Job Growth Changes Bond Buyup Plans
In a recent series of intermittent posts on the Federal Reserve’s massive buyup of mortgage backed securities, we’ve been following the plan’s fast forward/slo-mo progress in response to the ebb and flow of activity in various sectors of the economy, particularly housing. Now, just after some regional Fed presidents voiced concerns over the scope of the project and called for its phase-out, Fed officials are considering just that, thanks to encouraging news on the job front.
The encouraging news about the current employment picture comes in the wake of concerns about a slowing housing market. The welfare of both these sectors has acted as a barometer for the Fed’s buyup plans, which explains the project’s erratic trajectory. Since the Fed instituted the securities purchase plan back in September 2012 to boost the housing market, rising home pries and more activity have prompted calls to wind down. But signs of a slowdown in housing have ramped it up again.
But regardless of the need to bolster weak sectors of the economy with artificial intervention, the regional bank officials and others fear that the Reserve will become overburdened with securities holding – that’s over $3 trillion of them now – and that markets will find a natural balance once the Fed stops manipulating the economy.
The improving employment picture affects the plan – and other sectors such as housing – in many ways. Job growth means more purchasing power and gives more people the stability they need to get credit and make big purchases like houses. Expansion in businesses and industry can provide a much-needed boost to neighborhoods in vulnerable areas. A better employment outlook even stimulates the rental market when companies start hiring and attract workers from out of the area.
Federal Reserve Bank officials acknowledge the mixed messages they’re sending about the progress of the plan. These zigzags, they say, demonstrate the project’s flexibility and ability to respond to changes in the economy and selected sectors such as housing. That means that a downturn in employment or a slowdown in housing could push the whole initiative into high gear again.
Even if economic indicators hold steady or improve even more, Fed officials warn that there won’t be an immediate shift in policy. A meeting to discuss the future of the buyup is scheduled for mid-June, and financial analysts don’t expect any appreciable change until at least September – a full year after the buyup project began.
In the meantime, until the Fed decides how many trillions are enough, income property investors following Jason Hartman’s guidelines for successful investing can still find low interest rates and new opportunities in the surging demand for rentals. (Top image:Flickr/rubio)
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Can Rising Home Prices Signal Another Housing Collapse?
Everything old is new again. For many financial analysts and real estate experts, that old saying may explain fears that the stars are aligning for another housing collapse, thanks to current trends in the market that echo all too clearly the signs that led to the last one. Along with the reappearance of a variety of iffy loan products not seen since the last crash, home prices are rising and potential homebuyers are just as unprepared as they were the last time around.
According to a new article posted by The Motley Fool, the recent surge in housing prices sounds a warning bell. The rising home pieces seen in major markets around he country have been welcomed as a sign of economic recovery and new energy in the housing market. But, observers say, high home prices contributed to the previous crash, which saw the market bottoming out and millions of risky borrowers facing foreclosure.
Back then, home prices across the board were rising and sales were booming. But those high prices shut out a substantial number of less affluent potential buyers and left houses unsold. So to keep sales moving, lenders rolled out a smorgasbord of risky new loan options such as low interest, no-interest and even negative amortization mortgages that appeared to make homeownership available to anyone who wanted to buy –even those with below optimal, or subprime credit. Many of these buyers, woefully under informed and poorly prepared, lost their homes when payments ballooned or circumstances changed.
Now, industry observers point out, prices in some markets are approaching levels not seen since before the last crash. Banks are once again beginning to offer some of those risky loan products such as the no-interest mortgage. And the so-called “strategic defaulters” – those who chose to walk away from their mortgage during the crash – re being welcome back by lenders willing o overlook the credit hit those borrowers took the first time around.
And there’s one more factor that completes the deadly combination. Recent surveys on American homebuyer behavior reveal that today, as in the period preceding the last crash, many potential home purchasers are uninformed and unprepared for taking on a mortgage. These would be borrowers don’t know they can shop around for mortgage rates and options and rely on loan officers’ explanations rather than reading the fine print themselves.
When high prices push housing past the affordability threshold for many purchasers, standards drop and lenders begin courting riskier borrowers with problematic loan products and eventually the process collapses on itself. Will lenders learn the lessons of the past? Financial experts point to the behavior of major US banks after the collapse for the answer: a resounding no.
The key to avoiding this scenario, say some financial advisers, lies in the hands of potential borrowers, who need to clearly understand what their options are and what they’re getting into when they take on a long-term mortgage. Taking charge of learning what you need to know is Jason Hartman’s first commandment for investors – wise advice that might keep history from repeating itself. (Top image: Flickr/rieh)
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Mixed Messages on the Fed’s Securities Buyup
Since it began in the fall of 2012, the Federal Reserve’s large-scale plan to buy up billions of dollars in mortgage backed securities every month to stimulate the housing recovery has waxed and waned, depending on the health of the market. Now, as the program rolls on with no end point in sight, some senior officials at regional Fed banks are saying that it’s time to call it quits.
According to a recent Bloomberg report, the bank presidents of the Dallas, Richmond and Philadelphia regional branches of the Federal Reserve Bank have stated openly that the Fed’s actions to stimulate the housing market could end up having the opposite effect.
The Fed began buying up mortgage securities and Treasury bonds in the fall of 2012 as part of an effort to keep mortgage interest rates low and boost the housing recovery. The buyup, at a rate of over $40 billion a month, had no defined endpoint, with the option of either stepping up or sowing down the rate pf purchases in response to the ebb and flow of the housing market and the economy in general.
