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A Monthly Newsletter Source of Financial Sources • Price Your Home to Sell Into the Market You Are Dealing With Today. • Roth Conversions May Not Be Right for Everyone. • PERFECT BOOK FOR THE NEW YEAR - MEDIA COPIES AVAILABLE • Fixing Troubled Home Mortgages. Who Holds the $600 Billion Bag? Now that the bubble has burst and the big banks have been bailed out, how much will be lost on home mortgages? • Increase the Power of Your Sales Assistants or Client Services Team • Are You Ready to Meet Your Public?
---------------------------------------------------------------------------------------------------------------------------- Price Your Home to Sell Into the Market You are Dealing With Today. “Waiting for your price” means taking on the risk that the markets may not perform as hoped, and risking the loss of precious time that could fulfill a more important personal goal. Homeowners who are faced with selling a home in a depressed real estate market often do not understand that the present value of a future price for which they are holding out may actually be less than the current value of the property. How is this even possible? Here is an example: Dave and Joey Winkler (ages 61 and 59, respectively) own a home in Phoenix, Arizona. They were planning to retire and move closer to their children in Denver over the next six months when Dave turns 62 years old and qualifies for Social Security benefits. Over the past two years, they have seen the value of their home drop significantly about 35% from a market high of $425,000 to a current value of $275,000. They have set their sights on a sales price of $400,000, and are willing to wait to get their price. They will miss the early childhood of their grandchildren and may miss the opportunity to downsize to a beautiful home in Denver that could be purchased now also at a depressed price. But they have a number in their head and intend to hold to it. What the Winkler family may not realize is that in waiting for their price of $400,000, this future sales price may actually be less than the current value of their home in today’s dollars. Using the Winkler’s own information, they expect that once their local real estate market stabilizes in the next 12 months, their home should realize an estimated appreciation rate of five percent. This is much higher than the actual nationwide average of less than 2% since 1948, but in the absence of being able to predict the future, the assumption is valid. Then, after the next 12 months, assuming this five percent appreciation rate, how long will it take their home valued today at $275,000 to reach a market value of $400,000? Assuming a straight-lined growth after the next 12 months of no gain or decline, the answer is 8.78 years. The Winkler’s feel that general inflation during this time should be a little higher than normal due to the current needs of the country and economy, but feel comfortable assuming a four percent inflation rate. Note however, that this is lower than the average inflation rate over the past 40 years. Assuming a future value of $400,000 in 8.78 years and a four percent inflation rate, the present value of that future value of $400,000 is $260,626... lower than their current market value. How did that happen? It happens because of the principal of growth, inflation, and compounding. The assumed growth rate of five percent is reduced by the assumed inflation rate of four percent. A four-step calculation of solving for the present value of $400,000 during the holding period yields an answer that surprises most families, if the calculation is done at all. What are not factored are the additional real estate closing costs. These costs will deduct another six to seven percent from the difference between the current and future market value. Worse, perhaps, than losing ground on the value of this important asset is the time lost not fulfilling their ultimate goal; to move closer to their children and enjoy their retirement years with their grandchildren. The fact is, no one can predict the future of the market. But what is certain is that “waiting for your price” means taking on the risk that the markets may not perform as hoped. When decisions hinge on selling a primary residence in order to fulfill more important personal goals, don’t delay. Price to sell in the market you find yourself in today. Rich Arzaga is Founder and President, Cornerstone Wealth Management, San Ramon, California, a life planning company specializing in providing options and solutions for residential and commercial real estate investors. He is also an instructor in the nationally-recognized financial planning certification program at U.C. Berkeley, and teaches the highly-acclaimed Real Estate Investments course at U.C. Santa Cruz and U.C. Berkeley. Rich can be reached at rich@consultrich.com or toll free (888) 290-9900. Securities and Investment advice through Associated Securities Corp. (ASC), Member FINRA/SIPC and a registered investment advisor. Additional Advisory and Investment Services offered through Cornerstone Wealth Management Inc., a registered investment advisor not affiliated with ASC. CA Insurance License No. 0D92796 Roth Conversions May Not Be Right for Everyone. The financial press has been deluged recently with stories about Roth IRA conversions. 