function to the site. This has two purposes. First off, you can of course use it for your searches, potentially generating me ad revenue if the stuff you pick is sponsored. Please use it only for stuff you are really interested in, though. I don't need $0.12 so badly that I need to cheat, or want you to cheat on my behalf. Secondly, it gives my visitors a way to search my sites specifically for a topic you may be having difficulty finding. If you can't find an answer to your question, please consider asking me directly via email. If I use it in an article, I will either keep you anonymous or link your site, as you choose. The search function is supposedly sanitized against adult content, and the results are supposed to open in a new window. They worked when I tried it. Let me know if there are difficulties.

Loans Not Funded

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I got a question about "what does it mean if my loan is not funded after right of rescission?"

It likely means your loan provider lied to you, probably from day one. Once you have signed documents, there shouldn't be anything but procedural matters left. Things that cannot be taken care of earlier. Things like final payoff coordination, the escrow officer using funds to pay homeowners insurance. Every once in a while, a good loan officer will get a subordination moved to prior to funding because it's on the way, but it is necessary to start the three day right of rescission now in order to fund on time under the lock.

Every once in a while, it'll be because of something happening to you in the meantime. Lenders who are risking hundreds of thousands of dollars don't just sit there and presume nothing has changed since the first time they checked it out. They are going to check again, right before they put the money to the loan, to make certain that nothing the loan was based upon has changed. So sometimes while they are doing a final Verification of Employment (making certain you still work there), the answer comes back that the borrower doesn't. The final credit check comes back with a score that no longer qualifies under that program. These are not the loan officer's fault, except inasmuch as they didn't warn you not to do whatever it was. Whether you quit your job or were fired, the result is no loan. So I always tell folks not to change anything about their life or credit without checking with me first. Neither I nor they can really do anything about layoffs, of course, but the point is not to voluntarily do anything that messes up your loan.

The vast majority of the time, however, what's going on is that the loan officer never had the loan. There's some condition holding it back that you, the borrower, can't meet. They have a choice between hoping to get around it or going out and actually finding a loan that you can qualify for and telling you about that instead. I shouldn't have to draw you a picture as to which choice they will likely make. Many times, they were teasing you with a loan that you had no hope of qualifying for as an incentive to get you to sign up. This is a standard "trick". They get you wanting that loan, which sure sounds good, and you apply. Unfortunately, that loan was never real, or never something you had a chance of qualifying for, but now they've got you signed up. Now you've done their paperwork, and you're mentally committed to their loan.

Now if it's an honest mistake, they are not going to have you sign documents. They're going to come back and tell you as soon as there is a condition they can't meet on loan qualification. But the question was about when you have signed documents and the loan doesn't fund. They can keep stringing you along, hoping it will happen, or they can come clean and tell you they can't do the loan. In the first instance, they might still get paid. In the second, they likely won't, because if you're smart you'll go elsewhere. Needless to say, this can waste a lot of time getting "one more document" from you or jumping through one more hoop. If the loan doesn't fund at the end of the rescission period and you are not certain as to why, you've probably been had. This is why I always tell people to ask for a copy of all outstanding conditions on the loan commitment before you sign final loan documents. Ask them to explain them, too. You see, once you sign loan documents and the rescission period expires, you're stuck with that loan provider. You can't go elsewhere unless and until they give up. Even if you have a back-up loan waiting to go, they can't do anything until the other loan funds or gives up, which could be weeks. Not a bad situation for an unethical loan provider to be in. In the meantime, the seller cancels your purchase and you're out the deposit. Or the rates go up and you're not getting a refinance on anything like the terms you might have really qualified for at the start of the process.

Caveat Emptor.


Carnival of Personal Finance

Carnival of the Capitalists Recommended: Econbrowser (local fuel regulations boosting price), The Coyote Within (the importance of mindset)


Since I learned about telomers, I've suspected this, but it's now scientifically linked: Key to long life may be mom's age at birth


The tip jar isn't paying for bandwidth, so in hopes of mollifying the World's Only Perfect Woman with the time and effort and money I put into the site, I've installed Adsense. Of course, the usual Caveat Emptor applies. I imagine quite a few of them are going to be exactly what I'm warning you against. Please let me know if there are difficulties.

RINO Sightings

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George Santayana Edition

"Progress, far from consisting in change, depends on retentiveness. Those who cannot remember the past are condemned to repeat it."

In order to stop speculation in the press which was helping the Axis, in 1943 General Eisenhower gave a press briefing confirming to the reporters in the American press that Sicily was the next target of allied invasion. He explained to them that if they printed it, it would result in the deaths of many American and allied soldiers. Not one reporter said a word, even to their superiors in the newsroom. The invasion of Sicily was a whirlwind success, capturing the island in less than forty days, and many papers were sold reporting the successes. Dean's World would like the press to remember that their best interest conincides with the best interests of the country. Our greatest successes spur the most interest in the news, but that is lost on the media, as he relates in What's Black and White and Treasonous All Over?

In the same vein, in 1941, the United States cracked Purple, a supposedly unbreakable Japanese code. The failure to warn Admiral Kimmel of the Japanese attack in a timely fashion was a failure of communication, not of knowledge, and our knowledge of it enabled us to predict Japanese intentions many times during the remainder of the war, most notably at Midway. Many in the press suspected US knowledge of Japanese communications, but nothing was printed or confirmed until years later, and the war was won. Once again, Don Surber notes our modern traitorous press has lost perspective of what is important in Superman syndrome.

In 594 BC, Solon became eponymous archon of Athens. After having his constitution accepted, he extracted the promise of the city that they would not amend it unless he changed it himself, and promptly gave up power and left Athens for ten years. Armies of Liberation wonders if Yemen's president Saleh relly intends to follow in his footsteps. Of course, Solon reigned for only a few years and gained power through the political process, where Saleh has been in power for twenty-eight following a coup. Read the comments for more perspective. Pardon me if I also link an update wherein it is confirmed that Saleh is in fact running, much like Julius Caesar may have intended to eventually accept Anthony's offer of the crown, never mind that Anthony was Caesar's subordinate and had no authority to make the offer. We can hope for the sake of the Yemeni citizens that the Ides of March arrives soon.

In 1896, populist William Jennings Bryan set the Progressive agenda in motion and won the Democratic nomination for President with his Cross of Gold speech, saying things remarkably similar to much of what Hitler rode to power thirty-seven years later, but he was not a fascist (although modern american atheists might disagree with me). Enrevanche makes the same sort of comparison in Speaking of Godwin's Law...

In 1485 at the Battle of Bosworth Field, William Stanley turned his coat and the tide of battle, causing a defeat that was fatal to both Richard III and the Yorkist cause. Today, Commissar over at Politburo Diktat documents The Selling-out of Paul Hackett, which may be fatal to the NutRoots™, at least in Ohio.

In 105 BC, possibly in defiance of existing law and definitely in defiance of tradition, Gaius Marius was elected consul for a second term in order to deal with the the threat of the Cimbri. After he defeated them, he was elected to consul several more times, and his political manoueverings to hold onto power, particularly his struggle with Sulla, laid the foundations for the death of the Republic. So it is in modern context as Ex-Donkey wonders Superman Returns"...Is That A Good Thing?

The earliest recorded comedy is base doggerel, mostly sexual and always animalistic in nature, as we are reminded by these submissions from Blogger Ale, as well as this one from Avant News

Satire, by contrast, owes its origins to the fact that the person of the bard was sacred in the original heathen traditions of northern and western europe, thus preventing the satirized strongman from wreaking bloody vengeance upon the speaker. Which is probably a good thing for Morgnet.

In contrast to the (sarcasm on) horrible chauvinistic eurocentric custom of letting the opposition speak, (sarcasm off) Jawa Report notes that it is still under a distributed denial of service (DDOS) attack from the "enlightened" followers of Wahhabism. Since he is under DDOS attack, don't click the link which is simply to show support; there's no article there (and your chances of accessing the site are dim). Of course, those attacking him are still crazed whack jobs and you can still read about their nefarious deeds many other places. Only a couple billion people must realize how sick those attacking him are. It must make them feel good to temporarily shut one of their innumerable critics down. I hereby present them with my Leaky Sieve Award for Ineffectual Censorship. Which incidentally, is also failing in China and all of the other totalitarian regimes who can't bear to cut themselves off from civilization entirely.

In the middle of the nineteenth century, some Americans felt other americans were overstepping the bounds of the freedoms guaranteed them as Americans in that these fellow americans were keeping their fellow human beings as chattel slaves - personal property, to do with as they pleased. Our most vicious conflict today was fought over this issue, resulting in, among other things, the Fourteenth Amendment. Today, many americans feel that other americans are taking their freedoms too far, by forcing everyone around them to breathe their voluntarily created cancer causing and malodorous tobacco emissions. Some say it is big brotherish (both an ad hominem attack and a red herring, by the way), but I agree with legal redux in that I have no objection to someone killing themselves with tobacco, but when it comes to forcing others to abide the results of their pollution, I believe a strong line needs to be drawn. Not exactly chattel slavery for life, one must admit. Nonetheless, inconsiderate smokers ruin many people's enjoyment of the public environment by failing to respect the rights of others to enjoy their lives, different only in degree, not in kind, from southern slaveholders.

In the eighth through fourth centuries BC, the cities of what is in the present day Greece planted colonies from North Africa and Spain to the Ukraine and Armenia. They mostly brought civilization to barbarous lands, and even when there were existing civilizations, greatly helped the cause of order. By contrast, the colonization efforts of today are largely from less developed countries who nonetheless have high birth rates to more developed ones who have low birth rates. Techography notes exactly how strong this movement has become.

In 1787, representatives from the 13 states met in Philadelphia in what is now known as the Constitutional Convention. Remembering what was one of the colonists causus belli against Great Britain a dozen years before. Indeed, the british attempt to disarm the colonists was the precipate flash point behind the battles of Lexington and Concord that started the American Revolution. Therefore, they attempted to insure against the new federal government attempting to disarm its citizens with one of a series of proposed amendments to the new Constitution, called the Bill of Rights. Indeed, it was the second (out of twelve) of these to receive the necessary approval of the states, and henceforth became known as the Second Amendment to the Constitution. Classical Values notes that this amendment is still needed today, although largely from international pressure (Guns in the hand of the populace being a chief nightmare of the oligarchs and totalitarians that still make up the majority of the UN).

At the beginning of the 1960s, Dr. Martin Luther King Jr., facing an entrenched white power structure that had an interest in keeping minorities from participating in the political process, decided to emulate the tactics of nonviolence which Mohandas Gandhi has successfully used in India. Going Mr. Gandhi one better, his towering personal dignity helped convince ordinary Americans that the only decent rational thing - the only American thing to do - was to demand that those people represented by Dr. King receive a fair shake in the political process, the same access to voting and the same ability to run for office that any other citizen possessed. In 1994, minority Hutu extremists amassed weapons and carried out a genocide of between 800,000 and 1,100,000 Tutsis and moderate Hutus, who then proceded to turn around and militarily take over the country and turn the genocide around against those extremist Hutus who had initially carried it out, hounding the survivors out of the country. In 2006, facing a political climate of opportunity and equality, minority black extremists were planning their own army and plotting their political dominance. Inside Larry's Head takes a look at the story.

Pretty much everywhere in the ancient world, the will and whim of the monarch was law and fact. There was no-one able to force the monarch to debate and so the welfare of the nation was subject to whatever was easiest for the monarch at the moment. It is no accident that as the ability of the people to force the power structure to pay attention to overall needs of the nation, that nation's fortunes have increased. The Original Blog someone being unwilling to debate net neutrality, acting much like the monarchs and strongmen of non-democratic nations.

The ancient greek philosophers believed that there was no need to experimentally confirm the results of their thinking, as the universe was perfectly reasonable. Indeed, the person who proved the existence of irrational numbers was asked to take hemlock by the Pythagorean Society. Learning the lesson of your mental map not conforming to the territory is one of the hardest lessons, and ongoing even today, as Politechnical notes that the lesson is ongoing.

On much the same subject, one of the primary human activities since the dawn of time has been trying to get other people to pay, or pay more for, economic activities that they produce anyway. Your host at Searchlight Crusade has a few things to say on the subject.

When its elites had a tradition of service in order to obtain power, Rome conquered a large portion of the world. When its elites started thinking only of evading their share of the burdens of society, Rome fell apart. Pigilito Says notes that German patriotism is once again acceptable to most Germans, after several decades of atonement for their national deeds.

Throughout human history, the tendency has been to lionize those who accomplish great or risky deeds in wartime. This has the effect of rewarding behavior that is not necessarily in the best interest of the individual involved, but is in the best interest of the civilization. A civilization without defenders, or without enough defenders, is soon overrun. In the last forty years, the guardians of our public discussion have refused to honor our real military heroes while playing up the misdeeds of those who happen to be soldiers. This has the effect of fewer people willing to be defenders of our civilization, and practically none from the intellectual elite. It took thirty-five years before a movie showing real world American military heroes from the Vietnam era in anything like a positive light was made, and that by an Australian. Contrast that with World War II, where innumerable films were made soon after the events they were based upon, and they have continued to be made to this day. Tinkerty-Tonk slides in with a last minute entry upon how the marketing of the war by our guardians of public discussion has affected its public perception.

Next Week's Host: enrevanche

Hi Dan wondering if you could help me out I'm getting a lot of different answers from a lot of people and I'm really searching for help I bought my house brand new (three years ago) for 550,000, and (the next year) I refinanced into a mta loan. which at that time was around 4.25% and now is 7.125%. I have a hard prepay of $12,000.00 which expires in (fifteen months) house just appraised for $775,00 balance on 1st loan 440,000 balance on 2nd 148,000. should I ride the next 15 months out to avoid pre pay or refinance now into a fixed. The rate on the second is prime plus zero.

First off, a disclaimer. A precise infallible answer depends upon the rates when your prepayment penalty expires, something that is not currently known. I think thirty year fixeds will be in the low sevens, but I might as well be sorting through animal entrails to get that answer. I also think that the five year hybrid ARMS will stay about where they are, or perhaps even decrease a tad once the fed announces that they are done with hikes. But I don't know; nobody does. It also depends upon what comparable homes are selling for then, which determine your appraisal, and how long you keep the new loan.

Your rate moving like that is one of the reasons I recommend so strongly against negative amortization loans. The person who did your loan at the time had to know that, due to the nature of the mta yours is based upon, the rates were already set to rise into the mid fives for certain, and likely further, as older months were dropped from the average in favor of newer. Were it fully explained, would anyone rational agree to take a loan where you get a lower rate for six months, but then the rate rises inexorably, as the treasury rates the loan is based upon had already been rising, to a level that is well above what is available on A paper three or five year fixed? And with a three year prepayment penalty, so you're in precisely this sort of situation?

"No points" thirty year fixed rate loans are sitting right around 6.75 right now, and you're at 75% Loan to Value. The bad news is you're definitely a jumbo loan, as the conforming limit is $417,000. This boosts your rate a tad, depending upon the lender, to 6.875 or 7.00 percent without points. I prefer to discuss loans without prepayment penalties or points, but it might be in your best interest to pay a little to buy the rate down if you refinance. I'm going to use seven, as it makes the math slightly easier.

The good news is your loan to value ratio. According to the numbers you gave me, you're below 80 percent, even with the prepayment penalty. You owe $588,000 (If you bought for $550,000, the turkey did this negative amortization loan scammed you out of a lot of money), and the prepayment penalty boosts this to $600,000. Assuming you have enough liquid reserves to put up the money for interest and impounds, this means the costs of doing your loan are going to put you at about at $605,000 new balance (perhaps a bit below, but let's keep the math as friendly as possible).

Basically, it cost you $17,000 to save yourself an eighth of a percent on the interest rate. Under more normal circumstances, I wouldn't even put that one through the calculator. No way that's in your best interest. But your real rate on that MTA is going to keep rising - by at least another quarter percent due to increases already on the books, more likely half. I'll use 7.5 as your mean rate. Furthermore, the second is at 8 percent, likely to soon be 8.25. Monthly interest under the current loan at that rate: $2750 for the first, $987 for the second as it is. Monthly interest on the new loan, $3530. It saves you $200 per month in interest, albeit with a higher payment, $4025 as opposed to what you've got now. I am assuming you have documentation that you make enough money to justify the loan in the underwriter's eyes, and that your credit score is about average. On the other hand, divide $17,000 by $200 per month, and you get 85 months to break even on the cost of doing it.

However, this decision does not take place in a vacuum. You can't let that negative amortization loan go forever. In fifteen months, I think equivalent rates will be about 7.25, which translates to 7.5 percent for your loan. Furthermore, I believe prices will be a little lower then, so in order to refinance, you're likely to have to split into two loans. Assume prices are 10 percent lower. Any of these prognostications is an educated market guess, no more, and I could be way off. The appraisal would come in just under $700,000, but let's say $700,000. Your first, for $560,000, would be at 7.5%, and for your second, I'll presume you get a new HELOC on the same terms, on which the balance would be about $33,000. Interest on first and second, at 7.5% and 8.25% respectively, comes to $3500 plus $227. The payment on the first would be $3915, plus $227 (assuming interest only HELOC) for a total of $4142. So $12,000 saved if you wait, versus about $200 per month less in interest charges per month if you dive in. Divide that out and it comes out to 60 months. Five years. If you keep the new loan five years, approximately, or more, you'll be better off refinancing now. If you keep it less than five years, you're better off waiting is what the calculations say. Plus chop off the $200 per month you save starting right now for the next fifteen months, and the answer turns into forty five months or a little less, being your time until break-even.

I'm a reasonable risk taker. Were I plopped down in your situation, I have to tell you I would probably hang tight until the prepayment penalty expires. Roll the dice and bet on my personal ability to come up with a good loan. On the other hand, you may not be as much of a risk-taker as I am. The stuff I quoted you for refinancing now is available now, no suppositions about it. The rates could well be higher in fifteen months than I have estimated, perhaps much higher, or they could be lower (although I don't think so with increased federal borrowing). You need to decide what your level of comfort is. If you're the sort that is averse to risk, refinancing now could pay for itself just in peace of mind, because you're not worrying about it. That's why I always offer a 30 year fixed rate loan, no matter how wide the interest rate spread is between that and my favorite hybrid ARM. There are folks who just won't sleep nights. The difference comes out to about $7 per night, and my sleep is worth more than that, so I presume yours is, as well.

Caveat Emptor.


Navy Missile Intercept Test Successful Good. Looks like we need it more than ever. Japan evidently agrees.


The real agenda slips out: No Iran nuclear suspension even after talks: official. In short, they are not willing to suspend enrichment. The long delay in responding to the request for negotiations is simple more Fabian tactics.


Killing scares media away from Waziristan. He had reported something contrary to government pravda, that a US missile had blown up a terrorist rather than the official truth that said terrorist blew himself up. So the Pakistani government wants it kept quiet that there's mutual support between them and the US. I understand why. It's difficult politically for the Pakistani government, factions of which are working with Al Qaeda.


