Simply Junior

WARNING! If you are serious about buying a home in 2010, you might not have much time left! With recession of 2007-2009 fading into history, buyers are returning to the real estate market in droves. However, what most of the buyers don’t realize is that there are many forces working against them that might make it difficult to find real bargains comes spring and summer. Here are five main forces shaping up the market early this year, and you better pay attention to them:

1. Under the provisions of the massive stimulus package designed to support the housing market, the Fed has been buying mortgage securities for over a year in order to maintain liquidity in the housing market, which also artificially supported the rates at sub-5% level. However, this part of the stimulus ER is winding down by March, and it’s already driving the rates higher in anticipation of the program grand finale. What does it mean for the mortgage market? It means that comes March or April, you will not find rates in low or mid-5% any more. The consensus of most economists and finance journalists is that we will have 6% mortgages by the summer time. What it means for you? Have your loan approved and lock the rate no later than Mid-February!

2. With “normal market” demand for mortgage backed securities still very low, the lenders will tighten their underwriting guidelines even more. The preview of this was demonstrated in December of 2009, when following FNMA and Freddy all lenders increased credit score requirements for prime mortgages by 20 to 40 points, FHA followed them with the increase of the minimum score from 595 to 620, and some lenders made 640 as a minimum score for FHA or any other government-backed loans. Comes summer, the credit system most probably will tighten even more, as the banks will have a much smaller market to sell their loans to, which will force them to pick only cream of the crop borrowers to bet on. If you are not one of them, you might need to have at least 25-30% down, ratios below 30% and 750 score in order to have any chance for a home loan.

3. Unnoticed to the buyers, the Government passed a number of new laws in the last two years, of course all of them were done under highly publicized slogans of helping Joe the Consumer. In reality, these new laws practically eliminated a mortgage broker as a viable player in the market place. The government blamed the brokers for pushing “creative” mortgage products onto uneducated consumers who couldn’t afford to pay for them, however the reality is that the brokers were only selling products pushed to the public by BANKS! Truth is that the brokers don’t offer their own products, brokers don’t participate in the meetings of the banks’ boards of directors who decide which financial products to offer to the public, brokers only sell what the banks offer if the public demands it. In 2006 the brokers were responsible for 60% of all loans originated in this country, by the first quarter of 2010 – less than 5%! Why should you be concerned about it? Very simple: while enjoying practically unlimited access to billions and trillions of your taxpayer dollars, the banks succeeded in eliminating the only serious market force that kept their mortgage rates competitive in the last decade. With brokers gone, all loan origination now goes to retail banks with their “friendly and knowledgeable” staff who doesn’t give a rat if you buy their mortgage today at 7% or not, because they are on salary paid for by your savings deposits and unfair bank fees, and because your only alternative is to go to a retail branch of another bank, where you will face just as much competence and desire to lower rates as at the first branch. Consider this: The banks quietly managed to monopolize a market worth $10-15 TRILLION DOLLARS, and their profits (spread between your mortgage rate and the current Fed Rate, which is a 0%) per loan are the highest they’ve been in history! Now, did you get a thank you postcard from your bank’s CEO last year for helping the banks out with some free money?

4. Home buyer tax credit program winds down in April too. You must be in escrow by April 30th and close the escrow no later than June, which means that in March/April we will see crowds of late-comers last-minute shoppers trying to take advantage of the program and the inventory of homes, especially in 200-400K price range will be under serious pressure from the buyers, just like we saw in October and November of 2009, before it became known that the tax credit program will be extended. This time it is different – there will be no more extensions. This was the final extension, and those who missed an opportunity to take advantage of this program because there was no inventory on the market, will try to buy something this time around.

5. Traditionally, March is the first month of the official buying season in San Diego. In my 10-year spreadsheet, March sales represent an average of 30-50% increase in the number of closed sales over February of the same year! Believe me that this year will be no different. However, those who wake up late and start shopping for a house in March will face a much tougher competition and will be forced to bid up on properties beyond what they will reasonably appraise for, which will force the buyers to increase their downpayment or get discouraged and end up on the sidelines again.

Housing market has been battered enough to the point where even the bitter pessimists started talking about a turnaround. Some are still talking about some massive “shadow inventory” of homes that the banks are supposedly holding back to avoid the market collapse and that when it finally comes, the market will tank, however, this talk has been perpetuated since late 2008 and nobody knows when and if this inventory will ever enter the market. Today the banks can dump four or five-times more inventory on the market, where home attract 10-30 offers in the first week, and the buyers will just swallow them and move on.

So, what should you do now in order to take advantage of the situation in what’s left of the true bargain hunting season?