2010 is a watershed year for Roth conversions as the income limitation restriction goes away. Starting in 2010 anybody and everybody will be eligible to convert all or part of their IRA to a Roth IRA. Whether a person should convert is an entirely different question. People who expect to be in a lower tax bracket in the future probably shouldn't convert. They would be paying higher taxes now than they would be later if they waited. Also, if the assets in the Roth account drop in value after the conversion, you would have been better off not converting. No one can know ahead of time how their investments will perform, but if the assets decline in value, you would have paid taxes on the larger amount. Should that occur, you have a window of opportunity to re-characterize the conversion back into an IRA and file your tax return again. Finally, if you are under age 59.5 and want to convert, be careful how you pay the taxes for the conversion. If you use proceeds from the conversion to pay the taxes, you will be subject to an additional 10% penalty on the money from the IRA conversion used to pay the taxes. There are many questions surrounding a Roth conversion for 2010. The answer will not be the same for everyone. Seek professional advice before launching into a conversion. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. 952-835-9000 - pfshim@usinternet.com. A Christmas Present That Benefits You and Your Parents: By planning ahead for an aging parent’s long-term care needs, families may help to reduce the financial and care giving stresses that often fall on family members providing care. Long-term care (LTC) insurance policies, at different levels of coverage and design, may help the families of the insured implement a variety of long-term care planning strategies. With 70% of women likely to be the primary caregiver for their parents, in their home,1 husbands and brothers need to recognize that relying solely on a family member for care can be far more expensive and disruptive than ever imagined. The stress on families may become acute when several things occur in giving care to one’s own parents. Family caregivers may have to adapt their schedules and lifestyles, dining rooms may change into bedrooms, and someone, even pre-teen children, may be recruited to be with a grandparent after school until the working parent returns from work. In some cases, caregivers may decide to give up paid work to provide the at-home care diminishing the family’s income. Stress on the caregiver, even in the most loving families, is well documented, as is the depression that can occur among caregivers because of the hard work and dislocation of their lives.2 In addition, families need to consider the cost of bringing in home health aides, nurses and/or therapists and there can be un-reimbursed out-of-pocket costs for medical supplies and over the counter medicines, dressings, bedding, and such things as hospital beds. One solution is for adult siblings of healthy aging seniors (you can not purchase the insurance for an already sick senior) to come together to buy some form of long-term care insurance. These policies can help alleviate the financial drain on seniors and their caregivers and families. It does not have to be an “all or nothing” design when constructing a long- term care insurance policy. There’s a belief out there that long- term care insurance policies are expensive but there are ways to build a policy that is affordable and can still provide essential coverage. Siblings can look at a range of policy designs that long-term care insurance policies offer. To keep things as simple as possible, I often lay out their choices at three different levels of policy design. Through John Hancock Life Insurance Company (John Hancock), a minimally designed $50 daily benefit, with or without an inflation rider can offer access to care advisory assistance for coordinating long-term care services including home care and potentially valuable provider discounts — both features are offered through third party sources independent of John Hancock. Provider discounts may help "stretch" the benefits of the policy depending on charges incurred and benefits purchased. This may allow the benefits to last longer than they otherwise might and could be a savings compared to an uninsured person who pays "street" price for long-term care services. As a medium level policy, a policy with $150 as a daily benefit may be appropriate. If at the time a Massachusetts resident applies to Medicaid for help with nursing home costs and they have an in-force policy that meets state requirements, they may be able to protect the family home from a Medicaid lien. I encourage clients to consider consulting with an attorney familiar with elder care law to assist them with this process. For those who may want to protect more assets, may consider a policy design of $250-$300 daily benefit with an inflation rider. This benefit level will go a lot further to covering the cost of an assisted living facility, a nursing home, or more extensive home care benefits in the Greater Boston area. This higher level of coverage could be particularly appealing to risk adverse clients as well as those with a family history of such illnesses as Alzheimer’s, Parkinson’s Disease, Osteoporosis and other chronic diseases. An increasing number of states are offering even greater incentives to long-term care insurance policyholders through LTC Partnership programs, which offer Medicaid Asset Protection above and beyond the benefit currently available in long-term care insurance policies.. These types of policies can be especially helpful to individuals in these states who have a desire to leave a financial legacy to their children and other loved ones including the healthy spouse. As these programs and insurance policies are very specific, you must meet with an appropriately licensed and trained agent in your state to review the choices available to you. There is a personal story behind this article. Some time ago, my siblings and I discussed these issues in our own family and came to an agreement to help pay for long-term care insurance policies for my mother and stepfather. Knowing that they had the protection of a long-term care insurance policy put us at ease. However, the benefit of our decision really came to light when my mother broke her hip from severe osteoporosis and filed a claim. Thank goodness she was covered. 