In the early months of 2013 representatives of the Fed were reportedly considering scaling back the mortgage securities purchase plan because the housing recovery appeared to be headed for more solid ground. But new fears of a looming housing bubble have kept the program moving full steam ahead, with the option to step up the pace if the market shows signs of slowing down.
The problem, say regional bank officials, relates partly to the sheer scope of the buyup. If housing activity does slump, they say, the Fed could end up holding billions of dollars worth of one kind of commodity with no place to put it. A better plan, in their view, would be to downshift from buying mortgage backed securities and refocus on Treasury bonds for long-term stability. And because the securities plan pushes interest rates artificially low, it may actually be skewing the housing recovery’s natural trajectory.
But even those who advocate abandoning the securities buyup acknowledge that the program can’t be stopped cold turkey – a move that would most likely destabilize the market. A gradual phasing out would allow interest rates to equalize naturally and help to avoid another housing crash. What’s more, they say, the overall economic picture seems to be improving signaling less need for this kind of large-scale intervention.
Regardless of the reservations expressed by some of the Fed’s own representatives, the securities buyout isn’t likely to end anytime soon. But because it plays a major role in keeping the housing market stable, investors following Jason Hartman’s recommendations for building wealth through real estate may want to keep an eye on its ups and downs. (Top image: Flickr/gorfor)
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AMA 58 – The Quants and Dark Pools with Scott Patterson
Jason Hartman is joined by author, Scott Patterson to discuss high frequency trading, of which roughly 70 percent is driven by computers. Scott says the firms using artificial intelligence for high-speed trading make it nearly impossible for the little guy to compete in the markets. According to his book, Dark Pools, these robot systems trade in milliseconds. High frequency firms flood the market with buy and sell orders, effectively clogging up the system and posing a threat to other firms. For more details, listen at: www.JasonHartman.com. While this electronic exchange made the system more effective, one has to wonder if this trading style hasn’t become detrimental to the markets overall when trading successfully is defined by milliseconds. Scott coined the term “A.I. Bandits” to describe electronic high frequency trading. Scott also discusses the history of quant strategies based on his book, The Quants, a mathematical scientific approach to outsmarting Wall Street, which led to the recent financial crash. He calls the quant system “a classic tale of hubris.”
Scott Patterson is author of The Quants and his new release, Dark Pools, and is currently a reporter for The Wall Street Journal, where he covers financial regulation from Washington, D.C. He has also written for the New York Times, Rolling Stone and Mother Earth News. He has a Masters of Arts degree from James Madison University. He lives in Alexandria, Virginia.
Applying for Credit Can Damage Your Credit
According to the arcane rules of credit scoring, being in debt makes you a better candidate for more debt and paying off your debt hurts your borrowing power. Now another irony of the credit system undermines the efforts of applicants to qualify for mortgages and other types of loans – the simply act of applying may lower a credit score enough to disqualify the borrower from getting the loan.
When the loan process works smoothly, a prospective home buyer applies with a lender and credit scores are checked. If the numbers work out, the loan is approved and the borrower is on the way to buying an investment property or the home of his dreams. But if the application is turned down that means trying again with another lender – or two. Or more. And each new attempt whittles away at the applicant’s credit score a little more.
Here’s why. Every time a prospective borrower asks to be considered for a loan, the lender will run a credit check. Each check constitutes a separate credit inquiry on the credit report. And each of those credit inquiries lowers an individual’s credit score by a few points – which add up quickly over an extended period of loan shopping.
How many points can a credit inquiry cost? That depends on several factors. Though representatives of the Fair Isaac Corp – the FICO that creates the FICO score — say each query deducts on average less than 5 points, some factors on the credit report can cost 5 points or more. These include situations in which a borrower has a very short credit history, with little to offset the deductions or numerous recent delinquencies.
Even a lender’s outdated reporting software can cost points. There’s a window of time around a mortgage application that provides a cushion against multiple credit inquiries. If a borrower makes all mortgage inquiries within a 45-day period, all those applications are treated as one inquiry on the credit report. What’s more, inquiries made in the 30 days prior to the first mortgage application are not included in the tally. If a lender uses older reporting software that allows only the former 14 –day window for multiple mortgage queries, those queries made in the remaining 30 days will register as multiple requests.
Those with higher credit scores most likely won’t feel the bite of a few points for making multiple mortgage applications. . But for those whose scores hover on the edge of “subprime” territory – 630 for FICO and 700 for Vantage, the two leading credit scorers –those points can make a significant difference.
As Jason Hartman says, an investor’s credit score is a precious commodity, and it needs to be treated as one. Good time management during mortgage shopping can keep credit scores healthier and loans likelier. (Top image:Flickr/SqueakyMarmot)
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Mortgage Brokering – Another Real Estate Scam?
For many mortgage seekers the tried and true route to a loan is through a bank or perhaps a credit union. But faced with an often bewildering array of loan products and interest rates – as well as the potential for being turned down by one or more lenders – potential homebuyers are increasingly turning to third-party assistance – mortgage brokers who find the best loan options –for a fee, of course. And along with other kinds of services and consulting aimed at homebuyers and sellers, mortgage brokerage is ripe for frauds and scams.
What does a mortgage broker do? This individual works with many different lending institutions to find the best rates and loan options for each borrower. That means that in some cases they have access to lenders and loan sources that aren’t available through banks, making it possible for someone who’s been turned down by the bank for credit issues to find an alternative form of funding.