An expansion of automated appraisals? Lenders set to launch the 'five-minute mortgage' If you read the article with a professionals eye, you learn that's all it is. Unsurprising, and yet appraisals catch a lot of fraud. On the other hand, appraisers are a significant source of fraud themselves. Nonetheless, the incentives for appraisers that want to stay in business are all solidly on the correct side of the equation. Electronic evaluation services are pretty much worthless; I haven't found one where they are reliably close to real market evidence (by which I mean actual sales and failures to sell). The best you'll get is recent sales and current market prices supplemented by someone familiar with the market. In other words, an agent who looks at what has sold and what's out there on the market and makes a professional estimate. Even that is subject to the possibility of an ulterior motive. Today they say "list with me and I can get $40,000 more than anyone else." They lock up your business for six months, and six weeks from now they are pressuring you to reduce the price by $50,000. Ask people who make such claims to back them up with solid evidence of their success: properties that sold for full original listing price. Original listing contract and final escrow statement for each property they so claim. Hint: They don't have these documents, because such claims aren't real. Look for they agent that's going to market in such a way as to find the buyer who is looking for your property, not the person looking in the MLS for the below market property they can flip for a profit. A monkey can make that sale, and many monkeys want to.


"what happens at foreclosure if the appraisal is wrong" was a search I got today. The answer to this is short and sweet. The appraisals lenders get are intentionally conservative. They want the property to sell; they don't want to own it. Since the minimum foreclosure sales price in California is 90 percent of the appraisal, they want that minimum bid low. It costs them more to take over the property and sell it normally. This is one of the reasons you don't want to go into default if you can help it. See

What Happens When You Can't Make Your Real Estate Loan Payment?


President Bush has come out on the correct side of eminent domain, albeit in limited fashion. Now if he only he'd put a stop to the money side of the abuse, I'd believe he was serious.

Volokh Conspiracy details the shortcomings of the administration plan. It's a "look like you're doing something" thing.

I proposed a solution in this article that I believe would stop abuse dead. Of course, since big business and wealthy individuals who are likely to benefit from abuse contribute to political campaigns, nobody has yet taken it up.


Bernanke, US Fed face conundrum on rates. Kill the loan market if they raise rates, watch inflation fester if they don't. This is why I think they should make haste slowly. They shouldn't have gone as low as they did, and now they shouldn't be as high as they are on the overnight rates. Hint: Bernanke et al are bankers first, economists second, and a bankers worst nightmare is inflation. They'll raise the overnight rates some more.


Dr. Sanity contrasts the reports of WMD discoveries that the administration has downplayed to its considerable political disadvantage because it meant fewer problems winning the War on Terrorism. Fewer casualties. More informants. How mature of them, especially in contrast to their political opposition.


Hugh Hewitt has a letter to the editor of the New York Times from a servicement in Iraq. I cannot agree that the reporters or editors of the New York Times deserve to be in jail - unless they refuse to name their sources. It's those sources who need to be out of government employ and into jail and sued for every penny they have.


Volokh Conspiracy notes that the Department of Justice has requested a court hold the ABA in contempt for its accreditation procedure and the fact that said procedure is basically illegal.


Captain's Quarters notes that the amnesty offer for terrorists in Iraq is essentially dead, having been rejected by various groups. I thought is was likely a political play, removing all possible sympathy and sympathizers from the enemy before handing them their heads. Why fight them when you can co-opt them? Now that the offer has been made and rejected, there is no longer any pretense possible. Anyone who is fighting the government of Iraq now has shown themselves to be not interested in the political process.


Family went to Nighttime Zoo today. Got some good pictures and I'll try and share them tomorrow (later today).

Be sure to stop back on Monday when I have RINO Sightings again. This will be the Georges Santayana edition.

Tomorrow will have a new article, but Monday will be for RINO Sightings.

"challenging underwriters mistakes in housing loan paperwork" was a search that I got.

You can't challenge them. Butting heads with an underwriter is stupid and counterproductive. There's only one person who gets a vote, and it's not you, whether you are an applicant, processor, or loan officer. The underwriter may not be the original application of the saying "a majority of one," but it certainly fits the situation.

Now keep in mind that as an applicant, you will never communicate directly with your underwriter. It is an anti-fraud measure constant throughout the industry. If someone tells you that you are talking to your loan's underwriter, either they are lying or the loan has just been rejected on procedural grounds.

If a loan officer believes that the underwriter has made a mistake in the underwriting of the loan, it is far more constructive to find out what it was - on what grounds the client was rejected. Actually, loans usually are not flatly rejected, they simply come back with conditions the client cannot meet. A loan that actually gets rejected usually has further adverse consequences for the borrower's credit, and is usually pretty good evidence that the loan officer was promising something they couldn't deliver.

Now it happens that underwriters, like loan officers miscompute things, miss things, and misconstrue things. This is one of the hardest lessons for a loan officer to learn: NEVER tell the underwriter anything that they do not absolutely have to know in order to approve the loan. The client has a rich uncle that gives them $10,000 every year? The client makes millions in the stock market as well as their salary? The client simply has millions in assets and they could buy the property for cash if they wanted? I wouldn't breathe a word of any of this to the underwriter. Not a peep, if I had my druthers. The underwriter will start asking all kinds of questions, asking for all kinds of documentation, both on the existing assets or income and on the likelihood of it continuing. If you're familiar with how the stock market works, you might have an appreciation for how hard it can be to prove that you're going to have income from it in the future. That underwriter isn't interested in trends or suppositions or even the fact that it's happened the last twenty years in a row. They want proof it's going to happen in the coming years. When accountants won't write a testimonial (trust me, they won't), you're probably out of luck.`

Now sometimes the underwriter comes back with conditions that are beyond the bounds of reason. Dealing with this is part of my job, but it's more akin to a negotiation than a confrontation. I've got to get them to tell me what has them concerned, and see if there isn't some other way to reassure them. Remember, if the loan goes sour, both the underwriter and I are going to hear about it. It may cost them their job, and I may have to come up with thousands of dollars to pay the lender. Not to mention that the client isn't exactly happy. The underwriting process, properly used, is as much for the protection of the client as the lender.

So what I've got to do is find out what concern caused the underwriter to place this condition on the loan, and then a more reasonable alternative may suggest itself. If you ask in the right way, conditions can be changed if the request is reasonable. But you've got to know what you're doing. If the alternative you suggest does not adequately address the underwriter's concerns, they are within not only their rights, but also in full compliance with regulations where you are probably not, to refuse to make the change. Sometimes the underwriter and the loan officer disagree as to the computation of income, for example. By definition, the underwriter is right - unless I can persuade them that my way is better. Just human nature, you can't do that by challenging them, you have to persuade.

Now it is possible to run into an intransigent underwriter. That's one reason why brokers have the advantage over direct lenders, who are stuck with the same group of underwriters all the time. I can pull the loan and resubmit it elsewhere. Given that particular lender isn't going to approve the loan anyway, they won't fight too hard, although on several occasions I have had the lender come back and issue an exception on their own when I do that, but the ability and willingness to actually take it elsewhere is essential to this. And it is sometimes possible to go over a given underwriter's head and get an exception from the supervisor, but it tends to poison the well when you attempt this, whether it is successful or not. When you're asking for special consideration for your clients, they tend to look much harder at all of your clients. I've seen a couple loan officers talk themselves into one approval through an exception with the supervisor, only to have their other loans that were going through smoothly kicked back out for further underwriting. So you have one happy client, and three or four that otherwise would have been happy and who now are not. Sounds great if you're that one client, but how would you like to be one of those three or four others? Not a good situation for anyone to be in. Taking the approach of collaboration works better.

Caveat Emptor.


Carnival of Investing


On this day in history: Kofi Annan gets one right. It is an appropriate metaphor, as more and more countries move towards acquisition of nuclear weapons, the controls on them getting into the hands of terrorists and revolutionaries rises. Nothing scares me like the thought of some terrorist or "champion of the people" getting their hands on ABC weaponry (particularly Atomic or Biological). A state actor, no matter how tyrannical, has controls and limitations and reasons not to use such weapons (The chief of which for most, I might add, is that the larger nuclear powers would open the entire six-pack of "Whup-***" in response). A non-state actor has fewer constraints, and nothing to lose. You can't respond to a nuke from such a source with another nuke. If Al-Qaeda nuked one of our cities, it would do us less than zero good to respond in kind. This is one of the reasons I don't want Iran to get nukes while the mullahs are in power. It is entirely within their stated beliefs to hand one over to Hezbollah or Al-Qaeda with the intent of detonating it somewhere in the heartlands of the countries they consider to be their natural enemies.

Which is why this is important, and a good idea for the US and other industrialized countries, as it binds India with more incentives to be responsible about its nuclear materials. US Congress moving toward action on US-India deal


I see that the trend towards hiring hackers to find computer security weaknesses is continuing. Want to outwit hackers? Hire an ethical one. Other than just not allowing remote access, it really is the only way.


Expect to see more and more of this Police launch eye-in-the-sky technology above Los Angeles. Expect it to get more and more automated, as the price for such things plummets and people get more expensive. They're going to be on streetlamps, and centrally coordinated, before too long. Private entities are going to put them up, also. Outlawing it would just drive it underground, and make the bugs harder to find, and the people using them harder to trace. But if we enact controls aimed at allowing us to know they're around and who is using them, and giving us the ability to monitor those users, they will be a beneficial technology.


Angry in the Great White North has a good article about the prospect of the North Korean missile test.


OK So I'm Not Really A Cowboy has a good article on affirmative action.


Expensing lap dances is over the top, but Unrepentant Individual shows he understands the importance of the sales department.


Q and O has an excellent article about the Iraqis moving towards force withdrawal.


Regarding the death by torture of two american servicemen, Argghhh! has it right. The Germans and Japanese were into reprisal killings. It did them no good. They will do us no good. They are no deader than any of the others who have shed their blood in our cause. If the perpetrators are captured, by all means put them on trial and shoot them if convicted. But it does not do honor to the memory of those men to talk of reprisal killings. That is not what this country is about. If it were, I'd move elsewhere and start rooting for her enemies.

I was thinking of a different piece of fiction than John was, however. The Gordon R. Dickson story "Brothers" is an infinitely better description of the American soldier, science fiction or no. If you haven't read it, you should. It's part of his very popular Childe cycle ("The Dorsai books"), so it's pretty easy to find one of the collections it's in. As I remember, it is usually packaged with "Amanda Morgan," a tale of the difference between free people and the tyrants who would rule over them. Those who would be slaves will never get it, but I wouldn't expect them to.


Here's the source of the allegations that Daily Kos is the subject of pay for play. NRO:'s The Plank.

Okay, pop some popcorn. But I can't really take the NutRoots™ seriously. Even for this, to grant it relevance is to concede the NutRoots™ more than they are due.


Stop the ACLU notes that the Pentagon is going to charge 8 servicemen (7 marines and one navy corpsman) with murder, and describes the interrogation techniques used. We can't do this stuff to civilian felons or terrorists. Why can we do it to Marines? Because they're better men than terrorists?


via LGF, Document Details WMD Recovered In Iraq, Santorum Says. Now Rick Santorum is in a world of hurt, politically. He is the least popular member of the senate with the home state voters. So he has a motivation to invent things like this. Nonetheless, this looks credible. Over 500 Sarin filled shells. It is also consistent with other things I have linked here.

Now, should the weapons be verified, we know that the leftist chants of "Bush Lied" will stop, right?

They say everyone needs one good laugh per day. I try to help.

Captain's Quarters has more. It's starting to look solid.

This is very troubling. Give me bandwidth! You know that right and left wing are equally willing to use the government to abuse the people, just for different things, but this is a right winger suggesting the use of eminent domain to condemn the telephone lines? Better to simply revoke the monopoly status and give anyone else the right to use the same public easements that the current companies have. Because the one thing worse than a government granted monopoly is a government run monopoly.

Ladies and Gentlemen, both sides in the net neutrality debate are engaging in rent seeking behavior. The content providers want to use the wires at for free. The telephone and internet companies want to skim some fees off them.

The person being forgotten in the war is the consumer. I have digital broadband through the cable company which usually exceeds the 10 Megabits that the author above laments ever achieving. I pay the monthly fees gladly. But I pay those fees with the expectation that whatever content I might choose will all be delivered to me at that same speed, whether it's news, static text pages, or huge media files. If it's a 100 Megabyte media file, I should have a clue that it's going to take longer to get to download than a static 2 kilobyte text file. But the ISP has been paid to deliver that content to me. I paid them. The bill is already paid, and for them to attempt to extort more money from the content provider can only raise the fees the content providers would have to charge me. The online content providers don't pay such fees, the users do.

Now were someone to propose an ISP where the access is free but the costs are paid by the content providers, or through advertising riders, that would be quite reasonable. However, such business models have been tried and found to have limited success at best. Indeed, such providers tend to be some of the largest sources of spam around, as spam-meisters are always shifting the costs of their operations onto others, shifting the costs of access as well is no large jump. If you are using such a service, particularly for email, it should be no news to you that the majority of your outgoing emails get automatically tagged as spam, as the filters at your destination are well aware that these providers are the source of a large proportion of the world's spam (My bet for the first verified message from outer space? "Hot Andromedan Grrllz! Go to uww(universe wide web).pr0n.com!")

But with consumers willingly paying the bills of bringing the content from the providers to themselves, neutrality of content is precisely what we are paying for. Whatever that content is, it should have precisely the same priority as any other data. For the ISPs to attempt to extort more money from the content providers (and by extension, from their own consumers who have already paid for this access) is a violation of our contract with them. I know I didn't sign up with my provider for internet access with preferred content providers, I signed up for the entire internet, at equal access priority, all dependent upon what I choose to look for, and I suspect you did the same. If ever that deal changes, I'll find a different internet provider. I suppose I'm siding with the content providers, but only because doing so coincides with my support for the free market and consumer choices and the fact that the bill for access has already been paid, and so would you ISP extortionists please go away? If the content providers have to raise their prices because my ISP is charging them extra, I'll find another ISP provider. The government's role should be limited to making certain that my choices are not artificially restricted.

My aunt is going to move to a new condo and wants to sell her old one. I would like to buy her old condo as an investment and rent it out (as I am already a home-owner). This whole investment/rental buying is all new to me.

She has lived there about 5 years and the value has increased more than double. Obviously I would love to be able to keep her tax base. I am thinking about getting an interest only loan to help me get into this. Can I get a loan for 100% of value? My aunt will need the entire amount to purchase her new place. What suggestions do you have to make the loan process easier and pay the least amount in fees?

It is worth between 360,000 to 390,000 (we haven't yet got an appraisal, this is from comps in area). My wife and I currently have a house in (City) with a value of 650,000 and a mortgage of 400,000. We both work and have some extra income, maybe 400 a month that we could supplement against a renter. I think we could qualify for the loan, but then we would have to refinance our house to cover a down payment and closing costs. We don't have any savings to pull from. My wife hopes to retire in 2 years and I will in about 8 years.

Investment property is a different item from a personal residence, in several particulars. First off, even if it's residential, the loan is a riskier one to the lender. A loan on investment property is going to carry a surcharge of 1.5 to 2 discount points (one discount point is one percent of the final loan amount), over and above any other charges for the rate you choose. Furthermore, despite a lot of research, I don't know a single lender that will do a loan on investment property for more than 95 percent of the value, and most of them will only go 90 percent. The ones who will go 95 percent typically charge higher rates, and are to be avoided if you can. So you need a down payment of at least five percent and preferably ten.

The good news is that whereas you do not have savings to pay it, you do have a considerable amount of home equity. Depending upon your exact situation, either a "cash out" refinance or just taking out a HELOC (Home Equity Line Of Credit) might be in your best interest. It depends upon your current mortgage and your credit, and I cannot make a recommendation one way or another without looking at the market you're in for current comparables, running your credit, and seeing what can be done. If you've got good credit and income, and have had the good credit and income for some time, it's more likely to be in your best interest to simply take out the HELOC. I have some without prepayment penalties and are zero cost. If your credit or income has improved of late, it may be in your best interest to refinance, or if you've got an ARM that's about to adjust anyway. Assuming you're "A" paper, you may now be a conforming loan where you would not have been when you took it out, although taking the cash out could cause you to exceed, once again, the conforming limit.

Cash flow is also an issue with investment properties. If you don't have a tenant, you get zero credit for the rent at initial purchase from A papeer. If you do have a potential tenant, with a signed lease for at least one year, the lender will give you a credit of seventy-five percent of the proposed rent towards your cost of owning the home (principal, interest, taxes and insurance). Some subprime lenders will credit you with ninety percent, but their rates are typically higher in compensation. With the vacancy rate in urban California being about four percent, even ninety percent is a bit low, but the standards are what they are. I know many people who are making money hand over fist on rentals where the bank thinks they are paupers.

Now there is no such thing as an easy documentation investment property. Indeed, for any loan, for all real property you have to show the full breakdown for each property you own. You can state your overall income in most cases (and indeed, most folks with investment property have to do stated income due to the cash flow computations being so restrictive.)

In urban California, however, prices have gotten so high that I do not recall the last time I saw a single family residence being purchased for rental purposes that "pencilled out" with a positive cash flow. As I said in my article Cold Hard Numbers, this is one of the things that convinced me California real estate is overvalued.

Now, as long as you have the cash flow to last until rents catch up, this is fine. But you need to be very certain that you do have that cash flow. If you're buying for $360,000, this is a first loan at about 6.75 percent right now of $288,000, which gives a payment of $1868. Additionally, there's going to be Homeowner's Association dues of probably about $200, and taxes (assuming no Mello Roos) are about $375 per month, or about $200 if you can keep your aunt's tax basis. That sums to $2443 or $2268 if you can keep her tax basis. Now ask yourself how much similar units are renting for? If it's less than $2050 (or $1875 if you can keep the tax basis), your $400 per month isn't going to make up the difference. You might consider a negative amortization loan in this circumstance, but be advised that you're eating up your investment every month, the real interest rate is actually higher than the 6.75 percent, and prices may go down and not recover for several years, leaving you holding the bag for a big loss. It's a risk some folks are willing to take, others are not. I'm willing to do them for people in this situation, but only after I explain all the pitfalls (Option ARM and Pick a Pay - Negative Amortization Loansand Negative Amortization Loans - More Unfortunate Details cover most of them). Usually people who have been informed of the pitfalls decide that these loans are not for them, which is one of the reasons why I question whether the risks have been adequately explained to the forty percent of all local purchases being financed by these.

Indeed, given the fact that you're going to have to make payments on the Home Equity Line of Credit as well, it's difficult to see how your $400 per month of extra cash flow is going to stretch to cover. If your credit is decent, I can get you into the property, but that's not exactly doing you a favor if you find it impossible to make the payments.