1. Get your loan pre-qualified right now, don’t wait for that tax refund to hit your bank account. If you need to borrow money from the relatives for the downpayment, do it, you can pay it back with the tax credit money, with your tax refund, or do their laundry for the next 30 years, but get your loan fully approved at the highest possible amount and have it available when you are making offers. Nobody seriously looks at your offers today unless you can attach a solid loan approval together with a proof of funds for downpayment.

2. Make sure you have a clear idea what you are looking for and make sure it’s realistic. Don’t ask your agent to send you everything from Bonsal to San Ysidro in 100K to 800K range and expect to work with that agent. Sit down with your agent, outline the areas, types of properties you will target, maximum monthly payments including HOA, Mello Roos, property taxes, home insurance, utility bills and anything else that will become your monthly responsibility. Knowing what you want helps you achieve just that four-times faster!

3. Use technology to your advantage. There are many real estate websites that allow you to set up an automated search page and to receive listings that match your criteria the minute the listings hit the market, or with any other regularity of your choice. Such automated tools allow you to gain an “unfair advantage” over majority of other non-technically savvy buyers and realtors: if you are the first one to know about the listings, you have the advantage of making your offers before everybody else.

4. Make offers, more offers and some more offers! In sub-$300,000 price range in most areas of San Diego it takes now 20-30 offers before you get one accepted, so be patient, but also smart about it. Make offers on realistic listings, where you have a better chance of getting your offer accepted. If you have an FHA loan, don’t go after “investor flip” listings, FHA won’t allow it for 90 days after their original purchase date. Don’t make offers on short sale listings, where the listing agent sends ALL offers to the lender and waits for six months for the lender to accept one offer, which turns the process into a prolonged auction. Don’t subject yourself to some REO listings if the REO listing broker insists on seeing my buyers’ first-borne child, DNA tests and pre-approval by the lender of the listing broker’s choice BEFORE they will even look at your offer. (By the way, whenever the REO agent is asking for the pre-approval by their lender, understand that it’s done solely to facilitate a sales pitch by that lender, so complain about it to California Department of Real Estate, tell them that in your opinion it is against the spirit of California AB957 “Buyer’s Choice Act” of 2009, especially if you already have your pre-approval from another lender in place! If you end up putting 20 offers on REO listings, does it mean that you have to get pre-approved by 20 lenders BEFORE you even know if your offer is going to be accepted? Sounds ridiculous, doesn’t it?)

5. Be creative! If you can’t get what you want directly, look for other ways of achieving the same results. Consider buying a fixer upper and using a rehab loan to do the repairs, consider buying a smaller house and they adding square footage to your desired size of home, consider new construction, lease-options, seller carry-backs or other creative ways of getting in the house. Become familiar with these creative strategies, they may be your ticket to homeownership today.

This is not the time to procrastinate and wait for your April tax refund before you start shopping for a house. Act now, and take advantage of the last several months of the BEST time to buy a house in the last several decades!

Many of you are in the red zone right before retirement, or you’ve already retired. No doubt your number one fear is running out of money in retirement. You’re part of a very large and growing demographic force: 35 million over age 65, 50 million drawing Social Security and 78 million baby boomers now turning 62. This means the future demand for everything used by the “retirement set” will increase, and “retirement prices” will rise dramatically. Many of you may have accumulated a retirement nest egg in a pension account, will draw a company pension and/or have other savings and investments earmarked for retirement. Where should you keep your retirement money?

If you’re keeping up with economic and financial developments, here’s what you’re seeing: sub-prime credit meltdown that has destroyed housing and is now spilling over into automobile debt and credit cards; highly volatile stock and bond markets; a weak dollar fueling higher prices for oil and other goods; more unemployment and rising inflation; retail sales, consumer confidence and new jobs creation in sharp decline; drastic interest rate cuts by the Federal Reserve to avoid a recession; a money giveaway stimulus package from Washington to prop up the lagging economy; widespread talk of recession and stagflation. These all add up to troubled economic times which should prompt you to review where you have your retirement money.

You’re told the stock market is the best long term, but “long term” has a different meaning in retirement. Didn’t the dot.com stock market meltdown in 2000-2002 send many retirees back to work and prevent others from retiring? Aren’t the current inflation-adjusted stock market indexes below their previous peaks? Regardless, the loud voices of Wall Street and investment companies are advising you to buy now at bargain prices. Are the markets headed higher or is their advice self-serving? Who can forecast the economy or the stock market?

If the stock market craters as it did in 2000-02 and 1973-74, and you lose some of your retirement money, how will you replace it? Since there will be no second chance, I encourage you to think carefully before you commit your money. If you’ve been told that you’ll do just fine over the longer run (generally meaning ten years), make sure you can wait this long for a market rebound. Also remember that a rebound is not certain!