Advocates of mortgage brokerage point out banks operate on only one set of underwriting guidelines and can only offer the bank’s own menu of loan options. There often isn’t much room for flexibility and once a borrower is declined, there are no options except to try another lender, starting the loan process all over again every time.
Credit unions, like banks, offer a range of loan products, often at very attractive rates for their members. But the virtue of credit unions – their small pool of members and in-person service—nay work against a borrower on the bubble. And these institutions may not be work easily with investors who are applying for a mortgage on rental property rather than a personal residence.
Because mortgage brokers have access to far more lenders and loan packages than borrowers can access, a responsible broker may be able to save money. But anyone can claim to be a qualified broker with extensive contacts with multiple loan servicers, charge eager borrowers a hefty upfront fee and vanish without providing any services at all. Although mortgage brokers are frequently former bank loan professionals or real estate agents, there’s no established set of qualifications for the profession. That opens doors for anyone claiming to offer this kind of service.
The housing market is home to a variety of frauds and scams, many of them involving services, advisers and brokers. For investors seeking financing fur income property, it’s wise to keep n mind Jason Hartman’s recommendations to get educated about investing and take the advice of qualified and experienced professionals.(Top image:Flickr/rutio)
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AMA 57 – Fiscal Hangover & Global Change with Keith Fitz-Gerald
Jason Hartman interviews Keith Fitz-Gerald, the Chairman of The Fitz-Gerald Group and Chief Investment Strategist at Money Map Press. More at: http://www.jasonhartman.com. A bestselling financial author, Keith’s investment perspective is a daily feature for more than 500,000 Money Morning subscribers in 35 countries. A frequent commentator for financial news outlets including Fox Business, Bloomberg, CNBC Asia, Cavuto, Varney & Company, BNN, MarketWatch, and others, Keith Fitz-Gerald is among an elite handful of world-recognized experts on global investing.
Keith tours constantly on the financial lecture circuit alongside other legendary investor analysts including Jim Rogers, Steve Forbes, and Dr. Mark Faber and was lauded as a “Business Visionary” on the recent Forbes.com list. His engaging style and remarkable predictive record resonates with his audiences in North America, Europe, and Asia; investors and business leaders eager for Keith’s insights into how colossal global economic, social, and political trends are disrupting the paradigms of the last 50 years to create the most extraordinary investment opportunities of our lifetimes. The investment community praised Keith’s recent book Fiscal Hangover (Wiley) as “Essential reading for every serious investor” and “A brilliant, spirited explanation of the origins of the current mess and more importantly how you can cleverly turn the chaos to your advantage.”. His upcoming book Tomorrow (Sutton Hart 2012) spotlights today’s global trends and offers a roadmap for business leaders and investors to profitably navigate the turbulent waters of unprecedented global change.
Are Major Banks Choking the Housing Recovery?
After the string of lawsuits, settlements and legislative actions related to lax and fraudulent mortgage and foreclosure practices, the nations major lenders are taking a new stand. With stricter lending standards, more transparency and better accountability, these institutions attempt to forestall another mortgage meltdown like the one that created the great housing collapse. But, some sources say, these more responsible practices may be having the unintended result of stalling the recovery of the housing market.
One of the main reasons for the noisy popping of the “housing bubble” back in 2007-2008 was the loosening of lending standards that allowed so many mortgages to be granted to subprime borrowers – those with relatively poor credit and potential problems with repayment/ Many of these borrowers also ended up with adjustable rate mortgages whose terms they poorly understood, so that when payments eventually went up, they had to default.
A number of lawsuits, settlements and government interventions later, the nation’s major lenders have instituted programs to help troubled homeowners with refinancing and payment plans, and instituted tighter borrowing standards and better oversight of the lending process – strategies intended to encourage people to take advantage of the current low interest rates.
But as the Wall Street Journal reports, the Federal Reserve’s new survey of senior loan officers at major banks reveals that these lenders are easing up a little on some loan requirements – but only to those with the best credit scores and payment histories. But those with middle of the road and lower credit scores still face tight scrutiny and more problems qualifying for mortgages. That shuts some would-be homebuyers out of the market, unable to take advantage of the current low interest rates that might make it possible to buy a home at all. And. some financial experts fear, the loss of this pool of potential buyers could drag down the housing recovery.
But not all risky buyers get equal treatment. As we discussed here a few posts ago, many banks are showing a new willingness to work with the “strategic defaulters” – homeowners faced with foreclosure who simply walked away from the mortgage and accepted the resulting blot on their credit. If a borrower’s only credit stain comes from a mortgage default that’s traceable back to the housing crash, some lenders are offering a second chance.
Stricter lending standards and better accountability are helping major banks clean up their images and avoid the consequences of another housing meltdown, but the results for the long term housing recovery may be mixed. For heroic income property investors following Jason Hartman’s recommendations to keep a fixed rate mortgage, it’s worth keeping an eye on the changing policies of these major players in the mortgage business. (Top image:Flickr/rutio)
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Can Owning a Home Hurt Economic Growth?
For decades, the “American Dream” of owning a home has created some of the most enduring icons of the culture: white picket fences and happy children playing in a well kept yard, serene old couples rocking on a porch. But a new study by two university economists casts a disturbing shadow over that dream. High levels of homeownership, they say, tend to correlate with high levels of unemployment.
A new article in the New York Times reports hat Dartmouth economist David G. Blanchflower and Andrew J Oswald of England’s University of Warwick conclude that in areas with high levels of residential homeowners, unemployment rates tend to rise.