Caveat Emptor


Carnival of Personal Finance

Carnival of the Capitalists Recommended: Liberty Papers (changing business climate brought on by the internet) Insureblog (going foreign for medical treatments), Stingray (Some inconvenient facts about global warming) Jon Swift (Some humor about Mr. Gates' impending retirement)

RINO Sightings (Afraid I haven't had the chance to go through it yet)


There's a bit too much gloom and doom in this article: Foreclosures may jump as ARMs reset, but it does raise some valid concerns. I'm a big fan of hybrid ARMs that are fixed for three, five, or seven years prior to adjusting. Right now, due to the yield curve being inverted, there is essentially no difference in rates between a thirty year fixed rate loan and a 5/1 ARMs, but over the last fifteen years, I've used them to save myself and my clients thousands of dollars each. But you need to have enough equity in your home in order to refinance, and you shouldn't stretch too far to buy your dream home, lest it all come tumbling down in the first bad event that happens to you. I've talkied about this before, most recently in this article.

"I was a first-time buyer. I was blind. I didn't know what questions to ask," she said. "And the mortgage brokers are there telling you what you want to hear just to get you in the mortgage."

Questions You Should Ask Prospective Loan Providers


Army Charges 3 GIs With Murder in Iraq. This does not appear to be the Haditha incident, but rather a separate occurrence, and brought on by the Army's own investigators. Keep in mind that they are only charged, and have not yet had an Article 32 hearing, but if they are found guilty, I do hope they are hung or shot.


Bush: Iran must stop uranium enrichment


Argghhh! has a bit worth reading on deserters.


Well, today marks the official one year of this site. Thanks to all who drop by.

Not interested? Most people aren't when it's talking about how they got taken advantage of in the past. First off, it's in the past so it is over and done with, and there's no use dwelling on it, right? Second, there's the ego thing. Nobody who's been bragging about what a great deal they got likes to find out they've been had. Taken for a ride. Conned. Big time.

Anyone reading this who isn't interested in improving what happens next time can tune out now, because that's what the rest of this article is about: educating you in how to shop for a loan and what the tricks are, and if you've never had a real estate loan but want one someday, chances are you'll benefit from reading it to. If you're the sort of person who isn't interested in improving your future loan, chances are you're not a regular reader because helping folks understand their financial options for next time is the most consistent thing I do here.

On a very regular basis people tell me how they got taken advantage of by a loan provider. Actually, a lot of them think they're bragging about what a great deal they think they got, when in their situation, I wouldn't take that loan if the bank paid me. High points charges that stick around in the balance essentially forever. Points on hybrid ARM loans (3/1, 5/1 and 2/28 are the most common). Prepayment penalties, especially needless prepayment penalties, or prepayment penalties that last longer than the period of fixed interest rate. Fixed rate loans where hybrid ARMS are more appropriate. Long terms where a shorter term would be more in your best interest. Most loan officers are looking for an easy sale, and no loan officer ever complains that a sale was too easy to make. Failing an easy sale, they'll look for any sale. If they don't get you signed up for any loan, they don't make any money. They are not responsible for your best interest, they are responsible for making money and not stepping over legal limits which are very different (in the sense of being less restrictive to loan officers) than most members of the public believe. If ever a loan officer tells you that in your circumstances, they wouldn't refinance, make sure you get their contact information and put it someplace you will be able to find it when you go looking for your next loan.

First off, if your credit score is above about 660 and you have a prepayment penalty, chances are excellent that you were taken for a ride. People with credit scores above 660 should usually be A paper, not subprime. A paper does not need a prepayment penalty except when the loan officer wants to get paid more. A 2 year prepayment penalty is worth a good chunk of change on the secondary bond market - usually about 4% of the loan amount. This means that if you have the $270,000 loan I use as the default here, they made almost $10,000 over and above the normal price spread when they sold your loan. And even when they retain servicing rights, lenders sell loans over 95 percent of the time. At the very least, you should get some kind of benefit for accepting a prepayment penalty A paper. A current "maximum conforming" loan of $417,000 would be worth almost $17,000 more to the lender with a prepayment penalty than without. This, all by itself, is often a reason they stick folks in subprime situations. If you think you're A paper, make them show you the turn-down from the automated loan underwriting program before you even consider a subprime loan.

If your credit score is below 620, you're almost certainly stuck with a loan where you have a prepayment penalty by default. Buying it off is usually a good idea, but buying them off isn't free. Between 620 and 659, there's some wiggle room as to whether you will get an A paper loan.

But most people never undertake the three most important steps they can to get a better loan. They don't shop multiple lenders. They don't ask for a guaranteed quote. And they certainly don't sign up for a back up loan.

I've been looking for a new place to hang my license, and the one thing (other than looking for loan officers who don't understand the way the business works) that most of the firms have in common is that they don't want to compete on price. They know they may have to the first time, but they want the client that just automatically comes back to them that they can soak for two or three points on every loan, in addition to whatever they earn for the prepayment penalty. I understand this yearning very well; it's a normal human desire to want to make more for the same amount of work, and also to lock up the customer for the future. If all you think about is how easy the loan is to get, you are these firms' favorite type of client. Guess what? You may not see their extra $10,000 or $15,000 as a separate charge on any of your paperwork, but it is there and you are paying it, and someone who knows what they are looking for can find it. Most folks would never dream of paying $50 for the same toaster that everyone else is buying for $13.99 at Target, but the way loans are priced is confusing at first sight, and people don't want to sort it out. It's pretty easy, actually. Figure out what kind of loan you want and qualify for, then price the rate/cost trade-offs of that loan type amongst the various loan providers. Figure break-evens on the extra cost of the lower rate. One rule I have never encountered an exception to is that if a loan provider pushes a low payment to sell a loan, they are a crook. If they sell by interest rate, they may be worth talking to, providing the loan type is what you're looking for. If they sell by the Tradeoff between rate and cost, they're definitely worth talking to. And if someone suggests a different type, hear them out but make certain they tell you all of the details. There is always a reason why one loan is significantly cheaper than another loan

Another very common tactic used to induce your business is advertising. Remember the loan ads that went "Lost another one to (mega corporation which shall remain nameless)"? That particular mega corporation is not competitive rate-wise or underwriting wise with others. Joe ShadyBroker who earns six points on every loan can often deliver better rates than they can. What they were trying to via their advertising is create the illusion of low prices by telling you they have low prices. Then, when you call and they quote the superficially low payment due to a rate where you have to pay three points to get it, they've got the average potential client suckered. Because their payment on a 2/28 loan with a 3 year prepayment penalty where you have to pay three points to get the rate is lower than mine on a thirty year fixed with zero points, people will sign up. Why? Because it looks more attractive to them at first glance. Get the calculator and the checklist of questions and ask the questions and do the math. Nobody can take advantage of you without your consent, but those who allow themselves to be intimidated by numbers are giving their consent. Actually, with most places, it's like begging, "Oh, please, I want to pay thousands of dollars more to get a higher interest rate!"

If someone doesn't ask questions like "how long are you planning to keep it?" or "how long do you usually keep real estate loans?", especially if they just launch right in to a spiel based upon a low payment, they are a cash-sucking Vampire. They may be an intelligent vampire doing what they are doing in full cognizance of what it does to you, or they may be an innocent vampire who doesn't really understand the business and who is being controlled by a green-blooded master cash-sucking vampire, but in either case you don't want to do business with them. Yes, these are sales questions. Yes, they get you talking to a salesperson, who then has a possible opening to talk you into something that may not be in your best interest. If they don't ask the questions, I guarantee that they're trying to push you into something that isn't in your best interest. Which is better: Not talking to a salesperson and being certain of being messed with, or talking to a salesperson and possibly being messed with? Note that there is no option that says "Don't talk to a salesperson and not get messed with." If their people don't know enough to help you from their own knowledge, those salesfolk were probably intentionally hired because they didn't know any better. It is not a crime to make money. They are looking to make money, I am looking to make money, everybody in every line of business is looking to make money, including your employer - that's how they pay you. If I were independently wealthy and never needed or wanted to make money again, I certainly wouldn't be doing real estate loans, and neither would anyone else. You can take the attitude that you're going to pay a reasonable amount, and while you can take steps to hold that amount down and make certain it doesn't get outrageous, you know you're going to pay what it costs, or you can take the attitude that a cheaper quote means you'll actually get that rate at that cost when the overwhelming probability is that they're lying to get you to sign up. You need to look gift horses in the mouth. If someone's quoted fees are lower or higher than everyone else's, there is a reason. If they're too low, it's probably because they're pretending that a large percentage of what you are going to pay doesn't exist, because that gets people to sign up. Ask them if they will guarantee their total fees and the rate in writing. If the answer is no, they are lying. Actually, most of the liars won't tell you "no" in response to that question. They'll tell you some line about how they're a major corporation or how they honor their commitments or any of several other lines that mean absolutely nothing. The MLDS and Good Faith Estimate are not commitments. Major corporations pull the same games as everyone else. In fact, they usually get away with playing even worse ones than Joe ShadyBroker because of their "name recognition".

So shop around. Ask every single prospective loan provider every single question in this article. Pull out the calculator to see if it's believable, to see if the numbers work. Ask them if they'll guarantee the quote, subject to underwriting. And then go out and apply for a back-up loan as well, because even if you've got a guarantee, it's difficult to enforce, and impossible within the time frames most folks need the loan to be done.

The typical savings of being a savvy consumer is literally thousands of dollars every time you get a real estate loan. You may not see the savings directly on the HUD-1 at closing, but they will be present nonetheless. If you don't accept a prepayment penalty, that's thousands of dollars you've saved yourself down the line when you've been transferred and need to sell. If you get a rate that's a quarter of a percent lower on a $270,000 loan, that's $675 interest you are saving per year. That's a couple of car payments; perhaps enough to let you buy for cash next time you need a car. If you invest the difference over the potential lifetime of your mortgage, a difference of over $127,000! If you save yourself the two extra points of origination that they were going to charge you, that's over $5500 that either is in your pocket, and that you can invest or spend on other things, or $5500 that isn't in your mortgage balance, where you're going to pay hundreds of dollars in interest on it per year ($357.50 per year at 6.5% interest), in addition to owing the base sum.

My point is this, folks. If I were a financial advisor trying to score an extra quarter percent commission off of you, most of you would be upset. Many people are so upset by 0.25% 12b1 fees in mutual funds that they won't pay the advisor who would save them a lot more money than the 0.25% per year simply by simply reminding them of sound investment principles. If I were a car salesperson trying to pad the cost of the car you were interested in by $5500, a large percentage of the population would most likely slug me. But because real estate transactions are complex and people don't want to take the time to understand them, they unwittingly walk into situations like this, and many people do so repeatedly throughout their lives, making the same mistakes every two years. The dollar amounts are large enough that even small differences are thousands of dollars. If you're not going to guard your pocketbook, most loan providers will pick it.

Now the workman is worthy of his or her hire. The person who gets you the loan is entitled to be paid. Judge the loans on the bottom line to you; how much it costs and what you will get. The proof that they got you a better deal was that they delivered a better loan, not that they made less money. And if the person who does your loan can make an extra half-point while actually delivering you a loan that is the same rate on the same loan at less cost than the other provider, haven't they earned that money? You came out ahead because of their work - had you gone with any other loan, you would have paid more or had a higher rate. They made more. Definition of win-win. There is a loser here, by the way, but you'll never know who it was. It is the lender that the broker you didn't sign up with would have put you with. But by finding you a program you fit better, the loan officer you did sign up with got you a better deal and made more money. It happens every day, if you make the effort to look for it, and go about it in the right fashion.

Caveat Emptor


My wife is a genius about household projects. Instead of carping at me to do this or that project, where there is the possibility I might disagree with her as to that project's necessity or utility, she just tells me she's going to do them herself. Now in all fairness, she may be willing to do them herself. We'll probably never know, because thanks to my upbringing, my ability to stand by and allow her to do it all herself is non-existent. So by doing it this way, she gets the project done without debate. And if I ever argue against one on that basis, she can take the point of view that I'm free to just let her do it.

Which is how I spent Father's Day weekend replacing the floor in the kitchen and dining room. And why every muscle below the neckline hurts right now.


Good News! Eject! Eject! Eject! not only has a wonderful new essay, he's saying he'll probably have another entire book worth of material for us by September.

If you don't make a regular habit of checking him out, you really should. He writes the essays I wish I could. His latest deals with the theme of whether our perceptions are the map or the territory.


Armies of Liberation notes that the Yemeni regime broke up a meeting of its opposition with water cannons, using the excuse that said opposition didn't have its meeting approved by the state security apparatus.

Can anyone think of any countries that have used these sorts of tactics in the last hundred years? What have those countries all had in common?

The housing bubble is not the primary focus of this website, but to pretend it does not exist is plainly wishful thinking. One of the ongoing phenomenon that have been driving the bubble is the "Stated Income"loan, where the lender does not verify that the prospective borrower actually makes enough money to qualify for the loan, only that they have a source of income that could generate enough income. If you're working the night shift at 7/11, they're not going to believe you make $90,000 per year, but if you're a in a profession where some folks do make $90,000, you may be able to qualify "stated income" regardless of whether you actually make it or not.

Lest I be unclear on this subject, despite being known as "liar's loans" because people use them to lie about their income in order to qualify, it is not what they are intended for. Nor is "stated income" intended to help shifty or incompetent loan officers shaft lazy borrowers by not bothering to document income. They are intended for those who really do make the money, but because of the way that the income tax laws work and the way that lenders qualify people for loans based upon income, do not appear to. Business owners and the self-employed and people on commission get to legitimately write off a lot of expenses that the hourly or salaried employees do not. For instance, I write off a large percentage of my vehicle miles, office expenses, etcetera. I'm paying for business related expenses with pretax dollars, where most folks generally do not get to take this deduction. Being self-employed, if I was silly enough to want the home office deduction it would be easy enough to justify. Not to mention asset depreciation. All of these don't have much effect upon the money I have to spend, but they do have an effect on my tax forms, where it looks like I make a lot less than I effectively do. So instead of using my tax forms to qualify for a loan, sometimes I need to do a stated income loan in order to qualify for the loan, because the tax forms show a lower number than people making comparable amounts who are salaried. This is what stated income is for.

On the other hand, I'm sure that most of the adults reading this have seen the potential for abuse. When I can just tell the lender how much I make and they agree not to verify it, a certain number of people are going to say they make more than they do, and indeed, both stated income and NINA loans are often informally known as "liar's loans". Furthermore, since if the person getting the loan does not qualify, there is no loan and the loan officer does not get paid, there's a certain amount of pressure on the loan officer to get the loan done even if the prospective borrower does not qualify. Let's say they don't qualify, but the loan officer wants to get paid. So the loan officer puts them in for a stated income loan, says the clients make more than they do, and voila! funded loan. Clients get the loan where they would not have qualified by documenting their income, loan officer gets paid, bank gets a loan, and if it was a purchase, real estate agents get paid for their transaction and the seller goes happily on their way because they got their money.

A few years ago this kind of practice was an occasional thing. Of late, however, it has become endemic. And although if the clients really do make the money there is nothing wrong with it, if they don't make the money to qualify but they get the loan they are still going to have to make the payments. This reflects the reason for the rise of the negative amortization loan, where the minimum payment does not cover the interest charges. Either one of these is something a good loan officer does with a trembling hand and a lot of care. I always make certain that these folks really can make the payment they're going to have to make, but the vast majority out there do no such thing.

Well, it looks like everyone is going to have to, because of IRS Form 4506. Form 4506 is an item the clients sign, usually at the end of the loan process, that gives the lender and anyone they may sell the loan to access to your tax returns. IRS form 4506-T is basically the same thing, except that it gives access to a transcript (the numbers) rather than an actual copy. Signing form 4506 is mandatory. No signature, no loan. It's that simple.

Now it take the IRS about sixty days to respond to this request, so this has zero effect upon funding your loan. If your loan isn't funded withing thirty days of you signing the loan application, there's something wrong with that loan unless something external to the loan is holding them back and you should go apply for a back up loan. But for later on, it can have an effect.

One of the ways it can have an effect is on the loan provider's subsequent business. Traditionally, as long as the borrower made the first three payments on time, a loan broker was off the hook as far as borrower default. Lenders who have recently become much more nervous about their loan portfolios have recently started to change this, whereby a broker who put through a stated income loan (or any loan, for that matter) which is not subsequently borne out by the evidence of form 4506 is liable for the loan for the loan's full duration. Since form 4506 is never borne out by any stated income loan, else the client should be getting the better rates for full documentation, this means that every time any broker puts through a stated income loan, they are liable for the consequences to the lender.

Well, it shouldn't take much of an imagination to figure out the effects this is having upon the loan market. With the shifting of the consequences to the broker, the brokers are having second thoughts about doing stated income loans. Make no mistake, stated income was way out of control over the last couple of years. I've always been religiously careful about them, but that made me a member of a tiny minority of loan officers. Most of the loan officers out there have no clue as to what is an appropriate stated income loan, which has to a large extent put the brakes on stated income here locally. I'm not certain what effect this is having upon loan officers at direct lending houses, and there are a certain percentage of broker loan officers that are too clueless to understand what this means to them so they are going to keep right on doing them until the lawsuits pile up, but it's really starting to put the brakes on stated income loans here locally.

Now stated income loans have been a large proportion of what drove home prices upwards. It was an easy way for loan officers and real estate agents to get people into loans, and therefore properties, that they really could not afford and did not qualify for. Both easier sales and bigger commissions, as people want the better house with the higher price and tend to reward the agent and loan officer who can get them in, regardless of whether they can really afford it or not. People who did not really qualify, but this gets them the loan, and therefore that beautiful McMansion they've got their heart set on, despite the fact that they cannot really afford it. It really is easy to sell people on too much house, and very few of them really understand the implications. I've sat people down, taken them through the math, and they still signed up with the agent who promised to get them into the McMansion because they wanted it so much.

Well, with the lenders getting aggressive about enforcing financial consequences, every loan officer with the brains to understand that heavy objects fall is suddenly taking a hard look at their business practices. Now it's not just a question of "Get paid or don't get paid," it's a matter of whether the money they get paid right now is enough to balance out the money they are going to have to pay later to buy the loan back, and the answer is largely coming back "No!" Furthermore, there could be actions taken against licenses by lenders and not just by clients. That brings a completely different trade-off into the picture, and a lot of loan officers aren't liking what it says.

Now because the prevalence and easy availability of "stated income" loans has been one of the things driving the increase in the price of housing, essentially killing the stated income loan is not going to have a beneficial effect as far as sellers are concerned. It decreases, by some amount, the potential market of people who can afford to buy your property. Where before, the bottom line with most agents and loan officers was that anyone who wanted the property could probably be qualified for the necessary loan and was therefore a legitimate potential buyer, that is now changed. Since anytime you constrict your market of potential buyers, the equilibrium price of the market is going to fall, expect this to have a further deflationary effect upon property values. Indeed, there are a lot of factors that are conspiring against highly appreciated property values right now, but this one small item could well be what starts housing prices more notably downwards. Because it attacks a way of doing business that was at the heart of the run up in prices, this relatively small measure may be the pin that pops the housing bubble.