1 AARP Public Policy Institute, “Fact Sheet: Women and Long-Term Care” April 2007. 2 Butler, S.S., Kaye, L.W., Ruffin, L. & Downey, R. (2005). Depression and caregiver burden among rural elder caregivers. Journal of Gerontological Social Work, 46, 2, 47-63. http://www.pascenter.org/publications/publication_home.php?id=308 http://www.pascenter.org/publications/publication_home.php?id=308 Stuart H. Armstrong, CFP®, CLTC, a John Hancock Life Insurance Company agent with Centinel Financial Group, a Boston Massachusetts area firm. He can be reached at 617-424-0005 or sharmstrong@jhnetwork.com PERFECT BOOK FOR THE NEW YEAR - MEDIA COPIES AVAILABLE Paper Clarity at a Glance: What to Keep and When to Let Go Above all, this book offers peace of mind by reducing people’s fear of making a mistake, getting audited or wasting time searching for answers. No more frustration plowing through dense, complicated material. No more searching everywhere. Short, yet comprehensive, it’s all here — at a glance. Additionally, the book provides a strong foundation for dialogue between family members and professional advisors. Anyone who wants to bring order and greater security to their lives could use this book, especially during these turbulent times. Possibly for the first time, readers will be able to reduce their piles of paper and worry. Paper Clarity’s added value is in its unique design, carefully selected to ease learning, prevent information overload, and invite readers to approach and understand this otherwise dry material. Its size, color, binding, and feel all help make what is typically dreaded, potentially pleasant. Diagrams, 18 tips, and clarity on storage, taxes and audits all add more ease. The Paper Clarity Chart is the core element of this valuable resource. It includes a comprehensive list of over 100 personal (legal, financial, and medical) documents and records, information on how long to keep each document, and when one can shred or recycle. The book goes beyond getting organized; it helps people make good decisions. Laura Moore holds a Master’s Degree in Education from Harvard Graduate School of Education, and works as a consultant, workshop leader, professional speaker and writer. She is the founding principal of ClutterClarity at Home, teaching clients how to achieve sustainable relief from their clutter, and bring order and more enjoyment to their lives. She can be reached at Laura@ClutterClarity.com or 617-349-1661. To learn more, visit her website http://www.ClutterClarity.com or Blog: http://www.ClutterClarityatHome.com. The book is available on Amazon.com. For your copy of this book, send a request to beth_chapman@inkair.com with “Clarity” in the subject line. Include your mailing address. Fixing Troubled Home Mortgages. Who Holds the $600 Billion Bag? Now that the bubble has burst and the big banks have been bailed out, how much will be lost on home mortgages? Will the same Masters of the Universe who pushed subprime loans, deregulation, and derivatives on the public be able to stop the administration’s mortgage modification program? Do they care who gets hurt as long as their latest trade works? If they succeed, will the public get another huge tax bill? There are many opinions regarding the magnitude of potential losses in the U.S. home loan mortgage market. Almost always, each opinion is spun to advocate the spinner’s personal economic agenda.
Amherst said that there are 7.5 million loans, 13.5% of all loans, currently in non-payment status and that housing prices will decline another 8% to 10% because of the large amount of distressed housing inventory. Amherst projects 7 million foreclosures. Amherst, like most mortgage loan investors (“Investors”) and many investors in the mortgage related Credit Default Swap Market (“CDS”), do not like the MFA program. If they are short the mortgage market or purchased CDS protection, they really don’t want the government to fix the problem because it makes their bet worthless. If they are long (own mortgages or sold CDS protection), some Investors believe it delays their collections on their mortgage investments. Several Investors have filed lawsuits against the servicers, successful so far, to stop MHA mortgage modifications. Remember that 2/3s of all mortgages are guaranteed by the GSE’s and Investors expect to collect even if the mortgage is worthless. Republicans don’t like the MFA program because they suspect it limits their supporter’s options or is contrary to their belief in totally free markets. Most Democrats support MFA because it supports their social goals. The home mortgage market is so upside down and so convoluted that we must come with a solution to this problem. It is in the best interest of our country, our people, and the financial system to minimize the economic and social effect of the mortgage debacle. As of the end of August and according to the S&P Case Shiller Index, the average home price in the U. S. has declined about 30% since its peak in 2005-2006. 