The study has been met with skepticism and sharp criticism. After all, critics point out, private and government-funded research has found repeatedly that home ownership contributes to stability. Homeowners’ children do better in schools and have lower drop out rates, teen pregnancies are down in areas with high rates of homeownership, and homeowners tend to be better employed with more job stability. Neighborhoods are safer, they argue, and better maintained when most residents own their homes.
But although Blanchflower and Oswald aren’t saying that homeowners themselves are more likely to be unemployed, they point to data that shows that in the five US states with the largest increase in residential homeownership between 1950 and 3010, unemployment rates were higher in 2010 than in previous years. These data aren’t actually new; the notion was first raised back in 1996, but dismissed by other researchers who misread the evidence as comparing the unemployment rates of homeowners and renters.
If Blanchflower and Oswald are right, what’s going on? The connections between homeownership and unemployment are complex, but a key factor appears to be mobility. Homeowners stay put fur years, preferring to commute to jobs that may be far away. With most homes in an area already “taken,” there’s no room for growth through an influx of new residents, and industries and businesses may not be willing to expand into these areas because of issues of cost, congestion and a relatively limited pool of potential employees.
The darker side of homeownership came to light during the great housing collapse of a few years ago when many owners lost their homes to foreclosure and many more went “underwater” on their loans. The aftermath of that crisis and ongoing economic issues left large numbers of people locked out of buying a home entirely and at least in part fueled a growth sport in the rental housing market.
The findings of these two researchers are sparking debate among economists and financial experts in Europe and the US and raising fears that if the tradition of homeownership challenged that could mean changes in the tax benefits offered to home owners, and in zoning laws that encourage single family homes.
Changes like that won’t happen soon – if the happen at all. But for income property investors following Jason Hartman’s guidelines for building wealth in rental property, the professors’ conclusions may open doors to another American Dream. (Top image:Flickr/EmilyStAubert)
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AMA 56 – The Decline of the EuroZone with Alasdair MacLeod
Jason Hartman is joined by contributing author for GoldMoney.com, Alasdair MacLeod for a rousing discussion of the decline of the European economy, the mistakes of the European Central Bank and EU, and how “governments are eating their own children.” Alasdair makes a rather accurate comparison between the fall of Rome and the current economic disaster around the world, calling it the Nero influence. Governments continue to spend money and introduce new taxes that are detrimental to the people they serve. The ECB is now lowering collateral standards as they run out of quality collateral, such as taking on mortgage-backed securities, in exchange for helping banks and governments. For more details, listen at: www.JasonHartman.com. Alasdair said the real problem among Greece, Spain, Italy and other countries in crisis is that they are broke, yet they continue to meet to discuss increasing spending to build infrastructure and creating token taxes. Governments the world round are in a debt trap, including the U.S. Alasdair feels there is only one way to defer the imminent fall and that is for the Central Banks to come together and put into play quantitative easing. Governments would then need to seriously cut their excessive, wasteful spending.
More Apologies from the Fed to Mortgage Settlement Victims
Rust Consulting isn’t exactly a household name – but for many victims of the robosigning scandal of 2009-2010, it may become a dirty word. Yet another apology issued by the Federal Reserve for Ruts’ handling – or mishandling – of settlement checks issued this year highlights the private firm’s “errors” involving bounced checks, short checks and failures to send checks to the right addresses or addressees. Now, the Federal Reserve announced on May 8 2913 that around 96,000 of those victims would receive an additional check to correct “errors” leading to a shortfall in the original settlement check. That’s the second apology in less than two months to those who have already lost homes and waited over two years for compensation.
After the housing collapse of 2008, leading lenders including Bank of America, JP Morgan Chase and Wells Fargo ramped up their foreclosure processing, using fake signatures on paperwork, and other tactics to push foreclosures through the system. After the abuses came to light, attorneys; general across the country filed suit against the banks and the case was settled in late 2010 for over $9 billion – but it wasn’t until early 2013 that victims began to receive their compensation cheeks.
And that’s where the problems began. The Federal Reserve named a private consulting firm, Rust Consulting, to handle the payouts, mailing out checks to victims end routing appropriate funds to regional banks. The checks were issued in waves as payouts relating to various lenders were processed.
In April 2013, some victims who received checks in the first round of payouts took them to local banks, only to be told that no funds were available to cash them. That problem was traced back to accounting practices to Rust, which failed to make the funds available to the banks. Once that problem was cleared and borrowers were told to return to their banks and negotiate the checks, the process rolled on.
Now, the majority of those whose mortgages were serviced by lending giants Morgan Stanley and Goldman Sachs and their subsidiaries are being told that they can expect a second check this May to make up the shortfall in their original checks –with assurances that both checks are fully negotiable. Complete information on the correct payout amounts is available on the Federal Reserve’s own website, but because not all victims know the full chain of providers and servcers other loans, some report problems with tracking their status.
Confronted in a Senate subcommittee hearing about Rust’s handing of the problems, a representative assured critics that Rust is making a phone bank available to hear complaints. Of course, the settlement affects only the victims of foreclosure fraud — around 4 million people. But the issues surrounding it have far reaching implications for the current climate of mortgage lending – and for both residential homebuyers and investors following Jason Hartman’s guidelines for building wealth in real estate. (Top image: Flickr/cooperweb)
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Beating the Money Trap: Tips for New Investors
As the housing market regains its footing after the crash and subsequent slump of the last few years, increasing numbers of people in all age groups are considering buying homes as investments for a healthier financial future. But, say some industry watchers, for some, that dream of financial freedom doesn’t materialize and they’re losing money instead of making it. With that in mind, a number of real estate experts suggest that new investors keep in mind some key considerations before they buy.