Caveat Emptor


For those who follow politics, a parody. Ms American Spy


House rejects Iraq pullout deadline

1. Murtha is not a hawk, but the left wing calls him one because they think it makes him look more credible

2. 153 voted for it, "largely on party lines". The Nutroots™ really has taken over the Donkeys. Assuming that all 153 were Donkeys, that makes 3/4 of the ones in Congress. Not to mention 24 Congresscritters of both parties who didn't vote. Via Gateway Pundit, here's the Roll Call. I notice some interesting names in the not voting column.

3. This is just as stupid as the last time it came up. Once you mandate a pullout as of a certain date, you give your opponents a goal. No matter what happens, we're leaving on thus and such a date. That tells them they don't have to win before then, they just have to keep fighting one more day and they win by default.

If I got my news on the war from the papers, I'd likely think we were in trouble, too. But many thanks to the Milbloggers who have eyewitness accounts of what's really going on for us.

On the other hand, the good news is starting to filter into the media: Picture of a weakened Iraqi insurgency


Probe in possible Haditha cover up complete. And the results are...?


Gates to drop to part time at Microsoft.

Well, he built it into a huge, successful company. However, the writing is on the wall for those who know how to read it. They'll be big and important for a long time, just like IBM. But their era of controlling the market is over. Linux opened the door to other operating systems, and Open Office has put paid to their unconditional dominance of the Office Productivity Suite. They are losing market share in both. Why should someone pay $120 to $200 for Microsift Office when Open Office is free? This is the same problem Netscape had ten years ago, except that Netscape Suite was only $30.

Windows is a big agglomeration the interaction of the various parts of which are poorly understood, even by Microsoft. Too many things about Internet Explorer violate agreed upon web standards, and cannot be used properly. Both have way too many known vulnerabilities, and when they patch one, disturbingly often they open another.

Scrappleface has the real (funny) story.


Rat study shows dirty better than clean In other words, you can worry about dirt and germs too much.


Frist pushes for move on estate taxes.

Estate tax is not anywhere near my list of most important or immediate tax issue facing the country today. I'd like it gone, but I'd rather have AMT indexing, especially since AMT is pretty ironclad and there are so many ways to get out of estate tax that it is essentially voluntary. The current law is set to expire in 2010, at which point we go back to the pre-2001 scenario, which actually wasn't that bad.

Nonetheless, if we don't do something about the sunset provisions, I predict that a much larger number of well off elderly are going to kick off in 2010, especially the latter parts of it. This sample will be far larger than is explainable by the mortality statistics. Mom kicks off in December 2010, the kids get $10 million. Mom kicks off in January 2011, the kids get $1 million. Doesn't take a genius to see that some folks are going to make certain mom kicks off in time to get them more money, particularly if mom is one of those that refuses to do the necessary planning.

Will we as a society be culpable for those deaths? Not really. But for those keeping track of the moral scoreboard, do chalk it up as an assist. We set the conditions for them to happen.


Finally. House removes Jefferson from committee They've got him on folm taking a $100k bribe. They found $90k in his freezer. They persuaded a federal judge to issue a warrant for his Congressional office. And now, nearly a year after the beginning, they've removed him from the committee with the most influence over the budget.

Looks like I spoke too soon and didn't read carefully enough. Rhymes with Right notes the Washington Post saying

If he refuses to step aside from the Ways and Means Committee, as urged by the Democratic Caucus, the next step would be a vote on the House floor to remove him from the prestigious committee. Even his allies want to avoid that.

In other words, his fellow Democrats merely asked him to resign, to avoid handing an election year freebie to the Elephants.


The wave of the future: Delta to request end to pilots' pensions. Defined benefit plans are going to go the way of the dinosaurs and the dodo. Corporations always have better things to do with the money than fund the pension, and there is a distressing tendency to play games with the Assumed Rate of Return. Due to the amounts of money typically involved, by the time they get serious about the problem, the shortfall kills the company. Defined contribution plans (e.g. 401k) are much simpler, with fewer games available to the company. Not to mention that when they agree to defined benefit pensions, the company often has no idea how expensive they will turn out to be.


If you haven't yet read Michael Barone's Vietnam, Watergate, and Rove over at Opinion Journal, you should.

Rate Buydowns

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Every so often I run across a reference to a "rate buydown" I don't like to use them because they don't benefit the client, but I should explain them, what they are, and how they work.

A rate buydown is where for an upfront price, the lender agrees to give you a lowered interest rate for a time. 2/1/0 buydowns, where the rate is two percent lower the first year, one percent lower the second year, and then at the loan rate the third year, are the most common, but I've seen one year buydowns of two percent, two year buydowns of one percent for those first two years period, and any number of other tricks.

Now, this isn't free. A 2/1/0 buydown usually costs three points. In fact, what usually happens is the three points go into an escrow account somewhere where they pay out the money to make up the difference in interest to the lenders as the loan goes along. When the buydown period is over, the lender who originally funded your loan then gets to keep what's left over.

Now, here's what this means to you. Let's make this easy. Say you would have had a $291,000 loan, fixed at 7 percent, without a buydown. But with the buydown, you have a $300,000 loan at 5 percent the first year, six percent the second, and 7 percent from there on out. In order to really understand this, let's first take a look at your loan without a buydown:





























































































































Tot Int.

























Tot Prin

























Now let's look at it with the buydown:





























































































































Tot Int.

























Tot Prin

























It is also to be noted that in the very next month, your payments go to $1982.23, as opposed to the $1936.03 they would have been in the first place, and that they will stay there the rest of the loan, all 336 months should you keep it the rest of that time. Why? Because your balance is larger than it otherwise would have been, so the payment is higher, in this case by $46.20, due to the higher loan amount.

Finally, let's look at the differences:

























Escrow Acct.

























Net cost

























What this means is that your lender's escrow account ends up with $1850 that they get to keep, on top of everything else they made from the loan. The final column is the net cost to you, what you paid to get it less the interest it saved you. Hey, look at this! In month 21 it goes negative! You must be saving money if you keep it that long, right?

Nope. This is a temporary and illusory savings phenomenon, and I don't know of any way to make it permanent. You see, the benefits stop in month 24. They are over. Kaput. Gone. That's all, folks. But you owe $6798.14 more (at the start of month 25, not illustrated above) than you would have without the buydown. There are exactly three possibilities as to what happens. First, that kou keep the loan. Due to the extra interest you're paying every month, you are negative again in month 56, and it keeps getting worse the longer you keep the loan. After 120 months of the loan, you are $1755 down. This actually peaks in month 242 at $3351 negative, then starts decreasing, but you don't get it back before the loan is paid off.

The second possibility is if you refinance the loan. Let's say you get a really fantastic deal and refinance at 5 percent on a 30 year fixed rate loan, and I'll even give you that your higher balance doesn't cost you any more in fees. Your payment is $85.35 per month higher than it would otherwise have been, your interest charges $28.32 higher (and the difference represents you paying the principal off faster if you don't pay for a buydown). Your savings is gone in less than three years, and there's nothing you can do about it.

The third and final possibility is that you sell the house. You get $6798.14 less in your pocket. This means that you don't have $6798.14 earning money for you in the stock market. At ten percent your benefit is gone in less than a year and a half. If you take the money and buy another property, that's $6798.14 higher your loan balance will have to be. Let's say you get that same fantastic 5% loan we talked about two paragraphs ago on the new property. Guess what? The same math applies here also. There is no way to win in the end with a buydown, unless someone else pays for it (for example, seller paid closing costs).

So they are a piece of garbage. Why are buydowns attractive, and why do otherwise rational people sign up for them?

Because they lower the payment for a while. People choose loans based upon the payment. In particular, they choose loans based upon the payment in the first check they are going to have to write. Most people figure that the check they are going to have to write two or five years out isn't important. Unscrupulous lenders and loan officers know this. That's why the (censored) negative amortization loans are so popular, despite them being time-delayed financial poison. So don't shop for loans based upon the payment, and if someone starts talking about ways to cut the payment as opposed to the interest rate, put your hand on your wallet and leave. If they persist, drag them out into the sunlight and put a wooden stake through their heart. It's the only way to be sure.

Before I go, I want to mention one specific group that gets targeted for these things, and that is veterans. The Veterans Administration loan, aka VA loan, has the ability to roll (not coincidentally) three points closing cost over and above the cost of the home into the loan. Most military folks are busy learning their trade, which is usually not something having to do with finance. Indeed, I've never heard of any MOS that included this type of financial training. So when the loan officer whispers sweet nothings into their ear about cutting the payments for the first couple of years, they don't know any better and they sign right up. They could have used those three points for something potentially useful, like discount points that buy you a lower rate for the entire term of a VA loan. If you keep it long enough, they will eventually net you money and the VA only accepts fixed rate loans, not ARMS or hybrids. The veterans could just not pay those three points, and not start out with what is basically negative equity. But rate buydowns make a loan appear attractive on the surface to someone with insufficient financial training, while costing them money in the long term and allowing the initial lender to make more money than they otherwise would.

Caveat Emptor


Carnival of Liberty

Carnival of The Vanities


Googlebomb for Alaa Egypt

Goes to the free Alaa website


Home prices too high in 71 cities

The attached chart shows San Diego overvalued by 38.6 percent. That may be a little high; or my rules of thumb computations which say "approximately 30 percent, given an interest rate of 7%" could be a little low. I can do "no points loans at lower rates than that, but for how long is anyone's guess, given that inflation kicked up to about 5% annualized. Given taxes, at 7 percent the bank is just about breaking even in real terms on a loan if inflation is 5%.


"Glass carbon" is a world first. I don't know if there's anything potentially useful, but getting a glass from Carbon Dioxide is cool.


Don Surber hits the nail on the head as to when we should leave Iraq. When a freely elected Iraqi govenment asks us to. Not before. They want to create a situation where they can ask us to leave without the minions of Al-Qaeda moving into the Baghdad version of the White House and dispatching the current occupants with prejudice. I think we can safely project that they'll ask us to go as soon as they feel able to stand on their own.


Environmental Republican has a round up of the "no indictment for Rove" and the reactions of the tinfoil hat brigade.


This is revolting. Michelle Malkin has the story of seven Marines and one Navy Corpsman kept in close confinement confined to an 8x8 cell , shackled every time they leave the cell, and not allowed to so much as talk to their family except on the opposite side of a thick glass wall. They aren't even charged with anything. Where is the ACLU on this one? Can you imagine the screams of outrage if prisoners anywhere in any of our justice systems were subjected to this, especially prior to being charged with anything? They may be under investigation for suspicion of murder, but if the evidence is this strong, why haven't they been charged?

To turn a phrase to much better use than the original, No. Not in my name.

I'm in San Diego. If there's something we can do, let us know. Meanwhile, here are the links to the families' web sites:

no name


no name


I had to do almost this whole thing on my laptop. I hate laptops, for reasons varying from the keyboard to the fact that I just don't like this ******* touchpad pointing device, not to mention the fact it only has two buttons. Nonetheless, I suspect I'm going to be doing more on the laptop from now on. Anybody got any suggestions for a alternative pointing device? I'm biased in favor of trackballs, other things being equal. I can live with the keyboard if I have to, but this touchpad will lose me my few remaining sanity points.

This morning I finished a post titled "The Pin That Pops The Housing Bubble?". It'll post Sunday, giving me a day up on next weeks four money articles. You might want to check back then.

Finally, today is the ninth anniversary of marrying The World's Only Perfect Woman. We still can't decide whether we should go to dinner tonight or wait until the weekend, but tonight's agenda is spending time with her and the girls.

The bottom line on this question is always, "Whatever the courts say." Divorce law is complex, and different from state to state, and even when you think you've got a clear message in the law as written, the courts may interpret it differently, or there may be precedent that says otherwise, or even just some overarching concern you are not aware of. Even if the law is clear, it can usually be gotten around by the agreement of the parties. Consult your attorney.

With that said, there are a few rules of thumb to go over, valid in broad for most states in most situations.

Real Estate is usually owned by both partners in a marriage equally, even if one spouse acquired title prior to the marriage the second will be added by default when the marriage happens. The only thing that is usually held separate are inheritances - things that were inherited by one spouse or the other from relatives, and even those can often become joint property. Sometimes gifts to one spouse can also be held separate. One of the phrasings your learn from reading title reports are is "John Smith, who acquired title as a single man, and Jane Smith, husband and wife as joint tenants." This tells you John bought it before they were married, and Jane got added to title upon marriage by the effects of the law.

There are trusts and the like to frustrate this from happening, and most states have rules and law permitting them, but you have to talk to the lawyer, get the trust created, and most importantly, as it's the step that is most often omitted, transfer the assets to the trust in a timely fashion. I don't know how many folks I've seen who spent a couple of thousand dollars creating a trust and then didn't transfer the assets to it. Every penny they spent on that trust was wasted money.

Now, if Jane does not wish to be added to the property title, she may quitclaim it back to "John Smith, a married man as his sole and separate property." However, quitclaim deeds have this curious limitation in many states (California among them) that they only function with respect to the interest you have in the property as of the time you sign them. Since the new spouse has not yet been given the claim upon the property until the marriage takes place, the quitclaim cannot be signed until after the marriage in order to accomplish the desired goal, as Jane has not yet acquired the interest in the property. Jane can say she'll sign it after she's married, but if she changes her mind, that's a whole different legal struggle. If she signs it before the marriage, then since she subsequently acquired a claim to the property through the marriage, she now has an interest in the property through the eyes of the law. Let's even say John and Jane are ninth cousins, the only surviving family inheritors, but for whatever reason Jane quitclaims the property to John, but then they later get married. Jane now has a married woman's legal interest in the property. The quitclaim only applies to Jane's interest in the property at the time of the quitclaim, and has no effect upon any claims she may acquire later. The only way I am aware, in general, to deed away any rights you may acquire in the future is with a Grant Deed, and each state has its own laws as to how this may and may not be accomplished. On the other hand, a Quitclaim is a handy document if you may have the intention of acquiring some interest in the property back at a later time, as it generally doesn't make, for instance, buying the historic family homestead back from your wastrel brother problematic.

Now suppose John and Jane Smith get divorced, and the property was held jointly. Both John and Jane still have an interest in the property, and continue to hold an interest, even if the court orders them to sign a quitclaim, until they actually have done so. This is why it is better to get a court award of actual title rather than a court order for the other spouse to sign a quitclaim. Unfortunately, for some reason, most divorce courts are unwilling to award actual title rather than order the ex-spouse to sign the quitclaim. So whoever gets the title or possession is not able to do anything with the property without the ex-spouse's approval, unless and until that ex-spouse signs the quitclaim or the court awards the spouse in possession with clear title. I could tell stories of ex-spouses that disappeared, or pretended to disappear for years leaving the ex-spouse in possession unable to sell, unable to refinance, even unable in some circumstances to sign a valid lease. Not infrequently, the ex-spouse pops up years later wanting a better deal (that is, more money) as inducement to sign the quitclaim deed.

Until the ex-spouse signs the quitclaim, title companies will not insure either loans, either in support of refinancing or a sale, or actual sales transactions. No lenders policy of title insurance, no loan (in most states), and that kills the refinance, or the loan financing any sale. No policy of owner's title insurance, and I certainly won't pay my money for a property, and advise my clients in most stringent terms not to do so.

Now, let's say that the ex-spouse has signed the quitclaim but is still on the existing loan, which was taken out while you were still married. This isn't really a problem. In order to refinance, or deliver clear title on a sale, that loan needs to be paid off. The lender doesn't care how it gets the money, or from whom. That ex-spouse can drop off the face of the earth once the quitclaim is signed, and it really doesn't make any difference. Once they are out of the legal picture, they might as well be dead. On the other hand, both of you are responsible for the entire debt. It's not like some is His and some is Hers. Now, because this is true, sometimes ex-spouses also get their credit hit when things like a short sale subsequently happen, or foreclosures. To guard the ex-spouse who is giving up the rights to the property from this happening, many times the divorce court will order the ex-spouse who is retaining possession to refinance in order to remove the spouse who no longer has a legal interest in the property from future liability on the debt.

Many times, the court will order the ex-spouse retaining the property to buy the relinquishing ex-spouse out of the property, to give them some money or other goods in exchange for their interest in the property.

Often, especially if both spouse's incomes were used in order to qualify for the loan on the property, the remaining ex-spouse will not be able to qualify for the necessary loan on their own. In this case, the smart thing to do is usually sell the property. It is a real issue that because many former spouses are delinquent in their payment of alimony and child support, the lenders want to see a certain history (usually three months) of these items being paid before they will allow the income so generated to be used to help qualify the remaining ex-spouse for the new loan.

Keep in mind that all of the above are simply common concerns and happenings, and may have nothing to do with the situation you find yourself in in a divorce. Consult your attorney for real feedback of how the law and legal precedent apply to your situation.

Caveat Emptor.


(I have noticed a fair number of hits to this article that, judging by their search query, probably want the article on What Happens When You Can't Make Your Real Estate Loan Payment instead)

I got a question about legal late payments in California.

Unfortunately, there really is no such thing as a legal late payment. You borrowed the money, signed a contract, and it accrues interest according to that contract. You owe this money, and it only gets worse if you don't pay it. There is some wiggle room so you don't get unduly hit for a day or two late, or if the right to receive payments is sold, but that's about it.

The law gives you some wiggle room in the timing of the payments. First off, the laws of California and most other states give you fifteen days after the due date to pay the mortgage before a penalty can be assessed. I know of a lot of people who make consistent use of this. If it's due on the first, it's supposed to be there on the first, but many people take advantage of the fact that there is no penalty as long as it's paid within fifteen days of due date (i.e. before the sixteenth), and consistently mail their payment on the tenth or twelfth.

Now if you miss it by even one day, the penalty is up to four percent of the amount due here in California. As you might guess, most lenders charge the maximum penalty. When you compute it out, four percent times 360 divide by 15 is ninety-six percent annualized. I had my check get lost in the mail once and the lender waived the penalty when they called me on the eighteenth because I always paid on the first or before, but they didn't have to do that. I got the distinct impression that if I were the kind of person who pays on the twelfth or fourteenth every month, they would not have waived the penalty.

Now, there is also some wiggle room on when the new lender receives it if your contract is transferred between lenders. Because once upon a time some unscrupulous lenders would sell notes back and forth between their own subsidiaries because it made them more likely to get late fees, or even able to foreclose on appreciated property when there were relatively few protections for borrowers in law. Mind you, you still have to send it on time, but if it gets hung up in forwarding between lenders, that's not your issue. Within sixty days, the old lender must forward the payment promptly, and it counts as received when the old or the new lender receives it, whichever is first. It's still better to send to the new lender at the new address if you have it or know it.

In short, although there are some small period where payment is allowed to be delayed due to one factor or another, it is never to your advantage to do so. Make your payments on time.

Caveat Emptor.


Carnival of Investing Recommended: Seeking Alpha (profiting from mob investment psychology)

Carnival of Debt Reduction

RINO Sightings Recommended: Politburo Diktat

Carnival of Personal Finance


Students Find Ring Tone Adults Can't Hear

Ironically enough, it was originally developed as a loitering teenager dispersal agent.

