Housing Foreclosure Prevention Act of 2008 (HR 3221)

The 600+ bill is aimed at helping distressed homeowners. I am sure we all don’t have time to read the full document (housing act), so here is a great summary of what the bill is going to do provided by Votesmart.Org:

-Establishes the Refinance Program Oversight Board, which is responsible for coordinating a program that insures “homeownership retention mortgages,” which are refinance loans designed for borrowers who are at risk of foreclosure (Sec. 112).

-Specifies that the aggregate original principal mortgages insured under the “homeownership retention mortgage” program may not exceed $300 billion (Sec. 112).

-Expands eligibility for FHA mortgage insurance to include borrowers who have been deemed “high risk” due to having a credit score equivalent to a Fair Isaac Corporation (FICO) score of less than 560 (Sec. 206).

-Provides incentives for “high risk” borrowers who have consistently paid their premiums on time that would reduce the amount of annual premium payments to payment levels equal to that of individuals who are not deemed “high risk” borrowers (Sec. 208).

-Mandates the establishment of underwriting standards which allow the FHA to insure mortgage loans for qualified borrowers who have existing mortgages with adverse terms or rates, qualified borrowers who do not have access to mortgages “at reasonable rates and terms for such refinancings due to adverse market conditions”, and qualified borrowers who are in default or at imminent risk of being in default (Sec. 210).

-Outlines the following eligibility requirements for receiving insurance for a “homeownership retention mortgage”:

-The insured residence shall be the sole residence in which the mortgagor has a full ownership interest,

-The mortgagor shall be verifiably unable to pay the existing mortgage(s) and, as of March 1, 2008, the mortgagor shall have had a mortgage debt-to-income ratio of greater than 35 percent,

-The new loans shall not exceed 90 percent of the property’s value,

-Prepayment, default, and delinquency penalties on existing mortgages shall be waived,

-Indebtedness under the existing senior mortgage shall have been reduced by such percentage as the Refinance Program Oversight Board may require, and holders of liens on property securing a mortgage to be insured under the program shall agree to accept the proceeds of the insured loan as payment in full for all indebtedness under all existing mortgages,

-The Secretary of Housing and Urban Development shall hold and retain a lien on the residence which will be subordinate to the mortgage insured under the program but will be senior to all other mortgages,

-The mortgage insured under the program shall bear a single rate which will be fixed for the entire mortgage term,

-The mortgagor shall undergo a criminal history check to ensure that he or she has not been convicted of mortgage fraud in the past seven years (Sec. 112).

-Requires the implementation of the following underwriting standards for the “homeownership retention mortgage” program: the mortgagor insured under the program shall have “a reasonable expectation” of repaying the mortgage, there shall be no denial of insurance based on credit scores, based on previous delinquency or default, or based on bankruptcy, and a total debt-to-income ratio of up to 50 percent shall be allowed (Sec. 112).

-Terminates “homeownership retention mortgages” two years after the enactment of this amendment, in the absence of any approved extensions (Sec. 112).

-Increases the allowed levels of principal obligations for mortgages insured by the FHA (Sec. 203).

-Extends the term of mortgages insured by the FHA from thirty-five to forty years (Sec. 204).

-Establishes the Federal Housing Finance Agency, which shall supervise and regulate Fannie Mae, Freddie Mac, and Federal Home Loan Banks (Sec. 311).

-Raises limits on loans that Fannie Mae and Freddie Mac can purchase from $93,750 to $417,000 for a single-family residence, from $120,000 to $533,850 for a two-family residence, from $145,000 to $645,300 for a three-family residence, and from $180,000 to $801,950 for a four-family residence (Sec. 333).

As it stands today, the bill as passed the Senate 84-12.
Bill Sponsor: Nancy Pelosi 

Key attention should be noted that this bill will reduce loan balances for troubled homeowners and transition the debt carried by the banks to the Federal Government (taxpayers).

One should also pay attention that this bill has roots to the banking industry. While the stated goal is to help troubled homeowners, it is a bank bailout. You can read an internal document from Bank of America posted by the bigpicture and help but not see how similar the bill is to the ideal plan outlined by BofA.