Choose properties in good condition. Although it’s possible to get a smoking hot deal on a fixer upper in a decent neighborhood, getting the property in shape to yield a return on the investment can be a time consuming and expensive proposition. While repairs are going on the property can’t be rented and so won’t yield an income. And repairs and upgrades often end up costing more than expected. Industry experts recommend searching for properties in the best shape possible for the amount you can afford – these homes can be rented quickly with minimal fix-up.
Properties in low vacancy areas are less risky than those in areas where many homes stand vacant. High vacancy rates in surrounding areas may mean a long wait to get qualified tenants. What’s more, vacant properties invite vandalism and other problems in the neighborhood, which affects both property values and the potential for attracting the best tenants. In some areas, large numbers of vacant homes may be unresolved foreclosures – the so-called “zombie” properties that may not be rentable for months or even years.
For the same reasons, buying a property that already has good tenants in place trumps buying a currently vacant one. That saves expenditures related to cleaning and repairing a house to get it ready for tenants, and eliminates the vacancy period before they move in. Financial experts suggest taking a look at current tenants’ credit payment history as part of the decision to buy a property. And if the property itself is a winner, but the tenant isn’t, a prospective landlord may need to consider options for terminating or renegotiating lease agreements.
Boring properties may be less risky than those in highly desirable or flashy locations. A moderately priced house in a quiet neighborhood near schools and shopping may be easier to keep rented and maintained than a more exotic beachfront or resort0 area property with a high tenant turnover that may be more appropriate as a short-term rental.
Though flipping properties for quick gains became popular in recent years due to the housing crash, real estate advisers recommend buying properties with an eye to longevity – keeping the property long term with regular refinancing. That plan allows for maximum gain with minimum risk, with benefits including landlord/investor tax breaks and continued income from reliable tenants – a strategy that, as Jason Hartman advises, can weather economic storms. (Top image: Flickr/rutio)
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AMA 55 – “The Clash of Generations” with Professor Laurence Kotlikoff
Jason Hartman hosts an interesting interview with Professor Laurence Kotlikoff, author of The Clash of Generations: Saving Ourselves, Our Kids, Our Economy, regarding the problems with the economy and the effect that the astronomical national debt and government spending will have on generations to come. Listen at: www.JasonHartman.com. Professor Kotlikoff paints a picture of the magnitude of these issues very clearly, explaining that the fiscal gap is $211 trillion. He explains that we would have to raise every federal tax immediately and permanently by 64 percent or cut all non-interest spending by the government (Medicare, Social Security, defense spending, etc) by 40 percent. “The country is broke, totally broke,” says Professor Kotlikoff. He emphasizes that this applies to today, not 75 years down the road. Jason and Professor Kotlikoff also discuss why the 2007 quadrupled money base through money printing hasn’t hit the streets yet in the form of hyperinflation. Essentially, banks are being bribed to hold money reserves by the Fed. In simplistic terms, the Federal Reserve prints the money, lends it out at very low interest rates to the banks, and then the banks deposit it back with the Federal Reserve and get a higher interest rate. This makes banks more solvent over time without the public ever knowing what is going on. Professor Kotlikoff also talks about a proposal to fix the financial system, which he refers to as a fragile system, presently a “trust me” banking system where the public is unaware of what the banks are doing with their money.
Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, President of Economic Security Planning, Inc., a company specializing in financial planning software, a frequent columnist for Bloomberg and Forbes, and a blogger for The Economist and The Huffington Post. Professor Kotlikoff received his B.A. in Economics from the University of Pennsylvania in 1973 and his Ph.D. in Economics from Harvard University in 1977. From 1977 through 1983 he served on the faculties of economics of the University of California, Los Angeles and Yale University. In 1981-82 Professor Kotlikoff was a Senior Economist with the President’s Council of Economic Advisers.
Professor Kotlikoff is author or co-author of15 books and hundreds of professional journal articles. His most recent books are The Clash of Generations (co-authored with Scott Burns, MIT Press), Jimmy Stewart Is Dead (John Wiley & Sons), Spend ‘Til the End, (co-authored with Scott Burns, Simon & Schuster), The Healthcare Fix (MIT Press), and The Coming Generational Storm (co-authored with Scott Burns, MIT Press).
Professor Kotlikoff publishes extensively in newspapers, and magazines on issues of financial reform, personal finance, taxes, Social Security, healthcare, deficits, generational accounting, pensions, saving, and insurance. Professor Kotlikoff has served as a consultant to the International Monetary Fund, the World Bank, the Harvard Institute for International Development, the Organization for Economic Cooperation and Development, the Swedish Ministry of Finance, the Norwegian Ministry of Finance, the Bank of Italy, the Bank of Japan, the Bank of England, the Government of Russia, the Government of Ukraine, the Government of Bolivia, the Government of Bulgaria, the Treasury of New Zealand, the Office of Management and Budget, the U.S. Department of Education, the U.S. Department of Labor, the Joint Committee on Taxation, The Commonwealth of Massachusetts, The American Council of Life Insurance, Merrill Lynch, Fidelity Investments, AT&T, AON Corp., and other major U.S. corporations. He has provided expert testimony on numerous occasions to committees of Congress including the Senate Finance Committee, the House Ways and Means Committee, and the Joint Economic Committee.