May be time to let these folks have their way.


Philadelphia 'English-only' eatery to face probe.

The sign may violate the city's Fair Practices Ordinance, which bans businesses from discriminating on the basis of nationality or ethnicity, Lawton said.

"The complaint will say that the sign discourages patronage by non-English speakers because of their national origin and/or ancestry," said Lawton, whose agency enforces the city's anti-discrimination laws.

Ladies and Gentlemen, this has zero to do with racism, at least on the face of it. It has to do with refusing to speak the language of the country. It has to do with refusing to become part of the overall society. Yes, I suspect that a larger proportion of hispanics are going to have trouble with an english requirement because they've been resisting it, and their "leaders" (mostly self-appointed, and with a vested interest in keeping their "flock" apart from overall society) have done everything they can over the past forty years to make it difficult. Kind of like killing your parents and asking for pity from the court because you're an orphan. It has nothing to do with racism, and everything to do with the attitude of the person who refuses to speak the same language as everyone else. I recently read a a book that discussed, among other things, the attitudes of the greek speaking cities of Italy prior to the rise of Rome, and was struck by the similarities in attitude between those people 2500 years ago and those who refuse to learn english in the US today. They're not immigrants, looking to join our society; they are colonists, looking to supplant it. They're welcome to join us, but pardon me if I refuse to cooperate in the colonizing of the United States.


How come when you get an earworm it's always some annoying commercial or saccharine kids song, never something you would actually want to listen to?

My 6 year old gave me one. It's a popular ride (with kids) at Disneyland. No, not that! Anything but that!

Sunday night, I got an invitation to join a site that gets about 15 percent of this site's traffic level. Well, I'm actually still interested in co-authors here, but other than the strict real estate and mortgages for San Diego site I just started at http://www.danmelson.com/, I'm not really looking to spend more time online. But this guy wanted to know how I had gotten to getting an average of 3000 plus visits per day over the last week in just under a year from start up, and here's what I told him.

Reasons to which I attibute part of the success, in no particular order:

1) I hang out with a couple political groups as well as the money folks. A lot of the folks who find me for one stick around for the other. But I link them and they link me. The point is is that cross-fertilization of traffic works. (pr0n probably works better than politics or money, but that's not something I want associated with my site)

2) I write regularly. Minimum of three good articles per week on money stuff, and I try to do regular political stuff also.

3) I try to always write something worth reading, and tell the folks something that the commercial drones won't tell them. Deal with more than one viewpoint. One of the reasons I get traffic is I'm not afraid to tell folks what professionals are good for, as well as what to watch out for in a professional.

4) I write on the "nuts and bolts" level, and I don't pull my punches.

5) I am not afraid to haul out the calculator or spreadsheet and let the chips fall where they may. My article that will publish Thursday is a good example of this.

6) Carnivals are your friend. People find you through carnivals. They seem like they were better a few months ago, but they still help.

7) I get very good search engine rankings because of how I write and how the site is set up (Kudos to Chis at Powerblogs). Probably half my traffic on any given day finds me for one article. Every time 100 people find you, a certain number are going to come back. I try to give them reasons to come back.

8) Don't try plonking the conversational elephants in the backside after they've passed on by. I got a link from a larger site for something I said on Haditha yesterday, but that's just plain dumb luck. Get out in front and dig a hole for those conversational elephants to fall into. Think of an angle or something original that nobody else is covering. If you don't really have expertise in the main subject of a topic, hit a related concern you do have expertise in. When Katrina hit, instead of talking about the damage and all of the issues with FEMA's response, I wrote an article on the insurance issues that would be raised. That article isn't anything like my most popular, but because I was out in front of the crowd, I got a lot of hits on it over the next few months. It still gets hits today because it has broader applicability, as well.

9) I try not to get bigheaded. I get decent traffic on the typical site's scale, but Dean's World gets over 10 times my traffic, Instapundit and Kos 100 times my traffic, and the big commercial sites 1000 times or more (Drudge is showing 12M today as opposed to my paltry 3k). The way I usually put it is that I'm trying to fight my way onto the B minus list. On the sphere's scale, I may be as high as C plus, or I might be a lot lower down. All depends what you think is worthy.

10) Writing a good article on an enduring subject beats the same quality article on a topic du jour. In the latter case, you get traffic for a week if you're lucky enough to get noticed. In the former case, you get search engine traffic forever, or at least until the underlying dynamics that cause it to be important change.

Not to mention all the usual stuff like Trackbacks, trying to be generous with links (folks will link you back), feeds, etcetera.

One topic I haven't covered yet here is homesteading. This has nothing to do with the Homestead Act of 1862 that encouraged settling the western United States.

A declaration of Homestead basically protects your equity. In many cases, you may not even have to file a declaration to receive the benefits, but whether this is so is complex. If you file, you remove the ambiguity.

A homestead declaration may only be filed upon a primary residence, and only if you own it. Rental property, second homes, and property held for business purposes is not eligible. Law between the states varies, as does the exemption amount

How it works is pretty consistent. First off, it protects no equity arising from dates prior to declaration. If you are in one of those situations where you have to explicitly declare homestead instead of it happening de facto, you have to actually declare it before the incident happens. You get in a traffic accident that's your fault, and go out and declare homestead the next day, it won't help you protect your equity against that particular lawsuit.

Note that it protects your equity, not your asset value. If the home is worth $500,000 (as is often the case in San Diego) but you owe $400,000, you have $100,000 of equity. How much it protects is dependent upon your state law and exact situation. Default protection in California is $50,000, but it can be up to $150,000 if you or your spouse are 55 or older, disabled, or have income less than $15,000 per year.

It can also prevent sale of the property in some, although not all situations. In California, the judgment creditor usually has to get a court order, after they have won the judgment, in order to sell the property. I'm not a lawyer, so I'm not going to presume to advise anyone on what those circumstances are.

Now, there is some question in some minds as to whether a homestead declaration inhibits enforcements of Deed of Trust, so many lenders will require an abandonment of homestead prior to funding their loan. You can always re-declare as soon as the loan funds, anyway. I know that some folks have fought this issue in court, costing the lenders money to pay their lawyers, so it's hard to blame the lenders for requiring it. You can refuse to do this, but they can also refuse to give you the loan. It's their money, and they are the arbiters of how they lend it out.

Caveat Emptor.


Washington Post has an article giving the story (as told by the Post) of the Marine squad leader and others at Haditha. I do not know whether the Iraqi account of an atrocity or this account is closer to being correct, but it's a long way from settled as to whether anything untoward happened there.

The Marines' lawyers say that their accounts are consistent, but that doesn't necessarily mean anything, the lawyers having a primary responsibility to their clients.

I know which I'm inclined to believe in the absence of further evidence, but the investigation is ongoing, and soon enough we will all have more in the way of answers. If the Marines involved are guilty, they should be punished to whatever degree they are individually culpable. If they are not, they deserve an apology, to be made whole for what they have been put through, and their accusers need to be investigated for the making of false accusations.

Mudville Gazette has more.

Blue Star Chronicles comes up with some interesting information.


Jack the cat chases black bear up tree


Manatees off Fla. endangered species list Mind you, it's a state list and has no effects on their federal status. But this is a good thing, denoting the fact that there are more of them than there used to be. Why, then, are the environmental groups, who should be jumping for joy, doing this?

"As species like the manatee are reclassified to a less imperiled status before their populations have actually recovered, state funding for research, management and law enforcement will likely be directed elsewhere," said attorney Martha Collins.

Collins represents 17 environmental groups who last week filed a petition with the state seeking to have the entire protection classification system revamped.

aka moving the goalposts? The idea of conservation is to have the populations actually recover to stable levels, not to be perpetually endangered. Of course, if the population has recovered, there really isn't any need to keep working quite so hard and spending so much money on it, is there? We're talking unemployed conservationists! Only I don't see why they should be any more insulated from economic reality than anyone else is.


Iowahawk has the afterlife report from Zarqawi.


Negotiator: Iran Wants Unconditional Talks

Yeah, they'll take all the carrots they can get. But they want this talk of sticks gone. The best way to do that? Marginalize the one country with the fortitude to make them happen.

"...told reporters that Iran would not accept the proposal if it contains any threats of punishment in case of rejection"

If I have no intention of committing a certain act, I'm probably not interested in the consequences of that act. But if I'm intending to do something like , for example, build nuclear weapons, I'd be real concerned if the world was willing to do something to stop me from having them.

Reuters has a few more details, most notably that Iran is refusing to give up what it sees as its "rights".


enrevanche installed the latest betas of the new MS OS. He's not impressed, although I'm not certain you're allowed to short shares for as long as he's talking about.


Thanks to Ramona going to visit her folks for the day, I've got four articles for the week ready to go. I think that the Wednesday and especially Thursday articles are particularly worth reading. I'll try to stay a little bit ahead of the game for a week or two.

By the way, Chris at Powerblogs told me not to edit or add any more articles to the main real estate chain until he fixes his software. Since he hasn't gotten back to me on my question as to whether it would help to pull out the real estate articles out from the mortgage ones, I'm just starting a new chain for the time being.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor.

Originally here

You raise a lot of issues. Some I'm going to deal with very quickly, others I'm going to spend some effort on, but nothing as in depth as a full article would have. I'm going to keep referring to material found in Credit Reports: What They Are and How They Work

I'm going to take the email in chunks:

Turns out I made the Two-Loan choice myself, independent of your article, a couple years ago. I was motivated to get a conforming first loan (~$322K @ 5.75%), and put the other ~$45K of a prior mortgage into a HELOC (besides, the HELOC rate was lower than the 30-yr fixed at the time!).

Well, times (and HELOC rates) have changed, and I now have

~$65K on my HELOC, and relatively tight budget.

That was 2003. considering that I had 30 year fixed rate loans at 5.375 percent or lower without any points for months and 5.25 for literally zero total cost for about one, you likely paid more than you needed to. There was a period in late August when rates spiked up, but I was calling the same clients back in December and into 2004, asking if they wanted to cut their rate for free. No prepayment penalty, no points. Those would have lowered the rate further.

HELOCs (Home Equity Lines Of Credit) have the disadvantage that they are month to month variable, based upon a rate that is controlled by the bank. On the downside, you're somewhat at their mercy. On the upside, the rate is based upon that lender's Prime Rate plus a margin fixed in your loan papers. They can't change your rate without changing everyone else's also. There is absolutely no legal reason I'm aware of why they can't set prime at twenty-four percent. There are plenty of economic reasons. Unfortunately, given the high demand low supply of money currently, the banks are competing for new business with a better margin, not a lower prime. They didn't cut rates every time Greenspan's Fed did, but they have religiously boosted prime every time the overnight rate has gone up since the Fed started raising it. Banks are making a killing in real historical terms right now with variable rate lending.

Fortunately, in most cases it's pretty easy to refinance a HELOC. Credit Unions are a great place for this; variable rate consumer credit is where they shine. There are some internet based lenders where you can obtain no cost, easy documentation HELOCs at rates right around prime, or even a bit below if you have the credit. Most HELOCs also have interest only options for five or ten years. Brokers really don't do a whole lot for HELOCs except keep lenders honest; there is not enough money in them to make them worth chasing and the lenders won't pay for them the same as for first trust deeds; it's too easy to refinance out of them. (Brokers can beat the stuffing out of credit unions on first trust deeds, however).

Unfortunately, your credit score is a problem now:

I have multiple credit card companies offering me low

introductory rates (some 0%, some 2%) for short terms (up-to 1 year).

Why would I NOT want to take them up on their offer?

In truth, I've already done this a number of times in the past 12-18 months, always at 0%. So I've learned the "minimum payment" trade-off (and I wish congress hadn't forced CC companies to raise their minimum payment

requirements!) [ last year, one fine bank only made me pay $10/month on their loan of ~$10K! Now I'm seeing minimum payments of 1-3 %]

The difference between cash flow and real cost, and the fact that each time you accept a new credit card thus, it is a MAJOR hit on your credit. Let's say you have two credit cards now that you have had for over five years, and get four new ones. Your FICO score modeling goes from over five years to about a year and a half on your length of credit history (the average of your accounts, except that five years is the maximum you get credit for an account). Open four more six months down the line, and now you have ten, with an average time open of just over a year. Furthermore, since most people move as much as they can into the new credit accounts, this gives major credit hits for being essentially maxed out on a card. Thirty to forty points on your FICO score per card, perhaps more. You say you've been doing this a while. Not to mince any words, I wouldn't want to have your FICO right now.

There are always two concerns when you're looking for the best deal. Minimize your costs, of which interest is far an away the largest, and be able to make your payments. I don't know if you have other payments here, but if so I would do everything I could to live cheaply enough, long enough to use the money I save to make a difference on both of those scores. In your position, I'd sell any cars I still have a payment on, just to get out of the payment. This is a concern I've been telling people about since 2003, when the rates on everything were so cheap. There is more than one way to do things, but you have to be prepared for the consequences of the way you chose. I had some clients up in Los Angeles about July of 2003. They wanted to cut their payments. I gave them the option of a conforming loan (like yours) with a HELOC, and they took it. As soon as the loans funded, the wife called me and said I deceived them about the loan, and they wanted me to pay for another loan. Unfortunately for their contention, I had a piece of paper in the file with their signatures saying exactly what I tell everyone else about this situation, that the rate on the HELOC is month to month variable and subject to change, and that they understood this was a risk and they elected to take it. It looks like you went in with your eyes open, but the risk didn't work out as you hoped. I'm trying to think of other strategies to help you out, but other than "live frugally for a while", it's all little stuff around the edges.

Tonight I'm "running the numbers" on whether a 2% rate (nondeductible) is better than an 8% (tax deductible). And according to my simple calculations (I'm an engineer, not a financial advisor!), it's a no-brainer (go for

it!). For the $40K currently on the HELOC (other $25K is already temporarily in 0% accounts), the one-time transfer fee ($50-90/transfer) and lower interest amount (~$70/mo)

is ~$200/month less than the deductible interest-only (minimum, ~$435, @ 8%) HELOC payment, AFTER adjusting for the tax deductibility (@ 30% [fed + state], ~$130 on $435).

My plan is that in months when my "income"/cash flow cannot cover all the minimum payments, I'll just use a HELOC check to cover the difference. That is, slowly transfer SOME of the debt back to the HELOC. But in the meantime, my theory goes, I'm paying down my principle faster than if I was just making "extra payments" on the HELOC.

Yes, in most cases you will make more progress, faster, this way, but at such a long-term cost as to make it prohibitive, particularly if you have to leave the credit lines open after you transfer the money out six months down the line. Lots of very silly folks do all kinds of weird and non-remunerative things because it's a deduction, but deductions are never dollar for dollar. If that were the only concern, 2% nondeductible beats 8% deductible by a huge factor. Given what's going on in the background, however, kind of a different story. All these newly opened lines of credit are going to drag you down for years. Make certain to pay it off before the adjustment hits; one month at 24% will kill almost all of your savings. Two months at 18% will more than kill it. Given what your score has likely dropped to, I'd bet that it's closer to the former than the latter.

I also finally had a 0% application turned down, due to "too much credit already, for your income level". So I imagine having all these cards may be hurting my credit score? But I'm not going to re-fi my house (or buy a new car?) anytime soon, so I think I don't care.

I imagine you're going to care. FICO scores require care and tending and time to rise back up. Close off any cards you opened for the zero interest period that you have paid off, and that will mitigate the damage. Keep only a few long standing accounts. But a large amount of damage is already done. When Credit Card companies are saying that, your FICO has dropped big time. Without running your credit, from the foregoing information, I'd guess you are below the territory where I can get a 100% loan, these days, even sub-prime (lower 500s). You might be below 500, where only hard money can lend to you.

Another concern is that HELOCs have "draw periods", usually 5 years, and you're about three years into yours. I'd be very certain to move it all back into the HELOC prior to the expiration of the draw period. Your credit card options are already getting worse, meaning that you're not getting the cards or not getting approved for enough to be useful. The HELOC's rate, by comparison, is set by a margin in an unalterable contract, and you're not going to be able to qualify for a new HELOC that's anywhere near as good while those card accounts are open. Move the money back in at least a couple months before the draw period expires and close the credit cards, and you might be able to get a new HELOC on decent terms.

Your credit is always vitally important. Guarding a very high credit score is something worth stressing about. You never know when you might need to apply for credit. Most credit cards, nowadays, can alter your rate if your score drops or if you make one late payment anywhere, not just on that card. A good credit score saves you money everywhere, from borrowing to insurance. In your situation, I'd be stocking up on pasta and Hamburger Helper while seeing what I could do to increase my income, so I could live cheap enough to pay my bills down enough that I'm not squeezed. It's your life, but that's the way I see it.

Caveat Emptor.


(For full disclosure, the original email is below in a body).

Hi Dan,

While using Google to seek the wisdom of others regarding my current financial situation, I came upon an article of yours, and have now read at least a handful of others. In particular, "One Loan Versus Two Loans" caught my attention.

Turns out I made the Two-Loan choice myself, independent of your article, a couple years ago. I was motivated to get a conforming first loan (~$322K @ 5.75%), and put the other ~$45K of a prior mortgage into a HELOC (besides, the HELOC rate was lower than the 30-yr fixed at the time!).

Well, times (and HELOC rates) have changed, and I now have

~$65K on my HELOC, and relatively tight budget.

I have multiple credit card companies offering me low

introductory rates (some 0%, some 2%) for short terms (up-to 1 year).

Why would I NOT want to take them up on their offer?

In truth, I've already done this a number of times in the past 12-18 months, always at 0%. So I've learned the "minimum payment" tradeoff (and I wish congress hadn't forced CC companies to raise their minimum payment

requirements!) [ last year, one fine bank only made me pay $10/month on their loan of ~$10K! Now I'm seeing minimum payments of 1-3 %]

Tonight I'm "running the numbers" on whether a 2% rate (non-deductible) is better than an 8% (tax deductible). And according to my simple calculations (I'm an engineer, not a financial advisor!), it's a no-brainer (go for

it!). For the $40K currently on the HELOC (other $25K is already temporarily in 0% accounts), the one-time transfer fee ($50-90/transfer) and lower interest amount (~$70/mo)

is ~$200/month less than the deductible interest-only (minimum, ~$435, @ 8%) HELOC payment, AFTER adjusting for the tax deductibility (@ 30% [fed + state], ~$130 on $435).

My plan is that in months when my "income"/cash flow cannot cover all the minimum payments, I'll just use a HELOC check to cover the difference. That is, slowly transfer SOME of the debt back to the HELOC. But in the meantime, my theory goes, I'm paying down my principle faster than if I was just making "extra payments" on the HELOC.

Seems so obvious when I look at the numbers, that I cannot figure out why more people aren't doing it, or at least talking about it!

