Financial Frontlines®

For all you working people it has hit epidemic proportions.  People ready to sell their stock mutual funds in their retirement accounts.  Before you do, stop and consider these quick points.

Don’t let emotions dictate your investment strategy.  If you are ready to sell, you are making a decision based on fear, depression, or despair.  Emotions will kill your returns and your retirement account over time.  It’s not the market that hurts you; it’s you and your lack of a rational investment plan.  The market does exactly what we know it will do; go up and down.  You have to live by a plan that exploits that very fact of life.

Markets always have and always will go up and down.  The economy overheats and then it will deflate to cool things down.  Once the economy cools down, it will heat up again.  Glitches work themselves out whether it’s a credit crisis or a “dot-com” bubble or runaway inflation; whatever.  We are human.  We make mistakes.  We fix them.  We live to fight and succeed another day.

Buy low.  Buying low sucks—get over it for your own good.  To buy low means you have the guts to trudge on when things are their darkest.  Wealthy people get wealthy because they buy at the right times—they pick up other peoples’ assets a bargain basement prices.  They buy when others see pain and they see opportunities.

You are buying low when you invest regular amounts at regular intervals through payroll deduction.  Your regular contribution is raking in shares at bargain basement prices right now.  Concentrate on the shares, not the value.  The game is about owning the most at this point, not your value.  Your value only starts to matter when you are closer to needing the money—5 to 10 years out.

If you are raking in more assets at sale prices, don’t you want to be raking in the types of shares that will increase in value the most over time?  Every down stock market provides opportunities for us to buy more long-term appreciable assets than average income people normally get a chance to buy due to our limited investment abilities.  Five years from now you’ll kick yourself for not having found a way to buy more shares of stock mutual funds back in 2008.

Over the long haul, stocks have averaged the greatest returns of any other assets.  People of average means must have their investments work harder (earn more) in order to build enough wealth to retire.  “Safe, conservative, and secure” doesn’t return enough to build wealth.  Conservative assets don’t have the returns necessary to stay ahead of taxes and inflation.

You have to be “in the market” to get the better returns.  If you move your retirement assets in and out of the stock market based on emotion, you miss the times in the market that provide the greatest returns.  The greatest returns are typically as the market rebounds off the bottom.  If you aren’t there, you miss it.  You can’t afford to miss the rebounds.

Buying loads of shares at the market bottoms means you are averaging down your “per-share” costs.  You average down your per-share costs as you buy more and more shares at cheaper prices.  When the market returns, it takes less increase to break even and go on to even higher levels.

As a working person still accumulating shares, I wouldn’t mind for the market to stay down a few more years.  Let me rake in the maximum number of stock mutual fund shares at depressed prices.  When the market rebounds, yeeee-haw!

Across the country, many homeowners are in trouble.

A lot of homes purchased at the top of the housing mania in 2003-2006 are now worth significantly less than the original purchase price.  Some markets have seen a 40% drop in home values over the last two years.

Throw in the fact that many of these purchases were financed with non traditional mortgage products such as interest-only (IOs), adjustable-rate mortgages (ARMs) with lower teaser rates that are now starting to adjust and so-call “Option ARMs” where homeowners could choose their payments at the cost of having unpaid balances tacked onto the end of the note.  We are now seeing a foreclosure pandemic.

For military homeowners that have to PCS every 2-4 years, this situation can be financially devastating, forcing families to live apart as the servicemember travels to the new duty station and the family stays behind, desperately tying to sell the house. 

If installation housing isn’t available, the servicemember will have to rent, putting even more financial pressure on the family. 

Walking away from a mortgage or declaring bankruptcy is not an option for most military families, since these moves endanger security clearances (most security clearance revocations are due to financial issues).  So what are military families to do?

Consider the following 5 Tips:

Tip #1 – A Good Defense is the Best Offense

If you don’t currently own a house, be very careful before buying one in today’s market.  While bargains abound, it takes 4-5 years to break even on a home purchase in a “normal” market.  If you are PCSing in a down to flat market, a home purchase at your duty station may not be the best deal.  Given the chronic shortage of base housing around some installations, you may need to rent.  Before signing the lease however, question the landlord to make sure his or her finances are stable, since your rental property could get foreclosed right out from under you.  It isn’t always better to buy a house…so make sure you don’t make an expensive mistake!

Tip #2 – Refinance Now

If you have an adjustable rate mortgage that will adjust within the next year, plan to stay in the home and haven’t refinanced to a fixed mortgage, then strongly consider a refi before the note adjusts.  Rates on 30-year mortgages have, unfortunately, risen within the last month and currently hover around 6.4% with no points.  That is still relatively cheap money and refinancing now may save you trouble and heartache down the line.  In addition, many lenders will now cover the closing costs for refinancing, a big savings for homeowners.

Tip #3 – Renegotiate with the Bank

The Federal Deposit Insurance Corporation (FDIC) is now authorizing certain lenders to restructure loans for mortgage customers that are in trouble.  For instance, the FDIC authorized IndyMac Bank to send out loan modification offers to over 15,000 mortgage holders, with an average monthly savings of $430.  Several other large banks, such as Bank of America, who now owns Countrywide Mortgage, are pursuing similar programs.

If you are slipping underwater, be proactive and contact your lender.  It is easier to modify the mortgage before you reach the crisis stage and the bank is more likely to be a full partner in the process the quicker you get started.  Delaying just prolongs the process and costs you more money over the long run.  Please remember though, that for years banks were in the business of lending money, not restructing loans.  It may take time and perseverance and finding the right person at the bank to speak with.