Another Housing Bubble? Maybe Not
The housing market is springing back, and that has some housing industry observers looking for a downside. And now, with memories of the recent housing collapse still relatively fresh, some financial and housing experts are finding signs of another one looming on the horizon of rising home prices, short supply and increased demand. But although some lenders are offering no-interest loans and courting buyers with iffy credit, the conditions in today’s market are quite different from those that created the mortgage meltdown of 2008.
In the early years of the new millennium, housing was hot. Lenders made mortgages available to all comers, virtually without qualification, which fueled the so-called “subprime mortgage crisis.” Many offered loans with no interest, or no down payment at all. And many of these borrowers, trapped into loan arrangements they poorly understand, fell into default and, for large numbers, foreclosure. Those massive numbers of foreclosures, combined with mismanagement and outright fraud on the part of major lenders, sent the housing industry into a downward spiral that’s only recently begun to reverse.
Why the concern about a new bubble that might burst and undermine the housing recovery? Now, as then, housing markets are heating up. Home prices are rising as demand increases. Some major markets around the country are facing a severe shortage of available properties for sale. And despite the ongoing fallout from the foreclosure crisis and the days of indiscriminate lending to “subprime” borrowers, no-interest loans and no-down purchase options are appearing once again on the menu of lending options at some institutions.
But industry watchers point out that even though some of the signs are similar, there are still some major differences between conditions before the crash and the current environment. In general, mortgage-lending standards are tighter, forestalling some foreclosures. Mortgage applicants are different too. While pre-crash home buying was driven by unbacked borrowing, many of today’s transactions involve cash – either as full purchase prices or large down payments. Renting is a hot option too, keeping some riskier prospects out of the homebuying process –at least for now.
Interest rates now are still at historic lows. Although government intervention aims to keep them down, experts predict that they’ll be rising, reaching 4.5 percent by early 2014 – a development that may help to put the brakes on runaway housing markets. Along with limited supplies of homes for sale, that’s expected to keep down the indiscriminate lending that popped the last bubble.
A variety of factors in the larger economy also affect movement in the housing market. Stalled recovery in sectors such as manufacturing and industry can mean limited job grown and depressed wages – factors that contribute to slowdowns in both rental and homeownership.
Some of the same factors that appear to signal a new housing bubble about to bursts may actually work in the favor of investors applying Jason Hartman’s strategies for building wealth through income property. Low interest rates, and even the availability of loan products to meet many different needs may combine to open more doors than a bursting bubble might close. (Top image:Flickr/whologwhy)
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AMA 54 – Arbitraging Fed Policies w/ Rental Housing Cash Flows w/ Dan Amerman
Jason Hartman and returning guest, Dan Amerman discuss federal policies and interest rates, which hurts the savers and fixed income folks. The artificially low interest rates are not working and create higher prices through inflation. Listen at:www.JasonHartman.com. They also discuss inflation rates, in which the federal numbers are glossed over and do not match true inflation as experienced by the American citizens through food, fuel, and utilities. Manufacturers hide inflation by making products smaller. Jason and Dan then talk about rental housing and how to arbitrage the inflation. Dan explains how to turn the fed policies around to our advantage. It starts with understanding cash flow investing and setting your safety margin. When looking at cash flows, rather than being all about the price, it’s more about the interest rate when it comes to a mortgage. In the process of creating non-free-market interest rates for banks and for the federal government, the federal government has accidentally made available subsidized mortgage rates that are available if you can get the lending. It goes directly to your bottom line as the investor, resulting in much higher cash flows than you would see in a free market.
Dan and Jason illustrate how the sharp decline in housing costs and the interest rate levels causes the floor to drop out and provides an unprecedented opportunity to obtain mortgages and have inflation pay them off. While rates have been dropping, rents have been going up, thus making real estate investing even more profitable and sensible.
Daniel R. Amerman is a Chartered Financial Analyst with MBA and BSBA degrees in finance. He is a financial author and speaker with over 25 years of professional experience. Years of studying the costs of paying for over $100 trillion of US government retirement promises, as well as the costs of cashing out an expected $44 trillion of Boomer pensions and retirement accounts, have convinced him that too many promises and too much paper wealth chasing too few real resources will likely lead to substantial inflation in the years ahead, with potentially devastating implications for many savers and investors, a problem that will also apply to many other nations.
Mr. Amerman spent much of the 1980s as an investment banker helping Savings & Loans and others try to survive the effects of the last major bout of inflation in the United States. There is a basic economics principle that much of the public is unaware of – inflation doesn’t directly destroy the real wealth of goods and services, but rather, redistributes the rights to that real wealth (a principle which unfortunately will likely destroy much of the investment wealth the Boomers plan on enjoying in retirement). The author worked with the effects of billions of dollars of such wealth redistributions, and saw how there was not only a loser for each dollar of wealth redistributed – but a winner.
Federal Bond Buyups: Keeping the Recovery Moving?
The long-awaited economic recovery continues in fits and starts, with some areas doing better than others. But as the dollar retreats in value and job gains fall well below expectations, the Federal Reserve has changed plans to scale back on its massive buyup of mortgage backed securities, opting to continue – or possibly accelerate—its purchase of over $85 billion in bonds each month.