Why does a thorough website like yours not say anything about this (that I could find anyway)? Is it just to keep those low-rate credit offers coming? Am I missing something? I am really the only person to ever think of doing this? I also finally had a 0% application turned down, due to "too much credit already, for your income level". So I imagine having all these cards may be hurting my credit score? But I'm not going to re-fi my house (or buy a new car?) anytime soon, so I think I don't care.

Thanks for reading this far. If you post an article on this topic rather than replying, will I get a least a pointer to it in reply?

Again, thanks for considering a comment on my situation!

Identity withheld

Abu Musab Al-Zarqawi Killed in Air Raid Confirmed by face and fingerprint. Al-Qaeda also confirmed the information, while vowing to continue their terrorism. Several aides, including Rahman, his spiritual advisor, also dead.

Now this doesn't mean that al-Qaeda in Iraq is dead, anymore than removing bin Laden will end the war. It is very possible that we've cleared the way for a more capable subordinate to take charge (Think killing McClellan so that Grant could take charge of the Civil War earlier, or if Montgomery had been killed so Eisenhower could give the resources he wasted to capable generals).

Nonetheless, it is a significant blow organizationally against al-Qaeda, and unless a more capable subordinate does take charge, they've been hurt by this. Expect them to try something big soon, both for vengeance and for propaganda purposes.

Of course, the domestic political fallout will help the president, at least in the short term.

I'd rather have captured the small-minded weasel so that the Iraqis could put him on trial. Decency says that one should never feel gladdened by death, no matter how necessary, but I'm finding it difficult to be saddened by his. Okay, I'm finding it impossible, and my path to final enlightenment is doubtless somehow impeded, but that's existence. I'm very glad the troops got him, one way or the other, and I really hope it makes their lives easier and safer. It won't end the war, but it is likely to be a noteworthy milestone. Good job.

ROFASix has a nice summary, and links to the video of the airstrike.

via INDC Journal, some homegrown Iraqi reactions (severe language advisory). money quote:"Zarqawi would not listen to ballots, today there is no mistaking that he listened to the bombs."

Dean's World has more Iraqi reactions.

Gateway Pundit notes the reactions of that party that uses the stubborn animal for a symbol.

Captain's Quarters notes some other raids - 17 in all - now that Zarqawi is dead. Evidently a lot of intelligence was ready, waiting for the right time to strike, and now we've captured a lot of useful information.

Alright. I just can't resist a variation on an old joke.

Q: What was the last thing that went through Zarqawi's mind?

A: Shrapnel and the concussion wave.

Maybe he really will end up with 72 virgins. All of them named "Bubba."


Daily Kos DeLay Says Goodbye To Congress He Corrupted

Leave it to them to pretend people like Thomas Foley and dozens of ex congresscritters had nothing to do with. William Jefferson must be just weak and corrupted by DeLay's bad example, right? There never was an Adscam scandal, right?

Don't get me wrong, Abramoff is a crook and it's possible DeLay is as well. The trial will settle that. But to pretend he was responsible for institutional trends that started before his father was born is just a little too hyperbolic to let pass.

I'm pretty certain that not many people could withstand the sort of attention that's been focused on Tom DeLay. Where Jefferson has so far received basically a free pass from everyone for blantant illegal actions, there's been a partisan DA after him with three grand juries until he found one willing to indict on some pretty technical charges, and there's evidence the DA lied to them. No excuses for DeLay, and I want him to face trial, but I want Jefferson et al out of Congress and into jail as well.

UPDATE: Presumption of innocence for me but not for thee. Congresssional Black Caucus (essentially a Democratic Interest Group) opposes removing Jefferson from leadership post. Didn't DeLay step down once indicted? Wasn't that a big fight about "ethics"? Culture of corruption indeed.


Asymmetrical Information on abolishing the estate tax and the failed vote in the senate today.

I would like the estate tax gone, but it is so avoidable as to be, for all intents and purposes, a voluntary tax on stupidity and denial. Furthermore, charity benefits one heck of a lot from the planning done. All things considered, I'd rather they indexed AMT to inflation, or any number of other things. On the classic 10 scale of importance, abolishing estate tax might be as high as a 3.

Carnival of The Vanities Recommended: Soccer Dad (saving the lives of children with defects)


The Carnival of The Vanities Host said of my submission

I should warn you that Dan might tell you something you don't want to hear. While it's possible the person selling the property you want is being unreasonable by rejecting your offer, it may also be you who is offering less than the property is worth. And of course, the third possibility is that you're being yanked around by a buyer's agent who's just looking for lots of money and won't guide you toward making a reasonable offer on a property you can really afford.

Well, yes I say things some people don't want to hear. Perfect situations are rare, and they don't need expert help. Anybody can work in perfect conditions. But since most situations aren't perfect, indeed, are not anywhere close to perfect, and that's where an expert is worth his (in my case) hire. Somebody who is really looking to help - educate, advise, whatever, has to put their finger on where the problem area or areas are. It doesn't usually need to be offensive, but it does need to be on-target, and it does have to be in such terms as to leave no doubt where the problem areas are and how to fix them. "Experts" who won't do this, who do not consistently make it a habit to do this, are not worth the time of day.

Of course, when some experts solve a problem, it means they are unemployed. As long as people need real estate or real estate loans, there is a market for my services. Indeed, me plying my trade well is grounds for more business, more often, from the same clients. They make more money, I make more money. Everybody I'm concerned with is happy. And if my competition has a client who is unhappy, well, maybe next time they'll sign up with me.


Looks like Bilbray beat Busey in the 50th district. From where I sit, this looks like a tactical victory and a strategic defeat for the Republicans, vice versa for the Democrats. Despite Cunningham's problems, that district is very solidly Republican. Busby shot herself in the foot with her comments on how "you don't need papers to vote," which all the radio stations were running NRCC commercials about yesterday. If Busby hadn't simultaneously won the Democratic primary for the new term (while losing the runoff for the current congressional term), I'd say that district was likely to go Democratic in November. Get someone who hasn't ticked off quite so many citizen voters, and the Democrats might have a shot.

It is also noteworthy that Bilbray ran a pretty hard line on immigration.

The Moderate Voice has a lot more, including a roundup.

Via RCP, Slate has some more worthwhile thoughts.

Michael Barone's thoughts are more detailed, but seem mostly in alignment with mine.

Instapundit notes that Kos crowd actually won one yesterday, in Montana where a Kos backed candidate beat a DNC machine candidate in the Democratic Primary.

Except that, as everyone except Michael Barone seems to forget, the dynamics of party primaries are very different from general elections, otherwise Richard Riordan would likely have been governor of California. Gray Davis spent millions skewing the Republican primary to the right, so that he'd face a farther right candidate he knew he could beat in the general election.

In this instance, Kos seems to have saved Conrad Burns (Montana's Senator who faces almost certain re-election because of this) some big bucks.


lawyers ordered to play rock paper scissors to resolve dispute.


Don Surber makes a point worth making about how the attitude of the reporter makes a difference to the story.


Llama Butchers has a video for true econ geeks.


Gateway Pundit has some good information on the situation in Ethiopia.


Michael Yon has some good perspective on things that happen in war.

Real Clear Politics has a good essay on the media's lack of reasonable perspective.

Scrappleface has the "if only"


via Argghhh!, a fellow dachshund owner's description of the bathing process.

Other than the fact that Mellon will baptize the carpet every time and the fact I substitute chocolate for wine, that's pretty much the scene here.

Oh, and I use the tub so I can do both of them at once.


Those who think Lt. Watada is a patriot should read John's take over at Argghhh!

I don't want the military defying the legitimate orders of the civilian government any more than John does. The military is not allowed to pick and choose which orders it obeys, except when those orders are in fact, illegal, and they place their careers at a minimum, and often their lives, on the line to stand up and say no. If those orders are legal, and I haven't seen anybody making a legal case that they weren't that would pass muster anywhere outside a "Dedicated enemies of the american public" convention, expect the court martial to be brief and to the point.

Unlike Haditha, the facts are not in dispute, only the law. Except in the unlikely event these orders are found to be illegal (which, as Argghhh! points out, would require the en masse indictment of everyone who has served in Iraq), the needs of the service are such that the penalty is going to be at its maximum. This guy accepted a commission knowing he would likely be ordered to Iraq. There is absolutely no wiggle room in the circumstances, and the claim is going to turn upon points of law which do not appear to be in his favor.

In short, looks like the "let's quit before we win!" crowd is going to get the type of martyr they've been seeking for three years.

That was the wording of a search engine hit I got. It's not literally a death trap, of course, only much financial pain. But the hyperbole is forgivable in today's modern society and the state of the current market.

Other people may have other definitions of "housing bubble death trap," but when I'm talking about stuff like that, I'm talking about someone who bought too much house with an unstable (or insufficiently stable) loan.

I just picked a couple random streets in older lower middle class neighborhoods, and looked back a couple of years. I found a couple of homes that have sold twice or are on the market again.

A 3 bedroom home sold for $487,000 at the end of last year. It's back on the market now for $425,000. A condo sold for $285,000 at the end of 2004, and again just recently for $265,000.

Now just in case you don't understand, the owner doesn't get the full sale price, but they paid the previous sale price to buy it. Usual seller's expenses run about seven percent or so. So for the 3 bedroom home, the owner is only going to get about $395,000 to pay it off, even if they get full asking price. For the condo, the owner only got about $246,000.

Now, let's consider the sales involved. Either their down payment when they bought the home will cover it, or it won't. If it does, the homeowner is out about $92,000 in the first case, about $39,000 in the second. This doesn't include any prepayment penalties there may be or negative amortization it may have undergone, not to mention the cost of any payments they may have missed, etcetera, etcetera. There's always a reason people sell for a loss, and it's usually because they have no choice. They can't make the payments (and never could) or they have been transferred, have to get housing elsewhere, and can't make the payments. And what if the down payment won't cover the deficit? Well, at the end of the year they are likely to get a 1099 form that says they got income from forgiveness of debts. As I understand it, this is ordinary income, and it can knock you up to higher tax brackets, both federal and state, if your state has state income tax.

So why didn't the folks just refinance into something stable, you ask? They couldn't afford the payments on a stable loan. Furthermore, they couldn't refinance due to their situation. If you bought with anything close to 100% financing, and you lose $55,000 of value, well, banks don't like lending money for more than the property is worth. There's no security in it. Now there are 125% loans out there, but the rate is high and the terms are ugly. If you can't afford the rate at 100 percent, or 95 percent of value, you certainly can't afford the rate for over 100 percent. There are only two times that the value of a property means anything. One is when you buy or sell, and the value is whatever you paid for it, or your buyer pays. The other, alas, is when you refinance, and if you owe $480,000 on the property when similar properties are selling for $425,000, the odds of you getting a better loan with a lower payment are essentially non-existent.

Now if the folks are in a stable loan, and can make the real payments, it doesn't really matter what the property is worth right now. You're doing fine, whether you refinance or not. Refinancing might put you into a better situation, but if you can't refi, you're still doing okay. Yes, the prices are down and they're likely to go down more. It just doesn't matter if you don't intend to sell and don't need to refinance. Your cash flow is what it is, and if you really were okay with that to start with and the loan is stable, you're likely okay with it now. If you got a loan that was stable for three or five years long enough ago to worry about loan adjustment now (or soon), you've likely got plenty of equity in the property now. If, on the other hand, you did a 2/28 interest only a year and a half ago, then you're potentially looking at a payment adjustment in the next few months that's suddenly two percent higher and fully amortized, which could be thirty or forty percent difference in the payments. Ouch. Out of such scenarios are losing a property to foreclosure constructed, with consequences even worse than the ones I talk about above. Just the act of lender filing a Notice of Default usually adds thousands of dollars to what you owe, never mind any payments you may have missed or been late.

This then, is what I call the Housing Bubble Death Trap. People who bought too much house with unstable loans, then had the market recede a little on them. Now they are upside down (owe more on the property than it is worth) with a loan they cannot refinance and cannot afford, and they can't sell for as much money as they paid.

What are the loans to watch out for if you're buying. Anything like stated income, where you're not documenting that you make enough to qualify for the loan. Stated Income has legitimate usages, mostly for small business folk and those paid on commission, but should not be used nearly so often as it has been, of late. For all the people who have claimed otherwise (and used them for such), I have never seen a situation where I'd recommend any kind of negative amortization loan for the purchase of a property that you intend to live in. Stated Income Negative Amortization loans should scream out to anyone "WARNING, WILL ROBINSON! DANGER! DANGER! DANGER!" Short term (2 year) interest only loans are less clear-cut, but often a bad idea. These are sub-prime loans. I did a lot of 2/28 loans at six percent a couple of years back. They were intended as short term loans until folks' credit improved, and that's the way I explained them, emphasizing that fact that they have to make certain their credit score actually improves during those two years. They're going to be around 8 percent the first six months they adjust, and a $300,000 6 percent interest only has a payment of $1500 per month. If it adjusts to 8 percent and starts amortizing with 28 years left to go, that's a payment of $2240. I have a firm rule of no prepayment penalties longer than the fixed period of the loan, but I'm definitely the exception rather than the rule there among loan officers. If you were paying principal and interest all along, like most of my clients, you've got some breathing room (equity) in your property and the "payment shock" won't be nearly so bad, not to mention that if your score actually went up, you likely qualify A paper now.

Three year (or longer) fixed rate A paper probably gives you enough breathing room in all but the worst of all market collapses, and I prefer at least five, with thirty year fixed actually being my favorite loan right now, due to the fact that depending upon the lender and the client, I may actually be able to get them cheaper than anything else. This, however, is a short term pheonomenon of the moment, due to the yield curve being inverted, and once it straightens out, I'll be doing more hybrid ARMs again.

Caveat Emptor


Read The Full Note

| | Comments (0)

Just got a search "how can I tell if my prepayment penalty applies to selling my home"

Read The Full Note. You need to do this before you sign it. I know that many people are just thinking "Sign this and I get the house!" or "Sign this and I get the money!" but a lot of loan providers - often the very biggest - scam their customers by talking about one loan with very favorable characteristics, and when it comes time to sign they actually deliver a completely different loan with a prepayment penalty, burdensome and unfavorable arbitration requirements (I've seen stuff that amounted to "the bank chooses the arbitrator"), and any number of other unfavorable terms, not to mention having a higher rate and three times the cost, and being fixed for two years as opposed to the thirty they told you about.

Any loan officer can make up all sorts of paperwork along the way to lull you into a sense of security. The only paperwork that means anything are the papers you actually sign at closing with a notary present. The Trust Deed, the HUD-1 form, and the Note. Concentrate on these three items. The HUD-1 contains the only accounting of the money that is required to be correct (things like do you need to come up with more money than you were told?). And the Note contains all the other information on the loan that your provider might actually deliver. Notice that wording - I said might deliver. Just because you sign the Note doesn't necessarily mean you get any loan, let alone the one that Note is talking about, but these are the terms you're agreeing to now, and most Notes do actually fund. They can't change the terms without getting you to sign a different Note. But once you sign and the Right of Rescission (if applicable) expires, you are stuck. Get that other loan - the one your loan provider has been talking about up to now - out of your head. This is the moment of truth as to what they actually intend to deliver. The majority of the time, the loan they actually deliver is significantly different from the loan they were talking about before now, and this document is where the truth lies. Amount of the loan (does that match what you were told?). Length of the loan. Period of fixed interest. What the fixed rate is, and how the rate will be computed after the rate starts adjusting. The Payments: how closely do they match what you were told? Payments are a lot less important than the interest you are being charged, but if the payments are $20 more than you were told (or if the interest rate is different), you were basically lied to. If the real loan was available and the principal correctly calculated, the payment should be within $1. $20 off gives the loan provider literally thousands of dollars to soak you for extra fees in, even if the rate is correct. A competent loan officer knows what loans are really available and whether you are likely to qualify, and can calculate pretty closely how much money it takes to get the loan done. From this flows the payment. Payment is a lot less important than most people think, but you do need to be able to make it, every month. Furthermore, that's how most people shop for loans and how unethical loan officers sell bad loans. Shopping by payment is a good way to end up with a bad loan. Many loan officers will tell you about this nice low payment, and conveniently neglect to mention the fact that if you make this low payment, you'll owe the bank $1200 more at the end of the month than at the beginning of the month.

So take the time to read the entire Note before you sign. There are all sorts of things lenders slip in. I worked for a very short period at a place that trained its people in how to distract you from the numbers on this and the HUD-1 and the Trust Deed. This is a legally binding contract you are entering into, you are agreeing to everything it says, and there aren't a whole lot of methods of getting out of it if you don't like what it says later. Once the loan funds, you are stuck with the terms, the costs, and everything else. The only way out, in general, is to refinance, which means paying for another set of loan costs and quite likely the prepayment penalty on this loan. Multiple thousands of dollars. So don't allow yourself to be distracted. Read the full Note.

Caveat Emptor.


Carnival of The Capitalists Recommended: Econbrowser (M3 vs M2), Jim Logan (billable hours versus solving the customer's problem), Paul's Tips (The easiest way to fool smart people), Free Money Finance (money handling), Casey Software (non-disclosure agreements)

Carnival of Personal Finance


Dr. Sanity predicted several days ago that Iran would feel the need to do something about Condi Rice outthinking Ahmadinejad. Looks like they've done it. Iran warns U.S. on oil shipments:

TEHRAN, Iran (CNN) — Ayatollah Ali Khameni, Iran's supreme leader, has warned the United States that any "misbehavior" directed at Iran would serve to disrupt Gulf energy shipments.

"In order to threaten Iran, you say that you can guarantee movements of oil through this region," he said Sunday, referring to shipments that pass through the strategic Strait of Hormuz near Iran and other countries.

The United States "should know that the slightest misbehavior on your part would endanger the region's energy security," he said. "You are not capable of guaranteeing energy security in this region."

Khameni did not specify what he meant by disruption or misbehavior.

I'll translate, for the realpolitik impaired. Something over half of the world's oil supply goes through the Straits of Hormuz. Iran owns one shore of those straits. They are saying that if we do anything to upset them, they'll destroy the oil going through there. Except that "Who can destroy a thing, controls a thing," (from Dune) may be a seductive thought for those who wish more power than they have, but it is not quite true. It requires that you be able to answer the full might of your enemies more or less equally, which the Iranians cannot. Indeed, the Iranians, by such actions, may very well force the United States to swat them down harder than they otherwise would need to be swatted. It is one thing to treat a lesser power somewhat delicately if you have the latitude. When that lesser power is threatening the economic lifeblood of the entire world, that is quite a different matter. Of course, being from a masculine shame-driven culture, they see this threat as redeeming their manhood.

They are further gone in Denial than the Japanese even thought about being prior to World War II. Yes, they could hurt us badly enough that neither country would come out ahead. I do not want a confrontation with Iran. If it can be avoided without worse consequences, I'll suggest biting our tongue and biding our time - the Iraqi and Afghan governments on both sides are going to kill the current Iranian regime, given only time for the ideas to bleed across the borders. But although they can hurt us, we can destroy them, and everybody knows it. It's kind of like being hit by a .22 versus being hit by dozens of slugs of much higher caliber, not to mention multiple other ordnance, and that's without using our biggest weapons, which would damage our allied countries in the region.