What about fixed rate places like government bonds, bank CDs and money market accounts? These are rock-solid safe unless your greatest fear is outliving your money. Since current fixed rates are lower than inflation, you’ll be losing purchasing power with these choices. The potential loss of purchasing power will only add to the risk of outliving your money. What about real estate, collectibles and non-market investments? These are not only risky but generally illiquid. Before committing your retirement money, ask yourself this question: “How will I handle the worse case outcome?”

There is one savings place that offers an “opportunity” to make an above-market rate of return without the risk of loss if held to term. It is guaranteed by some of the world’s oldest, strongest and largest financial companies. The rate of return is determined by stock/bond market indexes with owners sharing in the upside potential but avoiding downside losses. The worse case outcome is a guaranteed positive rate of return. The earned interest is income tax deferred until actually withdrawn and there is no mandatory age when the money must be used. Additionally, it can be turned into a guaranteed lifetime income that can be started, stopped and stored. What’s more, it offers penalty-free partial liquidity for emergencies and bypasses probate if the owner names a beneficiary. It can be opened for a small or a large amount, and sometimes more money can be added later. There is no law which limits the amount of money that can be placed in it. It is truly a safe place to keep retirement money.

It is maligned by Wall Street and bankers because it competes with their products. The financial press doesn’t like it either – primarily because they are uninformed, misinformed or just plain biased. I’m talking about fixed index-linked annuities that are offered by insurance companies: the same companies that insure your home, live, health, business and other valuable assets. The worse case outcome is a positive, albeit small, rate of return if held to maturity, but there is an opportunity to do much better. Fixed index-linked annuities are not for everyone, but you need to consider them as one of your safe options for retirement money. Where are you keeping your retirement money in today’s uncertain and troubled economic climate? If in risky places, now is a great time to review your options.

Shelby J. Smith, Ph.D.

February 2008

Like the pot of gold at the end of the recession rainbow, Obama’s stimulus package, also known as The American Recovery and Reinvestment Act of 2009, could be the solution to businesses far and wide, small and large, in the current economic situation.

Dedicated to scientific research, energy programs, school districts, contractors and Medicaid in conjunction with creating millions of new jobs, the $787 billion economic recovery package is the lunch room gossip heard throughout the country. Who is going to be eligible for the money, how does one go about bidding for it and how much would one receive are all important questions being asked by business owners.

Good news – the federal assistance is for everyone, especially business owners facing significant challenges. This is even a great opportunity for small companies to step up and compete for business with larger corporations. With the plan in place, smaller companies will have an opportunity to bid competitively where previously their capabilities may have restricted them compared to the “big boys.” Learn how to take advantage of the stimulus package via the following 7 benefits offered to small businesses.

SBA Guaranteed Loans With Obama’s stimulus package on the horizon, small businesses around the country can now rest assured knowing that the Small Business Administration (SBA) will guarantee 100% of loans up to $35,000 without requiring payment for one year. With the $426,000,000 authorized to the SBA to loan out to small businesses – the stimulus package could definitely be that saving grace for you and your company.

Good-Bye to High Interest Rates For small businesses who currently have a loan that is locked in at a high interest rate, the stimulus package is of great benefit to you. The SBA will be authorized to refinance small business loans as long as they were issued before the stimulus package was passed and are less than $10,000,000.

Ability to Increase Investments Up from 300% of a company’s private capital or $15 million (whichever is less), to 300% of a company’s private capital or $150 million as the maximum amount that a small business can invest; the stimulus package allows companies the ability to invest more in their company’s future. By increasing the cap at which a company can invest, businesses can spend more in business development and securing a position in the marketplace. Whether you increase professional development, heavy-up marketing efforts or reallocate funds in struggling departments, the stimulus package can help.

Procurement Opportunities With many large companies looking to also cut costs right now, outsourcing work or bidding for services are becoming popular. Many procurement offices are offering up more Request for Proposal’s or RFP’s for companies to bid on along with adding a certain percentage required to outsource to minority companies. With these opportunities opening up, small businesses and minority business enterprises will be able to greatly benefit from the stimulus package.

Vital Tax Breaks With this recovery package, companies will be able to immediately write off 50% of the cost (up to $250,000) of new business equipment this year. Small businesses can also make a win out of loss with this package. Any business with less than $15 million annual revenue can now carry back net operating losses for five years instead of the previous two. This means that a business who is currently losing money can apply these loses to a previous year where the business made out well and then claim a refund on those taxes paid during that specific year.