My favorite quote in the document “we believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market”

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Another great way to make some extra cash if you have the skills to layout a magazine.

 (photo from Chevrolet.com)

So you want to buy an SUV.  Now is not the time.  I pulled some data from KBB.Com and Edmunds.com to show just how crazy the numbers are.  The chart below shows three cars, a Jeep Cherokee, Chevy Tahoe, and Honda Accord (for the non-suv comparison).  For each car you can see the 2008 MSRP, then three years of blue book value with a very low 12K miles a year put on the vehicles.  The Value lost is how much the car has decreased in value after the end of each year in that year.  The final column, is what your monthly loss is per month based on one, two, or three years of keeping the car.

 

It is shocking to see that a Jeep Cherokee will lose 40% of its value in the first year with a small amount of miles.  The Tahoe, a very popular SUV, will lose 44% in two years. 

I believe what we are seeing is an over reaction to high gas prices.  I value the data from KBB, but it can not always account for irrational behavior and as such you should avoid buying any new SUV unless you are the type that does not care about losing 10K or 20K.  If you need the space, buy a wagon or other vehicle that is perceived to get better gas mileage as it will hold it value better.  If you have to get that SUV, then buy used from a private party if anyone is stupid enough to sell at the super low prices.  Retail rates on any of these cars at the dealers will be inflated by at least 2-4K above private party, so don’t think buying a used SUV at the dealer is a good idea either.

Basically, until the market settles, don’t even consider buying a new SUV.  If you are selling one, keep in mind the very low KBB values and take the time to do the math.  Is the extra loss in the value of your car a fair exchange for the more fuel efficient car now?  It is simple math, don’t get caught in the hype as you will be burned.

For those that have been following the market, we have had some nice gains. It started me thinking that I have been lucky over the last 10-years to not experience a down year and it might be nice to share 10 Fundamentals that started me out. I believe these tips built a solid foundation for my own trading strategies and hopefully they will help you as well.

1. Only invest what you are willing and to lose!

If you only follow one rule, let it be this one. I hold solid to this one. I have talked to people that have taken out lines of credit on their homes only to lose it in the market. Why do this? Sure, if you are successful you can make enough return to pay the interest, but if you are wrong you not only have lost money, but you have a loan to pay back with interest. It does not matter if it is $3,000 or $100,000, only invest what you are willing and can afford to lose. If you follow this rule, any amount you lose will not send you to the mental institution.

Keep in mind this amount does grow if you investments grow. If you start with $10,000 and are lucky enough to turn it into $20,000, you can now afford to lose $20,000 because you are really only risking your initial $10,000. It is kind of like playing with house money when you strike it big in Vegas. You may choose to pull out you $10,000 and only play with the house’s money or you may keep in your initial investment to double your buying power.

2. Keep you emotions out.

Play with emotions and you will be guaranteed to lose money. This rule only works if you follow rule #1. Emotions are great for love and relationships, but it clouds judgments on investments. Sometimes a stock my be down 10% and it is time to let go because of new fundamentals or market sentiment, but if you are attached to the stock like your attached to your home football team you may just keep riding the boat down. Investing needs to be objective and emotion free in order to see the truths about stocks.

3. If you don’t have time to do research, then buy mutual funds.

Mutual funds are a great way to have some one else manage your risk. There are great funds out there and you can go to any major news site to find listings of the lowest cost and best performing funds. I personally use sites like Schwab.com and Morningstar.com.

4. Do not use margin.

I know it is tempting, especially when you have some winners in your portfolio. Unless you are very well seasoned with investing and know how to effectively use margin, stay away. Improperly using margin can quickly take you portfolio to zero as opposed to solid mutual funds or stocks which rarely go to zero.

5. Don’t count on the big win!

Don’t go in looking for the big score. When you begin investing you should look for solid performing stocks and mutual funds. This is not going to double you money over night, but it will keep your risk down and if done correctly start to grow your portfolio. The more you grow the more risk you can start to take. I typically allow 5-10% of my funds for risky investments (after much testing of my strategies), however, when I first ventured into strategies, I never invested more than 2%.