Matthew Yglesias makes a good point about third parties.


The big brouhaha today is due to a report from those "anonymous sources" that the army is going to modify one of their manuals regarding the Geneva Convention. Protein Wisdom has the most rational take I've seen.

Assuming it's true, and not another case like flushing the Koran.


Armies of Liberation talks about electoral corruption in Yemen.


Captain's Quarters notes that Iranians have moved the equivalent of $200 billion out of the country is recent months. If their president gets them into a violent confrontation with the US, the idea being they'd be in a position to recover personally.

The real bad news for Iran, of course, is that much money leaving puts a serious crimp in the Iranian economy, which doesn't exactly help stabilize the mullah's regime.


Free speech for Me but not for thee: Michelle Malkin covers the differing treatments of those student who were against one specific piece of legislation as opposed to one person who tried to support it.

I recently discovered the film Secondhand Lions. Robert Duvall, Michael Caine, and Haley Joel Osmont. Beautiful tightly plotted movie, highly recommended, and if it hadn't been up against Return Of The King it might have won Best Picture. Robert Duvall and Michael Caine are a pair of brothers, old coots who disappeared for forty years before turning back up in Texas. Everyone knows they've got money, and everyone's got their theories as to how they got it. One person thinks they were mobsters, another bank robbers, a third contract killers. Nobody knows where the money is, and everybody wants to get their hands on it. Walter (Haley Joel Osmont) is their great nephew dumped off with them by his mother for the summer. Over time, Michael Caine starts telling this fantastic story about where they were all that time, what they were doing, and incidentally, where they got their money. Along the way, we see how the two old brothers treat the world around them, and the boy starts to get a sense that there really is something to their story, no matter how many people tell him otherwise because it's too fantastic. Nothing out of science fiction or fantasy, but quite a bit of the stuff that romantic fiction is made of. The imaginations of the adults simply will not stretch far enough to believe what you as the observer suspect more and more along the way is the truth. They're older, "wiser", and "not that naive." But the story Michael Caine's character tells is not only compelling, but has all the little elements that make it believable and fits with the way the brothers treat the world around them, and when the major confrontation happens, Walter decides he believes his great uncles rather than his mother (who's lied to him for convenience many times) and her latest sleazy boyfriend, who are trying to justify stealing the two brothers' money.

There is eventual corroboration of main theme of the brothers' story just as the picture ends, after a twenty year fast forward, but by that point the viewer who has been watching carefully doesn't really need it, and the point of the corroboration is elsewhere. The watchers of the movie have seen the evidence. No matter how unlikely, we know it's the truth, even if those characters stuck in denial on the silver screen do not. If Michael Caine has possibly embellished the details a bit, that's not really important. You know that the basic story happened, where the on-screen adults refuse to believe.

This happens in the real world, also. When Heaven's Gate group suicided, the local rag ran a transcript of the sheriff's call. The first officers at the scene just could not understand what happened, despite it being fairly straightforward logically. Their minds just could not make the deduction. Their prejudices refused to believe 39 people could commit mass suicide, and they asked for back-up partially to figure out what had happened.

The real world happens, and it cares not a whit for our prejudices and experiences. It just is. It doesn't matter whether we believe there is an express train coming down the track or not. We're just as spectacularly dead either way when it hits us.

We have once again reached a point in history where many people believe that their perception is everything, despite it missing a large number of data points and ignoring another large number of them. People who would have no problem demanding immediate action if a group of neo-nazi skinheads took over the government of Germany, changed the flag to a swastika, built up their army, and started saying things like lebensraum and Drang Nach Osten and Judenfrei, nonetheless have a failure of imagination when it comes to the Islamists. When you're talking about the Nazis, I don't imagine anyone would have any problem extrapolating what would happen next. It's all happened before, and most of us have heard stories about it and seen movies and television ad nauseum (Hollywood has no problem with Nazis as bad guys; after all, they attacked the communists and almost won). Indeed, many folks believe something very similar has happened here in the United States, despite the vast weight of the evidence to the contrary. For example, instead of metaphorically "scapegoating the jews" so to speak, we are going quite a distance out of our way not to hold those of the ethnicity that was responsible for the most recent atrocities, despite the fact that a not insignificant proportion have actively worked to advance the cause of those who perpetuated the atrocities, and yet we refuse (mostly correctly) to allow our law enforcement and counter-terrorism units to concentrate their efforts on this ethnicity. We have yet to restrict them in any fashion, or treat them in any way disfavorably as compared to any other group. Compare and contrast this to the treatment that the Jews received in Nazi Germany, even before Kristallnicht. Consider that we are gearing up for Congressional elections, not burning the Reichstag, and that it is accepted by all concerned that our current president will leave office in January 2009 while having no apparent successor currently in sight. Indeed, for the first time in 56 years, we will have neither a sitting president nor vice-president on the ballot in 2008.

Why, if we are so intent upon manufacturing threats and conspiracies, are we unable to believe the publicly stated intentions of a large faction of a major world religion? They make no secret of their Islamist doctrine, and conquest for the sake of spreading their religion is embedded far more strongly in the dogma of Islam than it ever was in Christianity, yet a significant portion of our population completely discounts this threat while obsessing about the "establishment of a theocracy" here in the United States, presumably of the fundamentalist or evangelical Christian stripe. Despite their words, despite their actions, it's almost as if these people have dismissed the islamists as being unimportant, much like the British Empire of a century ago dismissed the request of one chinese mandarin who inquired as to when this barbarian chieftainess Victoria was going to come do homage to the Son of Heaven? The world today is different in many ways, but one of the most important is the damage a small group of dedicated people can do.

There is the fact that there have been christian theocracies, many of them spread all over europe. There is also historical favoritism towards protestant christians in this country. However, there hasn't been a single christian majority nation which has been believably a theocracy since at least the Spanish Civil War, and not really since the French Revolution. Protestant favoritism has never been legally based in this country, and its social practice in this country and elsewhere have been dying since the end of World War II and in another generation you'll have people who don't even realize that protestants used to be favored.

Compare and contrast this to Islamic nations, where the dhimmi tax is the order of the day, non-moslems are severely restricted in their opportunities and not allowed to do certain things. There is no imagination required to believe Islamists intend exactly what they say; these are typical practices in those countries that are officially islamic.

Consider the treatment of non-islamics in islamic countries, and historic militant expansionism of islam. Dhimmi is real. It is happening today. The pressure to adopt Islam is intense, starting with increased taxes and going from there through being unable to bring any kind of legal action against a Muslim, not being allowed to testify against them in court. If ever you give in, and accept Islam, not only do the imams have dominion over you forever, but you are never permitted to give it up. If you are raised in an Islamic household, you will be required while still a child to profess islam, and once you have done so, there is no recognition of the fact that you may have done so under coercion, or before the age of consent. You are moslem forever. Not even in the darkest, most repressive days of christianity did the christian priests go so far. Several muslim countries still enforce the death penalty for apostasy - attempting to leave the islamic faith.

So far, I have ignored the militant nature of Islam, how it carried the religion at the point of a sword all the way from Arabia to the Philippines and Morocco and Spain, most of it within a century or so after founding, and how it wants to do so today. Indeed, it is doing the best it can towards that purpose. Christianity a hundred years after the death of Jesus, or Paul, was a small sect, and if not generally persecuted to the degree portrayed in christian mythology, was officially forbidden and hid in the shadows where nobody looked. The reason we have so few examples of early christian lore, or buildings, is because they were forced to hide from official notice. For nearly three centuries, this was how christians lived. The christian philosophy has developed in accordance with this fact; it does not need official sponsorship from the state in order to attract believers.

Islam has never done anything of the kind. Indeed, they would likely have become something more akin to christianity if they had had to live thus. What they did in India was in no way atypical. I'm not going to pretend the Crusaders were saints, but the moslems, in general, gave at least as good as they got in terms of atrocities (there were some exceptions). The conquest of Cyprus, Syria, and Persia all had their atrocities. Not to mention the destruction of most of the remnants of classical civilization in Africa. Vlad Tepes was mostly noteworthy for being one of the few non-moslems willing to be savage enough to give them pause. Here's one more link just to drive the point home.

"So what," you say, "The last major offensive of the Islamic world was in 1683." True enough, but it was the last because they ran out of the means to carry them out, not because they had renounced conquest in the name of religion. The europeans had built their own civilization, and their technology, both civil and military, surpassed the Ottomans. By the time of Lepanto in 1571, it was only greater numbers that made them formidable, and when the southern european powers of the Mediterreanean combined against them to generate approximately equal numbers, the Turks were beaten. By the time of their last assault on Vienna, even superior numbers were insufficient to achieve their objective.

Not only have the Islamists today never given up on the goal of spreading their religion through conquest and force, the laws in the islamic countries hobble any who would speak against them or moderate their influence. It is a mistake to think of an islamic ruler as having the same sort of power that an absolute despot in most of the rest of the world. The real power lies in the mosque, which may grant the ruler some leeway, but nonetheless rules with an iron hand, and there are few islamic rulers who have successfully defied their priests. It is probably closer to the mark to think of their nominal rulers as administrators, because although they have discretion and authority of their own, there are boundaries they cannot cross if they wish to retain their position or their lives, as both Nasser and Sadat of Egypt, to name the first examples that spring to mind, demonstrate. Neither the ruler nor anyone else can fight sharia, and sharia supports the Islamists. There are a number of courageous moslems, primarily in the west, who have spoken out against Islamism and various parts of Islamic law. To date, I cannot point to a difference they have made in the overall islamic mindset, and many of them are under fatwas of death. I respect and admire them for speaking out, but thus far I cannot see that they have had much effect.

In short, this situation is in no way, shape, or form comparable to what limited efforts that christians have made to promote their values through legal-based means. The Islamic theocracies might be very comparable to Nazi Germany, if the Nazis had been in power for 1400 years and essentially every german was a true believer in Nazism and the virtues of the master race. This was not the case, as is demonstrated by the actions of Oskar Schindler and the White Rose group, among many others. China under Mao, the greatest mass murderer in history, comes closer, but even that falls short of the degree to which Islamic society proscribes disagreement with, and debate about its religious precepts, let alone the penalties for acting against those principles. If any imam has yet disavowed or spoken against world conquest by Islam, it's news to me. I just executed searches on several major search engines, and didn't come up with any. I seem to recall the pope apologizing for the crusades and indeed, christians have questioned them almost since they happened. I haven't heard of any reciprocation from moslems for their co-religionists' deeds in the same places, before, during, and after.

With all of this evidence readily available, if not precisely trumpeted by the guardians of our national discussions, the media, I cannot put the failure to comprehend the threat down to a failure of imagination. The data, the explanations, have been laid out quite solidly any number of places and they are easily findable on any search engine (except perhaps the ones based in Islamic countries, which are censored much the same as Google, MSN and Yahoo drew so much fire for accepting and cooperating with in China). Those sheriff's deputies who encountered the Heaven's Gate bodies I mentioned earlier did figure it out for themselves, although it took them a bit longer than you might think if you'd never been in a similarly worldview stretching situation. But they did manage to stretch their worldview to accommodate new facts. Those who do not believe in the war on terror are being presented with new facts that contradict their worldview, and instead of adapting their worldview to the new facts, they pretend those facts do not exist. Instead of believing in quite open and blatant islamist conspiracies for world domination, they insist upon creating ones which do not stand up under the comparison with known facts. This is not a failure of imagination. This amounts to nothing less than a willful denial of evidence, much like any number of scientists in the past refused to believe theories which described the world better than existing theories and correctly predicted subsequent events, much as the islamist hypothesis has correctly predicted everything from the arrests and other activity in Egypt to Iran wanting to join Pakistan in the nuclear club to the actions of the Wahhabi priesthood in Saudi Arabia.


I've written articles on when you can't make your mortgage payment and how to react if you see foreclosure coming in time to do something about it, and even on Short Payoffs, but all of those are owner (seller) oriented. This is intended as a basic buyer's guide to getting a bargain from people who bit off more than they could chew, with emphasis on the current local market but applicability anywhere.

There are essentially four phases in the foreclosure process. The first is pre-default. They've made late payments or none at all, and there's no way they can keep the payments up, but they won't to the intelligent thing, which is sell for what they can get. Many people who own properties headed for default are deep in Denial. Yes, this is often because something bad happened to them for reasons beyond their control. I'd be happier if those sorts of things didn't happen, but the amount of rescuing that's going to get done is minimal. There are very few White Knights running around, and the ones who claim to be White Knights are usually blackguards. Unless the seller knows of some factor that is going to change, this is the smart time to deal with the problem. Before the Notice of Default is recorded, nobody really knows but the owner and the bank. Once the Notice of Default hits, all the sharks come out because everyone knows the owner is in Dire Circumstances. Let's face it: most folks will make the payments on their home even if they let every other bill slide. When someone can't make their mortgage payment, and it's public information as a Notice of Default is, everybody and their pet rock knows thet don't have any choice but to sell. They'll flood you with offers, but they won't be good offers.

Now if you're looking to buy at this stage, the thing to do is examine the Multiple Listing Service. "Motivated seller" and similar phrases are often code for "These people can't make their payments!", particularly in the current market with prices declining somewhat and many people who stretched beyond their means. It would be great to be able to get a list of properties that are sixty days or more delinquent, as this would include the folks in denial, but it just isn't going to happen. The only folks who know are the banks and the credit reporting agencies, and they are prohibited by privacy laws from disclosure. So at this point all you have to deal with are the people who are not in denial. Now when the market is rapidly appreciating, this is a good place to find a bargain, because once the Notice of Default hits, the sharks swarm, so if you can find these people before that, you're in a strong bargaining position if you correctly suspect they can't make their payments. The taxes being delinquent is often a good indicator of this, but there is no way to know for sure unless the people or their agent tell you, and the agent who tells you has just violated fiduciary duty. This can mean prospective buyers overplay their hands in negotiations, which is fine if you intend to move on if you can't get a "Manhattan for $24" type deal, but if it's a property you want and can make money on, overplaying your hand can poison the atmosphere. There aren't many "Manhattan for $24" type deals out there. There are a lot more good opportunities for someone willing to pay a reasonable price and hold the property a while or make improvements. Deals so good that they instantly make oodles of money, someone will usually come along and offer the poor schmoe on the other end a better deal, and if the poor schmoe has a decent agent who's looking out for their interests, they can switch to the other offer. Buyers and escrow companies don't like it, but it can be done. It's extra work for the listing agent, so they may not want to, and they may not have done the best set-up, but it can usually be done anyway.

The reason it's smart for sellers to sell at this time is that this is when they are going to get the best deal. The mere act of entering Default is likely to cost thousands of dollars. Furthermore, this is the phase with the most opportunity to find a property at a better than usual price for buyers, because most of these don't get to actual default. Someone will come along and make an offer, and a listing agent who gets an offer on one of these is likely to advocate taking the first reasonable offer, reasonable being defined as "anything vaguely in the neighborhood of the asking price," and the asking price itself is likely to be lower than it otherwise would be.

The second stage of the foreclosure process is default. The Notice of Default has been filed, and because it is a matter of public record, the sharks instantly react to the blood in the water. The seller is going to get dozens to hundreds or even thousands of solicitations. Also, once the property is in default, the bank can require the owner bring the Note entirely current in order to get out of default. Whether or not the property is listed, they're going to have agents offering to sell it for them, individual buyers who want those Manhattan for $24 deals, and lawyers offering to "protect" them by declaring bankruptcy. By the way, I've never heard of anyone who came out better in the end by declaring bankruptcy, so you probably don't want to do it if you're in this position. I know it's your home, and you're likely extremely emotionally attached to it, but declaring bankruptcy doesn't mean you don't owe the money when it comes to a Trust Deed. Every single one of these folks, lawyer, agent, or prospective buyer, knows that you're in default. Some owners are still in denial at this point, but all denial means at this point is that such an owner is not likely to take the best offer they'll get. It's at this phase that most "subject to" deals happen, usually with highly appreciated properties with significant equity over and above the trust deed. If the owners owe anything approaching the value of the property, that's a silly situation to do a "subject to" purchase for buyers, and most of the prospective buyers (those with decent advisors or agents or experience) won't do it if the equity is less than a certain amount or proportion of the value.

The third phase of a foreclosure is the auction. This is typically a very short period. Five days before the auction date itself, the owner loses the legal right to redeem the property, although the bank will usually let them until the last possible instant. There is also a legal requirement to vacate the property before the auction. "Subject to" deals can still go through as long as the bank will accept redemption. Now the auction itself requires cash or an acceptable equivalent. You don't go to the auction and then get a loan later. At the very least you have to have the loan prearranged and a check for the proceeds in hand. This can mean that the rate is significantly higher, and it can be difficult to refinance within the first year.

The fourth phase is after the auction. In California, if the property does not get a bid for at least ninety percent of appraised value, it does not sell and becomes owned by the bank. The bank doesn't want it; they're not in the real estate business and in fact, they are legally required to dispose of it within a certain time. In the current market, this can be the best place to acquire a property. The bank knows they're taking a loss, and the longer it goes, the bigger the loss. Mind you, because the bank usually takes a loss, few properties go to this stage. The lenders will usually do anything reasonable in order to avoid auction, but once it goes to auction, they want to get rid of it. They usually require a substantial deposit, but the purchase price can be the best of all.

One thing to be wary of in foreclosures is they are often in less the ideal condition, to say the least. These people know they are losing the house, and often that they are going to come away with nothing in the best realistic case. They have no incentive to take care of the property, and many actively work to mess it up. This is cause for care in purchasing them, and inspections, because not all of the damage may be obvious. Furthermore, many of them may have been unable to afford proper maintenance for some time before they lost the property. Purchasing a foreclosure can mean you will need a large reservoir of cash in order to fix up the property to habitable condition.

Caveat Emptor.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Originally here

Woohoo! After several months of ups and downs but staying about where it was, traffic really took off set a new site record for visitors in May. 63,982 visits completely destroys the old record of about 48,500! 170,712 page views. I also had my single busiest day ever in May, with 3178 visits. Running totals: 383,153 visits, 1,217,295 page views since I started this thing last June 19th.

Thank you all for stopping by.


Via TuCents comes this story about the California Supreme Court ruling that police can enter a residence without warrant to arrest a DUI. I'm a big advocate of transparency, but here I draw the line. This is too permissive of fishing expeditions. Let's say I come home from work on Friday afternoon and walk into my home. A police officer waiting sees me get out of my car and says he suspects I was driving under the influence. As some readers may be aware, I don't drink alcoholic beverages but that is irrelevant and unknown to said officer. I walk into my home, they having made absolutely no attempt to detain me prior to doing so, and now the whole property is fair game for a search. They also have the opportunity to plant whatever they want, evidencewise, although they can also do so on a search warrant. They have the opportunity to do so, and never mind that the original charge never worked out. Even if no criminal charges come out of it, what happens to your reputation in the community when the information is "accidentally" released that they discovered fifty or a hundred weapons, several gig of porn with a particular kink on your hard drive, drug paraphernalia, or any number of other legal things that are nonetheless less than savory by the standards of the community, tolerated when nobody knows or has their face rubbed in it, but grounds for ostracism from many people when the community finds out about it? When there is something going on outside the home, or reaching out to touch the rest of the world (as phone calls do), that much is fair game. Something within the home that touches no one else is not. The California Supreme Court has just handed law enforcement yet another ticket to attack normal citizens at will.