Internet Improvement Grants With the passing of Obama’s stimulus plan comes many different types of grants for small businesses. One of the more important is the grant to improve broadband access or online abilities. The world is becoming digital and this package recognizes that fact and sets out to aid in whatever way it can.

Construction Contractors Lucky Day From transportation projects to road construction to housing development, this is the time for all contractors to up their marketing to the government sector. With informative brochures, innovatively designed pocket folders and updated capability statements, many small construction companies have the ability to shine with the government through this new stimulus package.

However you choose to utilize the stimulus package passed by Obama this year, there is a solution for you out there.

For those small business owners who think they were ignored in the new stimulus bill (American Recovery and Reinvestment Act of 2009), think again. While the debate continues to unravel as to “who gets what and whether it is enough”, one thing is certain: more money is coming in the direction of small businesses through the U.S. Small Business Administration (SBA). Remember, this is the agency responsible for the outreach, licensing, and implementation of, you guessed it, money into the pockets of small businesses. This is done through private licensed lenders who have agreed to join the SBA program. In other words, if your local community bank has a commercial loan department, it might very well have a SBA department which makes these loans. They are called SBA loans because the Federal government will reimburse, to a certain percentage, defaulted loans, thereby giving incentive for the private banks to loan more money. Net effect–more loans will be available for small business concerns. This is a continuing article (20 in all) on the subject: Help. Is anyone out there loaning to small businesses anymore?

Before we talk about how much more money is available to the SBA under the stimulus package, let’s look at the current status of one of the popular SBA loan programs. There is a loan program out there and SBA lenders are actually making loans currently: the Community Express Loan Program. This gives unsecured small business loans between $5,000 and $50,000 with very little paperwork, answers typically in two days, interest rates presently at 7.75%, funding and two weeks, and monies wired directly to your business account. There are still lenders participating in this program, although Congress has failed to make the program permanent and still has a 10% cap on the number of loans.
Enter the Obama stimulus bill. Let us look how it affects this program and small business lending as a whole.

So should we be excited by the stimulus package? Isn’t it all too customary in a new spending bill for a government agency to receive more funds? Not at all as to the SBA. During the Bush Administration tenure, they could easily have renamed the agency the ISBA (Ignore Small Business Association). As they were making “sound bite” statements to the press of how they were helping small business, they were arrogantly trying to dismantle it, or when they were in a better mood, just cutting the budget.

The point is we have a new administration that actually likes small businesses. Remember these are additional monies over and above the SBA’s current budget . As we all know, budgets are determined in approximately March of each year (assuming Congress has the good graces to agree) to be used for the next year. The SBA has already received their budget. This is whipped cream placed on the top of that small business cake.

And we are not talking about token amounts here. Here is how the additional monies are broken down:

1. 375 million for temporary fee reductions or elimination on SBA loans and increased SBA loan guarantees, up to 90% for some loans. Translation: When a borrower gets a SBA loan they pay a SBA loan guarantee fee which goes to Washington and used as a war chest to pay banks if there has been a default. That guarantee fee, depending upon the loan, is currently between 50% and 85%. There is a possibility that some loan programs can now be increased to a whopping 90% guarantee. If a borrower no longer pays these fees, the money has to come from somewhere, and in this case it is taxpayers’ money which is subsidizing those fees.

2. 255 million for a new loan program to help small businesses meet existing debt payments. Translation. You have a loan secured by fixed assets or real estate and want to refinance it, either to lower payments or put more money in your pockets for expansion.

3. 30 million for expanding SBA’s Micro Loan Program, with $6 million to help finance new lending and 24 million for technical assistance grants to Micro lenders. . Translation: Under the Microloan program, the Federal government loans blocks of money to the Microloan lenders who then reloan it, at higher rates, to the deserving communities and small businesses and usually collateral is required.

4. 20 million for streamlining the SBA lending and oversight process with new technology. Translation: The streamlining process will make it faster and more efficient to process loans and oversight is to monitor SBA licensed lenders–make sure they are acting for the benefit of small businesses and complying with the program guidelines.

5. 15 million for expanding SBA’s surety bond guarantee program. Translation: If you are a building contractor and have to take out a performance or payment bond on a project, you need substantial assets to secure the bond. This will help getting your hands on that needed bond and be able to secure the contract.

6. 25 million for staffing as to the new programs.

7. 20 million for the Office of Inspector General. Translation: To inspect and audit the licensed SBA lenders.

Although one could make the argument this new law is “too little too late”, we have to give our current administration a chance to do good things with this fresh money. And don’t forget the mindset of the SBA lender. Although they are not as wildly quixotic as stock market speculators, their purses open and close based upon the mood of the country. We want them to be as comfortable as possible when we walk toward them for money.