14% of homes and apartments are vacant. An estimated 20% to 25% of single family homes are worth less than their mortgage. Unemployment is over 10% and another 5% of the people are underemployed or simply tired of looking. My bet is that the 7 million Amherst foreclosure estimate is closer to the truth than the government’s 4.5 million in need loan modifications. It seems clear, that Amherst and most Investors are completely discounting the benefits of the MHA program. I don’t think most Americans understand the magnitude of the mortgage problem, the impact of foreclosures on home values or the potential losses to the banks and GSEs. Projections of the future of foreclosures are all over the place. We used Amherst’s 7.0 million estimate as an example because it is recent and Amherst’s data is reasonably well researched. Amherst hired many of the high-ranking mortgage executives and traders from Bear Stearns, Lehman Brothers, and Merrill Lynch when those firms went down or were merged. Amherst is loaded with mortgage market experience. Amherst reportedly made over $50 million dollars in a controversial CDS trade involving subprime mortgages with several of our largest banks. And, the banks are furious. For more information see http://online.wsj.com/article/SB124468148614104619.html Our assumptions and estimates are set out on the chart above. If Investors foreclose on 7.0 million homes and prices decline an additional 10%; then our estimate of the total loss to Investors and loan guarantors is $584 Billion and 7 million people will have lost their homes. Foreclosures may cause prices to deteriorate even more. The Federal Government does not like this scenario. The GSEs, run by the government, own or guarantee about 50% of home mortgages and FDIC insured banks own about 25% of the mortgages. The Federal Government does not really want to take $440 billion in losses, 75% of the projected losses, that are projected to result from the 7 million foreclosures. They designed the MFA program to allow homeowners to modify their monthly payments on their house notes for up to five years to give the housing market and/or the delinquent homeowners a chance to recover from this disaster. The administration believes that most foreclosures are caused by job losses or by homeowner’s reduced income. Most banks and investors appear to think it is some sort of inherent failure of character in the borrower that will be repeated. Federal, state and local governments also fear the effects of massive foreclosures on many neighborhoods and the tax base. Neighbors are legitimately concerned about what foreclosure sales at auction prices will do to the value of their own homes. One of the wild cards for Investors, not the GSEs or your local banks, is that there was so much demand sub-prime loans the investment banks created synthetic sub-prime pools and sold them all over the world. In 2005-2007, banks and Wall Street would underwrite a 2nd mortgage on a sub prime dog house because of the overwhelming demand. The synthetic pools magnified the losses on sub-prime mortgages to 2-3 times the actual loss in the real mortgages. By itself, the MHA program will not save 7.0 million homes from foreclosure but it should moderate the future decline in home prices, reduce the number of foreclosures, and save the Investors and the GSEs a ton of money. It should help some homeowners escape the foreclosure guillotine. Our best guess is that 25% of the distressed homeowners will not qualify for a loan modification. And, about 60% of the remaining 5.2 million non paying loans should be able to be successfully modified. Based on these assumptions, approximately 3.1 million loans will be successfully modified and 3.85 million of the 7.0 million of the loans in jeopardy will ultimately be foreclosed, deeded back to the lender, or sold in a short sale. This is not a rosy estimate, however, we expect MFA to cut our losses from $584 Billion to $265 Billion. Many people look at the MHA argument as a philosophical discussion. Banks are bad. Banks are good. Why should I bail out a bunch of people who bought a more expensive home than they can pay for? How does that help me? Why should the average person be concerned about the number of foreclosures? The main reason we should be concerned about the number of foreclosures is that the federal government is effectively on the hook for 75% of the losses and we, the average person, will pay for the losses through increased taxes. We actually lost that money back at the moment when the loans were made. The problem grew when housing prices boomed, when lenders quit requiring 20% down payments, when banks depended on Credit Default Swaps rather than due diligence, and when the barely employed started buying $500,000 houses. We all drank the Kool-Aid. The financial community was the Piper while the public and the politicians followed merrily along. We are facing extremes in the housing markets. Home prices are down much more that they should be. We can’t afford to let the current situation continue to drive prices down and further jeopardize the GSEs, the Banks and Investors with losses of some $600 Billion. Nor do we want to see 7 to 10 million people tossed out of their homes. We can’t be sure if MHA is the only correct solution to the housing crisis. But, we must to try to minimize the damage to our housing system. Properly executed MHA should keep the problem from getting significantly worse. It may not seem like much in the context of trillion dollar bailouts but, a couple of billion here and a couple of billion there can add up to some money for the beleaguered taxpayers. William G. Campbell, President of RPC Group, Little Rock, AR, has spent his career structuring real estate projects for financial planning and brokerage firms, and serving as the chief financial officer at corporations. He has worked on hundreds of projects that required debt negotiation and debt modification for highly complex real estate transactions. In these roles he helped corporations stabilize their financial relationship with their major shareholders and lenders, and directed the reorganization of the accounting and legal divisions of businesses. He has helped high net worth individuals organize their real estate holdings to preserve income, save taxes, and reduce their debt. In work with a major international bank, Campbell analyzed the financial statements of the banks holdings, particularly its REIT portfolio, to enable the firm to build a defensive