I have two words for our state Supreme Court: Rose Bird


Well the Donkeys have told voters where they stand in no uncertain terms. Should they take office in November, all of their prospective committee chairs are from the liberal wing of the party. Admittedly, it's hard to find moderates in the House, but they had to work to find people this "progressive". To quote, "Only two of 20 earned grades of less than 90 percent on last year's voting records from the liberal Americans for Democratic Action interest group. Half had perfect scores of 100 from the ADA - or would have had it not been for missed votes." Dingell for Energy and Commerce. Rangel, or all the possible alternatives, who fought every rational step to get the budget under control, for Ways and Means, of all places. Miller (prospective Education and Workforce) I don't know much about despite him bieng a Californian, but the fact that he is a Californian, as socialist as our politics have become, is not a good omen. Conyers, a congenital idiot, who will believe anything any member of Greeenpeace, the ACLU, or the communist party tell him, for Judiciary. Yeah, sure the Donkeys don't intend to impeach the President as soon as the house is in session if they win. Now pull the other one. Conyers has been trying already, and they tag him with Judiciary. Alcee Hastings (prospective chair of intelligence) was convicted in 1989 and removed from a judgeship for fabricating evidence that secured his acquittal on other charges.

Not to mention Pelosi.

Actually, the Donkeys are neither progressive nor liberal in the classic sense. Their leadership has not modified their politics in forty years, no matter how convincing the evidence is to the rest of the world.

Okay, they've given any rational person all the evidence they should need to vote Elephant in the fall, however lacking the current crop is. (the representative for the district I live in, Filner, is a Donkey, and so is Feinstein, our senator whose term expires this year, so I get to both vote Elephant and turn the rascals out.)

Captain's Quarters has more committee assignments, including ******* Henry "Numbskull" Waxman, who coincidentally, I talked about just his morning as the idiot behind stopping the Partnerships for Long Term Care (second to last paragraph here, for a quick easy lesson in how to do something stupidly destructive through class warfare, and they want to give this clown the Government Reform Committee?)


via Strata-Sphere, a four part Thomas Sowell column on mythology of liberals versus reality. Part I Part II Part III Part IV


via Boxing Alcibiades, the best sign I've seen that the war on Islamism is winnable.


Looks like a low life publisher has infringed Michael Yon's copyright.


In case you missed it, Canada has arrested seventeen allged would-be terrorists. They planned a bomb using three tonnes of ammonium nitrate

Via Wizbang, they planned to target the Canadian CSIS Toronto office, among other targets.

LGF notes that the whining has already begun about how they were framed because of their ethnicity, are being abused, etcetera.


Mudville Gazette has caught the press exaggerating what the military has said about the Haditha incident.

I have no idea and no qualifications to judge. For all the studying of military history I've done, I've never been in combat, never learned the rules of engagement that our military operates under, and have no experience to judge whether a violation has occurred. I will have to accept the verdict of whatever military investigations and trials there are. But it does seem plain to me that this has little in common with My Lai, or any number of other atrocities that have happened in war. At most, the response was beyond what such response should have been given the provocation, for which the commanders who failed to control the troops should quite properly be hit with the heaviest consequences in the book, if guilty. But it's not like it was planned, orchestrated, or even specifically ordered. People get a little emotional in a combat zone when their lives are on the line and their friends are killed. I understand this, even though I agree with the necessity for punishing it.

It also bears examining that the Iraqi relatives alleging the slaughter are refusing to allow the corpses to be disinterred for examination. Were this the United States, they would not be offered the opportunity of refusing. They are accusing these Marines of a felony level action, and refusing to cooperate in the gathering of evidence? Doesn't look good for the prosecution, whether it's downtown Houston or Haditha, the defense should make a strong point that it is his clients contention that this evidence which has been refused would clear them of wrongdoing.

Except, of course, that what those promoting the story are after trial by bad publicity of our civilian leadership, and those Marines are completely unimportant to them, excepting as how they are likely Bush supporters.

Two last questions: 1) Why are the same suspects whining about the treatment of the alleged terrorists not also whining about how these Marines are being treated? 2) Why are not the perpetrators of any number of atrocities on the other side not being brought to the same sort of justice?

LATER: Michelle Malkin notes some similarities between a photo the UK Times claims is of Haditha and a Newsweek photo that accompanied a report of terrorist executions. I'm still waiting upon the final resolution of the investigations and/or court martials, but this is starting to smell. Both badly and strongly.

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

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

Let me explain what's going on here.

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

Bathing is performing the functions to clean yourself.

Eating is feeding yourself food you are given.

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

Continence is what you'd think.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Supporting articles here and here and here)

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

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

Links to the four states with Active Partnership Programs:


New York



(Continued in Part III here.)

Caveat Emptor

Originally here

"overpriced house offer rejected what next"

(Before I get started, I want to make it clear that I am using the same definition of worth found in this article)

Well, the seller obviously didn't feel that it was overpriced. Given that they were unwilling to sell for that, consider the possibility that you didn't offer enough.

It's human nature to always want to blame the other side. Given the state of real estate prices here in San Diego, I have considerable sympathy for buyers these days. On the other hand, if you look at the sales log, sales are still being made. This means willing buyers and willing sellers are coming to an agreement that both feel leaves them better off, and they are doing it at market prices.

The fact is, there are always at least two possibilities when an offer is rejected, and the truth may be a mixture of the two.

First, that the seller is being unreasonable. This happens a lot. Somebody thinks their property is worth more than it's worth. When people can buy better properties for less, they're not going to be interested in yours. In this situation, you're not likely to get any good offers. You'll get people doing desperation checks - coming in with lowball offers to see how desperate you really are. A very large proportion of these are people in my profession looking for a quick flip and the profit that comes with it, or other investors. Anybody looking at properties priced where this one should be priced is likely not even going to come look.

Second possibility, the buyer is the one being unreasonable. Properties like that one really are selling for the asking price, and you offered tens of thousands less. Some buyers do this because it's all they can afford. Some buyers do this because they want to get a "score". And some are just the standard "looking to flip for a profit" that I talked about in the previous paragraph. There is a point at which I tell all but the most desperate sellers that they're better off rejecting the offer completely than counter-offering. It saves time and effort, and the prospective buyer either comes back with a better offer, or they go away completely. Someone offering $250,000 for a $350,000 property is not likely to be the person you want to sell to. Even if you talk them up into a reasonable offer by lengthy negotiations, they're far more likely than not to try all sorts of games to get it back down as soon as you're in escrow. Better to serve notice right away that you won't play.

Now some bozo agents think that starting from an extreme position, whether high list price or lowball offer to purchase, gives them more leverage, or that somehow you're eventually likely to end up in the middle. This is bullsh*t. A transaction requires a willing buyer and a willing seller. Price the property to market if you want it to sell. Offer a market price if you want the property.

Now, the Quickflippers™ have had a distorting effect on this, and disconcertingly many of the properties being offered for sale are owned by people who bought with the intention of the quick flip for profit, rather than buy and hold. Many of those looking to buy still fall into this same category, and I suspect this is much the same in other formerly hot housing markets as well. They've become addicted accustomed to the market of the last few years, when a monkey could make a profit on a property six months after they paid too much money to purchase it. That is not the market we face today. This market favors the buy and hold investor. Actually, if you remember the spreadsheet I programmed a while back, I've pretty much confirmed that the market always favors the buy and hold investor, it's just been masked by the feeding frenzy of the past few years, where John and Jane Hubris could come off looking like geniuses when it was just a quickly rising market and the effects of leverage making them look good. It's just that the support for the illusions of Mr. and Mrs. Hubris has now been removed.

Now, what to do when your offer has been rejected. There are two possibilities. The first is to walk away. If the home really is overpriced, and there are better properties to be had for less money, you made a reasonable offer and were rejected, you're better off walking away. I don't want to pay more for a property than it's comparable properties are selling for, and I certainly don't want my clients to do so either. The sort of people who go around making desperation check offers walk away without a second thought with considerably less justification.

The second is to consider that the property might really be worth more than you offered. Okay, a 3 bedroom 1 bath home did sell for that price in that neighborhood, but when you check out the details, that was a 900 square foot home on a 5000 square foot lot and the one you made an offer on is a 1600 square foot home on a 9000 square foot lot, and in better condition with more amenities. It's a more valuable property, and you can refuse to see that from now until the end of the world and you're only fooling yourself. The reason you thought the property was attractive enough to make an offer was that it had something the others you looked at didn't, and most of these attractors add a certain amount of value to the property. The more value there is, the more folks are willing to pay for it. This is why one of the classical tricks of unethical agents is to show you a property that's out of your price range, then figure out a way to get a loan where you qualify for the payment. This property is priced higher because it has features that add more value and a reasonable person would therefore conclude that other reasonable persons would be willing to pay more for that property than others. Landscaping, location, condition, more room, amenities. There's something that the seller thinks reasonable people would be willing to pay more for. It's kind of like taking someone who can afford a $10,000 car and showing them a $25,000 one, then telling them they can get interest only or negative amortization payments to get them into it. You only thought you could afford the $400,000 home, but they've got a way that you can get into the $600,000 home, which obviously is going to have many things that the $400,000 home lacks. Consumer lust does the rest. Cha-ching! Easy sale, and the fact that they've hosed the client doesn't come out until long after those clients made a video for the agent on move-in day when they're so happy they've got this beautiful house that they didn't think they could afford (and really can't), and they gush gush gush about Mr. Unscrupulous Agent, who then uses this video to hook more unsuspecting clients - never mind that the original victims in the scam lost the house, declared bankruptcy, and got a divorce because of the position Mr. Unscrupulous Agent put them into. You want to impress me with an agent, don't show me happy clients on move-in day. Emotional high of being brand-new homeowners aside, any monkey of a loan officer can get anybody with quasi-reasonable credit into the property. What happens when they have to make the payments? More importantly, what happens when they have to make the real payments? Given the current environment, the question, as I keep saying here, is not "can I get this loan through?" but "Is it in the best interests of the client to put this loan through?" You want to impress me with an agent, show me a happy customer five years out "My agent found this property that fit within my budget, told me all about the potential problems he saw, got the inspections and loan done, and it's been five years now with no surprises, and the only problem I've had was one he told me about before I even made the offer."

Of course, the real value of the property may be beyond your range or reach. If your agent showed you something you could not reasonably acquire within your budget, you should fire them. I accept clients with a known budget, I'm saying I can find something they want within that range. If it becomes evident I was wrong (eyes bigger than wallet syndrome) the proper thing to do is inform the client that their budget will not stretch to the kind of property they want, and suggest some solutions, starting with "look at less expensive properties" and moving from there to "find a way to increase the budget" and finally to "creative financing options." That's a real agent, not "Start with creative financing options but somehow 'neglect' to mention the issues down the road."

There is no universal always works strategy for rejected purchase offers. It's okay to do desperation checks, but be aware that most sellers aren't desperate and that it's likely to poison the environment if the seller isn't that desperate. Poisoning the environment is okay if you're a "check for desperation and then move on" Quickflipper™, but if you're looking for a property you want and have found something attractive, it's likely to be counterproductive so that you may end up paying thousands more that you maybe could have gotten the property for if you'd just offered something marginally reasonable in the first place. Make a reasonable offer in the first place, and you're likely to at least get a dialog. And if the seller rejected what really was a reasonable offer for an overpriced property, the only one to lose is them. Move on. Their loss is someone else's gain.

Caveat Emptor (and Vendor)


Took off yesterday to help my elder daughter's kindergarten class go to the zoo. She always enjoys the zoo. No pictures worth showing, though, as you'll realize if ever you've pulled the same duty.


Carnival of Debt Reduction


Pakistani Taliban take control of wild Waziristan. This is an area of Pakistan that the British never did completely pacify. Between it and adjacent provinces, there never was a five year period of no rebellion. Periods longer than 18 months were rare. The Pakistani government hasn't got anything like the willpower of the British Army, and I see a certain amount of evidence for collaboration with the Taliban covered by plausible deniability.

Looks like we may not have to wait for the Iranians to get nukes to face a hostile nuclear power.


Don Surber notes that there was a CNN reporter embedded with the Haditha Marines, and the report she filed may just save them.

this link is a little more coherent


I feel like I'm watching an old Hollywood movie where the villain takes his best shot at the hero, and then gets his comeuppance due to the nature of what he tried to do to the hero. Even better if it comes at the hands of another hero. Michael Moore Sued by Iraq War Vet. Oh, the poetic justice!


US company transforms Boeing 747 into aerial firefighter Okay, large capacity. But I've seen them fight fires with tanker drops. Those pilots are crazy, and most often are working in rugged, inaccessible terrain. Instead of flying along ridgelines, they dip down between at right angles and pull up so they fly directly up towards the ridgeline. I suspect the wings would fall off the 747 if they tried the same sorts of things. Either that, or it'll have an impact. The P3s and other stuff they use now were mostly designed with military uses in mind. They are designed for flying in rugged conditions, and sudden stresses and the like. A 747 is designed to be a reliable long distance carrier of lots of people in more of less smooth conditions. Mind you, if you're looking to blanket the area from altitude, a 747 would be most impressive. A C5A or C17 would probably be better operationally, if higher maintenance.


Looks like Google isn't the only one: Ask.com Adds New Search Tools for Blogs

This could go a long way towards boosting Ask.com's search engine share.


Just a little judicial arrogance. Different River caught a link on Reuters saying that a Georgia judge has declared an emendment to the state constition to be (you guessed it) unconstitutional.


via Buzz Machine, an explain-it-to-the-stupid-loan-officer article on net neutrality.


Armies of Liberation has more on the corruption in Yemen. Actually, I'd suggest going over to read her entire front page on a regular basis. It lends an understanding to the problems faced not only by Yemen, but a host of other countries in similar situations.


I know it's three days late for Memorial Day. Scrappleface has a non-satire post you should read anyway.


As you might guess, MEChA has no soft spot in my heart. Michelle Malkin notes some of their tactics.

You're here. You're Americans. If you don't want to be, Mexico lies a very short distance that way. Other countries aren't exactly inaccessible, if that's what you prefer. I have zero tolerance for separatists or supremacists of any stripe.

Iran has spurned direct talks with the US, but they say it's because of the condition that they must first stop enriching uranium. Looking at it from a context neutral standpoint, I have to agree with that point of view in that it does seem they would be conceding the point at issue even before talks are begun.

On the other hand, we're not talking context neutral. We're talking crazy mullahs play with nukes here. When the cops are talking someone down in a hostage situation, they don't give the bad guy what he wants, or concede that they will. Matter of fact, that's purely an appeaser's tactic. Give the enemy what they want, and maybe they'll conquer you last. Given the context, leaders employing a strategy of appeasement should be impeached.

Associated Press has a few more details.

Austin Bay thinks the american offer put the emphasis back where it belongs, on Iranian nuclear weapons.

Dr. Sanity speculates on Iran's next move, and she doesn't think it'll be anything "nice, like donating to the Indonesian relief effort". She think's he needs to do something to save face.

Atlas Shrugged has more, including a video of an interview with John Bolton.

"no options are off the table."

One thing that very pointedly occurred to me while watching the Bolton video is that the United States could handle Iran very easily, by being exactly the same sort of country that the "no blood for oil" crowd would have us believe we are: By destroying the regime and leaving. Hit them, hit them hard, decapitate the monster, and let someone else worry about picking up the pieces. No "Amercian occupation" to rail against, because there is none. No ongoing bleeding of the american servicefolk. Just remove the regime, and say we're done. If the Iranians can pick up the pieces from there, great. If americans as individuals want to donate or go help pick up pieces, better. But no target for an ongoing insurgency, and if they end up so bollixed up that they invite us back in to help them reassemble the country, that removes any wind from the sails of "resistance." Mind you, there'd be a hellish lot of human misery there until the pieces got picked up, but hey, no american soldiers would be dying.

I also think it quite likely that Iran could fragment in such an eventuality into three or more smaller countries, smaller countries that have fewer resources to act as fuel for global problems, not to mention the fact that the main goal of the power structure in the splinter states would be to avoid reabsorption by whatever rump state ends up with the biggest portion of the pie, while a lot of the resources of said rump state would be expended in attempting to reabsorb the splinters. Win-win-win, except for the poor folks who are unfortunate enough to have to live through it. I don't like it, but that doesn't stop me from appreciating the intellectual beauty and simplicity of it.

Now, pardon me while I go exorcise the ghosts of Nicolo Macchiavelli and Otto Von Bismarck.

my prorated property taxes came were paid at closing but now I'm getting a delinquent tax bill

You mean they were supposed to be paid at closing.

There are two major possibilities:

1) They were not, in fact, paid

2) They were paid, but were miscredited, or they were properly credited, but your county goofed anyway.

Look at your HUD 1 form. Lines 106 and 107 are for buyers reimbursing sellers for taxes. Lines 210 and 211 are for tax liabilities incurred but not yet paid. Line 1004 is taxes and assessment reserves, and I've also seen extra lines in section 900 used. If it is listed as paid, contact your escrow company to determine if it was paid in truth. Sometimes the escrow company messes up. If the escrow company tells you that taxes were paid, double check with the county. Sometimes the payment was misapplied to the wrong parcel, sometimes it was correctly credited, but due to the fact that government bureaucrats get paid the same whether the job is correctly done or not, they just aren't up to date. Sometimes time will repair the problem, but it's not something to count on. Get a statement from the escrow officer that it was paid, receipt number this or in conjunction with escrow number so and so, thus and such date, in the amount of $X. In some cases, you may have to get a copy of the canceled check to prove that it was paid to the county's satisfaction.

Do not allow this problem to sit. It will only get worse, and you could find yourself facing tax liens, tax foreclosure, or a situation where the lender then pays the taxes to protect their interest, and follows up by presenting a bill to you. They'll charge you interest for any amount they pay in defense of your interests and theirs, plus a fee for the trouble they were put to. I've never had it happen to me or a client, so I don't know how high the interest is, but it's not cheap.

Property tax liens take first priority over basically everything. It takes a while - potentially years in California - before they can condemn the property for unpaid property taxes, but once they do start the process, all of the protections you have against lender foreclosure are much weaker against property tax foreclosures. Lenders are therefore understandably nervous about delinquent property taxes, and they typically want to take action pretty quickly. Don't let it get to that stage. If you have to, you're better off paying them a second time and applying for a refund than letting it get to the point where the lender feels obliged to step in to protect their interests.

Caveat Emptor


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