Tip #4 – Rent Your Unselleable Home, If Possible: In many areas with depressed housing markets, fewer homeowners means more rental demand.  If you can’t sell, consider renting. 

Being a landlord isn’t for everyone, it is certainly worth a try and beats losing the home to foreclosure.  If you have trouble locating suitable tenants, there are some things you can do to sweeten the pot.  One strategy is a lease-purchase arrangement, where you agree to credit a certain percentage of your tenant’s monthly rent towards the eventual purchase of the home in return for a slightly above average rent.

This can help you get and retain a better quality of tenant, but make sure the rental income isn’t too much lower than your carrying costs on the property or you could end up with an “alligator” – a rental property that takes a painful bite out of your income each month.  It is critical to screen your prospective tenant’s credit before finalizing a lease.

Make sure you get some tax and legal assistance when structuring a lease-purchase if you don’t know all the ins and outs.  There are some specific tax savings availalbe through rental real estate that can help “slay” the alligator mentioned above, so make sure you check it out.

Tip #5 – Selling the Home with a Short Sale

If you can’t otherwise sell or rent your property, consider a “short sale” instead of allowing foreclosure or bankruptcy to proceed.  A short sale is a negotiated sale where the lender agrees to accept less than the property is worth and forgives the balance of the mortgage, avoiding expensive and time-consuming foreclosure proceedings and keeping the owners credit intact (Note: Not all short sales result in total debt relief…some will require carrying a note back from the bank, but will relieve the monthly payment burden).

In some areas of the country, 50% of current home sales are short sales!

A short sale is a negotiation and should be approached with a “win-win” attitude.  Don’t start pointing fingers at the lender or bad mouthing the original loan officer…this just gets things off on the wrong foot.

You are a good candidate for a short sale if:

• You are already behind on your payments
• You can conclusively show the monthly payments are not affordable for you
• You are willing to work hard towards a mutually satisfactory solution with lender, even if the first offer isn’t accepted

A successful short sale involves several steps:

• Find a good realtor experienced with short sales in your area.  They can often really assist in accelerating the process and can be an invaluable resource.  Also, most lenders want to see that you are actively trying to sell the property.
• Get the property listed for sale.
• Contact the lender, find the right person to talk to and see if the lender is open to a short sale.  It may take a number of phone calls to find someone with decision making authority, so be persistent.  In some cases, you will need to have your realtor send all paperwork (signed contract, competitive market analysis, loan approval paperwork from prospective buyer and your financial documents) to the bank to establish your need for a short sale before the bank will discuss moving forward.
• Submit documentation to your lender, including
  • A letter of authorization to the lender with key information on you and the property that will allow them to work with your agent on your behalf
  • A hardship letter explaining why you are seeking the short sale
  • Financial information such as tax returns for the last 2 years, your LES and bank statements for the last 2 months, financial worksheet (from lender)
  • Listing agreement and property report
• Receive an offer on the property (your agent will likely have a specific pricing strategy for selling your home quickly).
• Submit the offer to the lender and be prepared for some offer/counteroffer if they don’t accept the first offer.

If all goes well, the lender will accept the short sale, you can close on the property and get on with your life!  Be advised that it may take 90 days (or more) from the submission of your executed sales contract before the bank acts on the short sale.  They are in the business of lending money – not forgiving debt – so don’t expect instant approval.

Short sales can be tricky and require a strong commitment to see it through from end to end, but it can be far better than the alternatives.  They also save the bank thousands in foreclosure fees and, as a bonus, the realtor’s commission, most closing costs and even late payments may be covered by the bank.  Remember, if you are getting into trouble…don’t wait to act…put an attack plan in place and execute!

Special thanks to Florida realtor J.D. DeBoskey, Major, USAFR (www.allamericanrealty.com) for his assisstance in preparing this article.

I’ve been told that one of the “funniest” things you can say to an estate planning attorney is, “If I die, I want to…”.  Think about that statement for a minute.  I’ve also read over the years, arguments about the better choice for life insurance – permanent/whole life or term.  I’m not going to try to solve that argument for you today, but based off an article I read in the Journal of Financial Planning, I’m going to recommend a different lens with which to look through to determine you life insurance needs.

Let me start by saying that I believe you buy life insurance to insure against the financial consequences of death.  You don’t buy it as an investment vehicle.  There are those out there that don’t agree with that statement.  I’m willing to listen to the argument, but I believe that if you buy insurance as an investment you’re trying to do too many things with one vehicle.

So that brings me to the lens….the If/When question.  I think that if you start with the If or When question, you’ll know when to buy term insurance and when to buy permanent/whole life.

For instance if you say, “If I die before my children start college, I’ll need to pay for it with insurance”, then term life might be appropriate.  If you say, “If I die before my mortgage is paid off…” you might need term insurance (but most likely not a decreasing term, mortgage policy).  I think you get the point.

If you say, “When I die, there will be probate expenses”, permanent insurance might be appropriate.  “When I die, my spouse will need money until the business is sold”…you guessed it, permanent/whole life.  If there will be a requirement to care for a special needs child “When you die”, then again permanent insurance might be the right choice.

There are, of course, exceptions to this rule.  One that comes to mind is “If I die before my spouse is eligible for Social Security surviving spouse benefits.”  In this case, if you are very young, permanent insurance might be cheaper in the long run…you’ll have to check the specific costs of a 20+ year term policy versus permanent insurance.

I don’t claim the model is perfect…but it’s not a bad place to start.