The change in plans comes in wake of fears that the struggling economic comeback may be weaker than predicted in some, but not all, key sectors. . The housing market is showing signs of a more robust recovery, with a steady rise in home prices to levels not seen since 2006. But other areas of the economy are not so lucky. Industry and manufacturing continue to be weak. And although over 100,000 new jobs were created in April 2013, financial experts point out that that number falls well short of projected gains.
In the fall of 2012, the Federal Reserve announced plans to create a stimulus for the housing market as well as other areas of the economy by buying up over $8 million in mortgage backed securities every month for an indefinite period. That, officials reasoned, would help the housing market by keeping interest rates at their historic low levels and boost other areas of the economy as well.
In March 2013, economic indicators were bright enough that the Fed began to float plans to scale back on the buyup. But as these new numbers suggest that the recovery isn’t actually recovering all that well, it appears that these plans may have to change. Rather than scaling back the purchases, experts predict the Fed will have to continue buying securities at the same rate, if not higher, for at least the rest of 2013.
Some analysts predict that by the end of the year, the Fed will have bought over $1 trillion in Treasury and mortgage backed securities. That’s not the only way to stimulate the economy, of course – other options for the Fed include holding the bonds rather than selling them in order to tighten up monetary policy, or setting a lower unemployment threshold for raising interest rates.
As the value of the dollar retreats and the overall economic recovery lags behind expectations, the Fed’s intervention may help to keep interest rates low and boost incentives for expansion in key areas of manufacturing and industry. For investors following Jason Hartman’s recommendations for building wealth in income property, the Fed’s change of course means better mortgage rates and a heartier housing market – at least for today.
The American Monetary Association Team
More Legal Woes for Bank of America?
Will the Bank of America never learn? After a multibillion dollar settlement in the robosigning bank fraud scandal and ongoing court battles related to charges of skewing numbers reported to LIBOR, the bank so many love to hate is in trouble again, facing accusations of bad faith that could jeopardize yet another settlement in yet another fraud case.
Bank of America, which regularly makes the top ten of the most despised institutions in the country, has been a major player in numerous ongoing lawsuits alleging that the bank, and others, committed a variety of fraudulent acts and practices dating back to the housing meltdown of 2008.
BofA was one of 16 major lenders named in a lawsuit filed by state attorneys general regarding the infamous “robosigning” scandal after the housing collapse, when massive numbers of foreclosures were processed with fake signatures and no oversight. In that case, the banks involved agreed to settlement of over $6 billion to bee distributed among the scandal’s victims.
Then, Bank of America, along with other lenders, became the defendant in several lawsuits involving charges that the bank and its co defendants had fraudulently reported data used to calculate LIBOR (London InterBank Offered Rate) rates used to for short term lending worldwide. Narrowly escaping charges of violating antitrust laws, the bank and its fellow defendants still face allegations of fixing the rates.
Now, as the bank continues to fight some of these suits it’s embroiled in a new controversy – that a settlement deal totaling $8.5 billion reached in 2011 between BofA and some of its investors is now in question in light of charges from the plaintiffs that the bank violated terms of the settlement to further its own interests.
According to a new report by The Motley Fool, the current case involves 530 mortgage trusts sold by the now-defunct Countrywide Financial, a corporation purchased by BofA. The plaintiffs in the case – the investors – claim that the Bank of New York Mellon, acting s trustee for the investors, failed to act in good faith, thus calling the entire settlement into question.
If a New York State Supreme Court rules against BNYM’s parent Bank of America on May 30, 2013, some financial experts estimate Bof A’s latest penalty at around $60 billion. That’s in addition to the amount the bank must pay out in the original settlement.
The lawsuits aren’t over for Bank of America. As they roll on, with penalty after penalty assessed against the banking giant, property investors following Jason Hartman’s recommendations for financing income property, one lesson may be that Bank of America never learns its lesson. (Top image: Flickr/VoxEx)
The American Monetary Association Team
AMA 53 – “Secrets of Economic Indicators” with Bernie Baumohl
We are all confused about economic indicators and it’s critical that we understand the real figures, the direction of the economy, interest rates and their consequences, and much more. On this episode, Jason Hartman interviews Bernie Baumohl, author of Secrets of Economic Indicators, in regard to the numerous economic indicators and what is most useful. Bernie explains what a “business cycle” is and what happens during the cycle, how it comes full circle over time. For more details, listen at: www.JasonHartman.com. Bernie gives examples of stress points in the business cycle. People make mistakes, such as buying more inventory than they need or the economy can’t handle the demand of the people. More recently, we have seen longer periods of economic growth, but at a closer look, the mistakes that caused the worst economic crisis since the Great Depression are apparent. It was a “cauldron of fraud and wrecklessness,” says Bernie. Jason and Bernie touch on the subject of the Federal Reserve and the Gold Standard, citing what has been happening in Greece as an example of the limitations of a currency that is fixed and unmovable. Bernie feels that a country in economic trouble needs to have the flexibility to lower interest rates. They also discuss market sensitivity, the index, and the source of the leading market indicators.
Bernard Baumohl is chief global economist at The Economic Outlook Group. He is well known for being ahead of the curve in assessing the direction of the U.S. and world economy. Mr. Baumohl began his career as an analyst with the Council on Foreign Relations, a think tank specializing on international affairs. He later served as an economist at European American Bank with responsibilities to monitor the global economy and develop forecasts. Mr. Baumohl was also an award-winning reporter with TIME magazine who covered the White House, Federal Reserve and Wall Street. Apart from his role as chief global economist, Mr. Baumohl also teaches at the New York Institute of Finance and is a regular commentator on Public Television’s Nightly Business Report. A sought after international speaker, Mr. Baumohl has been recognized for his forecasting accuracy. He has lectured at New York University and Duke University, and is often cited in the Wall Street Journal, Washington Post, New York Times, Business Week, Barron’s, and the Financial Times.