6. Eliminate should of, could of, only if, bought to soon, and sold to late from your vocabulary.

You can not dwell on your past actions. It is fine to learn why you made the mistake and incorporate controls into you next strategy, but once you know why don’t harp on yourself. If you do, then your judgment will be clouded on your next trade because you will start to second guess your strategy.

7. Don’t ride waves!

By the time you see the wave it is probably too late and you will likely get crushed to the bottom. Remember, there are many firms and investors that monitor changes 24-hours a day that influence the markets. When waves are rolling, you can be sure they will exit about the time you enter.

8. Set goals!

If you buy stocks and want to eliminate emotions from your stock trading, you have to set goals and strategies for each trade. If you stick to your strategy you have more control. Yeah, sometimes you might lose out on some big gain, but it goes both ways. If a stock far surpasses your goal because of some news and you think there is more room, then you can always sell a portion of you position and hedge your risk, but other than that when you goal is reached you should take your action.

9. It is not profit until you sell.

So many times I here people talking about huge gains and how well they are doing in the market only to find out several months later they have huge losses. Mainly because they were lucky enough to be on the ground when a wave started and elected to hold their position instead of selling at the peak. This is why it is important to have realistic goals and sell your positions when they are reached. If you are not a buy/sell person then stick to mutual funds and let the mangers do the work.

10. Buy on down days in the market.

Why buy when the market is up 100 points. Just wait, at some point there will be a down day to buy.

Please share your successful strategies!

In a recent Article posted by CNNMoney called Breaking the Bank, ATM Fees, Jessica Dickler discusses the recent move by Bank of America’s decision to raise Non-customer atm bank fees to $3 per transaction.

Bank Of America claims they are doing this to “improve access and convenience for its account holders using ATMs at its branches - reducing traffic to cash machines” as noted by Betty Reese (Bank of America’s Public Relations). I believe that is a complete bold face lie. Bank of America owns and operates the largest ATM network in the US. An extra $1 fee will result in millions of extra revenue generated by non-BOA customers. This is really the perfect fee hike. You only affect you non-customers. It is a brilliant move by the largest consumer bank.

So does this mean consumers are getting ripped off? Should the government step in? Is it fair? These are questions that certainly surround the issue.

While I believe that the fees are bogus for large institutions due to economy of scales, they do run a for profit corporation and this does generate more than 4.2-Billion per year in collected ATM fees in the banking industry.

It is fascinating to read the responses to the story above regarding this. You see everything from BOA being called a criminal to people saying shut your mouth and get a life. I think in some sense every person commenting is right on both sides of the argument! The beauty of a free market is that if corporations are perceived to be gouging customers, new suppliers will slowly develop and mature that offer the shortfall of the main supplier.

For this to happens, however, people need to complain and call out for better prices when profits exceed reasonable expectations. It is completely reasonable for people to complain about a $3 fee, if you don’t and just take it because you believe it is the corporations right to charge you than you are naive of your power to be customer ( please send me $10 for reading this post if you are one of these people.  I have costs I need to cover!). In an industry that is highly profitable, it is fair to ask for better service and lower fees.

So why don’t people highly criticize Starbucks? They are highly profitable and $4 for a cup of coffee is most certainly a consumer gouge. It is a brand. Plain and simple. If you want cheap coffee you can go to you local gas station. You pay to be part of the Starbucks branding and concede to the $4 cup of coffee.

For BOA and Many other large banking institutions that have ATMs, consumers have little choice. As a result, you get complaints and from that new competitors in the market. There are now great alternatives to the large banks that offer much lower fees, better customer service, and better dispute resolution. Such examples are interest checking at Charles Schwab. Fidelity and TDwaterhouse (all brokerage firms).  If no one complained and accepted that the corporation has a right to make money and huge profits, then perhaps we would be paying $10 or $20 per transaction today.

Point is, when companies gouge consumers that have no other options for services that are needed, the only change will come from consumer action to force new competition. When new competition comes in, prices will decrease. Simple economics.

As far as government intervention, most of the time not a good idea. Look at the telecom industry. One of the best examples of how government can really make something messy.

What are your thoughts? Should we complain as consumers? Should the government intervene?