portfolio of high yielding securities with strong balance sheets for clients seeking income and safety. Given the current mortgage turmoil, Campbell has turned his energy to assisting homeowners with home mortgage refinancing or modification under the "Making Home Affordable" program. He can be reached at 501-225-1211 or wgc@therpcgroup.com. MARKETING & PRACTICE MANAGEMENT Increase the Power of Your Sales Assistants or Client Services Team For advisors who have invested in client relationship management software, but don’t have time to deal with the small details required to maximize the investment, enter My Office Gurus, LLC, offering a Virtual Sales Assistant Service platform. This service solves the expense issues of processing paperwork and setting up and managing your database. The innovative Sales Assistant Service division of My Office Gurus, LLC, is the cost effective solution that meets the demand for higher levels of service required as your practice grows and allows you to better manage the manpower and margins to support your growth. My Office Gurus makes it easy to identify and outsource important infrastructure procedures that interrupt and add stress to your office environment. With their help your team is free to strategically develop the core strengths of your firm. By trusting My Office Gurus with some or all of your sales assistant tasks, you can not only focus and develop the core strengths of your firm but hire employee talent that best compliments the overall client services experience you want your office to achieve. My Office Gurus Sales Assistant Services may be the right answer for your firm. Whether you are a registered rep at a securities broker-dealer, an investment adviser rep of a registered investment advisor, or a life insurance agent, your practice benefits when the small details and follow through are handled in an accurate and timely manner. Services currently being promoted include:
Glen D. Shepherd, My Office Gurus LLC, provides the expertise, resources, and solutions that give the financial professionals the freedom to successfully capitalize on their own talents and strategically overcome their firm’s challenges. He can be reached at info@myofficegurus.com or 402-359-1452. Go to www.myofficegurus.com for further information. Are You Ready to Meet Your Public? Clients notice these things, and they’re not the only ones. Potential clients, potential business partners, and potential hires get their first impression of you from your website and your printed collateral. A bad first impression may never be erased. All the publicity in the world won’t do you any good if people are put off by what they see when they look you up. Don’t put the cart before the horse. Get your firm’s image in order before you execute a publicity campaign. Your total image consists of two parts: concept and execution. Think of them as your version of the vision/implementation conversation you have with your clients. Concept is a theme that reaches people viscerally, emotionally connecting them to your firm’s culture. It is at the core of your firm’s mission, vision, and values, your artwork, your writing voice, and your business model. The search for your ideal concept begins with two questions.
Execution can in turn be broken down into two parts: creating tools and creating an experience for your clients. Tools: Do your logo and graphics enhance your concept? Do your web site, brochure, stationery, business cards, slide presentations, trade show booth, article reprints, e-mail marketing, and newsletters share the same look and feel? Do these tools convey your message as well as convey technical information? Do these tools promote and reinforce each other? Client experience: Do you have protocol for answering phone inquiries? Do you have a new-client first visit routine that creates excitement and confidence in you? Do your forms and questionnaires, whether on line or in print, share the look and feel of the rest of your marketing material? Do you promote yourselves to current clients (retention marketing) as well as potential clients? How good are you at keeping clients informed of new developments within your firm? Are you using technology to your best advantage? How do you capture solicited and unsolicited feedback and what do you do with it? How effective are you at capturing client referrals? Do you have a raving fan club? Are you making the best use of it? Do you know how to use social media effectively without giving your compliance person a heart attack? Should you be using social media at all? Have you conquered the content bottleneck issue and figured out how to leverage your time and your knowledge to reach more clients and prospective clients with less effort? Do you have the systems in place to keep all of this updated? If you don’t have at least your concept and tools in place (and are working on the rest), think twice about seeking national exposure. You may not be exposing what you want the public to see. Jan Douma, J.D. has crafted marketing for the financial services industry since the days of the dotcom bubble, including everything listed above and more. Contact her at (805) 644-8143 or (805) 258-2443. |
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The government designed the Making Home Affordable Program (“MHA”) to modify 4.5 million loans to reduce foreclosures. The administration and most members of Congress regard the mounting foreclosures as a tragedy for homeowners, servicers, banks, the GSEs (defined below) , as well as the Investors who own the mortgages. The GSEs are Fannie Mae, Freddie Mac, Ginny Mae, FHA and other government agencies are known as the “GSEs”. Amherst Securities Corporation, like most of today’s aggressive mortgage Investors (the “Investors”), recently weighed in with their predictions.