Mr. Baumohl is author of The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities (Wharton School Publishing, 2nd edition). The best-selling book is winner of the Readers Preference Editor’s Choice Award for Finance and has been translated into several languages, including Russian and Chinese. He is also a recipient of the John Hancock Award for Excellence in Financial Journalism, and is a member of the National Association for Business Economics and the American Economic Association. Mr. Baumohl holds an M.A. from Columbia University.
Student Loan Debt Keeps Women, Minorities Out of Housing
According to a variety of analyses, women and minorities have traditionally ended up on the short end of the economic stick. Now, new studies on the situation of recent college graduates reveal that two groups are also disproportionately burdened with student loan debt– a deepening crisis with potentially profound effects on the recovery of the housing market.
Recent studies by the American Association of University Women and the Center for American Progress found that although student debt issues affect almost three quarters of graduates from four-year colleges, women and members of minority groups face greater obstacles in resolving their debt. The studies, reported in a May 1 2013 article in US News and World Report point out that both these groups typically earn less after college than their white male peers, and must deal with other barriers as well.
For women, the “gender gap” in pay is well known. A woman graduate can generally expect to earn less in the workforce than her male peers even if both complete the dame degree with equivalent course work. Women are more likely than men to take work breaks to care for children and family members, and those periods of low or nonexistent income can affect their ability to repay.
Minority graduates, too, often earn less than their “majority” peers. Unemployment rates are higher for them, too. And for students whose families have different cultural values about debt and money, the loan process may be confusing, with no clear idea where to turn for help. Lower income borrowers may also be more likely to take out riskier loans.
As we’ve seen, the burden of student loan debt trickles into other areas of life, making recent grads reluctant to take on other kinds of debt such as car loans and mortgages. For women and minority graduates, the problem may not be simply reluctance, but an inability to qualify for home loans or other kinds of credit. That means fewer buyers to nurture the housing recovery, and more virtually permanent renters.
A recent study on trends among baby boomers to downsize and sell off large suburban homes raised the question of who would buy these homes since many members of the new generation of potential homebuyers are just not able to gain a foothold in the housing market. That means more homes unsold and a flattened recovery.
If these college grads are largely locked out of homeownership, that might seem to be a plus for investors who need tenants for their rental housing. But the financial situation of these overburdened graduates remains precarious, so property owners can end up dealing with renters who default on rent or renege on a lease as well.
For those who aren’t in school or recently out, the growing national concerns about the runaway train of student loan debt can seem pretty remote. But for residential homebuyers and investors following Jason Hartman’s strategies, the student loan debt crisis reaches far beyond the halls of academia. (Top image:Flickr/VoxEfx)
The American Monetary Association Team
When the Fed’s in the Red, You Pay More
The housing market may be on the rebound after the great collapse of a few years ago, but the effects of that meltdown are still being felt. Large numbers of homeowners –and small investors – are still seeking relief through government sponsored mortgage assistance and refinancing programs. But because of the demand, the FHA’s mortgage assistance fund is running at a deficit, which means higher mortgage related costs are looming for many borrowers.
After the housing collapse of 2008 that resulted in record numbers of foreclosures and homeowners in danger of foreclosure, a number of mortgage assistance programs were created and offered by both mortgage lenders and government housing agencies such as Fannie Mae and Freddie Mac and backed by the FHA, which was responsible for funding bailout programs like HARP (Homeowner Affordable Refinance Program).
But now, the FHA’s Mutual Mortgage Insurance Fund, its primary source for supporting mortgage assistance programs, is running at a severe deficit –over $16 billion for the fiscal year 2013. Because the FHA must maintain a federally mandated reserve of funds, this means that costs to program applicants must rise – with a ripple effect across the housing market as a whole.
According to the newsletter of the Department of Housing and Urban Development, June 3, 2013 is the date set for implementing the new belt-tightening rules affecting both mortgage insurance and interest rates on some government backed financing and refinancing arrangements. New rules on mortgage insurance tie payments to tighter standards for down payments on mortgages. Under the new regulations, both investors and residential homebuyers who can put down over 10 percent of the loan amount up front will end up paying mortgage insurance only for the first 11 years of the loan. But although applicants who can’t come up with a down payment of this size can still qualify for the loan, they can expect to pay mortgage insurance payments for the entire life of the loan.
For large mortgages or refinances in loan amounts over $650,000, the required down payment – or, in the case of refinances, the amount of equity in the home – will increase. Currently set at 3.5 percent of the home’s total value, this amount rises to 5 percent after June 3. This change is likely to affect owners of large residential homes and investors purchasing or owning multiplexes.
Add these FHA rule changes to predictions that mortgage interest rates across the board are expected to rise – reaching an estimated 4.9 percent by the end of 2013 – and there’s a pretty good argument for acting now to start the mortgage process, or to apply for refinancing help through private lenders or any of the homeowner assistance programs funded by the FHA or related agencies.
A key piece of Jason Hartman’s investing philosophy is to keep mortgage debt and refinance whenever possible. For investors seeking to build wealth through income property, the FHA’s new rules could take a bigger bite. (Top image: Flickr/CatieRhodes)
The American Monetary Association Team
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